GlaxoSmithKline PLC

NYSE:GSK

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the GSK 2017 Full Year Results Call. [Operator Instructions] I'd like to advise all parties, this conference is being recorded. And now I'd like to hand over to your host for today, Sarah Elton-Farr, Head of Investor Relations. Please go ahead.

[Sarah Elton-Farr]

Thank you. Good morning, and good afternoon, everyone. Thank you for joining us to discuss our full year 2017 results, which were issued earlier today. You should have received our press release and can view the presentation on GSK's website. For those unable to view the webcast, slides that accompany today's call are located on the Investors section of the GSK website.Before we begin, please refer to Slide 2 of our presentation for our cautionary statements. Our speakers today are Chief Executive Officer, Emma Walmsley; Luke Miels, President of Global Pharmaceuticals; and Simon Dingemans, Chief Financial Officer. Following our presentation, we will open up the call to questions and answers. [Operator Instructions] Joining us for Q&A are David Redfern, our Chief Strategy Officer and Chairman of ViiV; Brian McNamara, CEO of our Consumer Healthcare business; Luc Debruyne, President of Global Vaccines; and Patrick Vallance, our outgoing President of R&D. Our incoming Chief Scientific Officer, Dr. Hal Barron, will be joining us on our Q1 call in April. And with that, I will hand the call over to Emma.

[Emma Walmsley, CEO & Director]

Thank you, Sarah, and good afternoon to everyone. Before I begin, as this is the last call that Patrick will be representing GSK, I'd like to take the opportunity to reiterate my thanks and appreciation to him for all he has done for GSK and very importantly, for the patients that we serve.So a strategic strength for GSK is our balanced business profile beyond pharma, the sustainable growth returns and cash flow. And I'm pleased to say that we delivered growth across all 3 businesses in 2017, with sales reaching over GBP 30 billion for the first time as well as group operating margin accretion and improved earnings and cash flows.With growth in all 3 of our businesses this year, we delivered group sales growth of 3% in CER terms. In pharma, our new respiratory portfolio grew strongly at 75% and more than offset the decline in Seretide/Advair. We continue to have high expectations to growth with this new business, and Luc is going to talk you through some of the detail on that in just a moment.In HIV, we continue to deliver strong double-digit growth, driven by increases in market shares for both TIVICAY and TRIUMEQ. We also saw the approval of JULUCA, the first of our new 2-drug regimen in HIV, allowing us to establish a new paradigm in the treatment of this increasingly chronic disease.Within Vaccines, we also continued to deliver good growth, with sales up 6% at CER. The key drivers being meningitis and influenza vaccines, and their strong performance was partly offset by competition in pricing on some of our established vaccines.In Consumer Healthcare, we saw improving sales momentum throughout the year, with strong performances in wellness and oral health, offsetting the impact of a weak U.S. season and competitive pressures in allergy as well as divestments in the implementation of GST in India. Our power brands continued to deliver strong growth above market levels, and this has helped drive margin improvement that Simon will talk you through shortly.At the group level, we delivered margin improvement of 40 basis points in CER terms as we improved cost and cash discipline while still investing behind our priority launches and R&D programs, including the investments in a Priority Review Voucher to accelerate the introduction of JULUCA. And this has driven adjusted EPS growth of 4% and free cash flow of GBP 3.4 billion, an improvement on 2016 of GBP 400 million.In July last year, I laid out my long-term priorities for the whole company: innovation, performance and trust. There are changes and new focus that we need to reach our goals and to position us for stronger growth post 2020, especially within pharma and most specifically, of course, within R&D, where we're focused on making the right choices and changes as data reads out. Innovation comes first, and we've made real progress here. Last year, we achieved 3 major new approvals in the U.S.: SHINGRIX, a new standard of prevention in shingles, and Luke is going to talk about that in just a moment; TRELEGY, the first once-daily single inhaler triple therapy for COPD; and JULUCA, the first of our new 2-drug regimens in the treatment of HIV. We are ambitious for each of these launches, which are now getting underway.We're also advancing our pipeline and presented very encouraging data on our first-in-class BCMA asset at ASH in December as well as exercising our option rights to NY-ESO from Adaptimmune in cell and gene therapy. And we're putting new discipline into pipeline governance under new leadership.We've also made progress on our performance and trust priorities. We've reprioritized resources to those areas best able to deliver growth, whether product or geographies. We're fueling this through ongoing cost, cash and capital discipline and good progress on implementation of the restructuring of supply chain and our commercial pharma business.We've made some changes to our medical engagement policies to strengthen interactions with key external experts. We're also maintaining our leadership within global health, be it in antimicrobial resistance or malaria, where we solved an NDA to tafenoquine, which, if approved, will be the first new medicine for the prevention of relapsing malaria in over 60 years.And we've seen meaningful improvements in employee engagement scores, which, as you know, are an important driver of performance.Of course, to deliver these priorities and lead our culture change, which underpins them, what matters most is the caliber of our team. In our top roles, we're bringing proven track records, new capability, fresh perspective, diversity and leadership strength with 3 new executive team members and are making significant changes within the next layer of management also. We're focused on having the very best talent possible in the top 370 critical roles for the company, and are aggressively building a winning team to drive change of scale and pace. And I expect that to continue.Many of you will already know Hal and Luke from their previous roles, and they've already made a start -- great start, making changes to the pharma business. But Karenann, previously CIO at Walmart, also plays a critical new role with oversight for how GSK uses digital and technology to improve performance across the group.I'd now like to hand you over to Luke, who's going to give some detail on the commercial priorities and growth opportunities in his area. Luke joined us just in September and is responsible for pharma commercial activities, excluding HIV, which I will come back to you personally later, and is also responsible for our global vaccines commercial operations. Luke, over to you.

