GSK plc (GSK) Earnings Call Transcript & Summary

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Okay. Good morning, everybody, and welcome to day 2 of the Bank of America Global Healthcare Conference. For those of you who don't know me, I'm Graham Parry, one of the European pharma analysts here at Bank of America. And I'm very pleased today to be able to introduce our first company and, in particular, Emma Walmsley, the CEO of GlaxoSmithKline. As with the session yesterday, if you have any questions, then please enter them directly into the Veracast website and I'll ask them. Alternatively, if you're having any technical difficulties with that, then you can also e-mail them through to me at graham.parry@bofa.com. So Emma, welcome to the conference. Shame we couldn't see you in person, but I think this is the closest that we can get. And perhaps I'll just kick off the -- our fireside chat with a very broad question.

At the beginning of the year, you've laid out a 2-year plan to separate GlaxoSmithKline into 2 companies, a pharma and vaccines company and a separate consumer company. Could you just give us an update on progress so far, and perhaps the extent to which COVID has had any interruption in the process?

Sure. Well, first of all, good morning, Graham, and likewise, I'm sorry, we can't do this in person. And a very good morning also to everyone who's joined the call. Well, yes, certainly, when we announced the separation preparation program in February, none of us were expecting the year to play out quite as it did. But I'm really pleased to say that there are no changes overall in terms of our intentions around the separation into 2 exciting new companies that frankly, have never felt more relevant than they do now. And most fundamentally, because what underpins that change program is an enormous amount of work to set both those companies up for success. And all of that is very much on track. There were sort of 3, I suppose major work streams that came with it. The first one was making sure we continue to complete the integration successfully of 2 very large consumer companies, and make sure we are able to stand that up for independents as frankly, the world's only dedicated consumer goods company to consumer health with an incredible portfolio of brands and a very competitive geographic footprint. The second part was to continue on our program to be investing in terms of R&D and in terms of new launches for our biopharma new GSK so that we continue to strengthen, both growth prospects and returns for that business. And then the third part, which is really a lot of kind of operational crunching in a big global complex company is to make sure that we are readying the cost base of the company to support both that investment and make sure that we're competitive operationally and seeing an acceleration in margins for the future as we come out of that. So all of that is very much on track, whether it be reshaping parts of the organization, refocusing our resources behind long term drivers, making good progress on the pipeline, which I'm sure we'll come to in more of your detailed questions. And, frankly, being on track also following this period of investment to get to some meaningful margin accretion. It is frankly, a unique opportunity that had been long debated, long before I was in this job, around the future of the group. And we think that this is a catalyst that is then being added to, frankly, by COVID. We have made good progress, obviously, in an environment globally, economically that's challenging, but great progress with our employees and union representatives around the work that we have to do there. The necessary processes and systems and technologies are put in place for the underpinning for new consumer. And we've all adapted well to -- we're doing this work remotely. I think that's going to be continuing for some time. So there's no change in our expected time lines for delivery, in some ways, opening up further opportunities to simplify ways of working, accelerate culture change, and most of all, emphasize the relevance of our industry and both new companies.

Very clear. You touched a little bit there on changed ways of working and perhaps at even accelerating things. Have you found that there are new opportunities for cost saving brought about by COVID through the new ways of working? And perhaps, it's fingers cross, there is a vaccine next year and things begin to return to a lot more normality, how much of that do you think can stick?

Well first of all, we're doing more than crossing our fingers on vaccines, as you know. And I think when you see the way the industry is mobilized there and we're heavily involved, both on vaccines and other solutions. Whilst it's going to take time, and we will -- the world certainly needs more than one, I think we can be optimistic that across the industry, we'll bring some solutions forward. In terms of ways of working, I think there are that's sort of screaming the obvious, which everybody in this call, I think we all know will change for good about the way that we look at simple things of travel and how we operate. And the fact that as a leader, you can be in 3 continents in a day. It might be quite a long day, but you can do that. I think all of that is definitely going to shift permanently. There are obviously big debates, and that obviously has cost savings. But there are also, I think, less direct, as well all the stuff about office working and locations, that takes a bit of time to flow through, but we're all going to be moving to more of a hybrid model. But let's not forget that in our kind of company, the majority of the population is still operating in the field and in factories and a degree of presence is still required, although what we're seeing in terms of telehealth has an impact and how the health care systems start to adopt technology will definitely bring more efficiency and productivity from a reach point of view there as well. But I really think the hybrid model is what is going to play through. I think the other things, though, that are exciting is how this situation is unleashing the spirit of paced innovation and a lot of partnership with regulators. We're seeing, in part through COVID or it's something we were involved in long before that in our vaccines business, new technologies coming through. We think we're extremely competitively paced -- placed around some of the new technologies in vaccines, not least with some recent deals we did, but also some of our in-house platforms, be it in adjuvants or in now mRNA partnerships as well. And thinking of -- our vaccines business is undoubtedly one of the great competitive advantages of GSK, including when you look at our pipeline coming forward. So I think we see COVID, obviously, with the enormous cost and impact that that's bringing. But fundamentally, it creates some efficiency opportunities through technology and the primacy, frankly, at the front line, being far more important in a variety of ways than those of us that work for them in the offices, but it also brings innovation and growth opportunities and an underpinning and recognition of frankly, the enormous both health and economic benefits of preventative care and earlier intervention and preparedness as well. So I think all of that is -- from a very big picture point of view and not worrying about one quarter's impact, really just quite fundamental for our industry and GSK specifically.

