Earnings Call Transcript - GSK Q3 2021

Operator, Operator

Good afternoon, everyone and welcome to the analyst call on GSK's Third Quarter 2021 Results. I will now hand you over to Nick Stone, Head of Investor Relations, who will introduce today's session.

Nick Stone, Head of Investor Relations

Thank you, Operator. And good morning and good afternoon. As you've just said, I am Nick Stone, Head of Investor Relations at GSK. It's my pleasure to welcome you to our third quarter 2020 conference call and webcast for investors. The presentation was posted to GSK.com and was also sent to our distribution list a little bit earlier today. Please turn to slide 2. This is usual safe harbor statements and will be making comments from performance using constant exchange rate or CR. Please turn to slide 3. This is today's agenda where we'll try to cover all aspects of our results. The presentation will last approximately 25 minutes in order to maximize the opportunity for questions. For those on the phone, please join the queue by pressing star 1 and we request that you ask a maximum of 2 questions so that everyone has a chance to participate. Our speakers today are Emma Walmsley, Deborah Waterhouse, Brian McNamara, and Iain Mackay. In the Q&A portion of the call, we will be joined by Dr. Hal Barron, Roger Connor, and David Redfern. And with that, I will now hand the call over to

Deborah Waterhouse, CEO

Fine, Nick, and a warm welcome to everyone. On to slide 5. I am delighted to announce another quarter of strong financial performance and continued progress against our strategic priorities. Third quarter sales and adjusted EPS were both up 10%. These excellent results were driven by strong commercial execution and underlying demand, with double-digit growth in pharma and vaccines, 24% growth in new and products, proof that our pipeline is bearing fruit, and an acceleration in Consumer Healthcare growth. Continued cost discipline supported this performance. Today's results demonstrate the building momentum in the business, which has enabled us to improve our full-year 2021 adjusted EPS guidance and narrowed the range to between minus 2% and minus 4% CER. The guidance excludes any contribution from COVID-19 solutions, which we now expect to contribute an additional 7% to 9% to this adjusted EPS for the year, a very positive result. Alongside our strong financial performance, we continue to make excellent progress in R&D. Additional indications have been approved for Nucala in respiratory and Jemperli in cancer. We also received U.S. FDA priority review of Cabotegravir for the prevention of HIV. Following the positive headline results announced in July for another potential best-in-class new medicine for treating chronic kidney disease. We will present key data in a late-breaking session at ASN Kidney Week. The merger and creation of a world leader in consumer healthcare continues to be fully on track. And we were delighted to unveil exciting plans for a new global campus and innovation center here in the UK. Lastly, as we look ahead together, we are all strongly committed to delivering health impact at scale and maximizing value for shareholders. Our resolute focus remains on world-class execution and successful delivery of our stated key strategic objectives, beginning with a step change in growth in 2022, an exciting and important year for our Company. On slide 6, progress in the third quarter was reflected across all three of our strategic priorities. In innovation, we continue to build a high-value pipeline across prevention and treatment of disease through organic and inorganic delivery. I just mentioned some of the highlights and there are several more listed on the slide. Among them, I'm also delighted we're now playing a meaningful role in the COVID-19 response through our antibody treatment, Xevudy, with several COVID-19 vaccine programs coming to fruition, and we remain agile as the environment continues to evolve. Performance continues to improve. Commercial execution is driving robust growth and strong market performances in new and specialty products. For Shingrix specifically, we have seen an impact as a result of the surge in the Delta variant, but we are increasingly confident we're on the recovery track. The initiatives we've put in place and the underlying demand will drive strong growth in 2022 with the potential to deliver record annual sales. Luke is going to take you through the details of this in a minute as well as our confidence in the medium-term opportunity for Shingrix. And then consumer strong brand performance also drives a significant acceleration in growth in the quarter. Lastly, on trust, we continue to maintain leadership in ESG with the recent announcement of significant renewable energy investments in carbon reduction initiatives at our manufacturing sites in the UK and U.S. We also announced the new R&D program to reduce greenhouse gas emissions from metered dose inhalers which are responsible for 45% of the Company's carbon emissions. These new initiatives support our continued progress on our environmental commitments to be net-zero and nature positive by 2030, which we'll share more on at COP26. I also welcome the recent WHO recommendation for a broader deployment of our malaria vaccine. Malaria kills more than 250,000 children a year in Sub-Saharan Africa. This is the first and only vaccine shown in pivotal long-term clinical trials to significantly reduce childhood illness and death from malaria.

Emma Walmsley, CEO

Please turn to slide 7. I'll take a moment to expand on my comments on innovation. On our investor update in June, we shared how we have significantly improved R&D productivity since 2017. For the top quartile performance versus our peers for the number of launches with the approval of 11 major products. We have more than doubled the number of assets in Phase 3 pivotal studies from 11 to 23 and created a pipeline of over 60 medicines and vaccines, many with first-in-class or best-in-class potential. The results of all this work and targeted investment yield an increasingly valuable pipeline with real momentum. It is worth restating that major pipeline approvals delivered from 2017 to 2021, plus anticipated pipeline approvals will drive more than 100% of our forecasted sales growth from 2021 to 2026. Over the next 12 months, we expect a number of readouts and regulatory submissions to support the confidence we have in the outlooks we provided for GSK in June. Specifically, we expect to report key readouts on up to 7 of the 11 assets we highlighted, including outcomes seen in older adults during the first half of 2022, as well as proof-of-concept data on our potential HPV therapeutic. And we're planning a regulatory submission for blend and third line multiple myeloma, and, as I mentioned previously, you're going to hear a lot more on DAP from ASN Kidney Week and our investor science event, which is also scheduled for early November. Now, please turn to slide 8. Lastly, I want to take a moment on the timelines for the demerger of our world-leading Consumer Healthcare business. We are in countdown mode and moving at pace with our plans to unlock the potential of both GSK and Consumer Health, strengthening GSK's balance sheet, and maximizing value for all our shareholders. We're committed to the demerger of at least 80% of GSK's holding, and for the remaining 20% to be monetized in a timely and pragmatic manner. As momentum builds towards this important event, we expect to see several important steps in the process. Most visible will be the announcement of a chair designate and subsequently an appropriately skilled board for Consumer Health. In the first quarter of 2022, we plan to hold a Capital Markets Day, which will set out in detail the performance and compelling prospects for Consumer Health as a new and independent Company. We will then proceed with a premium listing of the new Consumer business on the London Stock Exchange, creating two companies set up for independent delivery of competitive growth, shareholder value, and scale impact on human health. Now, let me hand over to the team to take you through the growth drivers in detail. Luke, first over to you.

