Earnings Call Transcript - GSK Q3 2023

Nick Stone, Head of Investor Relations

Hello, everyone. It's Nick Stone, Head of Investor Relations. Welcome to our Year-to-Date and Q3 2023 Results Conference Call and Webcast for Investors and Analysts. The presentation was sent out to our distribution list by email. You can also find us on gsk.com. Please turn to Slide 2. This is the usual safe harbor statements. We will comment on our performance using constant exchange rates, or CER, unless stated otherwise. As a reminder, following the Consumer Healthcare demerger in 2022 to form Haleon, we're representing performance and growth of the continuing operations for GSK. Please turn to Slide 3. Today's call will last approximately one hour, with the management presentation taking around 30 minutes and the remaining time for your questions. Our speakers are Emma Walmsley, Tony Wood, Luke Miels, Deborah Waterhouse, and Julie Brown, with David Redfern joining the rest of the team for the Q&A portion of the call. I'll now hand the call over to Emma.

Emma Walmsley, CEO

Thanks, Nick, and welcome to everybody joining us today. I am delighted to be presenting to you all with another set of excellent quarterly results. Please turn to the next slide. Sales and profits grew double-digits for the quarter, with sales up 16% to £8.1 billion, adjusted operating profit up 22% to £2.8 billion, and adjusted earnings per share up 25% to £0.504, all excluding pandemic solutions. Our strong performance was broadly based and benefitted particularly from the outstanding US launch of our RSV vaccine, Arexvy, which is on track to be a blockbuster in its first year on the market. This excellent execution together with our drive for efficiency and margin accretion means we can upgrade our 2023 sales, adjusted operating profit, and adjusted EPS guidance. For the year, we now expect sales to increase between 12% and 13%, adjusted operating profit to increase between 13% and 15%, and adjusted EPS to increase between 17% and 20%. Within sales, we are upgrading the outlooks across all segments for the year, reflecting our clear momentum. Our performance also clearly demonstrates the delivery of the strategic choices we've made to invest in prevention, as well as the treatment of disease. New products launched since 2017 have contributed sales of £7.8 billion so far this year, with nearly 80% of them coming from Vaccines and Specialty Medicines. Approvals this year for Arexvy and Apretude, together with two important oncology medicines Jemperli and, most recently, Ojjaara, further strengthen this new product portfolio and offer meaningful sources of profitable growth. So taken altogether, this is a strong and sustained performance heading into 2024. Next slide, please. This quarter further underscores the importance and strength of our Vaccines’ business. Prevention is an increasing focus for healthcare systems all around the world. GSK is a world leader in vaccines and is extremely well-placed to deliver innovation and offer value to both individuals and payers. The introduction of Arexvy in the US is evidence of this, demonstrating our strong launch capabilities because with over £700 million of sales in its very first quarter, we are protecting people at scale from this life-threatening disease, especially those with comorbidities. Generating further clinical evidence for Arexvy remains a clear priority and we were pleased to present positive data in adults aged 50 to 59 years at the CDC's Advisory Committee on Immunization Practices last month. We also added to the outstanding clinical profile of Shingrix this quarter. Results of the large post-marketing study in China demonstrated a 100% efficacy. And alongside this, we're additionally significantly expanding the availability of Shingrix in China. Our exclusive partnership with Zhifei signed last month is going to support and accelerate our goal for Shingrix's annual sales of more than £4 billion by 2026, with opportunities to expand this partnership further, potentially including Arexvy. Our innovation in RSV, shingles, meningitis and pediatrics, all demonstrate our world-leading vaccine capabilities. We have further substantial innovation in the pipeline where we have our comprehensive and leading suite of vaccine platform technologies, including next-generation mRNA, our multiple antigen presenting system, or MAPS, as well as our adjuvant systems. All of these offer exciting new opportunities in seasonal respiratory, bacterial and chronic viral infections, and we continue to explore the science beyond infectious diseases. Next slide, please. Alongside delivering stronger shareholder returns, we also continue to build trust by delivering across the six key areas we prioritize for ESG. I am highlighting our continued commitment to fight malaria with innovation. GSK scientists, working with Johns Hopkins Institute and others, published their groundbreaking discovery of the naturally-occurring bacteria that can significantly reduce the malaria parasite load in mosquitoes, indicating the potential to inhibit the transmission of malaria to humans. We also continue to deliver our environmental and diversity, equity and inclusion goals. Further details, along with more on all six key areas, are included in the Q3 results announcement. Now, let's hear more from the team on our progress, starting with Tony and R&D.

