Andrew Philip Witty - Chief Executive Officer, 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

Andrew S. Baum - Citigroup Inc, Research Division Tim Anderson - Sanford C.

Bernstein & Co., LLC., Research Division Graham Parry - BofA Merrill Lynch, Research Division Brian Bourdot - Barclays Capital, Research Division Mark Clark - Deutsche Bank AG, Research Division Florent Cespedes - Exane BNP Paribas, Research Division Steve Scala - Cowen and Company, LLC, Research Division James D. Gordon - JP Morgan Chase & Co, Research Division Kerry Holford - Crédit Suisse AG, Research Division Keyur Parekh - Goldman Sachs Group Inc., Research Division

Thank you very much. Good afternoon, and welcome to today's call.

I'd like to particularly welcome people joining us from the East Coast after what's been a very rough few days. And we hope very much that things settle back down and the disruption is resolved quickly.

I'm actually speaking to you from our headquarters in Singapore. Simon Dingemans is joining us on the call from London.

I'm in Singapore. I spend a lot of time in the emerging markets.

It's one of our key areas in which we've chosen to invest aggressively over the last 4 years to help rebalance the group sales profile. And that's evident in this quarter with a very -- with a further strong performance in the region, helping offset some of the very obvious pressures we're facing in Western markets, particularly in Europe.

Emerging market/Asia Pac sales grew 11% in Q3, which I think puts it very much at the top of the industry growth rate for emerging markets, and it's a clear acceleration compared with the early part of the year. Particularly strong performances in India, up 9%, China up 15%.

And within the Chinese business, our Seretide business was up 46% for the quarter. I'm also encouraged by the continued strengthening of our business in the United States, while our reported sales were down in what is a noisy quarter with several discontinued or disposed products and some generics really hiding the underlying sales growth of 2%.

Respiratory in particular performed well. Business up 7%.

Advair was up 5% during the quarter. And that represents the fifth consecutive quarter where we've seen an improvement in the underlying performance of Advair, both as our shares hold well and the overall market starts to improve.

Newer products in our specialty franchise has also continued to perform well, Votrient up 50%, Promacta up 50%. And I think in all of our key areas, the promoted products, we continue to see good strength and certainly continued evidence that our new commercial model in the U.S.

has vetted in nicely and opening up new customer opportunities. We also saw another very strong performance from our global Consumer Healthcare business with sales up 5% in the quarter.

In particular, India up 16%, China up 16%. And across all of our key categories, all the way through from Maxinutrition, Panadol, Lucozade, Horlicks, Sensodyne, all reporting very strong performances.

At the group level, however, you, obviously, will have seen our reported sales were down 5%. As expected, these were impacted by prior year comparisons, specifically the substantial sales of Cervarix in Japan and flu vaccine in the U.S.

in the third quarter of 2011, which we're not going to repeat. This alone accounted for 3 of the 5 points.

We also lost a further 2 points as a result of the product disposals we have undertaken in the last 12 months to simplify both the consumer and the pharmaceutical portfolio. If you adjust for just those 2 items, group sales in the quarter were broadly flat.

And again, looking through the noise of the quarter, it continues to reassure me of the gradual strengthening of the business across our various business groups. An exception to that is the clear impact to the sales line from the pressure we faced in Europe.

And disappointingly, we didn't see an improvement in pricing pressure. Third quarter sales here declined 9%, 7 points of price, 2 points of decline in volume.

Absent a further deterioration in Europe, our expectations for the fourth quarter, obviously, sales grow again in particular with further momentum in emerging markets, Asia Pac and the completion of multiple preordered vaccine tenders. On this basis, we now expect full year sales to be broadly in line with 2011 on a constant currency basis.

We also expect to see an improving picture on margins in the fourth quarter with additional cost reductions and phasing of operating expenses expected to benefit earnings. Turning to new product flow and the pipeline.

Progress remains very positive. In fact, we have seen better late-stage output this year than in any equivalent periods for the company.

We've now completed 6 Phase III programs during the year, with 3 products already filed, 2 Oncology and 1 Respiratory, and 3 more ready to file around the end of the year, including new treatments for HIV, diabetes and COPD. Overall, of the 15 products we originally highlighted back in February of 2011 with Phase III data expected before the end of 2012, 12 have already reported some or all of their data.

10 of those have been positive, only 2 have been negative. It's worth noting, I think, that all of that has been achieved with a broadly flat R&D budget, 2007 to 2012.

You may have also noted in today's press release that we've confirmed our plans to review the progress we've made in the advanced pipeline and investor event on December 3, where we'll really bring together all the various data and news that's been presented at various scientific congresses during 2012 and give you a comprehensive view of the advanced pipeline as many of these assets move into filing and hopefully head towards launch as we move into 2013 and '14. These assets are the forefront of a pipeline with real strength, and if all goes well, over the next 3 years, we think we will launch 15 new products from this advanced portfolio.

We also have continued to make progress to improve the returns in R&D. And in the quarter, I draw your attention to both the acquisition of Human Genome Science and the new structure agreed between ViiV and Shionogi.

Both transactions will not only help with simplifying operations but also substantially increase our share of the economics. On key new product assets, these are already launched in the case of Benlysta or imminent in the case of dolutegravir.

Finally, we remain committed to improving returns to shareholders. And today, we announced another 6% rise in the dividends to 18p per share and confirmed our expectation for share repurchases for the year of between GBP 2 billion to GBP 2.5 billion.

I'd like now to hand over to Simon in London to take you through a little bit more detail the numbers behind the release.

Thanks, Andrew. On our half-year results, I highlighted that we expected the third quarter to be negative in terms of sales growth, particularly given the tough comparison with Q3 last year when we reported very strong sales of Cervarix in Japan and flu vaccines in the U.S.

And together, these comparators, as Andrew highlighted, contributed around 3% to our overall decline of 5%. Much of the remainder of the decline reported this quarter was also expected, being down due to the continuing impact of disposals such as the consumer OTC products and the Vesicare unwind that we completed earlier in the year.