Luke Miels, CRO

Thanks, Emma. So we made strong progress in the quarter on commercial execution and competitiveness, which you've seen come through in the revenue and market share numbers. For today, I want to focus my remarks on our strong performance in new and specialty and our confidence in the growth prospects for Shingrix. Please turn to slide 10. Growth in our new and specialty pharma medicine accelerated to 24% in the third quarter, taking us to 18% growth year-to-date. These figures include HIV, which Deborah will cover in a few minutes. As we've seen throughout 2021, Trelegy continues to deliver with 77% growth in Q3. The asthma indication is proving to be a unique differentiator. Our leading position in this space remains unchanged, with Trelegy holding 90% of the single inhaler triple therapy market in the U.S. Our market-leading IL-5 Nucala also contributed double-digit growth, up 20% in the quarter. We continue to hear from physicians that a clear and targeted approach to eosinophil-driven disease is preferred, and we remain confident in Nucala's market opportunity as we launch nasal polyps in the U.S. in July and received positive CHMP opinion for EGPA, HES, and nasal polyps in Europe. Additionally, Benlysta has its 17th consecutive quarter of double-digit growth, up 35% in Q3. Convenient subset formulation and lupus nephritis indication in the U.S. build on the established leadership we have in Italy, while we continue to build the market in other parts of the world like China. Our Oncology portfolio continues to grow. We received an additional approval for Jemperli in August, and in Q3 grew Zejula sales by 14%. We continue to see one and two new patients receiving Zejula despite a tough external environment where unfortunately, diagnosis remain about 16% below pre-COVID levels. Encouragingly, and based on new patient stock data, we're also seeing other products as the preferred choice to new patients across three lines with European. But Blenrep, we now have more than 4,000 patients treated globally. We're expanding use in the community where the majority of multiple myeloma patients are. We look forward to the opportunity for more patients benefiting from Blenrep as two pivotal studies read out. Please turn to slide 11. In vaccines, we delivered a strong quarter of growth with Shingrix on the recovery track following pandemic-related disruptions that impacted performance earlier this year. The performance of Shingrix in the quarter primarily reflected a favorable impact from inventory movements and also a larger proportion of Shingrix being administered in HCP offices—a trend we've been tracking through the pandemic as retailers prioritize vaccinations for COVID-19. Performance outside the U.S. was also encouraging with a recovery underway in Germany and several successful launches in new markets. As you can see on this slide, Shingrix TRx volumes are improving as we move through the year despite disruption from the Delta variant slowing the pace of recovery. With a challenging comparison in Q4 and prioritization of COVID-19 booster vaccinations in the near term, we now expect the year-to-date performance, which is a modest 11% CER, to be a good indication for the direction of travel for Shingrix for the full year. While this is below our previous sales expectation, we consider these as deferred, not lost sales. Our confidence in this transformational vaccine remains unchanged, and the underlying demand remains strong. Market research confirms that patients who have been fully vaccinated for COVID ranked their interest in getting a shingles vaccine higher than any other adult vaccine except flu. We're implementing activities to drive recovery with multi-channel direct-to-consumer campaigns, engaging healthcare providers, and further strengthening our relationships with U.S. retailers. Looking ahead, we continue to launch in new markets with our unconstrained supply position, and we expect continued U.S. recovery as we work through COVID boosters in the near term. Taken together, we anticipate Shingrix to deliver strong double-digit growth in 2022. Assuming an improved operating environment, we expect next year to be a record year for Shingrix turnover. Furthermore, we remain confident in our ambition to double revenues in the next five years, predicting more than 100 million adults along the way. Now, let me hand over to Deborah. Please turn to slide 12.

Deborah Waterhouse, CEO

Thanks, Luke. Third quarter HIV sales grew by 8%, driven by the growth in the innovation portfolio and taking year-to-date growth to 4%. In Q3, around 2% of the growth was driven by favorable wholesale purchasing patterns in the U.S. and 2% by growth in the international region. Strong commercial execution is driving performance at the innovation products which now represent 29% of the total portfolio, delivering almost £1 billion of sales year-to-date. Dovato, in particular, continues to grow strongly, building on the positive momentum that we saw in Q2. In the U.S. and Europe, despite the suppressed switch market, Dovato has gained further share with 15.3% and 27.8% of the switch market respectively. Turning to Cabotegravir, the world's long-acting injectable treatment for HIV. Cabotegravir will take time to build and the COVID environment continues to constrain which activities, particularly where a patient needs to visit a physician's office. We have robust lead indicators with about 80% market access and strong brand recognition. More than 2,000 people living with HIV are now taking Cabotegravir and intend to prescribe levels are high. We are very excited about the potential approval launch of two-monthly dosing in the U.S. in early 2022. This quarter, we also made significant progress with Cabotegravir long-acting for prevention. Last month, the FDA granted Priority Review status, which builds upon its priority application, a breakthrough therapy. We believe this underscores the importance of this medicine, supported by the results of the HPTN studies, which demonstrate Cabotegravir's superior efficacy over daily oral TDF pills. In the U.S., fewer than 25% of those who could benefit from PrEP are currently taking it, which points to the need for additional HIV prevention options. A final FDA regulatory decision is anticipated in January 2022. As we said at the investor update in June, we expect our non-GAAP portfolio of Cabotegravir long-acting for prevention to generate sales of around £1 million by 2026. We would be particularly proud to announce the new collaborations with our longstanding partner, Shionogi, on a third-generation HIV integrase inhibitor with potential for ultra-long-acting dosing intervals. This agreement aims to build on the success of dolutegravir and Cabotegravir, with the potential to anchor the next generation of innovative long-acting therapies beyond 2030. I conclude by inviting all of you to attend an HIV investor event on November 29, in which we will share further details about the growth outlook and early-stage pipeline. There will, of course, be plenty of time for you to ask questions. With that, I will hand over to Brian. Please turn to slide 13.