Tony Wood, Chief Scientific Officer

Thank you, Emma. My priority is investing in our pipeline and accelerating R&D to deliver new vaccines and medicines to patients. Today, the pipeline comprises 67 assets in clinical development, two-thirds of these prevent and treat infectious diseases and HIV. During the quarter, we've seen continued progress. In infectious diseases, we're focused on seasonal respiratory viruses, bacterial, fungal and chronic viral infections. In seasonal respiratory viruses, Arexvy received approval in Japan as the country's first RSV vaccine for older adults. We also shared positive data for those aged 50 to 59 years with the Advisory Committee on Immunization Practices in the US. In chronic viral infections, we will present data later this month on bepirovirsen, a potentially transformative treatment for chronic hepatitis B. I'll talk more about these data shortly. In HIV, the European Medicines Agency approved Apretude as the first and only HIV prevention option in combination with safer sex practices to reduce the risk of sexually-acquired HIV infection in high-risk adults and adolescents. For respiratory, Japan accepted the regulatory submission of Nucala for chronic rhinosinusitis with nasal polyps. Later this month, alongside Luke, I look forward to providing you with insights into our respiratory strategy and medicines at the next focused Meet the Management event. For oncology, the European Medicines Agency recommended not renewing conditional marketing authorization for Blenrep. As a reminder, given the changing regulatory environment, our expectations remain low for the event-driven DREAMM-7 and DREAMM-8 Phase III trials. We now expect to read these out in 2024. This quarter, we also reached an exclusive licensing agreement with Hansoh for a Phase I B7-H4 targeted antibody-drug conjugate, or ADC. We believe this has best-in-class potential in ovarian and endometrial cancer with opportunities in other solid tumors. Lastly, we're delighted with the US FDA approval of Ojjaara, or momelotinib, which is indicated for treating myelofibrosis in adults with anemia, and the approval of Jemperli, our highly effective PD-1 inhibitor, as the first new frontline treatment for patients with dMMR/MSI-High primary advanced or recurrent endometrial cancer. The profile for Jemperli was strengthened by the recent interim analysis of RUBY Part 1, which reported a statistically significant and clinically meaningful survival benefit in the overall population enrolled. We aim to present these OS data at a conference early next year. Next slide, please. Last week, we presented further safety and immunogenicity data for Arexvy to ASIP. The vaccine met its co-primary endpoints and demonstrated non-inferiority in people aged 50 to 59 years compared with adults aged six years and older, including those at increased risk of RSV lower respiratory tract disease. These data continue to demonstrate the consistent strength of Arexvy's profile in protecting the most vulnerable. We will make a supplementary biological license application to the US FDA before the end of this year in time for next year's ASIP to further support potential label updates. For Shingrix, we continue to build our knowledge with new data demonstrating 100% efficacy in the prevention of shingles in China for adults aged 50 and over, a remarkable result. We expect to publish these data in a peer-reviewed scientific journal before the end of the year. Slide 11, please. Continuing with infectious diseases, bepirovirsen, our triple-action antisense oligonucleotide, has the potential to be the cornerstone of a functional cure for patients with chronic hepatitis B. It inhibits viral replication, reducing viral DNA, and the production of viral proteins including hepatitis B surface antigen. Importantly, it also stimulates the body's innate immune system. We believe this triple mechanism of action is the reason for bepi's unique profile. There are more than 300 million people living with hepatitis B and our goal is to provide patients with the first clinically meaningful functional cure, eliminating the need for continued therapy and reducing the long-term risk of developing liver cirrhosis and cancer. We now have two completed Phase II trials for which data are consistent and demonstrate that patients with low surface antigen have the greatest chance of a functional cure when treated with bepi. In the case of B-Together, this is not significantly improved by sequential Peg-interferon treatment. However, the recent exclusive license of Janssen's Phase II small interfering RNA-based therapeutic provides a complementary opportunity to develop a potential novel sequential regimen to benefit a broader patient population and potentially drive higher functional cure rates. Lastly, we hope data from B-Sure will be presented later this month at AASLD. This will demonstrate a durable response for a significant proportion of patients treated with bepi. Our Phase III trials B-Well 1 and B-Well 2 are progressing as planned in 31 countries with data anticipated in 2025. Turning to my final slide. This slide highlights important clinical data readouts and regulatory events over the upcoming months. You can find a comprehensive overview in the appendix. In summary, I'm pleased with our progress so far this year. We have clear plans to move forward at pace, deliver on our key objectives for R&D and support GSK's overall growth ambitions. I'll now hand it over to Luke on Slide 13.

Luke Miels, Chief Commercial Officer

Thanks, Tony. In Q3, we again delivered growth across Vaccines and Specialty Medicines in each region with £8.1 billion of sales, up 16% versus last year, excluding pandemic solutions. Please turn to Slide 15. In Vaccines, we saw strong growth of 34% in the quarter excluding pandemic solutions, led by the excellent launch of Arexvy, which contributed £709 million. On the same basis, we now expect full-year Vaccines sales growth to be around 20%. On Arexvy, I want to highlight the excitement our organization has had behind the launch that we've seen in the US. Following an initial inventory build, we saw high demand and received two out of every three retail prescriptions. In the quarter, we saw around 50% of Arexvy doses were co-administered with flu. We're pleased with our commercial positioning in all major pharmacies, including competitive contracts with 11 key accounts. We strategically chose to highlight our 94.6% efficacy in the co-morbid population, and that message seems to resonate well with strong HCP brand recognition. There is a long runway for Arexvy in the US, where during the quarter, we vaccinated more than 1.4 million adults of the 83 million at-risk. Ex-US, launches are underway across Europe and Canada. In September, we also received approval in Japan. We remain confident in our peak sales being greater than £3 billion. For the full year, we expect sales to be between £0.9 billion and £1 billion, based on an analogue of flu vaccination seasonality. However, there continue to be unknown factors including annual vaccination patterns, duration of protection and what re-vaccination recommendations might be. We will continue to keep you informed, of course, as we learn more. Next slide, please. Moving to Shingrix, this remains an important vaccine for our portfolio, up 15% versus last year with the ex-US contribution now representing 50% of sales. In addition to the US, Shingrix is available in 38 additional countries, with less than 3% penetration in most markets, and we continue to have unconstrained supply. In the US, we have reached the most motivated consumers with 33% penetration of more than 120 million adults recommended to receive Shingrix. We remain encouraged by the growth in retail, which was up 4% in the quarter, and are investing in strategic initiatives to actively target consumers and HCPs to access the next tranche of customers. In October, we announced the deal with Zhifei to co-promote Shingrix in China, and this partnership materially expands the number of Chinese adults who can benefit from Shingrix over the next three years through a company with a track record of driving access to innovative medicines and vaccines in China. Zhifei has a significant reach across China with an extensive service network covering more than 30,000 points of vaccination versus the current 9,500 we have now. As Emma mentioned, we expect this partnership to support and accelerate our expectations for Shingrix sales to reach more than £4 billion by 2026. Next slide, please. In Specialty Medicines, including HIV, which Deborah will cover shortly, we've increased our sales by 17% excluding Xevudy. For the full year, we now expect low double-digit sales growth. Our market-leading medicines Benlysta and Nucala continue to deliver double-digit growth. Benlysta was up 20% in the quarter, with growth across all major markets and a promising opportunity with updated EULAR guidelines now recommending use earlier as part of a standard-of-care for lupus and lupus nephritis. Nucala was up 19% in the quarter and remains the first and only biologic approved in four eosinophilic diseases. We expect to see COPD data for Nucala in the second half of next year. Both of these medicines continue to have room to grow with relatively low buyer penetration and lifecycle opportunities, underscoring our confidence in the long-term opportunity for both. In oncology, sales were up 26% in the quarter with Jemperli now being used in the first-line for appropriate endometrial cancer patients, and Zejula was up 22% due to stocking of our new tablet formulation, providing an improved patient experience. We expect this stock to be utilized by the end of the year. On this slide, I wanted to highlight the recent approval of our myelofibrosis medicine Ojjaara. In addition to a line-agnostic label in the US, regulators acknowledged our unique benefit in anemia, an extremely important characteristic for these patients as we know that anemia status from transfusion requirements directly correlates with poor survival prognosis and quality of life. As you can see on this chart, if you're a myelofibrosis patient with no anemia, you have a median eight-year life expectancy. Conversely, you have a two-year life expectancy if you're severely anemic and your hemoglobin level is below eight. We look forward to making this medicine available to patients and have already recorded sales in September. We are raising our full-year oncology sales expectations to increase to low single digits. Please turn to Slide 18. Finally, our General Medicines portfolio continues to contribute more than £2 billion in the quarter, led by Trelegy, which was up 23%. Trelegy is the fastest-growing triple therapy for COPD and asthma with room to grow as the SITT class still only has 28% penetration of the COPD patient class share in the US. Overall, General Medicines were down 2% for the quarter due to negative RAR impact, slightly offset by Trelegy demand and the continued post-pandemic recovery of the EU and international antibiotic market. Taking everything into account, we now anticipate low to mid-single-digit growth this year. With that, I will now hand over to Deborah to cover HIV.

