Earnings Call Transcript - GSK Q1 2024

Operator, Operator

Hello everyone. Welcome to today’s call and webcast. The presentation was sent to our distribution list by email, and you can also find it on gsk.com. Please turn to Slide 2. This is the usual safe harbor statement. We will comment on our performance using constant exchange rates or CER unless stated otherwise. As a reminder, adjusted results are now referred to as core, like many European pharmaceutical peers. Please turn to Slide 3. Today’s call will last approximately one hour, with the presentation taking around 25 minutes and the remaining time for your questions. Today, our speakers are Emma Walmsley, Luke Miels, Deborah Waterhouse, and Julie Brown, with Tony Wood and David Redfern joining for Q&A. Please ask one to two questions so that everyone has a chance to participate. Turning to Slide 4, I will now hand the call to Emma.

Emma Walmsley, CEO

Thanks, Nick, and welcome to everybody joining us today. I’m delighted to be presenting to you all with another set of excellent quarterly results for GSK. Please turn to the next slide. We have had a very strong start to the year. Sales and profits grew double digits for the quarter, with sales up 13% to £7.4 billion, core operating profit up 35% to £2.4 billion, and core earnings per share up 37% to £43.1, all excluding COVID solutions. This excellent performance reflects our continued focus on execution, some benefit from phasing in the quarter, and strong delivery of our recent launches. It also demonstrates the great momentum we continue to see across the business. Demand for our innovative vaccines and specialty medicines was clear, with strong growth across new products. Our very good sales performance was also underpinned by good cost control. Julie will take you through the details on this in a moment, but I particularly want to highlight our SG&A performance, which was delivered alongside increased investment in R&D demonstrating continued delivery of effective operating leverage and margin improvement. These benefits are also delivering improved cash flow providing funds for investment and returns to shareholders. Our dividend for the quarter was £15. For the full year, we are upgrading our guidance and looking forward to delivering another year of meaningful growth for shareholders. Next slide, please. Alongside our excellent financial performance, we have seen strong pipeline progress across the therapy areas, with Phase III data readouts for four medicines. For Gepotidacin, further pivotal data that supports regulatory submission of this new antibiotic. For Cabenuva, further evidence of superior efficacy. For Jemperli, potential broader use of this medicine to treat endometrial cancer. And lastly, encouraging clinical data supporting the use of Blenrep for the treatment of multiple myeloma. These data will be presented at ASCO. And we look forward to sharing more with you on our plans for oncology at our ‘Meet the Management’ event in June. These readouts, together with other R&D achievements this quarter, mean we have strengthened growth prospects in all of our key therapeutic areas. Three material points I would highlight. First, we continue to strengthen our innovative Vaccine portfolio this quarter. With regulatory submission of our new 5-in-1 meningococcal vaccine candidate alongside new expansion opportunities for both Arexvy in the U.S. and Shingrix in China. Second, positive clinical trial findings for an ultra-long-acting formulation of cabotegravir further supporting the progression of this medicine, and confidence in the important transition we expect in our HIV portfolio for long-term growth. And third, in Respiratory, we completed the acquisition of Aiolos Bio. A signal of our continued investment and leadership in this disease area where a next important step will be sharing data for depemokimab, which we expect in Q2. Next slide, please. Alongside delivering stronger shareholder returns, we continue to build trust by delivering across the six key areas we prioritize for ESG. This quarter, we published our ESG Performance Report. 95% of the metrics we target are being met or exceeded. We also saw the GSK-developed TB vaccine candidate enter Phase 3, sponsored by the Gates MRI and Wellcome Foundation. This could potentially be the first new TB vaccine in over 100 years. So, all in all, a very good start to the year. Let’s now hear more from the team on our progress, starting with Luke.