[Luke V. Miels, President of Global Pharmaceuticals]

Thanks, Emma, and good morning and good afternoon, everyone. So this is my first earnings call since joining GSK in September last year, and it's a pleasure to update you on our progress today. We'll go to the next slide. Thanks. So over the last couple of months, I've had the chance to look at the commercial team and the pipeline in some depth and to assess how we can achieve our IPT goals. From visiting the markets and meeting the project teams, a few things became clear. When we're focused and actively competing, the results were strong, as evidenced by the new product sales reaching nearly GBP 6 billion at constant rate on this slide, almost 3 years ahead of the original 2020 target. There was, however, less focus and more management layers than optimal. And these are now starting to be addressed by simplifying our approach and more focus. And in a very much back-to-basics way, we use the IPT to make our products a central focus for commercial. Linked to that, we've prioritized the geographies where we can create the maximum revenue and ensure that, that results to success. Finally, the structure and the people we put in place had undergone material change to bring a more competitive and faster-moving mindset. These changes, when fully executed, are designed to maximize shareholder value by using TRELEGY and NUCALA to blockbuster status and driving the strong uptake of SHINGRIX and importantly, enabling commercial to work closely with R&D to select and accelerate the most attractive projects in the pipeline. And I'm certainly looking forward to working with Hal.Moving to our new vaccine, SHINGRIX, on Slide 11. As the title says, SHINGRIX represents a new standard of prevention, with more than 90% efficacy in the prevention of shingles. We're very pleased to have a preferential recommendation from ACIP, giving a target universe of over 100 million patients in the U.S. alone. And our focus is now getting all of the ducks in a row, so that when a patient walks into the pharmacy and asks for the vaccine, it's in stock, it's reimbursed and a health care provider knows how to give it. I'm pleased to say we're advancing this process and negotiating access with commercial and Part D plan. And in parallel, we're beginning to stock pharmacies and educate health care providers.We see a 3-phase launch. Firstly, [ counter-deeding detailing Merck ] because these guys are still out there; then targeting ZOSTAVAX patients for revax; and then in the third phase, driving market expansion. And the main thing and the rate-limiting step once we have access would be the velocity of which patients come in for vaccination.Looking now at our Respiratory portfolio. I want to highlight the growth and opportunity we see for NUCALA. The key factor for NUCALA, in my mind, is the strong and consistent efficacy outlined in the chart on the left-hand side. This efficacy, I think it's fair to say, is the best within the IL-5 class when you look at the level and consistency of exacerbation reductions. This efficacy is visible and compelling even at a relatively low eos level of 150, which you can see here delivers a reduction of 56%. And at 300 eos, NUCALA was able to show a reduction of around 60% or more than 60%. And these effects were found to be very consistent across studies. We believe we'll see significant growth ahead with this exciting product as there are still thousands of patients with severe asthma that might benefit from an IL-5. And in addition, we'll be launching NUCALA for EGPA later in Q1; and pending FDA approval, COPD, before year-end, with NUCALA expected to become one of the largest contributors to our respiratory portfolio by 2020.Next slide, please. The other growth opportunity I'd like to talk to you about is TRELEGY, the first once-daily, closed triple treatment for COPD, which is on our excellent Ellipta platform. The introduction of TRELEGY into this market sets a new standard for the treatment of COPD, with the data from the IMPACT study consolidating the role of triple therapy. With FULFIL and now the IMPACT study, the data showed superiority of triple therapy over dual, with significant reductions in exacerbations against Breo, Anoro and Symbicort. And I'm pleased to add that we've also submitted an sNDA to add the IMPACT data to our label, and we've also submitted this landmark study for publication in a leading journal. We started to roll out our launch plan and promotion to 8,500 pulmonologists in the U.S. began in mid-November. Naturally, the longer-term success is driven by the expansion of promotion to primary care doctors while accelerating the strong start with pulmonologists. We also have made good progress on access, and since early January 2018, commercial and Medicare Part D coverage has been secured at several of the top national players. For active promotion, the IMPACT study will begin if the sNDA is approved by the FDA later this year. And I would add, market research we have so far indicates that customers will find this additional data highly motivating. But before that, we expect the sales build to be steady but after approval, a more rapid uptake, and I'm highly confident -- we're highly confident of the longer-term potential for TRELEGY.And with that, I'll now hand over to Simon, who'll talk you through our financial results and 2018 guidance.

[Simon P. Dingemans, Chief Financial Officer and Executive Director]