Deborah Waterhouse, CEO of ViiV Healthcare

Thank you, Luke. Our HIV business delivered sales of £1.6 billion in the third quarter, growing 15%. This growth was primarily driven by patient demand, which contributed 10 percentage points of growth, with the majority of the remaining 5 points from tender phasing in our international business. Our continued strong performance through this quarter means we are now increasing our guidance for full-year growth to around 10%. Our performance benefited from strong patient demand for our oral two-drug regimens and long-acting injectable medicines, which now make up 53% of our total portfolio value. Dovato delivered £477 million in the quarter. Market performance reflects HCP belief in Dovato, which has firmly consolidated its position as the leading oral two-drug regimen. I'd like to spend a few moments describing our expectations around Dolutegravir's loss of exclusivity. In Europe, the composition-of-matter patent expires in July 2029. In the US, Dolutegravir is protected by a composition-of-matter patent until April 2028, which includes an additional six months of exclusivity following the completion of our pediatric studies. Dovato and Juluca are also protected by formulation and other patents in the US, which have expiry dates after the composition-of-matter patents. Therefore, we anticipate a longer exclusivity period in the US with Dovato until December 2029 and Juluca until July 2030. Moving to our long-acting injectable portfolio, Cabenuva sales for the quarter were £182 million, reflecting strong patient demand with high levels of market access and reimbursements across the US and Europe. Cabenuva continues to be supported by strong label evolution and data, which underpins confidence. Patient awareness of Cabenuva is high at over 70% and around two-thirds of switches are coming from competitor products. Moving on to prevention, sales of Apretude, the world's first long-acting injectable for the prevention of HIV, delivered £37 million in the quarter, and we are pleased by the momentum across the US. This, alongside the desire by prescribers, payers, and governments for new solutions to help end the HIV epidemic, gives us confidence that the PrEP market in the US will continue to grow strongly. We were also pleased to receive European approval for Apretude in September. We're also pleased with the progress of our pipeline, which is focused on innovative long-acting regimens. We have three clear target medicine profiles to provide the world's first self-administered long-acting regimen for treatment and to provide ultra long-acting regimens for treatments and prevention. In our recent HIV Meet the Management event, we confirmed that we are currently on track to deliver an every four-month injectable regimen. This would enable us to double the dosing interval, enabling clinic visits to be halved to just three per year, meaningfully increasing the benefit of long-acting regimens for patients and healthcare systems. For the four-monthly dosing and prevention, we currently expect approval in the 2026 timeframe, and for four-monthly treatments in 2027. We also provided greater clarity on our roadmap to further extend the dosing interval of our long-acting regimens in treatment and prevention to enable every six-month dosing towards the end of the decade. To conclude, we remain very confident in our ambition to achieve a five-year sales CAGR to 2026 of 6% to 8% and to maintain our innovation leadership in HIV. This, combined with the continued growth of the long-acting market, gives us the potential to significantly replace the revenue from the Dolutegravir loss of exclusivity. I will now hand over to Julie.