Luke Miels, Chief Commercial Officer

Thanks, Emma. Please turn to the next slide. In Q1, we delivered growth across all our product areas and regions, with £7.4 billion of sales, up 13% versus last year, excluding COVID solutions. This includes a strong performance in the U.S., led by continued contributions from new launch products. Please turn to Slide 10. In Vaccines, we saw strong growth of 22% in Q1, excluding COVID solutions, led by Arexvy and Shingrix. Following the outstanding launch last year, Arexvy continued to deliver, with sales of £182 million in the quarter. Script data shows a strong brand preference for Arexvy, as we receive two of every three retail prescriptions, with U.S. market penetration of around 14%. I’ll cover Arexvy in more detail on the next slide. Shingrix delivered a record £945 million in the quarter and was up 18%, driven by public funding outside the U.S. together with early supply to our new partner, Zhifei, in China. Outside the U.S., Shingrix has launched in 39 markets and the majority have less than 5% penetration. In the U.S., sales decreased by 4%, reflecting the comparison to Q1 2023 which benefited from the removal of the co-pay for adults aged 65 and over on Medicare, as well as the prioritization of other adult vaccines during the viral respiratory season. We are investing in DTC and HCP campaigns as we seek to activate harder-to-reach consumers to continue to grow the cumulative immunization rate, now at 37% of people aged 50 and older, which leaves more than 75 million Americans still unvaccinated and eligible to receive Shingrix. Our expectation continues to be that Shingrix sales will reach more than £4 billion over time, driven by growth outside the U.S. In addition, we have also recently shared exceptional data demonstrating vaccine efficacy of 82% at year 11. Turning to our meningitis portfolio, Bexsero and Menveo sales were up 3% and 41%, respectively, in the quarter, with performance in Brazil and favorable phasing driving the growth in Menveo. We’re pleased to have received FDA file acceptance for our MenABCWY vaccine in mid-April, and combined, our meningitis portfolio is expected to deliver around £2 billion in peak-year sales. Across our Vaccines portfolio, we expect sales to increase high-single to low-double digit percent in 2024. Next slide, please. Focusing on RSV, we vaccinated over 1.3 million people with Arexvy in the retail setting during Q1. The launch was exceptional and exceeded our expectations. We now see seasonality similar to flu, impacting use patterns in the first year. In 2024, we expect the vast majority of sales to be in the U.S. and weighted to the second half in preparation for the 2024/2025 RSV season. This year, we continue to build on our competitive profile with the potential to expand the label, adding at-risk individuals in the 50 to 59 cohort, which could impact approximately 15 million people in the U.S. This is subject to approval, followed by ACIP review in June. Last year we presented data supporting an efficacy profile for Arexvy of at least two seasons. As the 2023/2024 RSV season is coming to an end, later this year, we expect to have additional efficacy data on long-term duration of protection and immunogenicity data over three years. We plan to present the totality of data at a future public health forum in the second half of this year, and we do not expect public health officials to decide on the frequency of RSV vaccination or revaccination before 2025. We are ambitious about growth in an expanding market with increasing competition. Whether a two-season or three-season vaccine profile, we remain very confident that Arexvy can achieve more than £3 billion in peak year sales over time. Next slide, please. In Specialty Medicines, including HIV, which Deborah will cover shortly, we increased sales by 19%, excluding COVID solutions. In respiratory and immunology, our market-leading medicines, Nucala and Benlysta, continued to deliver good growth. Nucala was up 13% reflecting high patient demand for treatments addressing severe eosinophilic asthma, chronic rhinosinusitis with nasal polyps and EGPA. Our MATINEE trial to confirm the efficacy of Nucala in COPD is expected to read out in the second half of this year. We also expect pivotal trial results for our six monthly IL-5, depemokimab, this year with readouts in asthma in Q2 and chronic rhinosinusitis with nasal polyps before year-end. Combined, we anticipate our IL-5 portfolio to deliver more than £4 billion in peak-year sales. Benlysta continues to show consistent growth and was up 8% in the quarter, with opportunities to drive earlier intervention and increase penetration in both SLE and lupus nephritis. In oncology, sales more than doubled in the quarter. Ojjaara has performed well following last year’s launch, and I’ll talk more about this on the next slide. We were pleased to receive authorisation from the European Commission for Ojjaara in late January, and we’ve since launched in the UK and Germany. Jemperli has also continued to grow strongly, and again, I’ll discuss this further on the next slide. Zejula’s performance was driven by increased patient demand and higher volumes due to the new tablet formulation, with further growth from new international launches. Overall, we expect strong performance for our Specialty Medicines in 2024 with growth of low-double digit percent. Please turn to Slide 13. Ojjaara, which we acquired from Sierra Oncology, has performed exceptionally well following last year’s launch and has the strongest uptake curve for a JAK inhibitor in myelofibrosis. Ojjaara is establishing market share in both the first-line and second-line settings, and we have seen encouraging data suggesting physicians are anticipating increasing their use of Ojjaara in the coming months. For Jemperli, we’ve demonstrated strong execution in the quarter with our new patient share up 33%, and we continue to build further clinical evidence in endometrial cancer where we recently presented data demonstrating that Jemperli plus chemotherapy is the only IO combination to show statistically significant and clinically meaningful OS data in the all-comers population. Subsequently, the FDA has granted a priority review to our file to expand treatment with Jemperli to all adult patients with primary advanced or recurrent endometrial cancer. We also expect this data to be published soon in a peer-reviewed journal. On Blenrep, we’re encouraged by the data from DREAMM-7, which showed a tripling of progression-free survival. DREAMM-8 also met its primary endpoint and showed a statistically significant and clinically meaningful PFS compared to standard of care in second-line multiple myeloma. In addition, DREAMM-7 and 8 also demonstrated strong overall survival trends, and we will continue to follow up to completion. We look forward to presenting these data at ASCO in June and are targeting regulatory filing in the second half of the year. Next slide, please. Finally, turning to our General Medicines portfolio, sales grew 1% in the quarter, led by Trelegy, delivering £591 million, and established products in emerging markets. We have also seen growth owing to stockpiling and patient demand. It’s still early in the year, and we are continuing to assess and manage the impact of the AMP Cap removal in the U.S. As a reminder, there was a US$150 million impact in 2023, and we continue to expect up to US$550 million of sales at risk for the full year. The growth outlook for General Medicines is unchanged. I’ll now hand over to Deborah to cover HIV.

