GSK plc (GSK) Earnings Call Transcript & Summary

It gives me great pleasure to spend time -- all of us to spend time with Julie Brown, CFO of GSK today. I've got a few prepared questions we're going to go through, and then we're going to open up to the floor for questions or if you would prefer to submit your questions via the pigeon hole, I can look at those via the iPad. So without further ado, Julie, thank you so much.

So first question I was going to just talk about the new CEO. So could you just talk a little bit about the changes Luke is making to speed up and improve the quality of investment decisions at the company?

Yes, sure. Good morning, everybody. Nice to see you. Yes. So Luke has become the CEO from the beginning of the year, and he was an internal candidate. So he knows GSK well. He's worked with GSK for a long time. What he did from the very beginning was his focus was really on 3 priorities. The first one was all about accelerating R&D. The second one was to fuel the launches. And the third one was simplification. So what he's done in those early stages is he really wanted -- he set up a group that was called the strategic portfolio review group, and they met every 2 weeks with the people who run the programs. So effectively delayered by going directly to the people who are running the programs and looked at how we could accelerate the major assets or the prioritized assets within R&D. At the same time, we also set up another group, which was looking at how we could simplify the way we run the business, how we could use technology and AI to simplify the business. The benefit then of the 2 coming together was we said we want to accelerate R&D. We want to fund the launches, but we don't want to change the operating profit profile of the company. So we needed to find the funding through the second group's work running in parallel with the first group around accelerating R&D in those assets. And the benefit has been, and we announced a major change program just recently at the end of July. So we were targeting almost GBP 2 billion of savings, GBP 1.9 billion of savings that could be -- the majority could then be reinvested in the pipeline. It means that we've got 20 Phase III starts this year from 10. We started off at 10. We've now got 20 Phase III starts across 7 assets and around 18 indications. So this is really showing that GSK is changing into a more asset-rich company. The other point was we decided to do is we decided to allow part of those savings to drop through to the margin in the period when we lose HIV dolutegravir patent protection, which is 28% to 30%. So we've now said during that period, the margin will be stable to improving. So net-net, there's been a big change program running in the first 6 months. together with, of course, not to mention the biggest deal we've done for quite a long time, which was the Nuvalent deal, which was a $10 billion deal, just over $10 billion deal. Yes. So it's been a busy 6 months since we started.

And actually sort of sticking with that phrase of the company keeping busy. Could you just share a few thoughts on the kind of long-term improvements with regards to R&D that GSK expects to be driven by moving a lot of the U.K.-based R&D to Cambridge U.K. to the Bioocampus?

Yes. Yes, so we decided to move. We -- for those of you that don't know, we're currently in Stevenage, and we've been in Stevenage for quite a long period. And the decision -- we took the decision to move to Cambridge essentially because you've got a total biotech ecosystem in Cambridge. You've got access to some of the most prominent hospitals in the U.K. like Adambrooks. And you've also got over 400 biotech organizations built out of that together with obviously the university. So it creates this ecosystem that our scientists can then work in so that we will have new labs, new state-of-the-art facilities to really motivate those scientists to do their best work. And they will be interacting all the time with either hospital, university all on the doorstep, which we believe will make a difference and really energize the organization. Similarly, we work very closely with academic centers in the U.S. And the benefit is you can sort of shorten the period from research into translational medicine into the clinic. And that's the whole ethos of what's driven the change. Yes.

Just expanding a little bit on those relationships with East Coast institutions. So is your sense that hopefully, the ability to forge those academic relationships on the East Coast of the U.S. will get stronger with the move to Cambridge as well.

Yes, absolutely, both in the U.K., in the U.S., but also very importantly, increasingly, we've built additional capability in terms of BD to access BD opportunities in China. So I would say these are the key focal points. U.K., Cambridge, East Coast of the U.S., together with some biotechs in California, you've seen us do deals with those and very importantly, also China. And we've done very significant deals there with 2 major companies, Hengrui in respiratory and Hansso in oncology. So that deal scouting capability and those relationships and proximity mean you can get quicker from research into commercial.

Yes. I'm just going to switch to HIV for a minute as well. Could we just talk a little bit about the advantages that GSK sees with shifting to the longer-acting therapies and away from the tablets and what that might mean for share shifts in U.S. HIV mid- to long term?