Julie Brown, CFO

Thank you, Deborah, and good afternoon, everyone. As you've heard from the team, we've made great progress on our roadmap since the second quarter results, and we're well-positioned heading into the end of the year. We continue to be focused on execution, our pipeline, capital allocation, and investor engagement. As Tony mentioned, we've had several regulatory approvals, including Ojjaara and Jemperli during the third quarter. Following our HIV Meet the Management event in September, we look forward to holding a similar event focused on respiratory on the 30th of November. Please now turn to Slide 22. Turning to the quarter, as I cover the financials, references to growth are at constant exchange rates, and I'll focus my comments on adjusted results. So, starting with the income statement, sales increased 16% excluding COVID solutions and were up 10% overall, reflecting continued strong execution with the extremely successful launch of Arexvy. Gross margin improved 80 basis points, excluding COVID and 360 basis points at CER, including the impact of lower sales of Xevudy. SG&A growth was 14% excluding COVID. As a reminder, in Q3 last year, we had foreign exchange gains on the Vir collaboration, which contributed 3 points to reported SG&A growth this quarter due to the credit last year. Adjusted operating profit grew 22% excluding COVID solutions and 15% overall. The margin increased to 34%, driven largely by cost of goods improvements and operating leverage. Turning to reported results, total operating profit increased 83% to £1.9 billion. This was driven by overall performance and favorable CCL movements and fair value gains from our stake in Haleon. The reconciliation of total to adjusted results is included in the appendix. On currency, there was an adverse 6-point impact on sales and 9 points on adjusted operating profit, primarily due to the strengthening of sterling against the US dollar. Please now turn to Slide 23. Moving to the adjusted operating margin dynamics in the quarter. The margin increased to 170 basis points to 35% at CER and improved 180 basis points, excluding COVID solutions. Overall, costs of goods have been favorable, primarily reflecting reduced sales of lower-margin Xevudy and an improvement in mix towards Specialty and Vaccines. Regarding SG&A, we are in an investment cycle supporting our priority products. Our spend is focused on maximizing the launch of Arexvy, building awareness of RSV, and catalyzing the global market expansion opportunity for Shingrix. We now have approval in 39 countries for Shingrix and 18 countries for Arexvy. Specialty Medicines is also a targeted investment area, with clear opportunities for the long-acting HIV franchise and the launch of Ojjaara in oncology. We confirm our guidance for SG&A this year with the growth broadly in-line with sales. It is important to say that following a period of investment, we now expect to move to a period of delivering returns on that investment and building on the great foundation of performance. In this new cycle, SG&A growth will step down and will be accretive to profits in 2024. Next slide, please. Adjusted earnings per share grew 17% overall and benefited from lower net finance expense following debt restructuring and the favorable tax rate, partly offset by higher ViiV profits, leading to an increase in non-controlling interests. Next slide, please. Cash generated from operations was £4.4 billion in the year-to-date and £1.4 billion lower than the prior year. There are two major items to call out: firstly, the receipt of the Gilead settlement last year of £0.9 billion; and secondly, the increase in working capital, influenced by stronger Arexvy sales in Q3 and lower Xevudy collections. The Arexvy sales will come through in the fourth quarter cash flow. Free cash flow more than doubled to £1.7 billion in the third quarter and brought the nine-month year-to-date inflow to £1.3 billion. Cash expectations for the year have improved, but we still anticipate that 2023 cash generated from operations will be slightly lower than 2022 due to the one-off we've seen from Gilead last year. We confirm our commitment of more than £10 billion of cash generated from ops by 2026. Net debt stands at £17.6 billion with free cash inflow and proceeds from the Haleon stake partly deployed through business development on the acquisition of BELLUS healthcare. Turning to the guidance on Slide 26. Given our sustained strong performance across all segments in the business, we are upgrading our guidance at CER for the full year. As a reminder, our guidance excludes the impact of COVID-19. We now expect sales to increase 12% to 13%. We expect adjusted operating profit to increase between 13% and 15%, and adjusted earnings per share to increase 17% to 20%. The strength of the Arexvy launch has been ahead of our initial expectations and is the main source of the guidance upgrade. Q3 sales of Arexvy benefited from strong demand and initial channel inventory build, with TRx volumes representing around one-third of the volumes sold. As Luke referenced, we are projecting our forecast for the season in line with the high-dose flu analogues, and therefore expect full year sales of around £0.9 billion to £1 billion. However, there is still much to learn given the novel nature of this new vaccine, including annual vaccination patterns, duration of protection, competitor dynamics, and what expert recommendations might be. We anticipate further insight following the end of the US flu season, which will inform our outlook for 2024. We look forward to updating you further as part of our full year results and remain confident in our longer-term revenue ambition for Arexvy. Turning to the dynamics within upgraded guidance. Within sales, we're increasing our expectations across all product groups. We now anticipate vaccine growth of around 20%, Specialty Medicines to grow low double-digits, with HIV to grow around 10%, and General Medicines to grow low- to mid-single digits. Moving down the P&L to operating profit, we now expect royalties to be around £900 million with no change to our expectations for the other lines of the P&L. To EPS, we expect lower interest expense of between £650 million and £700 million. In terms of currency, if exchange rates were to hold at the closing rates on the 30th of September for the rest of the year, the estimated adverse impact on sterling turnover growth for the full year would be minus 2% and on adjusted operating profit growth, it would be minus 4%. Finally, we remind you of a few modeling assumptions for 2024, namely the impact of AMP cap, the loss of Gardasil royalties, and the tax rate likely being a couple of percentage points higher due to OECD legislation. More details on these are included in our pre-quarterly aide memoire, and I look forward to guiding more fully at the end of the year. And thank you, and with that, I will hand back to Emma.

Emma Walmsley, CEO

Thanks, Julie. Turning lastly to Slide 27. In summary, we are seeing strong and sustained improvements in our performance. This quarter marks the seventh consecutive quarter of competitive sales and profit growth, which supports an upgrade to our guidance for the year. We also remain very focused on strengthening our pipeline and our longer-term outlooks with progress in vaccines, developments of our long-acting HIV portfolio, and new prospects in respiratory, all pointing to new growth opportunities for GSK. We have strong performance as we enter 2024, and we look forward to keeping you updated on our progress. Thank you for listening. And let's now please all move to the Q&A.

Nick Stone, Head of Investor Relations

Thanks. I'd like to take our first question from Graham Parry. Graham, over to you.

Graham Parry, Analyst

Great, thanks, Nick. I appreciate your response to my question. I'd like to start with Arexvy. My inquiry is about the level of discounting during the initial launch. Since two-thirds of your £709 million was inventory and you've administered approximately 1.4 to 1.5 million doses, that suggests underlying sales are around £230 million to £240 million. This would indicate that the net price is likely more than 30% below the list price. Can you confirm if that estimate is accurate? Is the discount primarily from wholesalers or retail pharmacies to encourage the initial inventory build, and might we see some improvement in pricing over time, or is this simply reflective of the competitive nature of the current market? Additionally, Julie, you mentioned the dynamics for next year. I understand that you won’t have the initial inventory build, but how much of that inventory do you believe is just leftover since you won’t have the same return of vaccinated individuals next year? I would appreciate any insights on how deeply you've penetrated the easier demographics, such as the older population or those with comorbidities, and how challenging it may be to vaccinate new individuals next year. Thank you.

Emma Walmsley, CEO

Thanks, Graham. Well, we'll come to Julie in a minute on guidance and thoughts around next year, although obviously, we will mainly be giving you thoughts around next year when we come to February 2024. I would just remind everybody that while we are absolutely delighted with the fast and competitive start here on RSV, it is just the start, it's the first season, and we remain very ambitious for the £3 billion at least that we expect this asset to represent. But let's go to Luke first, noting, Graham, you will fully understand we're not going to be declaring all our commercial details on this call. But Luke, do you want to comment more broadly?