Understood. So -- and obviously, COVID had an impact in the field on net sales and in particularly on vaccines and vaccination rates. And you called out vaccination or return to normal vaccination rates as a specific risk to guidance, with the Q2 results there highlighting a 3 months delay in return to normality would have a 5% EPS impact. But perhaps help us understand what recovery means in that sense. So what do you need to see to maintain the guidance? What's assumed there? And what would be something which would mean that you would have to then change the outlook for this year?

Well I mean, I think the first one to point out, the most fundamental point, which is there's never been a time where every single household government payer in the world has been more focused on the contribution that vaccines bring than now. And so -- and that includes on the older adult cohorts, too. So I am very confident in the underlying demand around vaccination. And that this is really a question of when, not if, across the portfolio, perhaps with a -- just a bit of a question around travel vaccines in the -- not just the very short term. But I definitely -- and that's a small part of the business. But I think our fundamental confidence in this business and its growth and profit contributions, and the fact that we have a great pipeline here coming through and obviously, the lack of patent cliffs that you have through vaccines, means that this is a short-term challenge. As you said, we updated our guidance at Q2 to highlight exactly what the risk profile would be. And the key element in that is around Shingrix, where you can see the publicly available data, how the recovery is coming through. But we do need to make sure that we can deliver beyond a recovery and into a bounce back and the recovery of some of the lost sales to make sure that we deliver the outlook that we set out at the beginning of the year to deliver our overall guidance. Now what we've seen to date is where lockdown has lifted, you're definitely seeing vaccination rates starting to recover with pediatric vaccines coming back first, as you would expect. Adult and adolescent vaccines are a bit more discretionary. And obviously, with all of our meningitis portfolio, that's a bit dependent. But again, it's just a question of timing on when back-to-school and university, particularly in the U.S., happens. It's less the case in Europe, where it's very much a pediatric vaccine. Shingrix, TRx are already back at pre-pandemic levels, but we've, as I've said, got to see further catch up beyond that from the period of March, and the flu season is really critical for this. And I think, here, we're doing everything that we can, and with our retail partners, to make sure that we have all the plans in place to advise that people can get these vaccinations at the same time as flu vaccines. We've got tremendous support from government bodies, including the CDC, putting in place guidelines about underscoring vaccination. And we have a lot of consumer work going on as well as the supply, of course, to be in place when rebound does come. So I've mentioned travel vaccines is one area where you definitely won't see a recovery. That's hit. But we're watching this carefully, and we'll keep you updated as things progress. But the most important thing here, Graham, is that the underlying demand for this business specifically and vaccines, generally, I think, fundamentally, is only going to continue to increase over time.

So actually on Shingrix, I think you just touched on that, that it's just about now to back to growth year-on-year in the last weekly TRx data, which I think captures about 70% of Shingrix' scripts in the U.S. I have to think before we went into COVID, it was probably going around in the 20s to 30s. So is the expectation that you would make back up lost sales for Shingrix as we head into Q4, in particular. Obviously, flu seasons kicked off, we can see flu vaccination rates are picking up quite quickly. So Shingrix being brought along with that? And is this all going to be Q4-loaded rather than Q3-loaded, looking at the prescriptions at the moment?

Yes. Well I'm not going to -- yes, I wouldn't expect -- I'm not going to guide you specifically on Q3 because it continues to fluctuate, as I've said, and it's incredibly local because of lockdowns and it's always a moving picture. But you're right. I mean, you can see publicly what the numbers are currently. It is about a -- the flu season and this tremendous push that you're going to see from governments around that and particularly with the folks in the U.S. And yes, that is what we need to see, partnering with flu to get those injections in arms. And we've done an enormous amount of work to continue to support that towards the year-end. So it's just the timing issue.

Great. And then on flu itself, obviously, a lot of governments are now very keen to expand flu vaccinations. Could you just remind us what you've said about capacity plans for this year. I know you were just a little limited in what you could scale up. But then as you think about next year's flu season, are you already in planning to be able to increase capacity further? And maybe you can help us with some numbers on that.

Yes. So you're right. We have mobilized. And I think we've said -- I'm not going to guide for capacity next year but we've said, I think, 50 million doses around flu for this year. So it is -- we started shipping in July. That is a bit of a -- in fact, it's a record for us in terms of volumes that we would go into the U.S. And that will be through Q3 and Q4. Still a bit early days to construe where the season is going to be, but I think we can all imagine that we should be ambitious for that.