And together, these accounted for the remaining 2 percentage points of our decline. They will largely annualize during the first half of next year.

What was more unexpected was the extent of the pressure in Europe, where not only have further austerity measures been implemented in the quarter, but we've also seen a further expansion of parallel trade and generic substitution measures. This has impacted European volumes as well as price in the quarter, but importantly, also leaves the outlook more uncertain than before.

Recognizing that the risk from Europe remains real, we still expect we can deliver a positive quarter for growth in Q4, helped in part by the absence of the specific challenging comparisons seen in Q3, but also the momentum in our growth businesses, particularly the strength of our consumer delivery and a strong backlog of EMAP vaccine tenders in Q4, which could add up to GBP 50 million of sales to the quarter. We also expect to deliver sales for the full year on a constant currency basis broadly in line with 2011, although Europe clearly remains a challenge.

Turning to the quarter in detail, as usual, the focus of the commentary will be based on performance in constant currency terms. But I should point out that currency was 3% negative on the top line and around 2% at the earnings level this quarter due primarily to the relative weakness of the euro, although also a number of other international currencies.

Total reported sales were down 5% to GBP 6.5 billion, and excluding the specific Q3 comps and the impact of the disposals, were broadly flat. Outside of these known items, as Andrew highlighted, we saw many strong performances across the business, which helped offset lower sales in the U.S.

and Europe. Consumer ex the divested brands grew 5%, and this business has performed very consistently throughout the year and is really benefiting from the simplification of its footprint following the OTC disposal.

This has also allowed us to reshape our business, and now almost half of our consumer sales are outside the U.S. and Europe.

In total, this portion of the consumer business grew 12% with very broad-based growth across all of the categories. Elsewhere in the emerging markets, the EMAP pharma business also showed very strong momentum, up 10% in the quarter, with particularly strong Respiratory sales.

Seretide, for example, grew 16% in the region as a whole, with performances across the region contributing, not just China but also Latin America. More established brands, such as Augmentin up 30% in the quarter, also performed well, helped in part by an easier comparator following some supply interruptions in the second half of last year.

EMAP vaccines were also up strongly, up 13% in the quarter, including the benefits of several tenders in the Middle East region, which has now recovered much of the momentum it lost at the end of last year and is performing well across the region in both pharma as well as vaccines. In Japan, where obviously the Cervarix comparator has been a focus point, looking beyond that, the pharma and vaccines business absorbed the impacts of the biannual price cuts, generic competition to Paxil and still delivered 6% growth.

This include a very strong contribution from the Respiratory portfolio and also several products new to Japan, including particularly Alvedon, Lamictal and Rotarix. Turning to the U.S., total pharma and vaccine sales were down 6%.

This reflects the loss of Avandia and the Vesicare unwind, which took U.S. growth down by over 2%, as well as ongoing generic pressures, which impacted growth by over 5% in the quarter.

Outside of these drag factors, the promoted product portfolio delivered positive growth of around 2%, reflecting progress with both new and established products, and would have been up 4% without the flu comparator. Good contributions, particularly from Respiratory and in the new products arena from the Oncology portfolio.

Moving to Europe, as we've highlighted, the environment has been tougher than we'd hoped at Q2. Sales were down 9% for the quarter.

Price erosion was a negative 7%. But volumes were also down 2%.

Through the first 6 months, you'll remember that volumes were flat. And this shift in Q3 in part reflects new additional austerity measures, encouraging generic substitution at pharmacy level in a number of markets, particularly France and Italy.

As Andrew has pointed out, we're currently reviewing our business in Europe and assessing how best to respond to this changing environment. Turning to the margin, the core operating margin in the quarter was down 2.6 percentage points, reflecting 0.5% increase in COGS and a 2% increase in SG&A.

0.6% of the total reflects the inclusion in the quarter of costs from HGS, which fairly evenly affects COGS, SG&A and R&D. The COGS, the majority of the percentage increase, is due to mix effects and some high inventory write-offs this quarter, as well as volume under recoveries given the decline in top line that we've seen.

The increase in SG&A primarily reflects lower sales of roughly about 1.5% out of the 2% increase and a slight increase in actual spend, which reflects continued investment in our growth businesses as well as some of the HGS costs. We have offset most, but not all, of these additional expenses during the quarter through our continued cost-reduction efforts.

But we expect the phasing of the delivery of benefits from those programs in both regular savings and one-offs to be more favorable in Q4 relative to Q3. In R&D, we continue to actively manage our expenditure.

And this quarter, spending was down 5% despite the obviously high levels of activity. Year-to-date R&D is down 1% and is contributing to supporting the very considerable late-stage development.

Taken together, SG&A and R&D expenses overall were broadly flat in constant currency terms this year. Our margins are clearly being impacted by the additional pressures we are experiencing on the top line as well as the changing mix of our business.

We're offsetting a considerable element to that pressure through our ongoing OE programs and other follow-on restructuring initiatives that have been unearthed by the original programs, and the cost savings we are making should allow us to leverage the sales growth we expect in the fourth quarter. However, we continue to need to strike a balance between dropping cost savings we make to the bottom line and investing behind our growth businesses, and in particular, holding the resources in place we need to launch the pipeline successfully.

Holding those costs in place is one of the reasons why we said at Q2 we expected margins for the full year to be broadly in line with 2011. We still expect core margins for the year to be broadly in line with last year, although we will also now have to absorb around 30 basis points of impact from HGS.

Ultimately, however, our margin delivery for the year will now depend primarily on where we end up in our sales expectations for the year. I want to make a couple of points on HGS, which we included for the first time this quarter.

We completed the acquisition at the beginning of August. And since then, we've been consolidating 100% of U.S.

Benlysta sales. We've made very encouraging progress on integration, particularly with the commercial organization.

However, as expected, it'll take some time to release all of the synergies, and we will temporarily be carrying additional costs from HGS in 2012. These impacted the operating margins, as I said, by 0.6% this quarter.