Thank you, Luke. The results we have reported today are in line with our guidance for the year and reflects our continued focus on execution. This includes driving growth for new products and our recent launches; second, making sure we are controlling costs tightly to create the flexibility to help build better operating leverage across the group while also making sure we are investing behind our key future growth drivers; and third, improving our cash generation to give us more capacity to support those investments as well as the dividends we pay to shareholders.Our earnings release provides an extensive amount of information, so I'll focus on major points, our expectations for 2018 and important comparators to take notes of for your modeling. As usual, my comments will be on adjusted results and on a constant exchange rate basis, except where I specify otherwise.Starting with the headline results, sales up 3%, above GBP 30 billion for the first time. Adjusted operating profit grew ahead of sales, up 5%, with profit growth in all 3 businesses reflecting improved operating margins in Vaccines and Consumer and despite some margin pressure in pharma as we invest behind new products, including utilizing the PRV, and continue to transition the Respiratory business.Adjusted EPS was up 4%, in line with the guidance we provided in July. Free cash flow grew 14% on a sterling basis, reflecting operating profit growth, a greater focus on cash and the benefits of the currency tailwind.Turning to total results. Compared to 2016, there are 3 main differences in the items not included in the adjusted results. First, intangible impairments were higher than -- were higher in 2017, reflecting the decisions announced in July last year to focus the portfolio and make a number of divestments and discontinuations, including Tanzeum and sirukumab. Second, transaction-related adjustments were significantly lower than in 2016, primarily because compared to last year, we have not seen the same level of currency swings or business-driven adjustments to the valuation of the contingent consideration and puts. The other big difference versus last year is the impact of the U.S. tax reform as passed in December. The reform is a net positive for us and boosts the estimated after-tax valuations for our U.S. businesses. As a result, we've recorded related charges of GBP 666 million as part of remeasuring the liabilities for contingent consideration and the Consumer and V puts. We've also recorded tax charges to reflect the impact on our U.S. deferred tax assets and the repatriation tax. In aggregate, these charges were worth GBP 1.6 billion of earnings or 33.3p per share. I'll come back to the subject of U.S. tax later since we also expect a benefit to our effective tax rate going forward.Turning to sales. Pharma sales, up 3% despite a 1% drag from divestments, with strong growth from HIV, our Ellipta portfolio and NUCALA, partially offset by declines in Seretide/Advair and established products. In 2018, the HIV business, including some sales from JULUCA, is expected to continue to deliver good growth, albeit at a lower rate than 2017, after taking into account the larger base of the business. We have factored in a reduced drag from generic Kivexa/Epzicom.We also expect further progress from our new respiratory products, including the first contributions from TRELEGY, even though Seretide/Advair continues to decline. I'll come back to our expectations for Advair in our guidance in the event the generic Advair launches in a moment. But if we do not see a generic in 2018, we expect the momentum in HIV and new respiratory to deliver low-single digit top line growth for pharma, overall offsetting declines in older products including Established Pharmaceuticals.Improvements in supply helped the 2017 performance for this group, with sales for established pharmacies goes down 5% after a 3% drag from divestments. We will continue to rationalize these products where we see opportunities to deliver value. Growth in 2018 will continue to be impacted by some of the divestments made in 2017 as well as some expected in 2018. And we anticipate sales from this portfolio to decline this year at a mid- to high single-digit percentage, with the exact rate depending on the timing of when the current year divestments are completed.In Vaccines, we generated significant growth from the Meningitis and Flu portfolios, finishing the year, overall, up 6%. And remember, this was against last year's strong comp, which was up 12%. We continue to expect this business to be a mid- to high single-digit grower over the period of 2020 despite increasing competition for our pediatric and flu vaccines. Growth from the launch of SHINGRIX will add to contributions for meningitis and other established vaccines.In terms of phasing, vaccine sales will continue to be lumpy due to tenders and CDC stockpile movements. The pace of the SHINGRIX rollout may also vary quarter to quarter as we build demand and get coverage in place.Consumer delivered low single-digit growth despite the headwinds that Emma mentioned. Q4 saw a bit better consumption than we had expected in some of our key markets, including a decent start to the cough/cold season. The international region also benefited from comparison to a weak fourth quarter last year, which was impacted by demonetization in India.In 2018, we continue to expect low single-digit growth from Consumer after factoring in the impact of tail brand divestments, the TDS generic and the impact of GST in India, which, in aggregate, are expected to reduce growth by about 1.5 percentage points on a reported basis.We remain confident in the long-term profile of the Consumer business and in the outlook for low to mid-single-digit top line CAGR to 2020. Moving to the operating margin. We delivered a 40 basis point improvement in the group margin at constant exchange rates. COGS as a percentage of sales improved 50 basis points, with benefits from product mix and cost savings helping to offset price pressure in the inhaled respiratory market as well as investments in our supply chains.SG&A as a percentage of sales also improved 50 basis points, including benefits from sales leverage and cost discipline. We're continuing to build more flexibility into our cost structure, allowing us to reallocate expenses more easily and quickly, limiting growth in SG&A behind sales and focusing it on support for the new launches and other higher returning investments.R&D was up 8%, reflecting investments to strengthen the pharma pipeline and to accelerate and expand support for the high-priority assets. This includes an investment in the PRV we used in 2017 to accelerate JULUCA, which drove about 3% of the 8% increase. We continue to prioritize developing the pharma pipeline and will likely continue to rebuild our R&D spend over the next couple of years, subject to how the data comes in.Our royalties on Cialis came to an end in Q4, which is reflected within the overall decline we saw in 2017, and we expect the total royalty number to decline further to around GBP 200 million in 2018. You can see many of these factors play out by business. The pharma margin was down 600 basis points in constant exchange rates, in large part, reflecting investments in the pipeline. The 2018 margin will clearly be very dependent on how Advair performs. And particularly, whether and when we