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GlaxoSmithKline (GSK)

Q2 2017 Earnings Conference Call

July 26, 2017 09:00 AM ET

Executives

Emma Walmsley - Chief Executive Officer

Simon Dingemans - Chief Financial Officer

Eric Dube - Senior Vice President & Head Global Respiratory Franchise

Patrick Vallance - President, Pharmaceuticals R&D

David Redfern - Chairman, HIV Business and Chief Strategy Officer

Brian McNamara - Chief Executive Officer, GSK Consumer Healthcare

Luke Miels - President, Global Pharmaceuticals

Jack Bailey - President U.S. Pharma and Vaccines Business

John Pottage - Senior Vice President, Chief Scientific and Medical Officer at ViiV Healthcare

Joe Touey - Senior Vice President, Global ERP

Deborah Waterhouse - Chief Executive Office ViiV Healthcare

Analysts

Andrew Baum - Citi

Vincent Meunier - Morgan Stanley

Keyur Parekh - Goldman Sachs

Mike Weston - Credit Suisse

Graham Parry - Bank of America Merrill Lynch

Sam Fazel - Bloomberg Intelligence

Kerry Holford - Exane BNP Paribas

Richard Parkes - Deutsche Bank

Timothy Minton Anderson - Sanford C. Bernstein & Co. LLC

Michael Leuchten - UBS

James Gordon - JPMorgan

Steve Scala - Cowen

Presentation

Emma Walmsley

So welcome and good afternoon to everybody here, and good morning to those of you who either watching or listening in from the U.S. Today we have announced our Q2 results. And I am setting out the priorities that we will drive to improve our performance and our returns for the long term with the first phase focus on the next three years.

Of course for the whole presentation, we start off with our cautionary statement as usual. And in terms of the agenda this afternoon, Simon and I are going to share our priorities and financial implication for the next hour a half and we'll have a short break followed by an extended one and half hour Q&A with a broader group.

Of course today we have a fantastic team GSK from here, Patrick of course who leads R&D; David Redfern, Chairman of our HIV Business and also Chief Strategy Officer and Leader of the strategic fiber work; Brian and Luke are here the relatively new heads of our Consumer and Vaccines business.

I also have with make Jack Bailey, President our U.S. Pharma and Vaccines business; Eric Dube, who leads our Global Respiratory business; Deb Waterhouse, the new leader in our HIV business and Head of R&D, John Pottage just landed here today directly from attending the IAS Meeting in Paris; and then to stay with our R&D team and so on some more specific questions you may have either in the later session of within the reception this evening with also another eight key R&D leaders here in the room.

So I'm going to spend most of this presentation talking about our halfway to better return. So I'm going to start standing in front of you for the first time as a new CEO by sharing with you my view on the process of GSK.

This company does important work our purpose matters. To help millions of people every day do more, feel better and live longer. We prevent and cure disease in more than 150 countries around the world. We keep hundreds of millions of people well from the newborn babies through to the elderly.

Now this is the reason that most people join GSK it's certainly true for me. And it's what drives the discretionary efforts of our employees and partners all over the world, so this purpose will remain our ultimate priority under my leadership. We have a long history traceable back maybe 300 years in a variety of company configurations a history of helping change the burden and impact of disease through innovation.

And as we strengthen and modernize this company, this business to set a platform for its future success, we must make sure that we drive performance first and foremost through applying great science to impact human health. The demand for healthcare and innovation is more intense than ever as life expectancy of course continues to improve, but we are no doubt in a challenging and false changing industry and environment.

The good news, of course, is this is a market full of opportunity, first and foremost with fundamental advances in science perhaps most notably and genomics, but also exciting new frontiers such as our own bio electronics. And in fact with this acceleration of science and technology we should all expect some material shift in the way our industry operates, in who our competitors and partners are as we use digital data and analytics to fundamentally transform the way we discover and develop medicines the way we interact with patients and consumers and healthcare professionals.

Now as life expectancy expand of course demographics drive demand, but equally they put pressure on budget, pricing pressure is absolutely not new in this industry it's long been a concern in Europe, but it is now a major factor in the U.S. is both public and privately funded bodies look at ways to tackle the affordability of medicines. And for us this pressure is most obvious now, and as we look into next year in the inhaled respiratory markets.

And finally it's hard to believe that the industry is not poised for more change. Potential tax reformed in the U.S. pressures on performance in R&D output could all be drivers the sector consolidation over the next few years, and this could have in turn significant implications, so it's important that we agile and have flexibility if these changes should materialize.

So in this kind of healthcare world GSK offers the opportunity to capture value and withstand the pressures across all three businesses. We participate in a broad spectrum of the healthcare market if you think about it chronologically from prevention with the vaccine, self-medication and wellness in consumer health to high end therapeutic treatment with strong lifecycle management and pharma. So we are not reliant or over dominated by one therapy area or products.

Portfolios in each of these businesses have innovative and established products with leading positions in major therapy areas of the categories whether it meningitis in vaccine respiratory, pain relief and oral health and consumer or organic respiratory and HIV in pharma. Our recent transaction in 2015 created new scale for us in vaccines and consumer.

And all three businesses now benefit from a global footprint capable of accessing growth in established and emerging markets. This includes significant scientific or scientific, technical and regulatory expertise for the manufacture of high quality products. And earnings and cash flows of the three businesses provide balance and a level of sustainability to the Group's performance and visibility to invest in future growth and in return to shareholders.