And at the earnings level, that translates to about 0.6 of a penny. The full year impact on 2012 is expected to be around 1p of earnings.

Encouragingly, in getting into the integration process, we've identified a number of additional synergies and now expect the full run rate annual cost savings to be up to $250 million, ahead of the originally targeted $200 million that we announced at the time of the acquisition. In addition, with better visibility, we also see some good opportunities on the manufacturing side, particularly in the Biopharm manufacturing footprint, but it's likely we may need some bit of time to properly evaluate these.

And so that's likely to run some additional costs in 2013 on the manufacturing side for longer. As a result, you should assume that the full year net impact on core EPS for 2013 will be neutral and accretive thereafter.

I'm also pleased that this week ViiV has been able to acquire the exclusive rights to dolutegravir without investing any cash. This is a deal that should help maximize the value of the asset and benefit GSK, as well as Shionogi and Pfizer.

I should flag that the accounting for this deal will likely result in a significant noncash, noncore gain in Q4 as we bring and consolidate the accounting into the group's numbers. The deal is expected to be marginally dilutive to our group EPS in 2013 and 2014, due to ViiV now being responsible for all of the R&D costs post the agreement and the additional minority interest in ViiV's net income.

You should assume around a penny of dilution to core earnings in each of 2013 and 2014. Below the operating margin, we also continue to make progress leveraging financial efficiencies.

We have a lower effective finance rate, which is evident when you see the increase in our net debt without a corresponding increase in our net financing costs. This has been achieved in part by reducing the level of low return in cash balances on hand and also refinancing $5 billion of our debt through the bond issues we did in May, which had an average coupon of 1.89%.

This compares with our -- the rates on our maturing debt of over 5%. Our tax rate is 24.3% in the quarter, and we now expect to deliver full year core tax rate of 25% for 2012, 2 years earlier than originally targeted.

Basic shares were also down over 2%. Looking finally at the cash flow for the quarter, we continue to be highly cash generative.

Before paying legal settlements, cash generated from operations was GBP 1.8 billion. We've also made steady progress in managing our working capital, and we still expect more cash savings to come from this in the future.

Our progress to date is reflected in the reduction in working capital days from 227 a year ago to 213 at the end of Q3. This was achieved despite the addition of a relatively high inventory balance from HGS.

Net debt increased from GBP 9.6 billion to GBP 13.9 billion at the end of the quarter, and this really reflects the outflows of legal payments in the quarter of GBP 2.1 billion and GBP 2 billion for the consideration due on HGS. We have funded these outflows by tightening up the balance sheet and improving overall balance sheet efficiency, leaving free cash flow available to fund dividend payments and share repurchases this quarter, which totaled around GBP 776 million.

And we've now brought total repurchases during the year to GBP 1.9 billion, and as of yesterday, we were over GBP 2.1 billion. We still expect to spend between GBP 2 billion and GBP 2.5 billion over the year as a whole.

Total cash return to shareholders by the end of the third quarter total GBP 4.8 billion, up 9% versus last year. And with that, I'll hand back to Andrew.

Thanks very much, Simon. And let's open up the call to questions.

So first question, please?

Two questions please. Firstly, to Andrew.

You have previously spoken about the benefits of incremental cost savings. Obviously, reading the press release, it sounds like the pressures in Europe kind of precipitate the material cost reduction program.

Could you identify the potential magnitude and timing of that program? Second, the restructuring of ViiV, as well as having operation efficiencies, to what extent does it facilitate the separation or potential separation from the company in the form of a spin-off at some point in the future?

Then finally, my -- would be a question on tax. You've obviously reached your target 2 years ahead of schedule.

Perhaps Simon would like to comment on where he thinks is a realistic goal for GSK's tax rate given the [indiscernible] and some of the other ongoing factors further out?

Thanks, Andrew. So let me take the first 2.

As far as Europe is concerned, we -- as you know, we changed the management of our European business a couple of months ago and I've asked Abbas and the new team in Europe to take a couple of months basically to comprehensively review what capabilities we think we need and what deployment we think we need in Europe to compete in what we perceive to be a shifted environment. So while I think everybody in the industry hopes that this kind of level of price pressure isn't going to be sustained, it clearly isn't obvious when it's going to retreat from the current levels, and we need to make sure that we've got a capability which is built in that context and also in the context of very challenging access to market hurdles, which have been thrown up in a variety of different European countries.

So the question is very simple. Nothing is ruled in or out, and I'm not in a position and I wouldn't want to give you any guidance specifically as to what the conclusion of that recommendation will be.

I think the best I will say to you is that you should anticipate an update on this at Q4, and we'll be taking the time between now and then to ensure that we've configured our European capabilities in a way that we think makes the most sense for what we think is the environment we're likely to be dealing with. As far as ViiV is concerned, obviously the deal really simplifies things.

As you know, there was previously a joint venture structure in place and this really takes that off the table, creates a very straightforward mechanism for ViiV to now commercialize dolutegravir and hopefully other elements of the integrase program as we go forward. Our focus right now, Andrew, is on the successful filing and approval and launch of dolutegravir.

As far as the future status of ViiV, nothing ruled in, nothing ruled out. And this simply makes it operationally more straightforward to work, and most importantly, from our perspective, gives GSK a greater share of the economics than we would have had under the previous structure.

So in the short run, good news for GSK shareholders. In the longer run, nothing ruled in, nothing ruled out.

And Simon, maybe you could address the tax question?

Okay, Andrew, I'll give you my traditional quarterly answer as well, which is that at this point, I'm not ready to give you a specific target. I think we are working on a number of measures which could take the tax rate down again.

And I think we've always been clear that the trend is to consolidate the 25% and then move on from there. So I think the objective is clear.

When I've got a bit more visibility, which again, hopefully, will be in the next quarter or 2, I can give you some more specificity, hopefully. But I think it's a bit early to call that yet.

I have a few questions. On operating margins, you of course, lowered your prior guidance for 2012, but you're saying that they will expand over the next few years.