see a generic, Advair is still among our highest margin products.The Vaccine margin was up 1.3% in constant exchange rates, with the benefit of product mix and some one-off inventory adjustments, offsetting significant investment to expand capacity and prepare for the SHINGRIX launch. In 2018, we expect to reinvest a decent proportion of the expected leverage from sales growth into the ongoing launch of SHINGRIX and expanding capacity for our meningitis and other vaccines. The Consumer margin was also up 1.3% in constant exchange rates and continues to make good progress towards our 2020 target through a combination of power brand growth and strong cost control. All 3 businesses remain on track to deliver the margin outlook we have provided for 2020, remembering that these are at 2015 rates.Looking at the factors that will impact our overall operating margin in 2018, with Advair and generics more likely, we will continue to carefully balance the need to invest in the businesses with benefits from cost savings and expected leverage from sales from our new products. We've ratcheted up cost discipline across the group. On COGS, this include supply chain efficiencies from a mixture of site closures, consolidating our manufacturing supplier base and simplifying our global distribution and logistics network. We're also stepping up our focus on procurement through a new global organization. I'm very much using the lessons from the Consumer integration to target a much more consistent level of annual savings across our global spend. This will contribute to COGS but also SG&A efficiency, even as we invest behind our growth drivers. This will also be helped by the benefits of our restructuring program and the multi-year upgrading of our systems and functional organizations that is now coming to an end. We are particularly targeting noncustomer-facing spend to keep G&A costs flat-to-down, even after absorbing inflation -- inflationary pressures globally.Turning to the bottom half of the P&L. We continue to deliver financial efficiency, including successfully refinancing maturing debt during 2017 and holding net financing costs relatively flat. For 2018, we expect net interest will again come in broadly similar to 2017. On tax, we estimate U.S. reform will benefit our effective rate by 2 to 3 percentage points and will also help stabilize the rate, which we previously expected to rise over time. For 2018 and going forward over the next few years, we expect an effective tax rate of 19% to 20%. After accounting for minority interest, we expect about 2/3 of the benefit to drop to our net earnings. The lower tax rate will increase our flexibility to support our capital allocation priorities, particularly pharma R&D. Minorities, meanwhile, are expected to reflect the growing after-tax profits in our HIV and Consumer businesses.Moving on to cash generation and net debt. We remain focused on driving greater cash discipline across the group. Beginning in 2018, we've instituted a new company-wide incentive plan directly linked to improving cash flow that pushes targets directly down into the individual businesses for the first time. We've increased free cash flow by over GBP 400 million in 2017 to GBP 3.4 billion after investing GBP 106 million to the PRV and around GBP 450 million into inventory, primarily to support the new launches. As those launches progress in 2018, we expect to continue to drive down the number of inventory days as well as begin to reduce the absolute value at constant exchange rates.As expected, reductions in cash restructuring spend also helped deliver the 2017 cash flow improvement. As we indicated in July, we expect similar levels of cash spend this year as we accelerate the final stages of our restructuring program to deliver the benefits more quickly.CapEx has been a significant commitment as we invest it behind the launches, the expansion of our Vaccines capacity and the upgrading of our operational systems, but we are now moving past the peak of the tangible spend. We have instituted a new cross-company capital allocation review process to ensure we are prioritizing investment more sharply, backing the priority assets on highest returning opportunities for growth while also making sure we keep our infrastructure fully up-to-date with expected standards.These reviews were also a key driver to some of the disposal decisions taken last year. In 2018, we expect total CapEx, tangible and intangible, to be around GBP 2 billion, with most of the reduction in tangible spend. We continue to look for further opportunities to improve the efficiency of our capital allocation processes. More broadly, we expect our 2018 cash flows to be again weighted to the second half of the year as they were in 2017. This is due to some seasonality and a higher contribution from the new launches in the second half but also the impact on free cash flow in the first half with the milestone of GBP 450 million going out to Novartis due to the growth in Bexsero. This is being paid at the end of January and should be factored into your model as the reported free cash flow for 2018. Net debt was down GBP 1 billion from Q3 to GBP 13.2 billion, reflecting a strong free cash flow generation in Q4.Looking at 2018, the outlook clearly depends on whether Advair encounters substitutable generic competition in the U.S. If there's no generic in the U.S. this year, then we would expect core EPS growth of 4% to 7% on a constant exchange rate basis. This is based on an expected decline of around 20% to 25% in Advair's U.S. sales in 2018, which reflects somewhat higher expected discounts and rebates and further transitioning to the new Ellipta products.However, it seems more likely now that a substitutable generic to Advair is launched in the U.S. during 2018, given the filings that have been made. Clearly, the time lines, the pricing strategy and supply capacity of any generic are all uncertain. So as last year, to help you with your models, we have estimated the impact of a mid-year generic. In this event, we would expect U.S. Advair sales to decline to around GBP 750 million at constant exchange rates by $1.30 to the pound and for adjusted EPS to be flat to down 3% at constant exchange rates. We'll update you as and when we have more clarity, but realistically, it's likely to take some time for the potential impact to be clearer, most likely not before the middle of the year, even if the generic comes earlier.Currency will also impact actual sales and earnings growth on top of the CER performance. Given the recent strength of sterling, if exchange rates remain at the average January rates for the rest of the year, we'd expect a headwind of around 4% to sales and around 6% to EPS.On either adverse scenario, we are increasingly confident in delivering on our financial outlook for the group of mid- to high single-digit EPS growth over the 5-year period through 2020, given the progress we're making with our new products and the benefits from U.S. tax reform.The new products we identified back in 2015 have now almost reached a GBP 6 billion target 3 years early and with clear momentum. And as a result, we will not report on this particular target after this set of results. Finally, we delivered on the dividend expectations we laid out at Q2 last year, with 80p declared for 2017 and 80p expected for 2018.And with that, I'll hand you back to Emma.

