GlaxoSmithKline plc (GSK)

Q2 2011 Earnings Call

July 26, 2011 9:00 am ET

Executives

David Redfern - Chief Strategy Officer

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Andrew Witty - Chief Executive Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Unknown Executive -

Moncef Slaoui - Chairman of Research & Development, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Simon Dingemans - Chief Financial Officer, Executive Director, Member of Corporate Administration & Transactions Committee and Member of Finance Committee

Analysts

Mark Dainty - Citigroup Inc

Mark Clark

Florent Cespedes - Exane BNP Paribas

Simon Mather

Graham Parry - BofA Merrill Lynch

James Millett

Unknown Analyst -

Mark Purcell - Barclays Capital

Michael Leacock - RBS Research

Presentation

Andrew Witty

Okay, good afternoon, everybody. While you all grab a seat, I'm going to make it start. Thanks very much for joining us for the Q2 results of GSK today. I'm sure you've all got the press release, and there's a book of the various slides that we're going to present just in a few minutes. I just like to make a couple of introductory comments before I kick off properly.

First of all, just to introduce to you, we have got some of my colleagues from the executive management team of GSK here in the room and maybe they can stand up as I introduce them. Abbas Hussain, who runs our Emerging Markets Pharmaceutical business; Deidre Conley, who runs our U.S. Pharmaceutical business; David Redfern, who's Chief Strategy Officer for the company, also looks after Stiefel and the ViiV business; Moncef Slaoui, who's the Chairman of our R&D Business and also is taking over responsibility for our Global Vaccines business; and of course, I've got Simon Dingemans here at the front with me; and Phil Thomson, who is our Head of Global Communications and IR.

So they'll all be here. If you don't hear from them during the session, you'll certainly have a chance to chat with them afterwards when we finish. They'll then be allowed to spend a few minutes with everybody over there with a cup of coffee if you just want to nail some of them against the wall and really interrogate them. I've brought a few extras for you. So great a opportunity for you to see them.

Good chance for you as well to hear from Simon really for the first time properly as he spent the last 6 months really getting to grips with the organization and really challenging a lot of what we could do and what we could achieve, and I think you can see in the press release today the first really substantive evidence of the new financial architecture for the company, very thoughtful approach to how we should report going forward, trying to clear up, get greater clarity in the way we present our information, how we drive more value out of the business to generate more shareholder returns.

And you can see Simon's fingerprints all over that part of what we're trying to do. It's exactly why we wanted him to join the group, and I think you'll hear from him during the rest of the session some further insights into the way he's looking at the business. So it's going to be a great chance for you to hear a bit more from him today.

Before we get to that, I'll just give you a quick summary of where I think we are in terms of the group strategy and how things are going, and I think this quarter is quite a turning point actually in terms of GSK on a number of dimensions. First of all, although we still have some headwind for the rest of this year because of Avandia, Valtrex and Pandemic products dropping out, the rate of that headwind really drops now from this point onwards. So it's a turning point in terms of the pressure of the headwind which is running against us. That's the first important thing.

Secondly, I think you'll clearly see the delivery of new products and pipeline into the organization. And I'll touch a little bit more on that in a few minutes.

Thirdly, you'll see the shape of what this business is going to be for the next several years in terms of our geographic distribution, in terms of the emphasis we have across the business -- different businesses we have whether it be consumer vaccine, emerging market or the traditional pharmaceutical businesses. You can see that shape really crystallize as the restructuring process that we've gone through starts to come toward an end.

We're putting in a couple of comments I made today in one of the interviews just a statistic, which I think is just quite shocking actually when you think about it. When we created GlaxoSmithKline in the merger 10 years ago, the total integration synergies of that transaction, the GBP 1.8 billion, the total savings from the restructuring program over the last 3 years and through to the end of 2012 will be GBP 2.5 billion. So to just put into a context the order of magnitude of change in savings, I think that really crystallizes just how much has happened in this group over the last 3 or 4 years.