Luke Miels, Chief Commercial Officer

Yeah, Graham, thank you. I mean, I think we've been quite disciplined taking a longer-term approach around pricing and contracting and it's landed quite well. I won't give you any more color than that in terms of the percentages at this point because I'm sure our friends in New York have probably got up a little bit early this morning. But what I would say is to build on Emma's point, I think in the short-term, things are uncertain. We're very happy with the launch. In the long-term, we're very certain. I think so far, if we look at some of the metrics which I can try and help you with, it's about 50% co-administration with flu. This is a very large overlap with that population. Interestingly, around 15% of people are getting free shots when they come into the pharmacy. 85% is that 65 to 84 age population. So again, very similar to high-dose flu. For the rest of the year, in terms of demand, you're still seeing good market research in terms of HCPs recommending it, so it's about 64% based on our latest market research, which is encouraging. Of course, the CDC is advising doctors to keep going. So that's on a positive side of the ledger. But the fact is our working hypothesis is that this is more of a flu-like trajectory. As people start coming into pharmacies and we see a reduction in staffing levels of pharmacies who actually deliver these vaccines, then we're going to see a drop-off in demand. That's our hypothesis at this point. We'll obviously have a lot more color in Q4 to give you an update. As Emma said, I think we're very confident in terms of the £3 billion number that we have outlined in the past.

Emma Walmsley, CEO

And obviously, looking forward to running forward with that 50-year-olds to 59-year-olds data too, which is another potentially meaningful cohort. Julie, anything else you want to add?

Julie Brown, CFO

No, I think actually Luke has covered it extremely well. I think we've obviously looked at the levels of stock in the channel. We've looked at the rate of immunizations. We've seen a correlation with flu as Luke mentioned very clearly and that's really informed our guidance. In terms of 2024, I mean, I think as we come through the US flu season, we are going to have a much clearer view of 2024 when we give our full year results. So, we will definitely update you at that stage, more fully.

Emma Walmsley, CEO

Thanks. Next question, please.

Nick Stone, Head of Investor Relations

Okay. Next question is going to be from Kerry Holford at Berenberg. Kerry, over to you, please.

Kerry Holford, Analyst

Thank you. I have a couple of questions for Tony, please, within R&D. So, firstly, on bepirovirsen. So now you've got the full reach of your Phase II data, and you've recently signed that deal with J&J to look at sequential therapy. Do you still remain confident you offer hep B patients the functional cure, at least for a proportion of them? What do you expect that J&J siRNA to add here? And do you stand by your more than £2 billion sales target for that asset? And then secondly, a broader question on R&D budgets. So here, we've seen significant growth in your budgets over the past 18 months or so. And based on the pipeline you have ahead of you, are you broadly happy with the annual budget that you've effectively been given this year? The run rate looks to be about £5.5 billion. Or should we expect that R&D budget to continue to grow in the sort of low-double-digit range that we've seen year-to-date going forward? Thank you.

Tony Wood, Chief Scientific Officer

Thanks, Kerry. Let's get started with HBV, and then I'll comment on the pipeline, but perhaps, Emma, you might want to make your comment on the R&D budget. So, first of all, look, I'm really pleased with this deal, Kerry. Let me just remind you because I'm going to anchor it in what we know about bepi and becoming increasingly confident about that is in the context of monotherapy on top of nucleoside treatment. We achieve a durable functional cure for a significant proportion of the chronic HBV patient population. That's for individuals that have a surface antigen count of less than 3,000. Just as a reminder, that's about 40% of the 300 million individuals who are living with chronic hepatitis B. To put it in a nutshell, what the new deal with the J&J siRNA does is takes the broader population down to that target population of about 3,000 and below. Expect, and we're excited about the prospects, therefore, of seeing both an increased coverage in an ITT population and also a deepening of the therapeutic effect. This is important if you look at the mechanism of action of the J&J siRNA. It works in, excuse me, a complementary fashion to bepi, further lowering viral DNA and the consequences of that, as I mentioned in the presentation. The other important thing is that we've built a complex PKPD model around response, which this will add to. In addition, using AIML and some really deep phenotyping on nearly 500 patients, we established an understanding of the immune status required at the beginning of treatment for response. We're going to continue to add to that because with the deal in question, we get a number of ongoing Phase II studies. I'm really pleased about where we are with that particular deal. For me, it strengthens my expectations in terms of our ability to deliver a functional cure for a broader population of patients living with this disease. Let me just, in terms of the question about R&D budget and growth, perhaps I'd just say a few brief things about the portfolio and then hand over to Emma. Again, I’m really pleased with where we are on the portfolio. Emma mentioned the strength that we have in our growing vaccines portfolio, particularly next year, as you'll see more data coming from our mRNA platform, from MAPS. We have a number of important studies, like a therapeutic herpes simplex vaccine readout on POC that will again continue to hopefully deepen the importance of our adjuvant technology that is underscoring, I think, the fantastic clinical performance we see for Shingrix and for Arexvy. Luke and I will say more at Meet the Management about the cornerstones of depemokimab, Nucala and camlipixant. Our respiratory portfolio, of course, I just mentioned bepi. Again, moving briefly into oncology, Jemperli, most recently through the OS data that I mentioned earlier, continues to show its credentials as a very highly effective PD-1 inhibitor. With all of that in place, I think we're well set regarding our future ambitions and the budget required for that ambition. I'm in good shape about it. Emma?

Emma Walmsley, CEO

Thanks, Tony. I mean, I think that there are two important things to emphasize strongly here. First of all, we've been very clear in our capital allocation framework. The number one priority for the company is to invest in the pipeline, organically and inorganically. That is why, over the last five years, you've seen a significant step up in our R&D spending. What matters is not how much you spend but that you spend it smartly and that it's ever-improving and we're continuing to fuel competitive, profitable growth for our shareholders. So, the first thing is it is a priority, but it's about how we spend it. I think we are broadly at more industry norm levels in terms of spending, but very much focused on the returns of that. The second thing is we are absolutely committed to profitable growth, and we’re in that chapter now. We’re now in, I think, seven consecutive quarters of competitive growth. Glad to upgrade guidance for the year. Very confident about our 2026 outlooks and our double-digit profit CAGR. This year, we expect R&D spend to increase slightly below our turnover levels. We're not going to set an explicit target around that, but you can be very confident that the outlooks we previously laid out, we're completely committed to and delighted about our progress against. Next question, please.

Nick Stone, Head of Investor Relations

Okay. The next question is from Simon Baker at Redburn. Simon, over to you, please.