[Emma Walmsley, CEO & Director]

Thank you, Simon. So good progress on our priorities in 2017. Let's conclude with priorities for this year ahead and our outlook.Our long-term priorities are innovation, performance and trust. In 2018, we're particularly focused on 3 things to make progress on these, all underpinned by a necessary shift in culture. First, excellence in commercial execution. Luke already covered our plans for SHINGRIX and Respiratory. HIV is, of course, our other leading therapy area in pharma, and I'll take just a moment to update you on our progress here. We have built a winning portfolio with our leading integrated inhibitor, dolutegravir. Although we do anticipate the imminent introduction of a competing agent to the market, we believe we have the best core agent with the strongest set of data, with 5 studies in which superiority was demonstrated. The 2 comparative studies of the competing agent versus dolutegravir that have been published to date have shown noninferiority, but in both cases, with the trends favoring dolutegravir. And in our view, the data doesn't give any medical reason why patients taking either TRIUMEQ or TIVICAY should switch. We also offer the greatest degree of flexibility to patients. In addition to TIVICAY and TRIUMEQ, we are now launching JULUCA, the first of our oral 2-drug regimen for well-controlled switch patients looking to reduce the burden of medication.And we continue to lead the way in innovation in HIV therapy. In mid-2018, we expect to receive the 48-week Phase III data from the GEMINI study of dolutegravir plus lamivudine, which will form the basis of a submission for our second oral 2-drug regimen. And by the end of the year, we expect to have Phase III data from the ATLAS and FLAIR studies on our long-acting injectable 2-drug regimen cabotegravir plus rilpivirine. With this growing portfolio of assets, we believe we are well-positioned to meet the changing and different needs of HIV patients as lifespans and the durations of therapy increase.The second very important priority this year is strengthening our R&D performance. We have new leadership in place, with Dr. Hal Barron having joined us just last month. And before he joined, we'd already taken some steps to prioritize our pipeline and improve development discipline with better commercial input, but there is further work to do. And as data reads out, you should expect some assets to fall back and others to be accelerated. Hal will be giving you our first update on the direction and priorities for R&D at Q2.And finally, a third major focus for us in 2018 is cost, cash and capital discipline. We will be allocating resources to those areas where we see the best returns. We're proceeding with the divestments and the review of the supply chain that we outlined last year. And we're in the process of restructuring our commercial operations. And to ensure the entire organization is focused on this, starting from 2018, cost and cash discipline will be included in incentives for all employees.Let me reiterate our capital allocation framework and our dividend policy as laid out at Q2 last year. Our main priority is to invest in the business, with pharma and its pipeline #1, so we can ready the company for its next wave of growth. Then we have investments in the Consumer business put option, should it come, which should strengthen our position in consumer healthcare, and we expect would be accretive to EPS and free cash flow. And then also further investments to expand capacity in our growing Vaccines business and support exciting new launch. Nothing will compromise our investments in the business to drive long-term growth and return. Our second priority will be to deliver cash returns to our shareholders through payment of dividends. And similarly, there's no change to our policy. Dividend payments will be determined primarily with reference to free cash flow generated after funding the investment necessary to support growth, and we're aiming to rebuild our dividend cover. Given all these, we've indicated we do not expect an increase in the dividend in the near term, and we expect to pay 80p in 2018. And lastly, we would use cash for business development purposes, with scale M&A obviously dependent on the right kind of return profile.So in conclusion, clearly, in 2018, we faced the potential challenge of generic Advair, and the shape of our earnings trajectory over the medium-term will be impacted by the timing of that. But we have planned for it, and we are ready for it. And we are confident of delivery of our 2018 guidance.And the launches and opportunities we have, combined with the performance improvements we're making and the benefit of U.S. tax reform, provide us with increased confidence in our ability to drive growth over the next 2 to 3 years and deliver our 2020 outlook. And as a reminder, beyond the Advair genericization, we do not expect significant generics until beyond the mid-2020s.So in addition to good momentum in our recent launches with Bexsero, Menveo and our Varilrix portfolio, we have the landmark preferential ACIP recommendation with SHINGRIX, which accelerated our expectations for this launch. We have compelling data from the IMPACT studies of TRELEGY, which underscores the place of inhaled corticosteroids in this treatment of COPD. We have the leading biologic therapy for the treatment of asthma with NUCALA, with more consistent data than competing agents from the market or in development. And we have an exciting and robust data package and a comprehensive range of treatment options with dolutegravir and potentially, cabotegravir in HIV.So in conclusion, we are confident in delivering our 2020 outlook of mid- to high single-digit EPS CAGR.And now all the team are ready for your questions. So operator, if you could please open the line for Q&A.

[Operator]

[Operator Instructions] And your first question comes from the line of James Gordon from JPMorgan.

[James Daniel Gordon, Senior Analyst]

A couple of follow-up questions on HIV, please. So I think consensus has got low double-digit HIV growth this year, but there's also some concern around whether that will be achievable in light of the Gilead competition. So 2 questions, so first one is just about patient stickiness. As in how quickly do HIV patients switch between therapies? How often do they get the opportunity to? And particularly mindful of patients who might already be on TIVICAY and Descovy, they might have to switch to a single product from Gilead. And the second question would be HIV growth drivers. I think some of them were mentioned earlier in the presentation, but what are the biggest growth driver or the biggest offset to the competitive pressures? Is it probably GEMINI involving JULUCA? Or is it other factors? What's going to provide a bit -- the most defense?

[Emma Walmsley, CEO & Director]

Thank you very much, James. And I'll ask David, the Chairman of our HIV business, to take up both of those.

[David Simon Redfern, Chief Strategy Officer]

Thanks very much, James. So I think on your first question, I would expect it to be pretty sticky. I think HIV is an increasingly chronic disease. Patients who are well-tolerated, well-controlled, typically now visit their physician probably only once every 6 months or so. So it's relatively conservative. I think that's the first point. Secondly, as Emma said in her remark, I think when you look at the clinical data, we don't see any good medical reason why patients well-controlled and well-treated on dolutegravir today should switch to something else. Just going to that in a little more detail, I mean, we've now seen some of the pivotal studies on bictegravir and in particular, the 2 head-to-head studies that were presented at IAS in Paris last summer. First of days and probably most pertinent to your question was the comparison of BIC/F/TAF with Descovy/TIVICAY. Those are the straight comparisons really of bictegravir and dolutegravir, given the nucleosides are the same. It was not inferior on its primary endpoint of our HIV RNA levels, less than 50 copies. But it clearly trended in favor of dolutegravir, I think 93% versus 89%. And actually, if you drill down into it in some of the patient subsection, sicker patients were far, far low to 94% versus 86%. And patients over 50 years of age, 95% in dolutegravir's favor versus 88%. And then the second pivotal study was the comparison of BIC/F/TAF versus TRIUMEQ. And again, it was not inferior but slightly in TRIUMEQ's favor, and really no significant differences that we see in the side effect profile. So I think that really reinforces those patients doing well on dolutegravir. I think they, in that position, we'll be keen to keep them there. And thirdly, I'd just say, I mean, of course, we expect the competitive intensity of this to go up, but we've invested significantly in our U.S. medical and commercial organization. We have very deep relationships and credibility, I think, to make all these arguments. In terms of future growth, very much from the dual regimes and long-acting, if the GEMINI studies are positive, I think that we would expect that over time to become the bigger opportunity because it's in naive patients as well as potential to switch. So we see that's where most the growth is coming from. And then as we introduce long-acting in a couple of years also, we're increasing the confidence around dual therapy.