And I'm hoping you can give us a little more precise direction on 2013. In particular, do you expect margins will likely again be same year-on-year?

Do we expect to see some expansion as we head into 2013? And then on Advair or Seretide in Europe, can you update us when you expect generic versions or branded generic versions, to show up in Europe?

I'm just wondering what you have in your planning assumptions for the next few years. And then on the MAGE-A3 pipeline timing guidance, is Phase III results in 2013 for both melanoma and lung and then darapladib, what's the updated timing on seeing Phase III?

Okay, Tim, thanks for those 3 questions. In terms of operating margin, we're just well through coming toward the end of our planning finalization for 2013.

So obviously, a little bit premature to give you very specific guidance on operating margin. I think what I'd probably do is simply reiterate what I said at the midyear, which is that essentially, we've seen that European pricing pressure this year essentially shift our view of the company 1 year backwards, if you will.

So we expected to break the surface this year in terms of sales growth, and that would allow us to deliver some margin expansion. We haven't been able to get that minimal sales growth that we hoped for this year.

As we look forward, we're optimistic that we will be able to achieve that, not least because of the strength, the underlying strength of all the various businesses with the exception of Europe. And therefore, I would simply, at this point, leave you with that sense, that we've kind of moved things a year from where we were at the beginning of 2012.

Obviously, as we finalize the plan, we'll then be in a position to give you a better view when we get to Q4. But that's probably as far as I'll go today.

As far as Advair, Seretide generics in Europe are concerned, we have a generic product which was originally registered in Greece. It's now been approved in 1 or 2 other countries.

It's on the market in 1 or 2 others. Extremely low level of sales, extremely low level of activity.

Very different kind of product, not at all like Seretide in terms of what it is, in terms of the way it feels and looks to the patient. And I think what we'll see is what we've said for a very long time, Tim, that we will get sporadic generics popping up in different parts of Europe in very different ways.

Some countries, it may be substitutable. In many countries, it won't be substitutable.

A lot of these generic companies don't have distribution. And as I said, if you -- the early signs from the putative generics we've got is that they're not really making an impact.

The more dangerous phenomenon in Europe is therapeutic reference pricing where you see brands, not branded generics, but other products in the category. So for example, obviously, Symbicort, but more recently, the Chiesi [ph] fixed dose combinations, being grouped together in therapeutic baskets triggering off price reductions.

That's what caused the problem in Germany and has really driven a huge amount of our price downside this year. Now the good news is once you've been therapeutic -- I'm not sure there's a verb for this -- but once you've been basketed, you can't be basketed again.

So we've been through the step down, but that's more -- that has been where the pain has come realistically. And then, of course, parallel trade.

So Seretide remains -- particularly in light of the genericization of some of the other blockbusters of the industry, Seretide remains one of the really big products in Europe and does attract quite a lot of parallel trade activity. And with the various price cuts we've seen in Southern Europe, we've seen a big step-up in parallel trade.

You're actually -- I think, in the short run, Tim, more for us to be thoughtful about in terms of price risk and parallel trade risk, rather than generics. And I think over time, we'll get sporadic generics.

But I don't -- I think it's going to be kind of an increment effect rather than a major step event. As far as the data is concerned, both melanoma and lung, remember are event-driven trials, so I can't be super precise.

But we do expect both sets of data in 2013. And we should start to see some darapladib data in 2013, although we won't see all of it until well into 2014.

So I think we'll start to get some signals on these as we move into next year, but it's going, particularly for darapladib, it's really going to take the bulk of '13 and '14 before we're going to have kind of the comprehensive set. I think what's very positive about that is that, that will come on the top of the 10 drugs we've already got from the work we've been doing so far this year.

So we think about all of the filings which we're submitting, as we speak, MEK, BRAF already in, dolutegravir already in, Relvar already in, Zephyr on its way, albiglutide on its way, dolutegravir before the end of the year, hopefully. All of those programs are well on the way.

And then on top of that, we obviously have the opportunities with MAGE-A3 and with darapladib in the next year or 2. And then behind that, we have the next wave of products which have been promoted from Phase II to III, the most recent one of which was mepolizumab, which we started Phase III on yesterday or announced yesterday.

So I think in terms of pipeline, it's really starting to look very, very exciting. And while we can't dismiss all the risks until we've gone through the regulatory processes and we started to launch the products, there's no question in terms of both numbers and potential scale of opportunity, we've never had a portfolio like this at GSK, and I'm not sure too many other companies have ever had it either.

And that's a key piece of our optimism for the next few years built on top of what we increasingly think, except Europe, is an extremely solid set of platforms in our growth businesses and a very stable American business. So all of that put together puts -- this, for me, has been an interesting year and a particularly interesting quarter, where we have lots of noise, lots of things which take, if you will, the shine of what the company is.

But actually, the strategic strength of the company is, I think, really beginning to become clear once you peel the paint, the veneer off the top. Once you take that noise out of the system and you look through at what the consumer, the EMAP business, the Japanese business, the American business is doing and then add in the potential pipeline, we really feel like the strategic anchors of the company are starting to look very, very promising.

And that's why we remain committed to the view that we can get pretty quickly back to sustainable sales growth. And what's critical and has been proven during 2012, is if we can get sales growth, then the margin challenges become very straightforward.

If you don't get sales growth, much more difficult. And you've seen in 2012, without sales growth, margin gets very challenging.

With sales growth, margin kind of looks after itself. And that's really the way we're viewing the business over the next few years.

Firstly, just could you fill us in on exactly what broadly does mean there? So are we talking about roughly plus/minus 1% on sales?

Plus/minus 10 basis points on margins? Or on the last comment on margins is that flat, but then less than 30 basis points from Human Genome Sciences.

Secondly, on COGS in fourth quarter versus third quarter, if you could just run us through perhaps what the key differentials are. So how much of the third quarter was product write-downs that you wouldn't expect to see in Q4?