Simon Baker, Analyst

Thank you, Nick. Thank you for addressing my questions. I have two questions, both related to the pipeline. I apologize if I missed this earlier, as I did lose sound at one point. It seems that depemokimab is progressing slightly better than expected. Could you provide us with an update on the SWIFT and SWIFT-2 study timeline? Secondly, regarding the Hansoh ADC, could you elaborate on what attracted you to that asset? We haven’t seen much data, and you have access to more than we do. I’m curious if your interest is data-driven or if it's because the payload and the linker are identical to Dato-Dxd, which might give you a high level of confidence in the potential of that ADC. Thank you.

Emma Walmsley, CEO

Thanks. Well, I'll come to Tony on both of those. But just a flag, please do join us on the 30th of November when they will update you on some of the very exciting scale assets we have in respiratory, obviously our homeland and our heartland, including depemokimab and camlipixant as well. But Tony, you might want to comment a bit more on the trials that are ongoing and then also on the ADC, which is obviously completely in line with our oncology strategy.

Tony Wood, Chief Scientific Officer

Sure. Thanks, Emma. Hi, Simon. Yeah, I'm pleased with the progress we're making on SWIFT-1 and SWIFT-2. As you've spotted, we've seen a slight acceleration in that, which was associated actually with an acceleration in the ANCHOR study for nasal polyps. What that means is that the safety database that we need to underpin the file is now complete. You should expect, though, that we'll stay on schedule with regards to the analysis and publication of the data and I won't be doing that until we get the results for the second SWIFT analysis, which still places us in the first half of next year. As for the ADC deal, Simon, yes, as you rightly point out, in terms of the linker payload, there are similarities to Dato-Dxd, and therefore we derive confidence from the improved profile that you see for ADCs carrying that linker payload. Two important things, though, to stress in the context of this deal. One, the antigen B7-H4 is selectively expressed on gynecological cancers. That's why we went after the mechanism in line with our strategy for focus on women's cancers and heme. Lastly, in that area, there is ample evidence of the use of topoisomerase inhibitors as standard of care for chemotherapy. That's related in part probably to the fact that you see a lot of DNA instability in those cancers, and as I'm sure you're aware, topoisomerases work on that mechanism.

Emma Walmsley, CEO

Thanks, Tony. Next question, please.

Nick Stone, Head of Investor Relations

Next question is going to be from Andrew Baum at Citi. Andrew, over to you, please.

Andrew Baum, Analyst

I'm sorry about that. I have two questions. One is for Luke and the other for Tony. Luke, can you discuss how the removal of the Medicaid cap will impact your Gen Med business, especially in respiratory, in terms of projecting revenue and earnings for next year? And for Tony, or perhaps Kim if she's available, there was a recent report on the ATHENA cohort involving Cabotegravir and Rilpivirine. It noted several cases of viral rebound resistance, particularly among patients with high BMI or weight gain. Should we anticipate any changes to the label based on the findings from that cohort? Even though the number of cases was small, it was significant and highlighted. Thank you.

Emma Walmsley, CEO

Thanks, Andrew. We'll come to Deborah on the HIV pipeline first and then Luke back to you on AMP cap.

Deborah Waterhouse, CEO of ViiV Healthcare

Thanks, Andrew. So, the ATHENA is a cohort study. It was presented at EACS eight to ten days ago. Actually, the finding is exactly in line with our clinical studies. There are kind of three characterized things that give you a higher likelihood of failing with Cab+Rilpivirine. Weight is one, so high BMI is one. And then obviously A6, A1 sort of subtypes. Lastly, if you're resistant to Rilpivirine. We clearly guide that those patients have two of those risk factors, and they're more likely to fail. We guide that, and that's exactly what we saw in the ATHENA study in terms of the characteristics of those that failed. It was in proportion with what we saw in the clinical study, which is obviously less than 1%. So, no surprises whatsoever. Exactly what you would expect. It just makes it more important that we continue to communicate through our multivariate analysis data for whom Cabenuva is right and who probably shouldn't be taking the medicine. But it's a tiny proportion of the overall patient base that will get benefit from this medicine.

Emma Walmsley, CEO

And nothing new. Luke?

Luke Miels, Chief Commercial Officer

Sure. Thanks, Andrew. I mean, as I said at Q2, the exposure is US$700 million. We've had notice. So, we’ve got authorized generics in place. We’ve done some withdrawals that we’ve announced. We’ve done WAC adjustment with Lamictal. The other products impacted are Advair and Flovent and Serevent. Look, I think the impact is going to be sizable. We've started to reflect that in RAR adjustments now, but we need to judge to see what level of returns ultimately come back. There's also some variables in terms of the percentage of switch to authorized generics, but we do have competitive generics, for example, with Flovent, so they may pick up more volume, making it a bit hard to forecast. Long story short, we've been prepared for this. We've been working on it for a couple of years. I think we’re in the strongest position possible. But there is going to be a material impact on that US$700 million, and that's why it's reflected in the outlook for General Medicines next year.

Emma Walmsley, CEO

I mean, that's the really important point, it's a '24 hit, but it's all included in our medium-term guidance of being broadly flat in this business, where we've of course seen a nice uptick in performance, not least as Trelegy continues to power forward and lead the way. So, all factored in and planned for. Next question, please.

Nick Stone, Head of Investor Relations

So, next question is from Richard Parkes at BNP Paribas. Richard, over to you, please.

Richard Parkes, Analyst

Thanks, Nick. I have a couple of questions. First, regarding Arexvy, could you discuss the unmet needs in the severe disease segment for the 50 to 60-year-old patient population? I'm interested in understanding what you anticipate for ACIP recommendations and how a label update might affect the opportunity in the upcoming year. Second, concerning Jemperli, I would like to know your level of confidence in extending the approval to the MMR proficient population. There seem to be two options here: one being the overall survival data from Part 1 of the study. Could you comment on the consistency of that benefit across the subgroups? Additionally, I noticed you didn't mention Zejula when discussing Part 2 of the trial as an opportunity. Could you share your confidence in the PARP inhibitor maintenance arm of that study as well? Thank you.

Emma Walmsley, CEO

Thanks. Well, we'll come to Tony in a minute on oncology, but perhaps Luke, you can talk about the 50-year-olds to 59-year-olds opportunity, which is another 40 million people, by the way, in the US alone. So...