Brian McNamara, CEO

Thanks, Deborah. Now turning to Consumer Healthcare in Q3. We saw strong growth with sales excluding brands divested and under review up 10% at constant exchange rates reflecting good momentum and execution across the business. Importantly, performance improved across all categories and regions helped by strong investment in the business. Emerging markets performed well with continuing business of double-digit growth and with China and the Middle East and Africa as standout performers. Let me provide some color on our category performance. All health sales increased by 5% reflecting continued good execution and successful innovation. Pain relief was up double digits helped by easier comparisons last year, and strong double-digit growth in brands including Advil and Panadol more than offset a low single-digit decline in Voltaren. The Voltaren decline was expected given the entry of private label into the category following the successful U.S. RXOTC switch last year. Vitamins, minerals, and supplements growth was up 19% driven by strong growth in Emergenc-C and good Centrum results, helped by increased capacity enabling a return to more normal retail stock levels. Respiratory benefited from good growth in allergy and in cold and flu, as well as some help from favorable comparisons in the prior year, resulting in sales up 16%. Digestive health and other sales were up 3% in the quarter. Similar to consumer peers, we saw further pressure from cost inflation in the period. However, our cost structure, combined with a continued focus on productivity, along with pricing across our categories and regions, enabled us to increase both gross margin and operating margin. Innovation continued to be an important growth driver, and we had six first market launches in the quarter, taking this number up to 25 year-to-date, and 281 launches including market roll-outs. In e-commerce year-to-date, we grew in the mid-20% range and this now represents 7% of sales. Our ongoing investment in digital capabilities continues to position us well for growth in this key channel. Year-to-date, 7 of our 9 power brands maintained or gained share. Our full-year sales outlook remains unchanged and demerger plans remain firmly on track. We're making good progress on standing up the functions and building the future processes needed to be a separate company. Finally, I'm looking forward to sharing more information with you on this incredible business as we move closer to separation and at our Capital Markets Day in Q1 next year. Through the two largest Consumer Healthcare transactions in the last six years, we've created a great business, the global leader in Consumer Healthcare with a fantastic portfolio of brands and strong capabilities to drive sustainable market outperformance. With that, I will hand it over to Iain. Please turn to Slide 14.