And how does mix effects change between the 2 different quarters? And then thirdly, if you had any communication with FDA around the Breo filing, particularly around the acceptability of the dosing and also the trial, that technically missed significance?

Were there any discussions with FDA prior to or immediately after filing?

Okay, Graham, thanks for that. I'm going to let Simon deal with the first 2 questions.

But in terms of the latter, as you know, we don't comment on live filings. It's a bad habit to get into, to start to talk about this.

So you shouldn't take from that, that we've either had or not had any feedback. We're just not going to comment on it.

And the same is going to be true for all of our filings as we go forward. So what we -- what's discussed with the regulators stay confidential until it's public and we're not going to get into a blow-by-blow dialogue.

So sorry about that. And we're going to stick to it on all of the drugs.

So probably save some questions in the next year or so. But with that, Simon, maybe you could dive into the detail of COGS and the other elements?

So I think you had a couple of questions there. I mean, firstly, on what broadly means.

I think as I've highlighted in my comments, there is a degree of variability around the environment, particularly given what we've seen in Europe in the last quarter and what we're certainly still expecting to be a challenging environment in Q4 that led us to indicate -- there's a range around the potential outcomes. What does broadly mean?

Well, I'll leave that to you. But clearly, there's some risk, that it's below 0, rather than above 0.

I think, as I've also indicated, from a margin perspective, we are very determined, given the pipeline prospects that Andrew has just described, that we invest to make sure that we can commercialize those as quickly and as effectively as we can, if and when we get approvals in place. And so to that extent, we're holding quite a lot of cost ready for that event, as opposed to pulling it out and putting it all back in again.

That, clearly, puts a lot of leverage on the upside and the downside in terms of how we then respond to performance at the sales line. So I think, as I indicated in my remarks, the margin for the year will really be most driven by a direct translation of where we come in at the growth line for sales for the year.

So I think that's kind of probably the best way of thinking about the math on that. I think at the cost of goods level, remember most of the cost-saving initiatives that we're now working on are beyond and built on the original restructuring program.

So there's not big blocks of savings that sort of drop in into a particular quarter. There are a whole series of different initiatives.

The manufacturing savings we called out at the second quarter are probably hundreds of different particular measures that we're running across the manufacturing businesses. So the way in which they phase, the way in which the timing of those benefits flow through, is inevitably going to be lumpy and a little unpredictable.

And we're not managing them to individual quarters. We're managing them to sustainable delivery.

So take a good example, procurement, for instance, which, both on the manufacturing direct side as well as indirect, will probably each contribute over GBP 50 million of savings to the cost structure during the course of 2012, but the phasing of those savings is quite different in the manufacturing businesses from the indirects, just because of when contracts come up for renewal and the phasing of those cycles. And that's one of the reasons that as we look at our forecast for Q4, we expect a bigger contribution in Q4 relative to Q3.

And also, with one-offs, which are always a factor, they're just different. As we called out in Q2, we had some pension benefits in Q2 that generated real value.

We continue to look for other similar opportunities, and we may or may not get some in Q4. But there are some in the pipeline that we expect will favor that quarter.

Did that help?

How much is write-downs and how much is mix is the -- and how would the mix change between Q4 and 3Q in the COGS line?

I don't know that the mix factor changes materially, although clearly what Europe does is a key part of the mix. The write-downs are really relative to Q3 last year, so the principal driver.

But remember, the cost of goods shift is relatively small, so we're talking of kind of pretty tiny numbers here overall. I think the mix and the volume is much more relevant at the cost of goods line because if you see pressure on the sales as we've seen in Europe, you can't move the manufacturing businesses quickly enough.

Some of the benefit we're expecting in Q4 is the response to what we've seen earlier on in the year. It just takes time to work it through.

Just a question on ViiV, please. Can you help clarify what rights you retain to dolutegravir, particularly royalty rights on the single-agent and combination-based drugs?

And could you tell us above what sales level of dolutegravir-based products needs to be reached to make this deal financially beneficial for GSK all-up? And second question is just one on India, really.

The Indian government proposes broader price controls on drugs. Just wondering how this will impact you and whether you still see India as an attractive market for investment for you.

Yes. Thanks very much, Brian.

So as far the dolutegravir and Shionogi confirmed [ph], basically, they get a teens royalty, the same for whether it's single or combination opportunity for them. And in terms of whether it benefits -- it essentially benefits GSK from dollar 1 [ph] in terms of our share of the economics.

But you have to remember, obviously, our share of the economics for the first 12 months or so is that we're taking on a bigger share of the R&D costs than we were previously, which is why Simon mentioned there's a penny of dilution effect in 2013 and '14 because what we're doing is we're moving from that JV sharing of R&D costs to a situation where essentially GSK is taking about 75%, 76% of the costs. Remember at the beginning, of course, you've got more investment cost in the asset.

But in return, we end up with 76% of the ViiV share of dolutegravir plus various other payout mechanisms for the life of the asset commercially. So in terms of its value to GSK, this a fundamental uplift in the percentage of the economics that we will hold, both in, obviously, the short-run investment phase, but also then in the medium long-run commercialization phase, a very significant uplift in share.

And I think we've said previously it takes us into the mid-60s in terms of share of the economics, which is -- makes this a very important commercial asset for us, not just for the sales line, where we will book, we'll consolidate 100% of the sales number, but also the consequence at the earnings line as well because of that increased share of the economics, so that's the way ViiV works. As far as India is concerned, we're still waiting to see what finally gets done or not done.

There's quite a wide range of potential outcomes, Brian, in India all the way from nothing to 3 degrees of potential price legislation. We've operated under the price control order since the early 1980s, and a big proportion of GSK business is still under direct price control from that era.

As you know, GSK has a very, very big Indian business, which is different to most of our global peers in the sense that it is a lower-priced business. Of course, any new expansion of price control will have an effect on us.

My personal view is we'll end up with a 1-year step-shift of whatever the impact is. But actually, we're probably in as good a shape as any business to be able to compete in that larger volume, lower-priced world that price control tends to have created in India over the last 30 years.