[Emma Walmsley, CEO & Director]

Thanks very much. Can we have the next question please?

[Operator]

Of course, it comes from the line of Graham Parry from Bank of America Merrill Lynch.

[Graham Glyn Charles Parry]

So first one is on the tax rate. You talked about 19% to 20% for 2018 and beyond. It sounded like you're saying that some of that would be reinvested in R&D in the business. So did I understand it correctly? We shouldn't expect at all the tax benefits to drop to the bottom line? And what tax rate should we assume for the Consumer and V's businesses when we're calculating the impact or the offsetting impact of tax reform on your minority pay ways? And then secondly, on the Pfizer consumer business, I think your comments at the conference in January seemed to be somewhat dismissive. You're saying you take a look at this but it's not a priority and it's not something you'd directly compromise your ability to rejuvenate pharma R&D, and yet news-wise, they're now reporting that there are 2, but it's less than which GSK has won. Obviously, highly speculative. But I'm just wondering if you can help us square that circle and probably give us an update on your comments from January.

[Emma Walmsley, CEO & Director]

Thank you very much, Graham. So I'll hand over to Simon first to answer the tax question. Although, obviously, overall, this is good news in terms of the increased flexibility it gives us. And then I'll come back to your second question also. Simon?

[Simon P. Dingemans, Chief Financial Officer and Executive Director]

So I think, Graham, as I said in my remarks, you get about 2/3 of the benefit dropping to the earnings line because, obviously, there's more benefits in the 2 U.S. legs of the JV businesses. And I think the other important point is that we think the tax rate is going to be stable now going forward over the next several years, whereas previously, we did expect it to be rising. So that creates a bit more oxygen, if you like, in the system that we can use to drop to the bottom line or we can use to invest in the business where we see decent returns. And particularly, given the focus on R&D, that's why I called that one out as a place where we might want to put a bit more spend over the next several years, and this gives us more capacity to do that and still meet our 2020 outlook of mid- to high single-digit bottom line growth. So that's really kind of the context for that comment. As the individual tax rates for the businesses, I don't think I'm going to go there, but needless to say, there's a complex mix of kind of how the supply chains work, but we'll give you some more color on that when we see the detailed regulations.

[Emma Walmsley, CEO & Director]

So Graham, to the second question, as you'd expect, I'm not going to comment specifically on the process that you refer to and certainly, not on the media commentary either. But I will reiterate what I've said previously. First of all, you would expect us to take a serious look at any major assets that come up in the market. This is an attractive business. We are a world leader in consumer health care, and we have a good track record of integrating businesses effectively. But our first priority remains pharma and both investing in the launches and the execution that we have underway, but also, most specifically, prioritizing the pipeline within pharma. And we will not do anything that cuts across that prioritization. Likewise, we are going to be extremely disciplined around shareholder returns. And maybe, most importantly, we're very happy with our Consumer business as it is and the progress and momentum that it's making. So this is not something that we need to do. And perhaps on that, it's worth calling on Brian to just make a couple of comments on updating on our Consumer business program. Brian?

[Brian McNamara]

Okay. Thanks, Emma. Yes, I mean, as you mentioned, we had a stronger Q4. We have growth of 4.3% and continued margin progression of 130 basis points. And the results were driven by a number of factors, including strong performance of our power brands, which are growing at high single digits in the quarter. And also, all 7 brands are growing share on a global basis, if you look at the latest 3-month period. That's really anchored by some strong innovation like Sensodyne Rapid Relief launching in 40 markets in the back half of 2017. Voltaren No Mess launching in Germany, our largest Voltaren market. And we have some market dynamics. In the U.S., as Simon mentioned, we benefited in front of earlier and more severe cold and flu season in the U.S. But importantly, our Theraflu brand is growing well ahead of the markets. We also are seeing share growth back on Flonase in the U.S. as we anniversary the private-label entry. You'll see that we were flat in the U.S. on the quarter, and that's because the TDS generic impacted the U.S. results. In India, we benefited from demonetization on the base but are also seeing strengthening consumption on Horlicks were also back to share growth. So overall, I feel very good about the health and momentum in the business. As we look to next year, as Simon said, low single-digit growth with the negative 1.5 impact drag from GST, TDS and divestments. But we also expect to see continued margin progression to continue on the path to 20%-plus by 2020.

[Emma Walmsley, CEO & Director]

Thanks very much, Brian. Next question please.

[Operator]

That comes from the line of Steve Scala from Cowen.

[Stephen Michael Scala, Managing Director and Senior Research Analyst]

Advair was about 10% of total revenue in 2017. GSK has previously said that 2/3 of the Advair price pressure has already been experienced. So presumably, if you'll lower the price another 1/3, you could sell all you want. It would imply that about 3% of total group sales are -- or turnover is at risk. So given this, it's hard to envision why the bottom line will be impacted by negative 4% to negative 10% in 2008. Can you walk us through the math that's involved with that, please? And secondly, versus initial expectations several years ago, the U.K. Patent Box benefit didn't seem to be fully realized given GSK's rising tax rate over time, though I realize this is a result in part of geographic mix. But what is the risk that U.S. tax reform leads to a similar dynamic and the benefit we envision is not fully realized?

[Emma Walmsley, CEO & Director]

Thanks very much, Steve. Simon, do you want to pick up both of those two.

