Earnings Call Transcript - GSK Q2 2023

Operator, Operator

Hello, everyone. Welcome to our Half Year End Q2 2023 conference call webcast for investors and analysts. The presentation was sent to our distribution list by email, and you can also find it on gsk.com. Please turn to Slide 2. This is the usual Safe Harbor statement. We will comment on our performance using constant exchange rates, or CER, unless stated otherwise. As a reminder, following the Consumer Healthcare demerger in 2022 to form Haleon, we're presenting the performance and growth of continuing operations for GSK. Please turn to Slide 3. Today's call will last approximately 1 hour and management presentation will take 35 minutes with the remaining time for your questions. Our speakers today 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. Turning to Slide 4, I will now hand the call over to Emma.

Emma Walmsley, CEO

Thanks, Nick, and a very warm welcome to everyone joining us today. I'm delighted to present to you all another set of excellent results for GSK. Please turn to the next slide. Sales and profits grew at double-digit levels for the quarter, our sixth consecutive quarter of strong growth. Sales were £7.2 billion, up 11%, excluding Pandemic Solutions. Adjusted operating profit was up 12% to £2.2 billion, and adjusted EPS were up GBP £0.17 to 38.8 pence. This is further evidence of the sustained step change in GSK's performance, and this momentum supports our decision to upgrade our guidance for the year. Our performance also demonstrated delivery of the strategic choices we've made to develop the portfolio and the R&D pipeline. New products, notably in vaccines and HIV, all made healthy contributions to growth and reflect the investments we've made to prioritize these parts of our business. 62% of sales are now coming from Vaccines & Specialty Medicines, which we expect to provide durable and profitable growth through the decade, and new products launched since 2017 have contributed sales of £4.6 billion so far this year, adding nearly £1 billion of distributional turnover compared to 2022. Equally, our general meds business continues to perform alongside the other parts of our portfolio. Next slide, please. We are deploying capital in a financially disciplined way to invest in growth and deliver stronger returns to shareholders. We are delivering on our commitments. As you can see from the slide, we are on track to hit all the targets we set out in 2021. Our very first priority for capital remains to invest in continued pipeline progress, and we know this is the key question for shareholders. At the core of our work is an aggressive pursuit of organic pipeline delivery and targeted business development. We're making good progress on both, and there is more to come. The approval of the Arexvy this quarter is, we believe, transformational and set to bring enormous benefit to people aged 60 who are at annual exposure to RSV. Arexvy is still hitting the next wave of vaccine innovation at GSK. This quarter, we presented positive clinical data for our pentavalent MenABCWY vaccine, secured regulatory approval for Shingrix in Japan in at-risk populations, and achieved US FDA Fast Track designation for a drug candidate vaccine to prevent gonorrhoea, a bacterium that is considered a high-priority pathogen by the WHO. You have been informed at our recent management event that we have substantial developments to come with potential new vaccines to prevent bacterial infections, pneumococcal disease, and to combat respiratory viruses. This all sits alongside other innovations in infectious diseases like the reverse vaccine for Hepatitis B and a new portfolio of much-needed anti-infectives. We're also very pleased with the progress we're making in our HIV portfolio. A key aspect here is, of course, to develop the portfolio to replace the loss of exclusivity for dolutegravir, which, as a reminder, is not expected to start until 2028 in the US and 2029 in Europe. We are well on track to do this. We expect sales from our new long-acting regimens to reach around £2 billion by 2026. Clinical development plans are progressing well to support new ultra-long-acting options launching from 2026. With these innovations, we aim to replace the majority of revenues lost from dolutegravir and to support profitable growth for GSK well into the next decade. I'm looking forward to discussing this further at our HIV Meet the Management Event in late September. Equally, we continue to make good progress in our business development. Here, we're targeting acquisitions and partnerships to strengthen and complement our core therapy areas to help deliver above and beyond our current long-term outlook. You should expect to see us maintain our high levels and pace of business development as we have over the last 18 months. This quarter, we completed the acquisition of BELLUS Health, building upon our respiratory expertise with the addition of camlipixant, a potential best-in-class treatment for refractory chronic cough in Phase III. Our pipeline in respiratory is developing well across all three product areas, and we're increasingly confident it will be a major source of long-term growth. Next slide, please. Our focus is to deliver competitive performance and improved shareholder value in the short, medium and long term. With our core momentum and further successful execution of our priorities, we are very confident in our ability to deliver profitable sales growth across all time frames. For 2023, we now expect to deliver sales growth of 8% to 10% and adjusted operating profit growth of 11% to 13%. For 2026, we expect to achieve sales growth of more than 5% and adjusted operating profit growth of more than 10% on a CAGR basis. By 2031, we are confident we will have effectively absorbed any impact from the loss of exclusivity across the portfolio to achieve our stated ambition of more than £33 billion in sales. We know this ambition is significantly higher than current market expectations and over the next year, we'll continue to bring you more clarity and specificity on our building blocks to deliver profitable results through a series of management events, data readouts, and a more comprehensive update against our 2021 long-term plan. Let me now hand over to Tony, who will talk you through his latest thoughts on R&D priorities and performance.