Great. Perhaps we'll move on to the consumer spend. So just help us understand operationally, what steps need to be taken now -- between now and 2022 to achieve the spend within the 2022 time frame that you've targeted?

Well I think I alluded to that in some of my opening comments. The first thing is that we need to make sure that the integration is completed effectively. I mean, the separation is a big technical piece, but integrating 2 large companies and portfolios, it's not a small undertaking. We've done it all through our Novartis work, that's very much on track, but we need to make sure that, that is completed. Huge amounts of heavy lifting being done through this year, including remotely, but that will continue through and be largely complete next year. Then we have to make sure that we stand up independently, all of the sort of technical systems, which is always the biggest and most complex part of this but also appropriate corporate structures. And then there is obviously also quite a lot of technical work to be done, both with the GSK Board and with our partners with Pfizer to make sure that we plan both for the kind of model of separation in a way that's most appropriate for shareholder interest, and that's another steps that we will go through before bringing a lot more visibility for both new companies to the market in due course.

Okay. And then, at the time of the announcement of the Pfizer joint venture and potential spin, you highlighted some metrics around the spinco. So the consumer business, I think you said 3.5x to 4x net debt-to-EBITDA on gearing and then a 30% to 50% dividend payout ratio. What does that mean for the remainco? So what do you expect the gearing of the remainco company to look like. Is it going to be substantially less so that you can do more bolt-on M&A, for example, to continue to build your innovation and pipeline? And what will be -- or when will you communicate something on dividend policy for the remaining business?

Yes. Well both obviously important questions. One of the reasons that, and certainly not the only reason, but one of the key benefits of declaring the separation is, of course, the opportunity to reset the balance sheet for the biopharma company because we are expecting to gear what by then will be a highly profitable and with great prospects to be more so a consumer company, which we will gear up to 4x, and that's all public knowledge, which allows us to bring the gearing of the biopharma business closer in line to what would be the close to where the rest of the sector is. Now I think it would be -- obviously, we continue in terms of prioritization to say our #1 priority in terms of capital allocation is the strengthening of the pipeline, and we are really pleased with the progress that we've been able to make around that. That includes business development. And we've had many examples over the last couple of years in that space that we've continued to drive. So we're not waiting for the separation to be able to move forward on that. In fact, even just in the last few months, we also proceeded further with Advair deal with what we think would be very exciting COVID antibody potentially. And then the deal with CureVac on new technologies in vaccines as well. So we expect those to continue. We're not waiting around on that. But obviously, it will increase our capacity at split. Now in terms of bringing more visibility, we do have disclosure on our dividend intentions for the consumer business precisely because that's always something that's worth agreeing upfront. I'm not about to announce today what the biopharma dividend policy might be, but that will be something that will become clearer well ahead of the separation. And it will be, as you'd expect, about an output of the business' results with the necessary investment in growth and, of course, recognizing the dividend matters, and we expect to deliver strong shareholder returns. So more on that nearer the time.

So when you say well ahead of, so if it's 2020 spin, is that something we should think of with your full year '21 results and earnings guidance for the year?

Nearer the time, Graham.

Okay. And then in terms of the -- how you think about the dividend for the Remainco business, obviously, dividend has been an important part of the GSK payout. But as you rightly point out, the need to BDL and build the pipeline is also there, so perhaps just help us just talk through the pushes and pulls on capital allocation, post-spin and what will go into your thinking of where the dividend policy would be set?

Well I think it's exactly as I've said, which is our #1 priority, when you think about the purpose of the company and why we exist, we are here to protect human life and fight diseases. And never more than now we all have been aware of the contribution that we can make. And we have to do all of that profitably. But it's always a -- and continues through COVID, attention and a pressure for our sector around how the pricing dynamic comes into play in that. But our #1 job, therefore, is to solve health care problems at scale in a profitable and responsible way. And that means the pipeline is the first priority for capital allocation. And because of the model that we're in, we have a very exciting portfolio for new biopharma. There's tremendous strength in vaccines, which helps in terms of the patent cliff model, and that's going to be a growth market with a good pipeline in there. We have leading positions in infectious diseases and a shifting and growing portfolio in specialty, which is really where we've been investing recently over the last few years, and that has brought good prospects, both in terms of growth contribution because the advances in science, but also in terms of returns because of mix. And that's all this work we've been doing over the last few years to reset the portfolio, prioritize investments in R&D and in innovation and prioritize our executional capability to do that brilliantly, is absolutely our #1 priority. And that includes business development. So that's where capital goes first. But there should be no mistake, we recognize, whilst we're in a multi-stakeholder world more and more, the incredible performance of share -- importance of shareholder returns, and that the dividend plays a big part in that. So one of the changes we made when I came in was to bring transparency to our dividend policy to make sure it was understood as a function of free cash flow, and we will be doing that again, but obviously, with a reset company. We hope that's going to be a reset company with great growth prospects, an acceleration in returns prospects and obviously, we're looking for, at the moment of separation when that comes, that we're going to have 2 companies, which will be exciting from a shareholder return point of view.