Iain Mackay, CFO

Thanks, Brian. As I cover the financials, references to growth are constant exchange rates unless stated otherwise. Please turn to Slide 15. This is a summary of the group's results for Q3 and the year-to-date. In Q3, turnover was £9.1 billion, up 10%, and adjusted operating profit was £2.9 billion, up 16%. Total earnings per share was £23.3, up 3%, while adjusted earnings per share was £36.6, up 10%. The year-to-date turnover was £24.6 billion, up 3%, and adjusted operating profit was £6.9 billion, up 8%. Total EPS was 72.7p, down 19%, and adjusted EPS was 87.7p, up 5%. In currency, there was a headwind of 5% of sales and 7% in adjusted earnings per share, in particular due to the strengthening of sterling against the U.S. dollar relative to the third quarter of last year. Slide 16 summarizes the reconciliation of our total to adjusted sales. The adjusting items for the quarter were intangible impairments, which primarily reflected the results and determination of the agreement with Merck KGaA on Bintrafusp Alpha. My comments from here onwards are on an adjusted results basis unless stated otherwise. Turning to slide 17, the key drivers of revenues and profits for the group in Q3 compared to the prior year centered here. Revenues grew by 10% overall. Excluding revenues from our COVID solutions, sales were up 8%. The positive operating leverage from higher sales in the quarter was bolstered by continued focus on cost control and the benefits of restructuring across the group. This was alongside the expected 15% increase in R&D investment. In Q3, margin was 31.7% and year-to-date margin was 8.1%. We now expect R&D to grow high single-digits in the full year, reflecting upskilled investments balanced by continued realization of efficiencies with our approach to one R&D. Moving to the bottom half of the P&L on Slide 18. The effective tax rate of 20.6% was higher than last year and reflected the timing of settlements with the tax authorities. We still expect the full-year effective tax rate to be around 18%. We expect interest expense to be between £800 million and £850 million. I'll briefly cover free cash flow for the quarter before going into more detail on the financials of each business. Turning to Slide 19. In the year-to-date, we generated £1.5 billion of free cash flow. The main factors were increased adjusted operating profit at constant exchange rates, lower dividends to non-controlling interest, and lower tax payments mainly in the U.S. versus the comparative period. The primary factors more than offsetting this were increased purchases of intangible assets, including our collaborations with Alector and iTeos, adverse timing of returns and rebates compared to 2020, and adverse exchange impacts. Improving cash-flow performance continues to be a constant focus for the team. We're ahead of expectations for the year. However, we do still expect this year to be a significant step-down versus 2020. Turning to performance of the Pharma business in Slide 20. Overall, pharmaceutical revenues grew to 10% driven by strong growth in new and specialty medicines, favorable U.S. return and rebate adjustments, and sales of Xevudy in the quarter, which contributed approximately 3 percentage points of growth. Year-to-date overall revenues grew by 5%, and we're raising our expectations for sales to increase low single digits in the full year, excluding Xevudy sales. Within this, we still expect established pharma sales to climb high single digits in 2021. The Pharma operating margin was 29.4% in Q3, and 29.2% year-to-date. The increase in Q3 primarily reflects the positive operating leverage from increased sales, as well as continued tight cost control and restructuring benefits. These positive margin dynamics were delivered alongside our focus on increasing R&D investment, which grew 11% in the quarter. The prior-year comparative included the recognition of pre-launch inventory for Blenrep, which was a credit of slightly over £13 million. Please turn to Slide 21. This is an overview of vaccines performance with overall sales growth of 13%. Excluding pandemic adjuvant, revenue sales growth was 8% primarily driven by Shingrix in the quarter, which we described earlier. In the year-to-date, total vaccines revenues were up 5% and down 2% excluding pandemic adjuvant sales. With sales year-to-date and a strong Q4 comparator, particularly for Shingrix, we now expect vaccine sales to decline mid-single digits this year, excluding pandemic adjuvant. This has no impact on our mid-term expectations for the vaccines business, so we continue to be very confident in the demand for our products and high single-digit growth outlook. Notably with regards to Shingrix, where we've outlined our ambition to double sales by 2026. The operating margin was 47.5%. The increase in operating profit and margin primarily reflected the positive operating leverage from sales growth with a positive mix, as well as higher royalty income. Partly offsetting this was an increase in R&D investment of 46% as we progressed our RSV and Meningitis development programs and invested in our MRNA efforts. The year-to-date operating margin stood at 37.3%. Please turn to Slide 22. Q2 revenues in Consumer Healthcare increased 10%, excluding brands either divested or under review. Including those brands, turnover grew by 8%, as Brian outlined the main drivers earlier. In year-to-date revenues excluding brands either divested or under review. The operating margin for Q3 was 25.9%, up 420 basis points at constant exchange rates versus last year. The year-to-date operating margin was 23.6%. Consumer in the full year, excluding brands divested or under review, we continue to expect lower to mid single-digit percentage revenue growth. Turning to Slide 23. Considerations for the 2021 outlook. Following our strong performance in the year-to-date, we're now confident that we can improve our full-year guidance. As a result of continued commercial execution and sustained delivery of tight cost control, we now expect adjusted earnings per share to be between minus 2% and minus 4% in constant exchange rates, excluding the impact of COVID solutions. We expect COVID solutions to contribute approximately 7 to 9 percentage points of earnings growth in the full year, following better-than-expected progress on Xevudy contracting. It's worth noting that the outcome within that range is still dependent on pandemic action contracting for 2022, and the resulting potential charges within cost of goods sold as we continue to manufacture for this potential. Key factors that will influence Q4 and the full-year rate will continue to be the adult vaccination rates within the context of the COVID environment, the relative phasing of launch investments to generate future growth, and effective tax rate. We'll keep you informed of our progress in executing against our strategy through events, such as the HIV Update that Deborah referred to and the upcoming Investor Science Event. In summary, we believe the business momentum from the excellent work of our teams sets us up for a step change in growth in 2022, which is both an exciting and important year for the Company. We'll provide formal guidance for 2022 with our full-year 2021 results in February. Overall, an encouraging quarter with posted momentum. With that, Operator, we're ready for Q&A.

Operator, Operator

Thank you very much. Your first question in the queue comes from James Gordon from JP Morgan. You are live on the call. Please go ahead.

James Gordon, Analyst

Hello, James Gordon from JP Morgan. Thanks for taking the questions. First question is on OpEx. So to reiterate your comments about meaningful operating margin expansion next year, but SG&A was 5% below and already 8% below our expectations today. The question is, how much is low OpEx about cost avoidance versus structural changes at the Company? And as we look into next year from the higher base, when you talk about meaningful expansion, can you just 100 basis points of EBITDA margin expansion next year? Or could it be a bit of a catch-up if things get back to where COVID and you have to stop spending more. So that's the first question, please. Second question was about Consumer separation. A couple of weeks ago, Greenberg was reporting that the Consumer Division could attract bids from PE firms or other pharma consumer companies. Have you had recent informal expressions of interest in the Consumer business, and are discussions ongoing in parallel with the separation process you've described, or is that story inaccurate or just not going to happen historically, and is it definitively just the separation process described? And I also saw a comment about price range of the U.S consumer. Are you able to tell us what the price range is that you put through in October in consumer, and how do you see the pricing power of the business going forward, please?

Emma Walmsley, CEO

Great. Thanks, James. I'll comment on the separation first of all. As I outlined today, we are very committed to the demerger of at least 80% of our holding in consumer. We're absolutely on the runway for that. We've had tremendous amounts of positive feedback from investors who are interested in owning this business and are really looking forward to sharing with you in Q1 with the management team. The prospects for that business, and much more detail on its competitive advantage and the strength of the brand portfolio. We've consistently said that we will seek to monetize in a timely and pragmatic manner the remaining 20% of our shareholding in that business. The Board will always do its fiduciary duty, but we are focused on the significant amount of work that's delivering on this separation and the tremendous value unlock that's going to bring. I'll let Iain comment on the dynamics of OpEx, although I know his first answer's going to be with guidance for 2022. And then Brian, could come back with some specifics on the price because we do think we're a bit advantaged on that dynamic versus some other consumer companies. But Iain, first to you.