[Simon P. Dingemans, Chief Financial Officer and Executive Director]

Yes, I'm not -- I think, Steve, as we talked about before, the complexity of the Advair modeling, if you like, is because we've got a relatively steady now decline in the existing products, and then you have to layer on top when and how does a generic arrives. So we're anticipating this year that we'll see Advair decline 20%, 25%. That's a slightly higher number than we had last year, where I think we guided 15% to 20%. If you kind of look through different [ RAR ] true-ups during the course of 2017, we were pretty much in here from an underlying perspective but within that range to maybe the slightly higher end of it. And then off a smaller base, we're going to continue to decline, hence, the bigger number. And overall though, I think the patent hasn't changed. And equally, when a generic arrives, we're going to go from roughly GBP 1.6 billion of U.S. Advair sales in 2017 to GBP 750 million. That is very, very high-margin business. And when that drops through the P&L, it is going to have an impact on the operating margin for the pharma business, and it's also going to have an impact on the operating margin for the group, and therefore, the earnings position that we've described in the past. And that is factored into the guidance. That obviously falls at a point when we're also trying to invest and have decided positively to invest in the pipeline but also in NUCALA, in TRELEGY, in SHINGRIX and the continuing growth of Breo, Anoro, et cetera. Yes, and we think that's the right thing to do for the long-term value of the company, but it does create a particular [ chore ] during the course of 2018. So I mean, that's really the answer to your question. And on the Patent Box, the dynamic we have here is Advair is in the Patent Box, so Advair/Seretide is in the Patent Box. So if Advair goes, we lose quite a lot of the benefit that we've been seeing to date. And then clearly, the benefits of the newer products is taking some time to build up the other side of that transition. So that is why we were seeing some more upward pressure on the rate previously. Obviously, again, it depends on exactly how Advair folds, but we are expecting to see more benefit from the Patent Box going forward as the new products kick in bigger revenues and we see increased benefits from those going forward. But I think all of that is factored into -- all that transition is factored into the now 19% to 20% flat guidance that we've given you.

[Emma Walmsley, CEO & Director]

Thanks, Simon. And Steve, I would just add that '18 will bring some challenges if Advair -- the Advair generic comes. But to repeat, we are very much prepared for it and we're ready for it. And what we are extremely focused on is the growth of our new products. As a reminder, the new recipe products were up 75% in 2017. Breo has caused -- crossed the GBP 1 billion sales mark. NUCALA is a very competitive medicine and I'll move into biologics. And we're extremely excited about the medium and long-term possibilities of TRELEGY, particularly once the IMPACT data gets shared more broadly. So we're ready for the challenges of this year, but our confidence in respiratory and the broader overall company performance is growing in terms of outlook for 2020. Thank you. Next question please.

[Operator]

That comes from the line of Andrew Baum from Citi.

[Andrew Simon Baum]

Couple of questions. First, the administration is talking about lifetime caps for Medicaid. Given the heavy representation of HIV patients under Medicaid and given the rate of price increase that you might enjoy with your 3TC jewel, would such development be viewed with a positive view in your ability to take market share? Or alternatively, is it a negative in terms of potentially deflating the overall market? So that's the first question. And then second question for Luke and Emma, I noticed that you had changed the head of your immuno-inflammation, assuming the position inside GSK. Given Hal's geographic background, can you tell us a little bit about the background of the new candidate, including where he will be based?

[Emma Walmsley, CEO & Director]

So David, would you like to pick up the question, first of all, in HIV?

[David Simon Redfern, Chief Strategy Officer]

Yes. Thanks, Andrew. So you're right, in HIV, Medicaid in the U.S. is a relatively important segment. It's about 20% of the volume that we sell in the U.S., recognizing actually there's also the [indiscernible] segment. So we watch what happens in Medicaid pretty carefully. I mean, I think on things like lifetime caps, it's far too early to say how that will play through. And there's obviously potential other dynamics in Medicaid that we're watching, whether it's block grants out to the states, individual states or changes in eligibility for Medicaid. All of that, I think, still play through and will probably take a bit of time to play through. So it's too early to say whether it's a threat or an opportunity. I hope that whatever happens, HIV patients remain eligible for treatment. We will obviously do everything we can to play our part in that, working with individual states. I'm not going to comment on price. What I would say is we have a very flexible portfolio because although we have SDRs and fixed-dose combinations, we also sell single agents as well, whether it's TIVICAY and so forth. So we have quite an offering we can offer individual states, and we would do everything to ensure the right product and the right medicine to the right patient.

[Emma Walmsley, CEO & Director]

And Andrew, just to conclude on your second question around personnel within R&D. Obviously, Hal is spending a lot of time looking deeply at the assets that we have in the portfolio and spending a lot of time with the people and being thoughtful about his own team and how he wants to take that forward. I'm not going to comment on any specific individuals, but as we've said, he will be with us on our Q1 results and then most importantly, bringing an update -- his first update in terms of priorities and [ his teams ] at Q2. Next question please.

[Operator]

That comes from the line of Keyur Parekh from Goldman Sachs.

[Keyur Parekh, Equity Analyst]

Two questions, please. Emma, one for you and one for Luke. Given the guidance that you've given today, if one assumes the scenario that you do get generic Advair in 2018, then it's likely that 2019 could also be impacted given the full year impact on that full year impact from bictegravir competition and potentially the higher R&D spend that presumably Hal wants to or will want to do. So how should we think about the growth profile for '19 versus '20 to get to your high single-digit 2015 to 2020 outlook? Because right now, it looks like you will need to do somewhere between 8% and 10% CAGR to get there between '18 and '20. So that's question number one. And question number two, for Luke. Luke, your competitor in the inhaled respiratory space has been making some very bullish commentary about their product and their ability to differentiate that product versus NUCALA relative to dosing, relative to the label that they have. Just give us your perspective on how you see NUCALA being positioned for growth in that market.