Luke Miels, Chief Commercial Officer

Yeah. I mean, I think there's two advantages. One is just the access to the 40 million people. That lines up nicely with the overall Shingrix cohort. So, there's lots of synergies we can achieve. The broader advantage when we're contracting in retail and non-retail settings, because we'll be the only one there. Our expectation at this point is it's going to be shared clinical decision making, but as we speculated before the launch and I think so far that's holding up, that's not been a barrier during this initial phase of adoption. If you look at that 50-year-old to 60-year-old-plus population, there's a sizeable proportion of them that also have one or more comorbidities. It's attractive, and certainly it resonates well with primary care doctors in terms of their support for the brand, which is around 71% in terms of their preference overall for Arexvy.

Tony Wood, Chief Scientific Officer

In terms of RUBY, particularly RUBY Part 2, it's important to recognize that the RUBY Part 1 study was not designed to assess overall survival in the measurable residual disease-positive population but rather in the overall population. When considering both Part 1 and Part 2, we should focus on the measurable residual disease-positive population and examine the conditions under which we are likely to observe the most significant therapeutic effect. There are genotype factors related to PARP response in the Part 2 population that are significant. While I won't delve into those details right now, it's worth noting that our filing strategy for Jemperli in first-line endometrial cancer will take into account all these aspects, as well as our competitive positioning.

Luke Miels, Chief Commercial Officer

To enhance our competitive position, we are optimistic about how the NCCN may interpret that. As you know, GY018 is not focused on an overall survival signal. Since our initial label, we've increased the number of accounts stocking Jemperli in the US from 300 to 900. This has had a positive impact, with sales increasing tenfold following SGO. The marketing shares are interesting; in the first-line setting, which was not promoted initially, Keytruda captured about 40% of that market. Chemotherapy dropped from 40% to 27%, while we held around 13%. There is an opportunity to advocate for GY018, considering the design elements and survival signal, to expand the use of Jemperli in that context. We are quite excited about this. DUO-E also aids in shaping our approach to RUBY.

Tony Wood, Chief Scientific Officer

Exactly. Just a couple of things to underscore to Luke's point to remind you about GY018, different patient population. We had a larger degree of carcinosarcoma patients, which are harder to treat, importantly as well the resist sampling frequency for our study was smaller, which obviously is going to pick up failures more quickly than the GY018 case does. Important to bear those two things in mind when you consider the comparison of the two studies. Luke, I think has guided you correctly in thinking about DUO-E as being informative with regards to how we might interpret the Part 2.

Emma Walmsley, CEO

Thank you. Next question.

Nick Stone, Head of Investor Relations

So, next question is from James Gordon at JPMorgan.

James Gordon, Analyst

Hello. James Gordon, JPMorgan. Thanks for taking the questions. I'm going to stick to Arexvy for my two. The first one was about Arexvy and stocking. It looks like about £460 million of Arexvy was stock in this quarter. The guide for this year implies about £200 million to £300 million of sales in Q4. But what does this assume in terms of stocking unwind in Q4? How much stock do you need to keep in the market to support the product as an ongoing run rate? Also, what are you thinking about ex-US stocking in Q4? Could there be a US-sized stock-up that we saw in Q3 in Q4? The second question sort of leads into that, which is Arexvy and the ex-US launch. Ex-US sales, I think, were only £9 million this quarter, but the product was approved in the EU back in June. My understanding is you're not capacity constrained. So, could ex-US start to ramp in Q4 this year? Looking into next year, could we see a big launch for ex-US Arexvy? Could that be a big growth driver for next year? Or is it going to take a bit longer in Europe to get this going? What are the gating factors to get ex-US Arexvy ramping like what we've seen this quarter in the US?

Emma Walmsley, CEO

Okay. Well, we'll go to Julie first just to deconstruct the guidance for Q4, and then Luke around the globalization. But you're absolutely right, this is a global opportunity. I'll even include in that the recent commercial deals we've been doing in the second biggest market in the world, which would be an option on that for the future. Just to repeat, we're very ambitious for this being a multi-billion asset, as we've committed before. But in terms of the very short term, in its first season, Julie, do you want to comment on the guidance ahead?

Julie Brown, CFO

Yes, thank you very much, Emma. What we've found so far is sales of £709 million. In terms of immunizations administered, we have around £230 million to £250 million. The launch has been extremely successful. We were anticipating a stock-in at this point because it's very similar to what happens with the flu. I think I'll pass it over to Luke regarding the amount of inventory we expect to maintain. Your figure for Q4 was spot on in terms of the sales we expect to see, which is £200 million to £300 million. It’s all about stocking. So, over to Luke.

Luke Miels, Chief Commercial Officer

If you look at the total market, I think it's about US$2.71 billion. We've got US$1.7 billion of that in arm. I won't give too much more color. As Julie said, it's two-thirds of sales so far. We'll obviously try to burn through that towards the end of the year to position ourselves well. What we don't want is empty shelves or any window that Pfizer can get in there. That's why I’m being a little bit cute with the numbers here because it’s very dynamic at this point. In terms of the EU, look, it’s very early days. It's private. We’ve kept the price in a very tight collar with the US like we've done with Shingrix. Our expectation is that we now need to navigate access. We’ve got early wins in Canada. We've seen some encouraging signs coming in Europe and other markets. We will see the full effect of that in 2024. The advantage in the European markets like Japan and other international markets is once we get the NIP, the level of resourcing we need to do to drive patients significantly lower. From a P&L point of view, it’s also very attractive. So 2024 for the rest of the world for Arexvy and good start in the US.

Emma Walmsley, CEO

And just to repeat, we are definitely seeing increased openness and recognition of the value, literally financial value of investing in prevention. And so that is definitely a part of why we're seeing this faster rate, even if it's currently in the private market of approvals, because it's just a lot cheaper. There isn't a healthcare system or budget that isn't burdened at the moment, and they have more infrastructure in place, not least through pharmacy channels for distribution in many countries. All of this underpins this broader confidence but with phenomenally tight discipline from Luke and his team as he's alluded to around the shape of the financial contribution plan. Next question, please.

Nick Stone, Head of Investor Relations

So, mindful, we're at just over the hour mark, and we've still got six individuals with hands raised. So what I propose is that we try and work through as many of those as possible till quarter past the hour, and then we'll close the call there. Our next question comes from Mark Purcell at Morgan Stanley. Over to you, Mark.