Huge change in the shape, 25,000 people have left the group, 17,000 people have been added to the group; most of the leavers in the West, in the traditional Pharma business; most of the joiners in the East in the emerging markets. Huge change of our manufacturing footprint, 111 factories down to 65, adding back another 12 factories through acquisitions. So we're now at 77. But massive changes in the way our manufacturing footprint looks over that period.

Our R&D headcount down 27% in the last 3 years, and yet, you can see the size of the portfolio that's coming through that pipeline. I'll touch on that a bit more during the presentation. And you see a business which is much more balanced in terms of its exposure to specific risks. What you'll also see is a business which is phenomenally disciplined. So we are focused on ensuring that we allocate all of our investment resources to get the best possible return. We are focused on managing our expense base aggressively.

You'll see and you'll hear more from Simon on how we believe we can drive greater financial focus in the organization, if you will, add a further turbocharger to what we can do organically in the business in terms of value creation. And you can also see that we're disciplined and not straying off into buying lots of businesses just for the sake of the short-term adrenaline pump that the acquisition gives.

We only deploy M&A at a small scale, and we only deploy even then when we're convinced that the returns are a superior way to deploy the money. And I think you've seen us resist all temptations to be drawn off that path in the last 3.5 years, and I think we've been proven to be right to do that. It's been a right way to protect the return profile for shareholders, and it's forced the organization to address organically what needed to be addressed to turn the group into what we think can be an extraordinarily competitive organization in the coming period just as we think many of our competitors are going to go into their worst moments.

So let me start off just by giving you a little bit of a sense of what we are up to. Just summarizing the growth performance of the business. Underlying sales growth, excluding Avandia, Pandemic products and Valtrex, Q2, 5%. You can see for the last 6 quarters now the underlying number has been up 4.5%. So I think clearly we've got a momentum in our underlying businesses.

As I said already, that comparator set of 3 products, those discontinuing businesses, will start to drop away quite quickly as we go through the second half, and that we are clearly confident that we are going to be able to get back to reported sales growth in 2012. You can see where that growth comes from, and you see the mix of the business as those consumer and vaccine businesses have continued to grow faster than the Pharma business. You can see they become a more and more important contributor of the total, if you will, absolute amount of growth in the business. But also, you can see that the Pharma business on an underlying basis continues also to grow. And you've seen in this quarter some further improvements, particularly in the U.S.

So that's just an interesting way of looking at the business. This is the group. So this is all businesses integrated together. And you can see that 37% now of GSK's business is outside of the traditional North American and western Europe business areas. And you can see that, that's where all the growth is. Now, we're talking enormous amount about emerging markets. We shouldn't overlook Japan, which continues to be a tremendously exciting marketplace for GSK. Why? Because we've got a very substantial new product flow rolling out.

This year, we launched Cervarix. Already this year, 840,000 girls have been initiated into the Cervarix vaccination program. So again, strong second quarter in terms of Cervarix. We expect to see that flow through the rest of this year. In the last few weeks, we had Rotarix approved for rotavirus prevention in Japan. Again, the first vaccine for that particular disease, just the Cervarix, was first in class. And we've also had Lamictal approved.

This all part of that program that I stood up here 2 years ago and talked about 40 potential new drug opportunities in Japan. We are well through that. We continue to reload that pipeline. Japan is a great innovation marketplace, and I think the team have really solved how to get product there quickly and in a very rapid flow rate.

Helped also in Japan by the new pricing regime, which has taken away that historic erosion of being a successful innovator. It's now you're incented to be an innovator, you will pay the price when the product eventually goes generic just as in normal Western markets. But for a company like GSK, where we have so much innovation opportunity. That's why Japan is such an important area for us, and Philippe Fauchet, who's our new head of that business, has really brought now, in addition to this R&D focus, an operational discipline, which I'm confident is going to continue to allow us to deliver great sales growth in our Japanese business.

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