[Emma Walmsley, CEO & Director]

Thanks very much, Keyur. And so -- And you're right, if you assume a midyear launch on Advair, you would then get -- for generic Advair, you would then get some drag in '19. But don't forget, we're also talking about building momentum behind launches that are going on now, particularly SHINGRIX, TRELEGY as coverage builds as well, and also, over time, kind of expansion of our 2-drug regimens within HIV. So just to reiterate, our confidence in the 2020 outlook continues to build. We have factored in an Advair genericization at some point. We're ready for it, and the shape of the curve will depend on exactly when that lands. So Luke, do you want to give particular comment on respi?

[Luke V. Miels, President of Global Pharmaceuticals]

So I'd -- thanks, Keyur, for your question. I'll answer it in 2 parts. I think, firstly, if we look at biologic usage in severe asthma, it's relatively low. I mean, we got around 20,000 patients on NUCALA. The U.S. market, depending on which data you look at, is around 250,000 to 300,000 patients with their profile. So first point is, there's plenty of room to grow. Now if a physician wants to engage us in a conversation about the relative merits of NUCALA versus benralizumab, then we're very happy to have that conversation. I think the key thing with products in this area, of course, is efficacy. All of these studies, the primary was -- in the pivotal studies was exacerbation reduction. I think, and you saw that in the slide that I used, it's very consistent and I would argue, very powerful with NUCALA from 150, 500 right up you can see to the highest ranges of eos there. So very, very powerful. And our aim is really to steer the conversation on to what's clinically relevant and what a physician can observe in the patients in terms of benefit. There will -- there's quite a few samples out there right now, so I think we need to look at this over the next few weeks and just see the picture. But in the end, our aim is very much to focus on efficacy. In my experience, when it comes down to a discussion, all else being equal between efficacy and convenience, in my experience, physicians will go to efficacy every time, and that's really our focus. Our aim is to compete there and make a point on efficacy for NUCALA.

[Emma Walmsley, CEO & Director]

Thanks. Thanks, Keyur. The next question please.

[Operator]

That comes from the line of Kerry Holford from Exane BNP.

[Kerry Ann Holford, Analyst]

Two questions please on Respiratory. One, just really following on from Keyur's question. On NUCALA, does that drug only get to be a blockbuster, which you were alluding to? Luke, if you succeed in bringing that to market in COPD and the other inflammatory indications you're looking at, how do you think about the opportunity across those different therapeutic categories? And then secondly, on Respiratory from a long-term guidance perspective, you've reiterated that group 2015 to '20 guidance, but I wonder if you would revisit the Respiratory set of guidance where previously you've said 2020 sales to be at least or above the 2015 sales figure. Since that was set, we've had regulatory approval for NUCALA, TRELEGY, so some changes is that guidance was stuck, and I wonder if you're willing to be any more specific on that growth of sales now.

[Emma Walmsley, CEO & Director]

So I'll let Luke come back to you on the NUCALA-specific question, but I don't think we'll be revisiting our Respiratory guidance until after we navigate through some of this year. But again, we're feeling very confident behind these new launches. Luke?

[Luke V. Miels, President of Global Pharmaceuticals]

Sure. So I think we can get there, but I think that -- well, you'll never know until you get the final decision from the FDA, but I think it's largely academic. I think we feel very confident about our filing. In terms of hierarchy, clearly, severe asthma is more valuable just because of the large number of patients, but there is interesting data in terms of high [ clinical ] levels in COPD patient, a lot of academic interest there. And certainly, we've a lot of interest in our program. And then EGPA is, of course, a smaller group. We use 3x the dose there. So it is quite an attractive segment but it's limited by the number of patients, who -- of course, who suffer that condition.

[Emma Walmsley, CEO & Director]

thank you so much, Luke. So I think we got time for just one last question please.

[Operator]

And that comes from Emmanuel Papadakis from Barclays.

[Emmanuel Papadakis, Managing Director]

Emmanuel from Barclays. Maybe a follow-up on HIV. You talked eloquently about the lack of medical incentives necessary to switch patients but presumably still persist a potential adherence and/or cost, for example, copay reason why patients might choose to switch. Could you talk about any offsetting levers you could pull with regards to those considerations when working out forthcoming competition? And then maybe a quick one on SHINGRIX, looks like an interesting start. Could you talk a bit about how the relatively higher price points of that vaccine could drive margins to that division in the midterm, particularly thinking beyond the 2020 target of 30%, where you think that might enable you to get?

[Emma Walmsley, CEO & Director]

Okay. So David, do you want to pick up the HIV, and then I'll wrap up on Vaccines.

[David Simon Redfern, Chief Strategy Officer]

Yes, sure. So Emmanuel, I mean, it varies -- by channel, but certainly in the commercial channel, we offer various different patient-saving [ cards ] for patients, but copays are significant. So I think overall, in that channel, it's not really a big deal. The level of copays in Medicaid and so forth are relatively small. And I would say in a specialty area like HIV, what matters more than anything else is the medical data and whether it's the right medicine for that patient. And that really overrides everything else. So it's not totally irrelevant but I really don't think it's a major factor.

[Emma Walmsley, CEO & Director]

Thanks, David. And just to conclude on SHINGRIX and Vaccines margins. So you're right, this shows that with a vaccine that has this kind of efficacy of over 90%, a premium can be charged and demonstrate meaningful value, which is why we also ended up with a preferential ACIP recommendation at that price. That said, whilst we are very ambitious and good signals, as Luke said today, we still need to read through how the progress of SHINGRIX is going to be delivered through this year. And we're very confident in our outlook for Vaccines. We're not going to give any targets beyond 2020, And we certainly think the opportunity for SHINGRIX runs very well beyond that. And as a reminder, the vaccines margin was 30%-plus, so let's see how we get. With that, thank you very much to everybody who's joined the call, and we look forward to conversations in coming days in the near future. Thank you very much.

[Operator]

Thank you. Ladies and gentlemen, that concludes our conference call for today. You may now disconnect. Thank you for joining.