Mark Purcell, Analyst

Thank you, Nick, and thanks for taking my question. On Arexvy, a little bit more color. I just wondered if there are early indications of outer seasonal demand for RSV vaccination. Still, there may be more of a sort of Prevnar flu hybrid model. I know you'll know more by the end of the year, but any early indications there? In pharmacies where Pfizer is fully stocked alongside you, given they talk about how they're not fully launched yet, what is your market share in those pharmacies where both products are present? A quick one for Tony. In terms of the Inflation Reduction Act considerations on R&D, where you have assets such as your IL-18 where you could run parallel trials across multiple indications, do you see the sort of pressure to do that? On something like IL-5, could you do a bridge study, or would you have to do a separate study in COPD?

Emma Walmsley, CEO

Okay. Luke and Tony?

Luke Miels, Chief Commercial Officer

Yeah. Thanks, Mark. We're beating them everywhere so far. The aim is to keep that happening. It's interesting. When you look at pharmacists' prioritization, RSV is up there with flu and COVID. You've seen COVID volumes drop off. Last week, we still kept growing with Arexvy, which is encouraging. I was sort of wondering whether it would start to slow down. This next couple of weeks, script data will really be interesting. It’s more than 90% in the retail setting. That’s another critical component in your assumptions. We don’t expect that to materially change. We think vaccines for maternal in OBGYN and PCP offices will occur, which will be something we’ll have to back out in future calculations, but we think the older adult market is going to be very much like flu, very much like Shingrix heading in the direction of retail. We’ll just see what people’s enthusiasm is over the next couple of weeks. Clearly, awareness is very high. Intention to recommend is very high. So again, I'm very happy to sort of back the truck up with everything that we know in Q4 and give you much more color around the market research we’ll have at that point.

Tony Wood, Chief Scientific Officer

Just two very quick ones in terms of the IL-18 question. The key question you’re asking with IL-18 at the moment is its efficacy relative to depemokimab in atopic dermatitis. For the medium term, as we build out our biomarker strategy and look for markers of efficacy at Phase I, that's exactly the underpinnings that I would want to have the confidence to go forward into multiple indications. You probably have in mind that in the case of IL-18, the Mendelian randomization also points to inflammatory bowel disease, obviously a range of other considerations there beyond just IRA in terms of whether that's a path to go. And for MATINEE and the bridge for depemokimab, let's see where we go when we get the MATINEE results. We're focusing on the role of eosinophils in driving the morbidity and mortality associated with COPD. That will be part of our strategy, but I'm focused on ensuring we get the results out for MATINEE and deliver a success. Emma, any color to that?

Emma Walmsley, CEO

Yeah. Of course, any allocation of capital is a combination of probability of success and the assumed forecast. That assumed forecast now has to take into account the area under the curve, what they really like, format or anything else. Next question, please.

Nick Stone, Head of Investor Relations

Next question is from Steve Scala at TD Cowen. Over to you, Steve.

Steve Scala, Analyst

Thank you very much. I'm just curious about Arexvy shipments in October supporting your conservative guide for the full year. So, were they essentially zero? I would note that in the first quarter of 2018, GSK called out stocking for Shingrix and then went on to beat in 10 of the next 12 quarters in the US. Second, I know you're beating Pfizer in RSV everywhere, but to what should we attribute the success they have had? Previously, you've said that you have a better vaccine; you're stronger in the commercial setting, yet they put up a big number as well. What do we attribute that to? Thank you.

Emma Walmsley, CEO

Well, I'll ask Luke to overlay, Steve, but thanks for the questions. This is the first season that we've been through. We've given our guide for the reasons that I won't repeat since we're under some timing pressure, but we will know a lot more in Q4. Obviously, we remain extremely ambitious for this. Our competitive focus is to make sure that not only is the size of the market big, which is where we welcome competition, but we are able to effectively reach the patients that need us, which is this more vulnerable cohort. Luke, anything you want to add?

Luke Miels, Chief Commercial Officer

Look, I think Shingrix is a different case, right? I was in the middle of that; we canceled the global launch. We redirected all of the volumes to the US. We also, in the middle of the later year, had some synergies in manufacturing, which were surprising upside in terms of loss rate and packaging. That’s why we were able to get that volume ahead for Shingrix. In terms of us versus Pfizer, firstly, it's great to have two companies out there driving volume because this is an awareness game. No one had heard of RSV if you're a person in the population before that. Having two companies promote it is good. We have enormous respect for Pfizer. We like competing with them. They are a strategic competitor for us if you look across PCV, meningitis, RSV and potentially shingles at some point. It’s nice to have this strong start. We want to keep this going.

Emma Walmsley, CEO

Next question.

Nick Stone, Head of Investor Relations

Next question is from Peter Welford at Jefferies.

Peter Welford, Analyst

Hi, thanks. Yeah, I'm afraid I’m sticking with Arexvy. Can I just ask quickly, you mentioned that retail was over 90% of the volumes so far. I'm curious why you're so confident that that mix will continue? Obviously, Shingrix, it’s varied over time. I think your competitor made some comments that they think potentially in the fourth quarter and the back half of the season, it's going to switch more towards the non-retail segment where they see perhaps a greater competitive advantage. I wonder if you could comment I guess on both of those, both from the competitive advantage point of view and also how potentially this could change during the course of the season? And then just secondly, I wanted to stick with vaccines, but wondering if Tony could possibly give us an update at all on how you're thinking about mRNA. I know we come back to this almost every quarter. There have obviously been some competitive developments in there. I wonder if you could just give us a quick update on how you're looking at your strategy and updates from news flow we could get for your mRNA portfolio in 2024?

Emma Walmsley, CEO

Yeah, we’re very excited about mRNA, so I’m going to come to Tony first. Remember, the 90% is all the rest of adult, but we'll come back on that to Luke in a minute. But Tony, mRNA.

Tony Wood, Chief Scientific Officer

Yeah, so just very quickly then, I’m very pleased about the platform and how it's moving forward. We're now moving into Phase II in both COVID and flu. The Phase II program for flu includes a range of options and doses that we've deduced from our Phase I study, looking at up to eight antigen components, which we feel is the path forward to resolve the B strain coverage question that exists. It’s also worth pointing out that, that's likely to become a slightly simplified proposition as the B/Yamagata strain is probably going to be removed in 2024. More on this when I've got the readout from the Phase II data.

Emma Walmsley, CEO

Luke, anything you want to add on that?