Recent performance has demonstrated the benefits of our 2015 transaction and in the last 18 months new product growth in all three businesses has been stronger. Good delivery of our new and held Ellipta portfolio and Nucala our new biologic asthma treatment is driving an affective transition in our Respiratory business, and the success of Tivicay and Triumeq has we reestablished GSK of the world leader in HIV. Both are showing strong and encouraging Q2 performance.

In Vaccines, new meningitis vaccines Bexsero and Menveo are both growing strongly and this business will continue to see volatility based on the tender agreements our supply position is stabilizing providing good further opportunities for growth.

In Consumer Healthcare growth in our seven power brands is ahead of the market driven particularly by well-loved brands like Sensodyne and Voltaren. We are seeing a mark slowdown in consumer market growth and that's clear in our own Q2 numbers. But while growth has slowed we still very much believe we have a portfolio capable of responding to this challenge and we definitely have the profitability leaders to continue to deliver our target margin improvement of at least 20% by 2020 as around double the pro-forma margin of 2014.

Sales growth and cost saving measures together with exchange rate movements having cash flow and margin improvements for all three businesses in the last 18 months. And the adjusted operating margin has improved by 400 basis points since 2015. However, while this recent delivery is encouraging it has to be set against the longer term context for GSK's performance.

The reality is longer term performance has been weaker than we all would have like. Although recent at new product momentum has been better sales growth on a longer term basis has been limited due to some slow start or missed launches the reducing contributions of profit and cash flows from our largest products Seretide/Advair and insufficient R&D output to compensate and supply issues have also been a clear factor. All of this it's clearly reflected in our long term TSR performance, which has been uncompetitive when viewed against our peers.

Our R&D performance is an important part of what we need to change and improve upon. In fact in output we have had a significant number of launches, especially in the last three years and we've been among the industry leaders on volume metric and have had some undoubted successes.

However peak year sales per assets the charts on the right here have been among the lowest of our sector peer group. So we have not consistently translated the output into commercial success arguably this is a combination of asset choices made if use with the competitiveness of our labels and the competitiveness of our commercial execution. In all cases this requires a much more integrated partnership between commercial and R&D.

But is also clear is the comparatively we've allocated capital in R&D to a much broader range of projects versus our peers and as an average spend per project was also low we arguably didn't back some key assets with sufficient resources to strong enough data packages. And development cycle time for GSK also appeared to be longer than the average for the industry, notably in Phase II clinical development, and we know that phase is critical in such a competitive environment. So all of these points to the need for a significant overhaul and reevaluation of how we develop our clinical assets and most importantly our commercial and R&D in space.

So long side this challenge of addressing R&D development there are several other key things we have to get right over the next three years. All businesses, all three businesses need to perform, but our priority is clearly pharma.

We will start with some keep changes to our operating model and portfolio. We must maximize value from recent and new product launches. We must address the pricing exposure in our portfolio this is acute and the inhaled respiratory market we have to ensure our pricing strategies and our cost base reflect the reality of the therapy areas and geographic markets we're operating in. We must make the right choices to invest and develop early clinical stage pharma pipeline for our next wave of innovation, which will come in the early 2020. This pipeline appears promising, but it is early and much of it is still unproven.

So over the next three years we will start see clinical data on many assets, and how we get best decisions on investing behind them is of course of critical importance. Beyond pharma we must realize the benefits of our newly scaled consumer and vaccines and across all three businesses, but more discipline into our capital allocation processes.

Our distribution of returns to shareholders has also been ahead of cash flows in the past few years. So improving our cash generation for more flexibility to invest in future growth is also key. As R&D data read out we have to make sure we comeback our winners. At the same time we need to be ready for inorganic solutions to strengthen our pipeline or take advantage of other opportunities to strengthen our company such as the consumer put option.

Today we are repeating and updating the 2020 outlooks for the group, which was set out for investors in 2015. And to deliver this outlook we have a lot of work to do. All of these objectives need to be met. And as a reminder our outlook for sales to grow at a compound annual growth rate of low to mid-single digits over the five year period to 2020 and for adjusted EPS to grow mid-to-high single digit. And these outlooks were all given using constant exchange rate with 2015 as the base year and they do anticipate the launch of at least one generic adding to an already strong market pricing pressure in the near term.

But another very important points I want to make today, is that these outlooks are also given the potential development options in our pipeline subjects to data driven R&D investment opportunities. Of course, we've already made some assessments of the R&D investment that will be required going forward and built this into our plans. But I want to be clear and transparent with all of our investors that if additional investment is required to maximize full value of a particular asset we will act with the long term interest of the Group's performance in mind.

So let me start the outline some of the changes we are and will be making to achieve these important goals.

First, we're going to have fewer and more focused priorities for GSK. The environmental trends I already outlined at the beginning of this presentation are going to lead to fundamental changes in our industry. Responses to them require agility and our own change at pace. But they also need to be set alongside the long term nature of R&D and responsible use of our capital. So under my leadership all three businesses will be tough to be focused on three long term priorities; innovation, performance and trust.

Our innovation is important to all three of our businesses, but again the top priority is pharma. We are very focused on maximizing commercial opportunities for our recent and near term launches. We've made mention of the three important launches to come. The close triple, we know around a quarter of COPD patients end up on triple therapy, and this will provide a simple single inhalation the way of delivering it in a device that allows the move from single to dual to triple as needed.

Read the rest of this transcript for free on seekingalpha.com