Iain Mackay, CFO

James, thanks for your questions. We will absolutely provide detailed outlooks for 2022 in early February 2022 when we get there. On your OpEx questions, one of the things that's really important to note, which is true across the business over the course of this year and last, is it's just a very strong focus we've gotten time cost control across really every line within the P&L, whether it's within our cost of goods sold and great products, both within the pharma, across the pharma, vaccines, and consumer healthcare businesses. From within the manufacturing sites through the logistics to our main storage areas. Also from an SG&A perspective. Also from an R&D perspective, continuing to move our trials, moving along at pace in a difficult operating environment, but realizing the benefits through our approach to one R&D. There is another factor that has continued to play a part in 2021, and that is lower expenses in line items. For example, in travel and related expenses, where our level of such activities are continuing to be constrained in the current pandemic environment. In terms of how we see this moving through the rest of the year, we will, as I mentioned in my comments here, continue to invest behind launches with a focus on driving growth and good momentum going into 2022, we continue to grow our investments in R&D, as you've seen this quarter, and we will continue to grow investment into non-A&D through the fourth quarter and into 2022 as well. But, as I say, will provide more detail on that when we offer 2022 guidance in February next year.

Emma Walmsley, CEO

Thanks, Iain and Brian on pricing and cost.

Brian McNamara, CEO

Yeah. Thanks, James. I first just want to reinforce that I feel very good about the top-line growth in the business and the fact that we're seeing momentum across brands and categories from Q1, Q2, then Q3. On pricing, we have taken pricing across regions and categories. Most recently, we took pricing in the U.S. in October. The U.S. price increases were mid-to-high single-digits on brands that represent about 50% of our sales, such as Sensodyne, Parodontax, Emergen-C, and Tums. While it's never easy to take pricing in the U.S. environment, we had good acceptance on the pricing. We're also taking pricing across Europe and have been successful in taking pricing in China as well. For perspective, in the quarter with our 10% growth, we saw about a quarter of that growth come from price with about three-quarters coming from volume growth. I'm confident that going forward, we have the ability to take price. We have great brands and strong innovation, which puts us in a very good position.

Emma Walmsley, CEO

The other aspect of that is we're less exposed to input costs. I think the numbers some other consumer goods companies buy from the size of our products and things, but 10% reserve share of our sales come from that, so that's important to be aware of. Next question, please.

Operator, Operator

Thank you very much. Your next question on the line comes from the line of Peter Holford from Jefferies. You are live on the call. Please go ahead.

Peter Holford, Analyst

Thanks for taking my questions. First, I think I will just wonder if you can comment a bit on dream five. We saw some headlines about ongoing partnerships. Would you comment on what you see in the encouraging early data with the Cabot secretase inhibitor, most probably regarding the expansion of this study? What we should perhaps be thinking about in terms of next steps of what you're looking forward to in the expansion cohorts? And then secondly, just want, I guess for Iain, just on the EPS outlook. Could you just outline in the time you've given for EPS, does that at the moment include any talks, write-downs, for the pandemic adjuvant, or does that explain the 7% to 9% delta? Could you just explain what the applicable sales are for pandemic adjuvant within that 7% to 9% range? Thank you.

Emma Walmsley, CEO

Let's come to Hal first.

Hal Barron, Chief Scientific Officer

Thank you for your question, Peter. As you know, the functional genomic data that we generated suggests there would be synergy between a gamma-secretase inhibitor and Blenrep due to its inhibition of the cleaving of the BCMA protein from those surface plasma cells, and that's what was being tested in the sub-study of the dream five to see if a dose of Blenrep, which we studied at 0.92 milligrams per kilogram, Q3 weeks would be active on top of a GSI. We know from the dream one study, although limited numbers of patients that such adults would have limited if any activity? We studied to see if the combination of a gamma-secretase plus Blenrep at this low dose would induce meaningful responses. As we said, the data, although preliminary, is very encouraging and it has led us on getting the expansion phase of this program. In that expansion, we're going to be comparing it in a randomized way so that we can get more robust data of whether the 0.9 mgs per kg dose of Blenrep given two, three weeks compares to the standard approved dose of 2.5 mgs per kg two, three weeks as monotherapy in the refractory setting.

Emma Walmsley, CEO

Iain, could you take the EPS and pandemic adjuvant question?

Iain Mackay, CFO

On EPS and specifically any elements coming through COGS on adjuvant sales. No, we've absolutely fulfilled the obligations and expectations for adjuvant sales for 2021 with no adverse impacts coming through cost of goods sold. As I mentioned in my comments, Peter, in terms of whether there will be any impact in the fourth quarter, or for that matter next year, is really very much about the antigen contribution based on the outcomes of the Phase III studies that we've got going on with a number of partners, two of which I think Sanofi and Medicago we'd expect a readout in the fourth quarter and one in the first part of next year from SK Bio. At this point, nothing adverse coming through cost of goods sold as it relates to that. In terms of Xevudy, we've contracted more than 420,000 doses, and we have reserved, with agreements being negotiated presently with more than 220,000 doses, those negotiations ongoing with a number of governments. You'll have noticed within the quarter we recognized £114 million of revenue from those from part of those 420 contracts, and all that 420 obviously. Luke and the team continue to pursue contracting opportunities for this important treatment for COVID-19 aggressively, because it clearly has a very beneficial effect conceivably on impacted patients. That's really the dosage outlook that we've got in terms of contracted and reserved at this point in time, Peter.

Emma Walmsley, CEO

Thanks. Next question, please.

Operator, Operator

Thank you very much. Your next question comes from the line of Mark Purcell from Morgan Stanley. You are live on the call. Please go ahead.