Deborah Waterhouse, CEO, ViiV Healthcare

Thank you, Luke. We continue to drive HIV market transformation and are pleased to see our growth momentum continuing with HIV sales growing 14% to £1.6 billion in the first quarter. This is driven mainly by increased patient demand for our oral two-drug and long-acting injectable regimens and represents an increase of more than 2 percentage points in global market share versus Q1 2023. This continued strong performance demonstrates our leadership in transforming the HIV marketplace and delivering on individual patient needs. Looking across our portfolio, Dovato, our leading oral two-drug regimen and number one selling HIV medicine, grew sales by 27% versus Q1 2023. Our long-acting portfolio is also showing strong momentum with Cabenuva, growing 73%, and Apretude growing over 100%. With more than 60 thousand patients benefiting from these medicines, our ongoing growth is underpinned by strong patient demand and excellent operational execution. We believe that long-acting options have the potential to change the trajectory of the HIV epidemic and as the leaders in driving this market shift, it is positive to see this portfolio, growing more than 80% versus Q1 2023 and contributing 17% of total portfolio sales. In absolute terms, this resulted in £116 million of growth, representing more than 50% of the total HIV CER growth. Overall, Q1 has been a very strong quarter and puts us firmly on track to deliver a growth rate of high single-to-low double digits in 2024. We were also pleased by the positive reaction from the scientific and medical community to the comprehensive set of early phase, as well as phase 3b/4 and real-world evidence data that was presented at CROI in March, demonstrating confidence in our current portfolio and progress towards our pipeline of ultra-long-acting regimens. HIV physicians and healthcare providers reinforce to us time and time again that the long-acting regimens, which they have in their hands today, are really transforming the lives of people living with HIV, liberating people from the daily burden of oral therapy, improving adherence and tackling stigma, which remains stubbornly pervasive. Data from over 11,000 patients participating in long-acting clinical and real-world evidence trials clearly demonstrates the effectiveness of our long-acting treatment regimen. We were particularly pleased with the interim data from the LATITUDE study indicating that Cabenuva has superior efficacy compared to daily oral therapy in individuals living with HIV who have adherence challenges. We also presented positive phase 1 data from a study of cabotegravir ultralong-acting dosed at intervals of at least every four months and positive phase 2A data from the BANNER study, exploring the use of our novel broadly neutralising antibody N6LS for the treatment of people living with HIV. These data show continued progress towards our ambition to end the HIV epidemic, delivering our ultra-long acting pipeline, with cabotegravir replacing dolutegravir as our foundational medicine. We remain on track to offer four monthly dosing options for prevention in 2026 and treatment in 2027 as well as extending the dosing interval of our long-acting regimens in treatment and prevention to enable every-six-month dosing towards the end of the decade. At our September 2023 Meet the Management event, we committed to delivering around 40% of our revenue from long-acting medicines by 2027 and our current performance puts us on the right trajectory to achieve that goal. We are therefore confident in our ability to navigate through the revenue impact associated with the loss of exclusivity of dolutegravir. With that, I will hand to Julie.