Yes, of course. So with regard to HIV, we have got a very strong franchise with dolutegravir. And we've been pursuing long-acting therapies for the simple reason that patients prefer longer-acting therapies in HIV. It means that instead of having a daily oral tablet that reminds them that they've got HIV every day and they stand the risk of viral breakthrough if they forget a tablet and then they can pass HIV onto somebody else. The benefit is with a long-acting injectable is that they are protected for the course of the duration of that injection. And so at the moment, we've got 2 months on the market, which means that the person has got to have an injection every 6 times a year. So we've got 2 months on the market. And we are the leader in terms of HIV treatment for long-acting injectables. It's probably important to say that an integrase inhibitor is at the core of this, and we're the only company with integrated inhibitor at the core of HIV long-acting therapies. Now to Justin's point, we are moving increasingly from once every 2 months to once every 4 months. That's a big transformation because it means the person goes in 3 times a year, usually coincides with the testing for sexually transmitted diseases. So it fits with that. And we're anticipating having the final readout of that in '27 and the launch in '28. So that's basically 3 times a year. And then the next stage is to move to basically lasting for 6 months, long-acting injectables for 6 months, which is twice a year. So that's a big step forward. Treatment is the most value opportunity, and it's 90% of the market in HIV. So it's a large component. And this is where we're in the leadership in terms of when we'll bring those products to launch. And to the point about the patient, when we've done a study, we did a SOLA study, 90% of patients prefer long-acting injectables to orals. And it's because of this lack of stigma, it's no need for a reminder to take their medication and it's the assurance of protection. And then from the physician point of view, we did a study called LATITUDE, which was again comparing daily orals with long-acting injectables. And again, the data monitoring committee stopped it early because the data was so compelling that people were more protected with long-acting injectables. So this is the big change that's going on now and will continue to go on as we launch longer-acting therapies in HIV.

That's super great. And could we just talk a little bit about that 2031 patent expiry for that long-acting HIV molecule and why GSK doesn't see that as a material headwind?

Yes. So the Cabenuva -- so if I step back, the treatment solution will always be a combination of 2 products. And with regard to the product we got on the market for treatment, you've got a combination of Cabenuva and rilpivirine. And that means you've got the treatment, you've got the integrase and the capsid. So putting the 2 together. In terms of the patent estate, Cabenuva is a single asset. The new chemical entity patent expires in 2031, which is what Justin is referring to. There is the prospect as you put combination products together, Cabenuva with rilpivirine or the next generation of assets, the patent estate will go for longer. And we've got applications with the patent office to take us to 2035, beyond that, 2040s. So we are not concerned about the patent situation because we've got all these applications pending. And the newer assets, which is the 6 monthly treatment would be VH184, VH-499, that patent estate would be brand new. So this is why as we convert the business and we're leaders in treatment, this is where you feel assured about the future of HIV.

So switching on to oncology, and you kind of mentioned Nuvalent a few moments ago. But could you just delve a little bit more into the rationale for that transaction and the impact and in terms of other niches, where GSK is confident it could win in oncology and why?

Yes, of course. So we were -- we did a lot of work on the Nuvalent acquisition. As you can imagine, it was a big deal for GSK. And we had studied it for a long time. For those of you that are not so familiar with it, it's a precision oncology company. And rather than being a single asset, which a lot of our deals have been single assets, this actually brings with it 2 major assets, very late-phase assets, who were late Phase III together with the Phase I. What Nuvalent did being a precision oncology company is they were looking for opportunities in non-small cell lung cancer, which is one of the largest lung -- which is one of the largest cancer markets. to be able to make changes so that therapies that were efficacious but had tolerability issues, they could amend the product so that it could address that tolerability problem. And this is essentially what we did, what we were looking for. So the first one was niladalkib, which has actually got its PDUFA date already in November this year, so very, very soon. The other product was zidesanttinib, which is also -- this is ALKOROT1 treatment for non-small cell lung cancer. And this has also been approved early by the U.S. FDA. The PDUFA date was actually in 2 months, but it was approved in July. So it's come early. So now we're in the process of launching zitamtinib and noladelptib comes in just a few months. Both of these assets are tackling the genes that cause tumor replication, but they are doing so in an efficacious way but with far less side effects. So some of the competitor products have some limited use because of the side effects, the side effect profile. And when you think about the patient in this case in non-small cell lung cancer with ALK and ROS1, they are typically quite young. They're 40 to 50 years old, typically women, non-smokers. And so they're working age and not having a tolerable medicine to be able to take means effectively, they can't work so well. So this is a big innovation, and we're excited about the launch and then the next stage, which is an Nladelpcic product that's coming shortly.