And the growth of our Indian business is almost entirely been coincident with the existence of price control. And so we've proven before we can do it.

I personally think it's not a necessary piece of legislation, and actually, there is sufficient premarket price competition in India to ensure that prices are kept under control by the market. And I hope the government doesn't choose to go down an overly aggressive route here.

But even if they did, I think it looks more like a step-shift in the curve rather than a total change in the shape of the curve. And I think, as such, it's not totally uncharacteristic of many events that we've seen in emerging markets, where you can have a setback in 1 year, but within 2 or 3 years, the business looks as robust as it did before the change.

So we'll have to wait and see what specifically comes out. It will be an issue, obviously, to manage in the first year, but I don't think it's going to be a massive curve changer for us.

Just a, firstly, a question for Simon. Just wanted to check if I understand correctly on ViiV.

It appears in the press release that the royalties aren't going to go through the P&L that are payable to Shionogi. They're going to be put on the balance sheet and reduced annually.

So I just want to check if that is the correct interpretation. The reason I asked, obviously, is that most analysts are really upbeat on this product so we could be talking a couple of hundred million of royalties shifted to the balance sheet from the P&L.

And secondly, peering into 2013, if we think about the sort of factors that have kept the lid on growth this year and kept things sort of broadly in line, really not a whole lot changes next year in terms of the flow-through of Europe, et cetera. And the timing of new product launches are such that they're probably going to be back-end 2013 loaded.

So can you give us any more optimism that we won't have another broadly in line year in 2013?

Thanks very much, Mark, and let me ask Simon to address maybe both of those and I'll chip in if necessary.

Okay. I mean I think on the ViiV royalties, it's important to understand that these are royalties that are deferred consideration, they're not royalties in the traditional sense.

So part of the structure of the transaction that we agreed with Shionogi was effectively to pay them partly by their share of ViiV, but also to pay them partly as the product is delivered in terms of an earnout-type consideration. So we have valued that.

It will be held on the balance sheet and we'll amortize it over the life of the asset. Clearly, we'll have to look at the valuation of that as we go forward, but we think we've based it on our current expectation for forecast.

But so if you think about it as deferred consideration, then you can see why we're carrying that on the balance sheet. And I think in relation to next year, I mean, I think as Andrew said, we're still in the process of working through our planning cycle.

I think it's a little early to give you specific color or guidance on next year, which we would normally do in February. So I think that's probably the point when we should have more of that conversation.

Three quick ones. First, on new products, when we look at the new products on pharma and vaccines, their contribution remains still below the 10% mark.

Could you tell us which are the new products which are the most attractive or the ones which are underestimated? And do you have any internal targets to achieve in the coming years in terms of contribution to the total group sales?

And second question, on the emerging markets, the emerging markets are regaining momentum. Could we have some details on that?

Is it due to a base effect or is it also due to the impact of the reorganization that you implemented earlier this year? And can we have an update on the reorganization of the emerging market business?

And last question, on M&A. Given the tough environment in Europe and the still soft top line growth, would you be more active in bolt-on acquisition in pharma and/or consumer?

Thanks, Florent. In terms of the new products, so what we've seen in the quarter is our new products, those launched since 2008, accounted for about 7% of turnover and was up 27%.

Within that portfolio, you've obviously got very new products like Benlysta, up 100%, partly benefiting, obviously, from the consolidation with HGS; Arzerra, up 58%; Promacta, up 59%; Votrient, up 70%; Volibris, up 40%. So it's a very punchy growth rate on what actually is a portfolio of specialized products.

But I think what's really important, I think, we've made no huge secret about this, the company has been highly prolific in the last 4, 5 years in producing assets. In fact, we've had more products -- more NMEs approved by the FDA than any other company through '08 to '11, through the last full year, but they've almost all been specialist products.

And what we've seen is that gradually those products are beginning to turn into something pretty chunky, but they're always going to be limited by the fact that they are in specialist marketplaces. Now what's encouraging is we're seeing them one by one move into material individual scale and keep very punchy growth rates, represented both across, particularly America, emerging markets and Japan, but in some occasions, also Europe; and in that case, particularly Volibris.

If we look forward, what's critically different about the group is that the vast majority of products coming in are now major opportunities. So we're still producing a regular flow of new products in the way that we've proven we can over the last 3 years, but they're moving from being specialist-type products into more mass market or larger scale opportunities.

And clearly, that is going to be the thing that drives the company forward if we can successfully get those products through the final hurdles of regulatory approvals. And clearly, we expect to see a greater proportion of our business being driven by innovation as we move forward.

And that's been the whole game plan all along, and it's absolutely the focus of where we're moving. In terms of the recovery of emerging markets, Asia Pacific, very broad-based is the first thing I'd say.

So we're seeing, across the board, very strong bounce back in the Middle East, which is excellent; and very, very strong performance in China; good, sustained performance in India; and strong Latina; and good Russia. If you look within the emerging market portfolio, you'd see very strong performance of Seretide in places like China, a very strong performance of products like Paxil and Parit in Russia, so different sorts of products driving different businesses, very, very robust.

And based on what I've been able to look at from other companies' Q3 release, I think 11% growth for emerging markets is industry-leading, I think, there may have been only one other company which is in that territory. Very strong and we remain very optimistic about Q4 for that business as well and particularly also because we anticipate a very substantial ramp-up in vaccine deliveries in the next 3 months.

So that's -- very broad-based, very encouraging. I spent today with our emerging market leadership team and I can tell you they have their tails up.

They feel very optimistic about the future. And they're excited now that they have a second -- another opportunity to drive growth because we're also accelerating the pace at which the pipeline of products will reach the emerging market.

So we're looking to bringing products much more quickly into the EMs, and it gives us an opportunity to start to create another tier of business with the next generation of new products over the next 2 or 3 years. So our EM business looks very good.