Julie Brown, CFO

Thank you, Deborah, and good morning, everyone. As a reminder, to align with European pharmaceutical peers, we have changed our naming convention, so I will be referring to ‘Core’ instead of ‘Adjusted’ results. Next slide, please. Starting with the income statement, with growth rates stated at constant exchange rates. Sales increased 13%, excluding COVID solutions, and were up 10% overall, reflecting continued strong business performance. As Luke mentioned, growth benefited from newly launched products Arexvy, Ojjaara and Jemperli, along with earlier-than-expected Shingrix sales to our partner Zhifei in China. Together, these added around 5 percentage points of growth in Q1. Core operating profit grew 35%, excluding COVID, and 27% overall. The margin increased to 33.2%, with leverage from gross margin and SG&A. Cost of goods benefited from mix effects, including growth of higher margin Arexvy, Shingrix and Specialty care products. We expect to deliver gross margin leverage in the full year, with benefits predominantly in the first half given anticipated sales phasing and mix dynamics. At the full year, we discussed our focus on delivering improved operational leverage as we seek to benefit from the investment made over recent years. Against this backdrop, we’re pleased 2024 has started well, with underlying low-single-digit percentage SG&A growth. This, together with a one-off benefit from the successful Zejula royalty dispute, caused SG&A spend to decrease in the quarter by 2%. R&D investment continued to grow broadly in-line with sales as expected, mainly within our Vaccines, Respiratory and Infectious Diseases late-stage portfolios. Core earnings per share grew 37% excluding COVID solutions. Now turning to the total results, operating profit decreased 18% to £1.5 billion, primarily reflecting a charge arising from remeasurements of the ViiV CCL and Pfizer put option, largely resulting from improved longer-term prospects in our HIV business and currency. Overall, currency was adverse in the quarter due to the strengthening of sterling against the U.S. dollar and emerging market currencies. Next slide, please. Moving to the Core operating profit margin. On this slide, we have shared including and excluding COVID, to provide a review of margin dynamics. Excluding COVID, the margin improvement was significant at 580 basis points at CER, due to two main reasons: First, underlying margin benefits contributed 410 basis points driven largely by sales growth, favorable product mix and SG&A leverage, partly offset by the impact from the loss of Gardasil royalties and secondly, the Zejula royalty dispute contributed 170 basis points of margin improvement in the quarter. Including COVID solutions, there was 460 basis points improvement, driven by similar factors. Next slide, please. Cash generated from operations was £1.1 billion, representing an improvement of £0.8 billion over Q1 last year. This was driven by core operating profit and favorable working capital, with the latter benefiting from higher receivables collections, particularly in the U.S. vaccines business. Free cash flow was £289 million in the quarter, relative to an outflow last year, and therefore improving year-on-year by £978 million. Next slide, please. Slide 20 shares our net debt position since 31 December last year and how we’ve actively deployed capital in the business in line with our framework. Net debt was broadly stable compared to the end of 2023 at £15 billion. This included further monetization of our stake in Haleon and the completion of the acquisition of Aiolos Bio in the quarter. With our end 2023 net debt to core EBITDA ratio of 1.5x and expected cash generation, we have a strong balance sheet to support continued investment in future growth, including through BD, as we look to deploy funds to enhance growth and deliver attractive shareholder returns. Now, with that, I’ll now turn to our full-year expectations. Next slide, please. Turning to guidance, there is no change to our sales range of 5% to 7%, but we are increasingly confident of the full-year being towards the upper part of the range. We are upgrading our operating profit guidance to 9% to 11%, reflecting the strong start to the year and benefits from the Zejula patent dispute in the first quarter. We also expect royalty income to be slightly higher, between £550 million to £600 million in 2024. These benefits also flow through to our earnings per share, now upgraded to 8% to 10% for the year. I also wanted to give some color on anticipated phasing throughout the year, starting with sales. Continued execution of the successful launches of Arexvy, Ojjaara and Jemperli lifecycle innovation have contributed 5 percentage points of growth in Q1 and will continue to benefit Q2. However, we will annualize their launches, including the initial channel inventory build in Arexvy, in the second half. This year is also the start of our agreement with Zhifei for Shingrix in China. As Luke said, we had earlier than expected sales in Q1, but still expect the majority of 2024 Shingrix sales to be in Q2. Taking these factors together, we therefore expect sales growth will be significantly higher in H1 relative to H2. And turning to the operating profit dynamics, we continue to expect SG&A to increase in the low single-digit percentage range and for R&D to increase broadly in line with sales for the year. As a result, driven by the sales phasing, operating profit growth will also be significantly higher in H1 given the operating leverage. In summary, whilst it is still early in the year, we have made an excellent start to 2024 and are confident in delivering the full-year guidance and longer-term outlook. Turning to Slide 22. Lastly our IR roadmap, which shares our progress towards major milestones and value unlock opportunities, it’s clear that we have had a very positive start to the year, with a number of important pipeline events delivered, as Emma mentioned. The main milestones expected in the next two months are the U.S. FDA approval of Arexvy in adults aged 50 to 59, the phase III data readout of depemokimab in severe asthma with an eosinophilic phenotype, and the presentation of Blenrep data at ASCO in June. Turning to R&D milestones, many of the successes since Q4 have been within Oncology, and we look forward to our Meet the Management event in June to share a deeper review with you. I will now hand back to Emma to conclude.