Super. Yes. And are there other niches within oncology you would talk to where blood cancer possibly where GSK also thinks it can generate outsized returns as well?

Yes, no question. I mean the -- there are a few products to pull out in this regard. We've got BLENREP, which is already on the market for multiple myeloma. Again, BLENREP had fantastic data behind it. It can be used in the community, which is 70% of the U.S. market. But the data is basically it halves the risk of death and it triples progression-free survival. So there's astounding data in an oncology field. The second to draw your attention to will be the 2 ADCs, antibody drug conjugates. So we've got B7-H4, which is for gynecological indications, endometrial as well as ovarian. And then we've also got B7-H3, which will first go into 2 major tumor types, small cell lung cancer and also prostate. But the beauty of B7-H3 is it's actually a pipeline within a product. And the opportunity to take this into multiple tumor types gives a very, very significant commercial opportunity. And then the final one, just to draw to your attention is Vltamtinib, and this one is basically for gastrointestinal stromal tumors. And there, we see this as a second-line opportunity with first-line trials ongoing. So coming into, again, a market -- and one of this is one of our features, we will look for opportunities where the market is not satisfied either through efficacy or tolerability. And this is another example of that.

I'm going to change gears to vaccines, if that's okay. Could we talk a little bit about Shingrix's potential, both U.S. and ex U.S. life cycle management?

Sure. So Shingrix, for those of you that don't know, I'm sure in terms of the audience, but Shingrix is a great asset. It's a vaccine, obviously, for shingles. It's got an astounding amount of data behind it and exposure to a huge number of patients already, people already, I should say, because it's a vaccine. The data for Shingrix was phenomenal in terms of almost an 80% efficacy rate and the longevity was 6 to 11 years, majority 11 to 8 years. So once you have Shingrix, it protects you for that period of time. The U.S. is obviously the major market. The U.S., it's all about the level of penetration that you can achieve, i.e., how many people in the U.S. population are vaccinated. And the good news is we've been growing that penetration level, and we're now up to around 45% penetration of people in the U.S., and we're now into the category of harder to reach. So we're anticipating getting an additional 2 to 4 percentage points of penetration in the U.S. market each year is where we're tracking at the moment. The second part of the world is obviously you've got Europe, international and part of that is China. And with regard to the rest of world markets, the top 12 markets in the rest of the world, the penetration level is still low. It's still 12%. If you compare that where we are in the U.S., it's a big difference. So it just shows the opportunity to penetrate more. And our European growth of Shingrix, as you probably saw from Q1 and Q2, has been very, very strong. It's been way into the double digits. And we've had very good success in the private market and the public market in a number of Scandinavian countries in the first half of this year. So we're penetrating further and further when it comes to the opportunity for Shingrix. And then the final major market, of course, China. Again, we had phenomenal efficacy data in the Chinese population with 100% efficacy of the Shingrix vaccine. And we're working with a partner, hifi. It's private pay in China. So depending on the situation of the Chinese economy, depends on the rollout. So we're working with hiffei, who is a phenomenal partner, but just responding to the macro situation that we found in China at the moment. But net-net, Shingrix, we've guided more than a $4 billion assets. It's -- I think in the first quarter, it was around already $1 billion. So it's doing incredibly well. And I should answer the second part of your question, which was MACE and dementia. So what we found through observational studies is that -- and we believe it may be the adjuvant component of Shingrix that it potentially reduces the degree of inflammation people experience when they get shingles. And that means there's a potential benefit in terms of cardiovascular events together with dementia. So what we've decided to do is to do studies in terms of dementia, but then we're running -- we initiated a major trial for MACE. This is one of the assets we decided to accelerate for cardiovascular events for Shingrix, where we're doing trials now that should lead, if successful, to an extension of the FDA label, which could be very compelling because through the observational work we've seen, we've seen the potential for between 30% and 40% reduction in the risk of events such as cardiovascular events. So this is a major -- this is one of the targeted areas that we came up with as part of the work that we referred to at the beginning.