I'm very optimistic about it as I have been from Day 1, and I think we've demonstrated during this year a real resilience across all the key business areas. As far as M&A is concerned, I mean I think our position hasn't really changed, Florent, which is that we're, generally speaking, a bit less pro-M&A than we were 2 years ago.

Why? Because we've got a big pipeline we want to focus on.

So we want to make sure that we focus on that first. We think that's the best way to create shareholder value.

We don't rule out doing M&A, and obviously, this year, we've done the HGS deal and although it didn't use any cash this year, the Shionogi deal is a really critical deal to make sure that we capture a bigger share of the economic value for GSK shareholders. We'll continue to do those sorts of things, and I don't rule out that we might do the occasional bolt-on, maybe in consumer, maybe in emerging markets.

But I would say our general level of interest is lower now than it has been for the last several years and that's why we've been able to put more back out through the share buyback than we might otherwise have been expected to do. And I think that's pretty much the position we hold today.

Two questions, first, regarding operating margin improvement. On the second quarter call, Andrew, I believe you said, or at least implied, 20 basis points improvement in 2013, which represents the 1-year shift.

Is that correct or do I not remember that correctly? And then secondly, the headwinds that Glaxo has experienced in Europe appear a bit more severe than other companies.

Beyond Advair, what products stand out as particularly problematic? And why will RELOVAIR fare better than Advair once it becomes available in Europe?

So in terms of the shift 1 year to the right, I think there's no question about it, it's exactly what I said at Q2, it's 2 different kind of elements of a conversation. I'm going to just reiterate the sentiment we want to signal to you is a shift to the right.

The exact quantum, we didn't declare up front for 2012, we'll give you a view as we move into 2013, what the appropriate kind of measurement of quantum is, whichever level of guidance we ultimately decide to give. But the sentiment of a shift 1 year to the right is exactly right.

So the notion that we feel we would -- if you remember, we had the long torturous discussion about slowly, gradually expanding our margin. That whole notion of the beginning of a slow and gradual expansion of margin, we believe, has shifted 1 year to the right.

We will, as we give you guidance at Q4, we'll aim to try and give you some points to help you a little bit more. Whether we give you everything you want, we're very frustrating on that front, but -- and I apologize in advance of not giving you everything you want in Q4, which I'm sure we will fail to do.

In terms of Europe, I don't really know whether we see massively different headwinds from other companies. I mean, I looked at a lot of the other companies who've reported sales down 20%, down 30%.

Of course, they've got lots of genericizations going on. They're not really splitting out pricing from volume in all of those numbers.

So I don't really know that it's massively different. If I look at our numbers, we think about 5 percentage points of the 7% are essentially straight price cuts, and I've heard many, many other companies talk about 5%, 6%, so I don't think that's very different.

We have then seen about 1% of accelerated genericized -- forced genericization, and we've seen about 1% of parallel trade impact, which obviously has a price effect. I just don't know whether the other companies share with you that level of granularity.

But I don't actually -- everything I'm looking at shows that the shape of our business in Europe, both on volume and value, is tracking with peer group companies in Europe. So it looks like the whole market is moving in a very similar direction.

I think quarter-to-quarter, you get slightly weird. So GSK, for example, was particularly early in the curve because we had the German Seretide price referencing and we had the German vaccine price reduction, both of which had very significant immediate effects and then very significant reference price effects.

Those stand out, and it's why we kind of got drawn into this early. But the more I look at what's going on in the rest of the industry, it's not at all clear to me that we are a particularly different standout on this, and I think the data I'm seeing says that we look more like everybody else rather than less like everybody else.

Three questions, please. Firstly, on the EU and mandatory generic substitution, should we think that this going to persist at least for another 3 quarters?

And can you give us any insights into what products you're now starting to see this mandatory generic substitution for? That's the first one.

The second question was, in the release, you mentioned a proportion of the businesses is being tender-driven. Is that becoming more of an issue now for some reason?

Does it now introduce more volatility? And if so, why is that increasing now?

And then thirdly, you also mentioned in the release that there are some advanced assets with essentially a need for investment to drive returns were necessary. Are you able to tell us which assets you think they might be?

And also, when do you think the increased investment might be required?

Yes, great. Thanks for the question.

So there isn't a pan-European mandatory substitution regulation, James. There are various countries.

So Denmark, for example, has long had a mandatory substitution. And if you look at the generic marketplace in Denmark, you see very rapid genericization.

What we've seen in the last 3 or 4 months, in particular in France, increased pressure to get pharmacists to switch. So it's not correct to say that there is a single pan-European phenomena.

What is happening is accelerated substitution is being used as one of the latest tools to drive -- try and drive down costs. And so hopefully, that may be just clear as that.

As far tenders are concerned, I think that the only point we're trying to make, and I suppose in a way it wraps up in a general comment, that we think that the quarters are not all that -- because so many things go on quarter-to-quarter, we think it's quite difficult to track the performance of the company quarter-to-quarter, because you've got Q4 this year versus Q3 this year. You're going to have a huge burden of tenders in the fourth quarter.

Why? Because a lot of governments have tried to push its phased purchases towards the end of the year, there's a tradition of shipments at the end of the year.

Those are very simple reasons why you end up with these boluses of tenders at the end of the year. And I think we just want to signal that whether it's tenders, whether it's one-off events, that the quarters do tend to bounce around a little bit, and we feel much better looking at the kind of 6-month, 12-month trends rather than the noise quarter-to-quarter.

Now I know for many of you, who are very focused on quarters, that's probably not music to your ears. But it's the way we view the business.

And I guess we just wanted to reiterate our view that the quarters are a bit vulnerable for this sort of noise. As far as investment is concerned, again, the point here is really to say we know we're under a lot of pressure in Europe, but the most crazy thing in the world for us to do would be to cut back on late-stage R&D on this pipeline of products as a mechanism to offset the earnings impact of price cuts in Europe.

It would just be nuts to do, and we're not going to do it. We are -- the absolute value proposition of this group is to deliver pipeline assets into pro-innovation growth markets around the world and to release that economic value to our shareholders.