Emma Walmsley, CEO

Thanks, Julie. So, to summarize, GSK continues to deliver on its commitments and perform to a new standard. Our excellent performance in Q1 provides us with clear momentum; we are pleased to be upgrading guidance and expect to deliver another year of meaningful growth in sales and earnings in 2024, as we continue to focus on prevention and changing the course of disease for millions of people. This all bodes well, but it is still early in the year and we remain very focused on delivering on our commitments and more at continued pace for patients, for shareholders, and for our people. Combining science, technology, and talent to get ahead of disease together. With that, I will now open up the call for the Q&A with the team.

Operator, Operator

Thanks, Emma. We will take our first question from Mark Purcell at Morgan Stanley. So Mark, over to you. Please.

Mark Purcell, Analyst

Yes, good morning, good afternoon, everyone. Thanks for taking my questions. So two questions on Shingrix. Could you help us understand the contribution we might expect from Zhifei for the full year 2024, and then going back to your point of ex-U.S. penetration being less than 5% versus 37% in the U.S. Could you help us understand if there were any leading indicator countries which we could think about in terms of the broader ex-U.S. penetration increasing or other vaccines that could be proxies for how high the ex-U.S. penetration could go? And then the second one on Nucala COPD, there has been some discussion around Dupixent and the potential of delays. The PDUFA Sanofi trades label breadth for time into the market, so could you help us understand the breadth of the MATINEE trial in terms of the patient population you are addressing? I think you got broncholytic and emphysemic patients in there, and it’s a broad eosinophilic phenotype as well, so it would be helpful to understand the relative breadth of your label and target population? Thank you.

Emma Walmsley, CEO

Great, thanks, Mark. We will come first to Luke on the prospects of Zhifei expansion on Shingrix, and then we will come to Tony on COPD.

Luke Miels, Chief Commercial Officer

Sure, Mark, so I am pleased to say it’s falling very much in line with the strategy that we have been outlining over the last few years, so with the contract with Zhifei, we have – it’s around £400 million with the contract. As we have said before, we are somewhat limited with supply into China this year, so £400 million is the number that you should use and then £800 million next year and then £1.2 million. The intent, of course, is to run that relationship significantly beyond the initial three years. Encouraging start. We are now in the field as of April with Zhifei and their point of vaccination expansion is very encouraging, so good news there. In terms of analogues, I think in markets like Europe and Japan it is very much about reimbursement penetration, so I think the UK is a good analogue. Spain/Italy, these are good analogues and we are very much at the start of the process in those markets with single-digit penetration overall. In terms of emerging markets, I think you got a range of markets. Saudi is quite interested in terms of government support with tenders and things like that. We have been very strict on pricing, so that’s encouraging. And then out-of-pocket markets like Brazil, and again we are in single-digit percentage penetration here, so very early days in those markets at a very tight price corridor.

Tony Wood, Chief Scientific Officer

Hi Mark. In COPD and Nucala, MATINEE is the study you referred to. It is ongoing and we expect it to read out at the end of the year. To get to your questions, it is a broader population and we have included emphysema as well as chronic bronchitis phenotypes. That’s important because of the 500 million individuals with COPD, about 30% of them present with an emphysema phenotype. We are also excluding any current or prior diagnosis of asthma. That was important given the nature of the CRL for the previous studies. I think it is worthwhile just pointing you to the data that we disclosed at ATS which was a post-hoc analysis of those previous studies, showing that in that broader population we see a 24% reduction in exacerbations. It is also important to stress that this is a two-year dataset in an area in which quality of life is also important over and above the headline reduction of exacerbations.