Brilliant. I'm just going back to the U.S. for a minute in terms of what seems to be like a bit still of an anti-vax environment that we have, if you would agree. And just any thoughts you might have about how that potentially becomes a tailwind mid- to long term?

Yes. Yes. This is a very topical question. I mean, unfortunately, what we find is that if vaccination levels drop because of public policy or sometimes commentary, unfortunately, the rate of illness increases because people are more susceptible to the disease, whatever that might be. And we've seen that with MMR vaccinations, and we saw sad situations happening with measles and young children dying as a consequence. And it makes -- so not only is it better for people, but it's also better for the health care system because the U.S. spend around $9 billion a year on vaccine preventable diseases and around 80% of that is adults that could have been protected from the disease that they then got that cost them and the health care system a lot of money. So what we find is when -- as I mentioned, when it drops, it then comes back again because people need it and actually parents, our MMR business was really, really strong at the beginning of the year because people were worried about masal incidents. So net-net, what we do believe is this will go in cycles. We believe it will come back at some point. We continue to invest in vaccines. We've just taken mRNA for flu, which is obviously going to compete with high dose. into the market, into the clinic. And so we're behind it. We will stay behind it, and we expect the commentary and the rhetoric to start to change based on scientific evidence.

Yes. Got it. I'm going to change tack to lung diseases now or respiratory. Could you talk a little bit about XtEzA that you just launched and the competitive differentiation that product has?

Yes, absolutely. So Xensia, which we used to call gatmokimab. So Extension is the brand name. And this is a big innovation. The reason -- it's an IL-5. It's in the IL-5 category. We've already got a product on the market for an IL-5 for respiratory disorders, which is Nucala. The big benefit of EXensia is the dosing. And instead of having medication once a month or, in some cases, once every 2 weeks or once every 2 months, Extensia runs for its one injection once every 6 months. So it's very compelling because for somebody who's suffering from asthma, they can basically have 2 injections a year and be protected from exacerbations. Now you may say, why is that so important? The reason it's important is because each exacerbation injures the lung function. So you want to avoid -- from the patient point of view, you want to avoid the exacerbation. The other thing is exacerbations can frequently lead to hospitalization. And again, that's cost for the patient, cost for the health care system. And Extensia has very strong data. So there's a 72% reduction in exacerbations that result in hospitalization. That is a phenomenal piece of data and extremely competitive. And the other opportunity with EXensia is there are very few people on biologics in asthma, in serious asthma. There's only 1/3 -- about 30% of people are actually taking biologics, which means there's a golden opportunity to encourage those people to go. And so the bio-naive market opportunity is significant, we call Bionave. So net-net, I think this is a golden opportunity because people also -- those -- the 30% that do have biologics, there's quite a high dropout rate. And we think that's because they feel protected, they feel safe and then they stop taking the monthly therapy and then they then exacerbate, which then does exactly what I said. So the longer you can keep the therapy, the better. And this is 6 months. We launched it earlier in the year. We got the approval in December last year in the U.S. We've got approval now across a range of countries. And the key with the U.S. market, especially for a 6-month therapy, is you need the J-code because it takes away the risk for the physician of holding 6 monthly treatments without being sure of reimbursement. And the J-code gives access to reimbursement. And that came in just a couple of months ago. So this next Q3 results, Q4 results, Q1 the following year, will give a much better line of sight in terms of how this is performing.

I'm going to change tack to liver diseases, if that's okay. Could you just spend a few minutes sort of explaining why the company is confident that in what seems to be a very high unmet need market, the company will be able to lead there.

Yes. I think in terms of liver diseases, we -- there are a number of assets to pull through. I mean bepraviren is probably the first one to call out. So bepraviren just recently had one key opinion leader called it totally transformational data to be able to support the launch. The product called bepraviren has now got Fast Track designation or Senco in Japan, Fast Track designation in the majority of major countries across the world. And that's because of the power of this data. So people with hepatitis B go on, if not treated, to develop liver disease. And in China, in particular, it's a major issue because there's a lot of stigma associated with hepatitis B. They have regular testing similar to the way HIV is seen in the West. So it's a major issue. And the data we got was basically that -- and this is revolutionary, -- 19% of patients, bepraviren offers a functional cure for hepatitis B. So it means they take 6 months of therapy and then they're effectively cured, which is groundbreaking because otherwise, they will be taking daily tablets, which are not tolerable. And then we found an additional percentage of patients also have a benefit from reduced surface antigen, which means there's less chance of going on to develop cirrhosis or liver cancer. So this is a major innovation. So around 50% of people have a chance to either be functionally cured, which means they don't need to take therapy thereafter or they can have surface antigens reduced, which has a medical benefit. So this is a major -- I can't stress how important, a major, major innovation. And like I say, we've now just got approval just over the last few weeks in Japan. And in terms of commercial potential, for those of you interested in the financials, there are essentially 3 markets that will make up 3/4 of the business. And that is the U.S., China because of the incidence level and Japan, the major 3 markets. And then coming behind that, we've got products for steatotic liver disease earlier in development. But again, products that we are accelerating, epidmosterman, et cetera, we're accelerating them considerably as part of this program so that we can bring them to the market earlier.