It's crucial that we don't allow unrelated short-term pressures to knock us off course. So it's -- the point around the near-term assets, just reiterating, if you will, our absolute determination that we have a very clear view about what drives long-term and in fact, in this case, short- to medium- and long-term value by not taking our eye off or disinvesting at all, from the products coming through.

In terms of commercial support for the front -- the leading edge of the pipeline, we're in pretty good shape, because most of the assets which are due in 2013 and the beginning of 2014 are very much in therapeutic areas where we have big established organizations like oncology, like respiratory, like HIV. The challenges around building out resources become more applicable when you move into areas like diabetes a little bit later in the cycle.

But even there, we have resources on tap in the U.S. It's more of an issue for us in the rest of the world.

So I don't think you should be concerned about short-term commercial investment pressures. And what we're simply trying to signal is that we're not going to be diverted from the R&D delivery because of short-term European pricing dynamics.

It's Kerry Holford, Credit Suisse. Three quick questions, please.

Just to clarify, do you need the negative 7% price impact in Europe to ease as you move into Q4 in order to achieve your full year guidance or essentially not -- just not worsen? Secondly, could you tell us which vaccines have been pre-ordered in those EMAP tenders for which we should then see a bolus revenues to be booked in Q4?

And then finally, at their Q4 results last week, Novartis highlighted that the IFRS pension change will increase the annual pension costs for next year. Do you have a feel for what this accounting change may mean for GSK pension costs next year and beyond?

Thanks very much, Kerry. I'll ask Simon to comment on the pension dimension.

As far as the vaccines are concerned, it's a whole -- it's all of them, basically, so it's broad portfolios of vaccine business in a variety of geographies. So I don't think there's any particular thing to call out within that.

If there was anything, I'd say that probably of the 30 or so tenders we expect in EMAP, maybe Simplirix will be the one that kind of tops within it. But even then, it's a bit to the bigger end of the scale, but it's pretty much covering the whole portfolio of business.

Essentially, we're anticipating, at this point, that pricing in Europe doesn't get any better for the next 3 months. So we're not -- in our view for the year end, we're not anticipating that the 7% gets a lot better.

We're not anticipating it gets a lot worse either, but we're certainly not anticipating that the 7% gets a lot better. And Simon, maybe you could comment on the pension point?

Yes. I think we're still working through the detail, but I think as a rough number, around GBP 100 million increase in terms of our pension expense next year will be the effect.

There will clearly be some restatement to 2012 to make it comparable, but the additional cost will be around GBP 100 million.

I've got 2 questions please. First, Andrew, as you look at the shape of the business from kind of a 3- to 5-year perspective, it looks like a lot of the growth is going to come from the pipeline products delivering.

And I think consensus and investors kind of seem to have a slightly less optimistic view of that than GSK. Can you point us to some markets along the way from a commercial perspective where your strategy might be prone to be the right one in that sense?

And secondly, as you think about the growth rate for Advair, Seretide in China, up 46%, that's truly impressive, was there any onetime kind of stocking impact on that? Or should we assume that to be the running kind of growth rate over the next few quarters?

Okay, great. Listen, thanks very much for the question.

In terms of -- ultimately, for investors in the market to come to their own conclusion about what our prospects are, our view is we're developing a battery of new assets, which really speak to major market opportunities, first of all. We think, in many cases, they are going to represent key points of differentiation, and we think they're going to give us -- and in many cases, we're going to be there potentially with best in class, potentially with first in class.

We've seen, in a number of our competitive arenas, competitors run into quite a few problems with their own programs, particularly in the respiratory marketplace. So I think our sense is that we're in a good shape.

I'd reiterate that although the products that we've introduced in the last 4 years have been, by definition, very small because they've been in specialist arenas, the individual performance and market share dynamics are looking more and more encouraging. And I think that reassures me that we have a capability to launch these products.

And we're going to have, with a fair wind, multiple waves of opportunity. And I think if I've done a poll of everybody on this call in February of 2011 and said, "Okay, in October of 2012 you have to tell me how many of the 12 drugs that we report on are going to be positive," I don't think many people would have said 10.

But 10 have come out positively. We still have 3 more to report before the end of the year.

And as I said already on this call, we then have 2 very significant, albeit more wildcard-type opportunities, with MAGE-A3 and darapladib, next year. And then we're into the next wave of products like mepolizumab, p38, et cetera, et cetera as we move forward.

That is a tremendous quantum of material opportunity going forward, all coming on top of a business where we're now talking about 2 or 3 points of drag in a quarter, whereas, for the last 7 years, we've been talking about billions of dollars of genericization and Avandia business is going away. So the relative stability of the base, looking much better.

We've seen, again, from FDA, the prospect of a generic Advair significantly receded again in America. All of those things really say to you that the basics are in place, the platform is solid.

Within that platform, with the exception of Europe, every single business is either growing or it's on the verge of growth because it will stay in the pipeline and by that, I mean the U.S., of course. Every other business is in significant growth.

We have to address Europe, which we've made very clear we will. But our view is that, that portfolio of growth businesses, plus the pipeline, plus the fact that we now have over 40% of our business in the growth markets of emerging world and Japan, this is why we're confident for the future.

Now am I disappointed we couldn't quite synchronize it to the quarter in 2012? Yes, I am.

But it doesn't change my view that actually, during this year, the strategic prospect for GSK have strengthened because of the improving performance of emerging markets, the continued performance of consumer Japan, the strengthening of America and the great delivery of the pipeline. And we just need to try and get all of that across the goal line in the next year or 2.

And I think the group is then in a very clearly massively differentiated position from most of our competitors. And that's always been the game plan for GSK, and that's what we're going to try and deliver.

With that, I think we'll maybe bring the call to a close and thank everybody for your attention. Appreciate the questions.

Obviously, the GSK IR team are available to answer more detailed questions as you update your models. But in the meantime, thanks so much for your attention today.