Mark Purcell, Analyst

Thank you very much for taking my questions. First on RSV for older adults. Timelines shifted forward from the second half of next year to the first half of next year. Could you help us understand whether this is a function of speed of recruitment or higher implied infection rates at the trial sites? Could it be the competitive dynamics here with two other players in pivotal trials? Secondly, there's been a little press recently around COVID vaccines and raised concerns around the relatively narrow neutralizing antibody response such as the S-protein. With natural infections, you are seeing much higher levels of event and protein antibodies, for example. When it comes to sort of next-generation approaches, are you considering with your partners developing COVID vaccines against a broader range of protein targets beyond just the S-protein? Thank you.

Emma Walmsley, CEO

Thanks. Two questions to Hal, please.

Hal Barron, Chief Scientific Officer

Thanks, Mark, for the great questions. First to talk about RSV. Very excited about the opportunity here, of course, because of the significant unmet medical need that RSV represents, with more than 175,000 patients in the United States alone being hospitalized and 14,000 deaths, something that compares very much to flu. Our program is actually progressing very well. The increase in timelines, sorry, the decrease in movement forward in timeline is really driven by operational efficiencies and our ability to enroll more aggressively. Of course, this is going to be an event-driven trial, and so events will matter, but the timeline shift is simply due to better execution and acceleration. I think the second question was about COVID and the impact of neutralizing antibodies, whether they be from vaccines or endogenous infections. The immune response generated by the various vaccines does differ. As variants start emerging, the response and neutralizing titers to each of these subcomponents are different. This is why we're excited about our protein with the adjuvant as a vaccine. We'll have data for that in the coming months. We're excited to see what neutralizing antibody titers and how they compare to other vaccines that are available today because there could be, as you say, an opportunity for broader spectrum response with mRNA. We're pursuing a collaboration with CureVac and have a second-generation approach where we're using optimized five-prime, three-prime to ensure the transcripts are more stable and therefore protein expressions higher. We're also exploring a version of that with both unmodified and modified to see what the incremental contribution of modified is. Pending that data, there are opportunities to create transcripts targeting any variants that emerge, to focus the neutralizing response on any emerging variants. It's an exciting technology and we're excited to be playing a major role.

Emma Walmsley, CEO

Next question, please.

Operator, Operator

Thank you very much. Your next question comes from the line of Simon Martha from Exane. You are live in the call, please go ahead.

Simon Martha, Analyst

Thank you everybody for taking the questions. So first one's for Deborah, actually. Just looking at HIV, obviously developers are doing exceptionally well, and it's driving new growth in the ViiV division overall. I'm just wondering if you have any thoughts about the future potential threat from dolutegravir. I think two days ago I saw headline results that Alumnite switched to these seem to be non-inferior to the current best-in-class treatment opportunity. Basically, just talking through the opportunity that you still see in the two-drug regimen and the threat of what you might see from potential competitors. The second question, maybe for Luke, just an update on your views around the commercial opportunity for dapro. I think originally, these were very bullish expectations, but its negotiation could offer and all helps them to face? Obviously, competitive edge doesn't seem that is the case. I'm just wondering if you could maybe talk to the competitive dynamics today and opportunity charting the commercial opportunity.

Emma Walmsley, CEO

Right, let's talk briefly about both. Deborah?

Deborah Waterhouse, CEO

Great, thanks for the question. So first of all, I think when we think about Apple 30, and you're right about it, it's had a very good quarter. We're really proud of our innovation leadership in the development of two-drug regimen in the therapies section. You can see our competitors following us, and you saw the studies out this week. The headline level for Merck in two-drug regimen in the switch to that setting. If we think about the label that Devanto has, basically we have the Gemini studies in naive out to 3 years, which had non-inferiority that's it Dolutegravir-based three-drug regimen. Then you've got the time guys in the switch testing. Again, days dropped to 3 years with no confirmed virologic failures. We recently published our SALSA study, which was a second switch study, but to a similar stomach from where it was an ARV that is to monetize study. We saw no confirmed virologic failures. All that data has led to a great deal of confidence in Devanto by physicians that is now being seen to convert into prescribing. We see that Devanto feature on all the major guidelines recommended for both naive and switch patients. I do think having a competitor come into the market following us on this is going to help trend the market towards drug regimens because if you think about the US, at the moment, less than 5% have converted over to two-drug regimens. The journey is moving at pace but it's probably slower than we would like to see. That would be helpful in reshaping the market and building more confidence in two-drug regimens. The question we should ask ourselves every single day is why should somebody living with HIV take three medicines when two is all they need?

Emma Walmsley, CEO

Thanks, Deborah, Luke, on dapro.

Luke Miels, CRO

Thanks, Simon. If we all went back 18 months ago, I don't think many people would have expected that dapro would be one of one or two hits in the U.S. So I think that's driven a reappraisal of the potential for that reagent in the U.S. and also Europe. I think it's largely going to be driven by the type of label that we get, with safety being the key element there particularly in the non-dialysis population where a number of companies have tried to penetrate that area and it's been a bit of a challenge. If you look at the numbers in the long term, we estimate that by 2030, the number of CKD patients who are naive or less than 12 will be around 8 million. On the label that we expect, initially outside of that 3 million will become eligible. You have about a third of that with dialysis and this is applicable to the U.S. and EU5. The potential is certainly there, but I think it's going to depend on how the regulators treat it. We are expecting publications around the ASN academic event, and I think the treatment through the editorials will also be very influential there. It's very positive but we just need to see how the frame lands. There is clearly a high demand for these products. EPOS have limitations, particularly in this non-dialysis setting, and we're very focused on ensuring that we maximize opportunities from this product.

Emma Walmsley, CEO

Thanks, Luke. Next question, please.

Operator, Operator

Your next question comes from the line of Graham Parry from Bank of America. You are live on the call. Please go ahead.