Yes. Can we just circle back to margins a little bit more? Could you possibly just expand on the moving parts we need to think about going through those HIV patent expiries '28 to '29 and '28 to '30 and the mitigating factors and the reinvestment and the 1.9 billion very, very helpful.

Yes, of course, of course. So the -- when I first joined GSK, I went out and did investor listening sessions. And people quite often fed back that they were concerned about the dolutegravir patent expiry. There was uncertainty at that point as to when it was actually going to have an impact. And we clarified that it would be between '28 and '30, with the majority impact between '29 and '30, which is when the U.S. patents go. As you know, we are protecting the dolutegravir business ourselves by introducing long-acting HIV injectables with longer patent estate that we talked about with Justin. So that's all underway. In addition, we are pivoting our business more and more to specialty, which brings with it margin benefits because the SG&A associated with specialty products is so much lower than it would be if you were dealing with other parts of the range. So net-net, what we see is that we will be able to hold the margin stable through the dolutegravir period, which is '28 to '30 and we made that commitment about 3 years ago, and we're holding that commitment, and we're confident of being able to do it. Now what we decided to do with the Change Program that we announced at the end of July, which is a 1.9 billion savings program. We decided the majority will go towards investing in those assets, like 20 Phase III starts, 7 major assets, 18 indications. We will invest in that. But an element of it, we will also drop through to the margin in that period of 28% to 30%. And that means our margin through that period will now be stable to improving. People have asked me why is it stable to improving? Because depending on how the pipeline is performing, it will determine whether we put more priority towards investment, but it will be at least stable, and we have the option, our choice to have it is improving. So that's sort of given people, I think, a reassurance through that period. And I'm pleased to say that consensus expectations over that period have now risen as a consequence from where they were before.

I'm going to ask last one of my questions, and thank you very much. I've got 5 questions in the pigeonhole. So thank you for that, and we can have more. So last one for me before going to the pigeon hole would be on M&A. Could you just share some thoughts about -- it's been a very busy period for the company, your ability to sustain the rate of activity which sort of started in 2022. And then just a few thoughts on how as an organization with M&A, you guard against sort of biting off more than you can chew.

Yes. Yes. It's a very good question. I think R&D pipelines increasingly are built through very good sourcing of internal and external. You've got to have both. You've definitely got to have both. And therefore, we've got very, very strong teams scouting for the right opportunities in different parts of the world, as we talked about U.S., Europe, certainly the U.S. and very much now China, increasingly in China. To Justin's point about -- we've done a lot this year. We've already done -- we've done 35 pharma. We've done wrapped. These 2 deals were around GBP 1 billion to GBP 2 billion. And then we also did Nuvalent, which was a GBP 10.5 billion deal, but it was GBP 7 billion net because they had cash in sterling. It took our leverage level to just less than 2x net debt to EBITDA. So it was a fairly significant deal. We are very committed to a strong investment-grade balance sheet, and we will maintain a strong investment-grade balance sheet because we want our investors' money to stay totally safe -- and you can see that what we've done recently is we funded ourselves to do the acceleration of R&D and bring in these assets, in fact. And we committed as part of the Nuvalent deal that we would -- it's immediately sales accretive because the assets are launching now. It's operating profit accretive next year. It's EPS accretive in 2029. So you can see that we are generating income cash ourselves to be able to offset the headwinds associated with doing this. So net-net, I'm very comfortable we won't bite off more than we can chew. We hold that balance sheet dear to our hearts as well as looking for the best assets as well as exercising capital discipline inside our organization to generate savings to fund what we're doing. So again, you can feel assured about that.