Graham Parry, Analyst

Thanks for taking my questions. Firstly on Shingrix in your commentary on 2022 deferred sales, you guided strong double-digit growth. If I look at consensus at the moment, that's probably pointing towards 2.5 billion or close to, 50% of where your current guide is. Does that fit into what you define as a strong double-digit envelope? Secondly, on the RSV vaccine, if you're pulling for the first half of 2022 just on enrollments, could higher RSV incidents see that land early as Q1 and perhaps just help us understand where you see differentiation now that you've started to see more data from your competitors in the clinic with studies from Pfizer, J&J, Moderna all out there now? Particularly in terms of the implications of your adjuvant, but also not targeting our COVID with your vaccine?

Emma Walmsley, CEO

Thanks, Graham. We're not going to outline specific guidance for Shingrix in '22 today, but Luke may have some underlying consumer and commercial dynamics on that. Let's hear both from Hal on the overall scientific differentiators and Roger on how we see the prospects of the RSV market playing out. But first, to Luke, please.

Roger Connor, CEO

Sure. Thanks, Emma. Thanks, Graham. If you look at demand for Shingrix in the second half of this year, it's been clearly correlated with outbreaks of Delta, which is logical as people do not want to go into retail pharmacies if there's an outbreak in the area, and we follow that at a state level each week, and the pattern is very clear. What is interesting is when we look at leading indicators like, for example, Google search tools, the highest level for shingles in the last couple of weeks. If you look at the script trends that we're now starting to see, these are also very encouraging. A key point on the script trends, and I mentioned in my commentary at the start, we made a decision to promote Shingrix as the second shot on the Trelegy team targeting HCPs in their offices. Normally, about one-third of shots that are given are HCPs, and about two-thirds from retail. What we're seeing right now is that's more 50-50, which means that you see an under-reporting of the TRx levels because they're more efficiently captured in retail. These are all encouraging. Emma mentioned the market research that says when we ask people who've been vaccinated for COVID that they tend to be motivated adults, Shingrix is the second vaccine they want to get after flu. These are all pointing in the right direction. I think if you look outside the U.S., we'll be in 17 markets at year-end, with 35 added over the next three years. We had a very strong start in Germany that was disrupted by COVID vaccines and outbreaks, that is now returning. Germany will be the second-largest market next year. These are only elements that underpin our confidence there. People may have questions around inventory. The inventory is very much in the range that it's been historically. The past we have seen it drop down to say 0.5 to 0.7 million doses, but the range it normally stays in is just over a million, and we have a lot of parakeet managing that very tightly to avoid past supply problems. Right now, it's very much within the million doses, very much under control and feedback from retail pharmacists is continuing to be very positive. The hypothesis of DMARD demand remains robust.

Emma Walmsley, CEO

Thank you, Roger. And Hal, can you add a little more on the commercial side? What are you seeing on the RSV market?

Hal Barron, Chief Scientific Officer

We are very excited about the RSV program and the changes we've made in the development organization to be able to speed this up from an operational efficiency perspective. But as you point out, there are other contributors to when we'll be able to see the data—including rates. So that is one of the dependencies to see how many events we have. I should say the third aspect of when we will be able to see data is driven by being able to see the duration of the effect and ensuring we have a broad section of the season so that we can understand the effect over time. All three of those things collectively go into when we will see data, but we're confident it will be in the first half now. As for differentiators, we see this very important component of why we use the adjuvant. If you think about this disease, it's really prominent in those over 65 because as you age, your immune system becomes less able to mount the appropriate B-cell response and that includes neutralizing antibody titers, as well as to mount an effective T-cell response, the cellular immunity. We've seen over and over in vaccine development with other diseases, and what was confirmed in our Phase II data is that the adjuvant that we're using is effective at normalizing the T-cell response. Some competitors do not have that. It's not clear from the data generated whether the immune response that's generated in the elderly will be effective as the one we can generate with our adjuvant. We see that as a differentiating feature, not just with this vaccine but our whole adjuvant platform. Additionally, we've looked carefully at the neutralizing levels of neutralizing antibodies against both RSV Protein A and B—the different epitopes of the two viruses—and we see a very effective neutralizing antibody response with the PRiMA fusion protein. We're expecting this to be highly effective against both variants, and as I said, with the adjuvant being able to mount the T-cell response which we think will both have a broader antibody spectrum, as well as greater duration of effect leading to a differentiated vaccine on that. We're pleased about the speed, and pleased about the science, and hopefully, we'll be able to translate this into a very effective vaccine quite soon.

Emma Walmsley, CEO

Alright, so the next question, please.

Operator, Operator

Thank you very much. Your next question comes from the line of Seamus Fernandez from Guggenheim. You are live on the call. Please go ahead.

Seamus Fernandez, Analyst

Great. Thanks so much for the questions. So I just wanted to go back to the gamma-secretase, just hoping you'd get to help us understand when you might be sharing the combo data that you have so far and how you see the combos fitting in relative to some of the other Phase 2 expansions that you've started. I'd just note the DREAMM-14 study has a number of different doses and schedules with Blenrep. Secondly, on the process of the demerger itself, there has been some speculation and questions around the value of potentially shifting gears to an IPO. Just wondering if you could confirm or deny that possibility. It seems like you're quite far down the path with a straight demerger spin. Just hoping to get a little bit of clarity there given some speculation in the market. Thanks so much.

Emma Walmsley, CEO

Yeah, Seamus. So I can be really quick on your second question and then hand back to Hal on Blenrep. Just to repeat what I've already said, we are very committed to the demerger of at least 80% of our holding. We've had very positive levels of interest from our shareholders, and then we're looking at a timely and pragmatic monetization of the remaining 20%. We are on the runway and we are really focused on executing that brilliantly. Hal, over to you on the various approaches to maximizing.

Hal Barron, Chief Scientific Officer

Thanks, James. When you look at the strategy for maximizing the opportunity for Blenrep in patients, it's important to remember that the risk benefit for myeloma patients changes according to a lot of therapy that we're studying. When we think about studying the second or third outlying patients, such as in DREAMM-3, we're going head-to-head with pomalidomide and daratumumab, as well as other drugs that are approved. We're trying to be superior to standard of care. In that setting, we're focusing on optimizing efficacy. We think there are opportunities to improve upon current dosing and schedules and implementation.

Emma Walmsley, CEO

Thanks, Hal. Next question, please.

Operator, Operator

Thank you very much. Your last question on the line comes from the line of Laura Sutcliffe from UBS. You are live on the call. Please go ahead.

Laura Sutcliffe, Analyst

Hello, thank you. Could you help us understand how Shingrix is working in the real world and the retail setting at the moment a little bit further? So if a patient who's receiving a flu vaccine or a COVID vaccine makes it as far as the retail pharmacy, are they a person who is a likely candidate to get Shingrix at that time or someone who is avoiding getting Shingrix at that time? And then for Deborah on HIV, on your third-generation integrase inhibitor with Shionogi, could you tell us what routes of administration you think might be possible for that molecule? Thanks.

Emma Walmsley, CEO

Right, so Luke and Deborah, please.

Luke Miels, CRO

Sure. So Laura, great question. If someone presents seeking a COVID-19 vaccine, I think the key parameter is just the history of vaccination mentioned in the past. If it's someone who regularly came for a flu shot, then they're likely to be more receptive to receiving it. It depends on how much time that individual has at that point, and also how busy the pharmacist is. If there are 10 people lining up for a COVID shot, then the opportunity to discuss the benefits of being vaccinated for shingles is less. In that case, though, the retail pharmacists have incentives through the major change in the U.S. to re-book that patient to come back to the retail pharmacy on another day and receive that vaccination. They can also give those doses concomitantly, which I said has indicated they're comfortable with; we're also running a study with Moderna COVID vaccine that will read out in Q1 of 2022 just to build some more evidence around that co-administration. And then the other trend, which I think is just encouraging that I didn't mention earlier, is around seven out of ten shots right now for Shingrix are either the first shot, and we now have 90% of people coming back for the second shot. It's their history of vaccination and how much time the individual has when speaking to the pharmacist that plays a key role.

Deborah Waterhouse, CEO

I currently feel very confident in having integrase inhibitors at the core, and they really are the premium goal standard of therapy in the field today. We believe in the future, they're supported by guidelines, by a significant amount of strong data. With more than 18 million people living with HIV, we see taking the second-generation integrase inhibitor. Our core belief is that if you’re going to be successful, it’s very important to have a robust integrase inhibitor at the core of your regimen. If I think about what Shionogi offers, the Shionogi integrase inhibitor has the potential to be ultra-long-acting, also having a unique resistance profile. By 2030, undoubtedly, some resistance will have emerged to the second-generation integrase inhibitors, such as dolutegravir and bictegravir. We believe the opportunity to harness the OEP long-acting potential is to have it as either subcutaneous or intramuscular. We will now start the development journey of that medicine to explore both of those options. But we don't see it as oral; we see it as a subcutaneous or an intramuscular injection.

Emma Walmsley, CEO

Thank you, Deborah. So with that, I think we have time for one last question today. Obviously, we can do lots of follow-up with you afterwards, but just time for one last question, please.

Operator, Operator

Thank you very much. Your last question comes from the line of Kerry Holford from Berenberg. You are live on the call. Please go ahead.

Kerry Holford, Analyst

Thank you very much. Two questions: I think you said diagnosis rates in various amounts remained at 15 levels. Are you seeing any signs of improvement and how soon do you expect to normalize? When do you expect to see a step change in the trajectory of sales growth? And then based on Benlysta, those questions—any thoughts about why the Phase Three study failed to show any incremental benefits for Benlysta mono?

Emma Walmsley, CEO

Let's go to Hal first and then finish with Luke on Zejula.

Hal Barron, Chief Scientific Officer

The simplest answer is that Benlysta was not a backbone for both arms, of course, and is a very effective therapy for these patients with lupus nephritis.

Luke Miels, CRO

We're actually hoping to see a recovery by now, but we saw the Delta variant emerge and on Slide 26 in the appendix, we put the IQVIA data showing that relationship. Surgery did go up in August; we expect that to restate. We hadn’t gotten through the peak of Delta in the U.S. in August. Hopefully, as we go into the northern hemisphere winter, we see a reduction, with the boost from a reduction in the number of cases meaning more of these women present to their GP and get diagnosed. It's challenging as the symptoms are quite diffused. The downstream effect will mean that they will typically have 6 to 7 cycles of chemo. After the initial debulking event, it’s going to take another six months before they present for maintenance. We're not sure if these women will be diagnosed later or are more progressed in their disease, affecting the time they will potentially relapse.

Emma Walmsley, CEO

In conclusion, it's a quarter where we've continued to deliver evidence that the hard work of the transformation program over the last four years is generating results. We’ve got strong business performance, double-digit sales growth in pharma and vaccines, and increased momentum in Consumer Health, which has led to the upgrade in full-year guidance. Our pipeline reinforces our confidence in the outlook for step changes in growth and performance from 2022 and beyond. We're also very excited about the progress towards unlocking shareholder value with the successful demerger in mid-2022, which is going to be a landmark year for our Company. Thanks very much, everyone. I look forward to following up with you in the coming days.

Operator, Operator

For all our speakers, that concludes your conference call for today. You may disconnect. Thank you for joining and enjoy the rest of your day.