Tony Wood, Chief R&D Officer

Thank you, Emma, and hello, everyone. It's great to be with you today. Please turn to slide 9. I'm pleased to report that we're making good progress in strengthening the pipeline, and we know there's more to come. Our absolute focus is to develop a robust pipeline that can drive sustainable, profitable growth. I see this being achieved through a combination of organic delivery and disciplined business development overlaid with continuous improvement in R&D productivity. This is reflected in my three priorities for R&D shown on this slide and in the delivery of our strategy, which focuses on four therapeutic areas, aims to leverage our deep understanding of the immune system, and use advanced technologies. Next slide, please. It's crucial that we allocate our capital and resources effectively. I think about this in two perspectives. First, from a therapeutic area standpoint, our priority is to build on our strength in leadership in infectious diseases, HIV, respiratory immunology and our emerging capabilities in oncology. This is achieved by investing in both organic and targeted business development to deliver first- or best-in-class innovation, balancing probabilities of success and sales potential. We apply the same discipline and return criteria for both approaches. In addition, we see platform and data technology-enabled opportunities. Second, from a time perspective, I want to develop, partner, or acquire vaccines, specialty medicines and technologies with significant commercial potential that can meaningfully contribute to sales and profit growth in the latter part of this decade and beyond. Ultimately, I want a portfolio of R&D innovations that offers a good balance of risk and return, and which can drive growth for GSK above and beyond the ambitions Emma just discussed. Slide 11, please. Our pipeline today comprises 68 assets in clinical development. Two-thirds of the assets within our development portfolio are focused on infectious diseases and HIV. In infectious diseases, we're focused on seasonal respiratory viruses, bacterial, fungal, and chronic viral infections. Vaccines are at the forefront of this effort. Emma has already mentioned the vaccines and some of the innovations that are coming behind it. Our pentavalent meningococcal vaccine candidate recently met all primary endpoints in its Phase III trial and demonstrated immunological effectiveness against a broad array of Menveo strains. These account for 95% of circulating strains in the US. If approved, ABCWY would offer a simplified immunization schedule and support increased vaccine uptake. This is important when we consider that only 30% of individuals currently receive full protection from all 5 meningococcal serogroups. We're on track to submit the vaccine to regulators in 2024. Our novel 24-valent pneumococcal vaccine candidate, acquired through the Affinivax transaction, has also shown very positive immune response across serotypes. We continue to examine potential acceleration options for the 24 and 30-valent programs in infants and adults. With CureVac, we're looking to disrupt the influenza market and deliver new multi-valent combination vaccines using next-generation RNA technology. Multi-valent Phase I and II flu and COVID trials are underway, and we expect data from these towards the end of this year and the start of 2024. In chronic viral infections, we are focusing on geographic expansion and new growth opportunities for Shingrix. These include extending the population that might benefit from protection to younger adults, such as the recent Japanese approval to include adults aged 18 to 49, and we continue to review the potential need for a booster. Additionally, a growing body of evidence suggests that shingles vaccination may reduce the risk of dementia. We're leveraging our expertise in herpes varicella zoster virus to develop a promising injectable treatment for the control of Herpes Simplex virus reactivation. Our plan is to initiate proof of concept studies later this year. In anti-infectious disease, we have a promising portfolio for new medicines. Gepotidacin has stopped early for efficacy and is anticipated to launch next year and has the potential to be the first oral antibiotic to treat uncomplicated urinary tract infections in over 20 years. Complementing this is tebipenem from Spero Therapeutics, which, if approved, will give us access to a late-stage antibiotic with the potential to treat complicated urinary tract infections. Brexafemme, a novel first-in-class medicine to treat fungal infections acquired through an exclusive licensing agreement with SCYNEXIS, completes this trio. Additionally, the promising drug has the potential to help patients achieve a functional cure for chronic hepatitis B. We look forward to presenting data from our Phase IIb trial later this year. This trial is designed to address key questions to improve the durability of functional cures following treatment. In HIV, we are entering an important period in our clinical development plans for potential ultra-long-acting treatment and prevention options. We'll be setting out more detail on this in our third quarter investor event. In respiratory and immunology, we're in late-stage development of our IL-5 medicines. The addition of Camlipixant, a highly selective P2X3 antagonist in the treatment of refractory cough, also provides us with another asset in Phase II development. Luke and I expect to share more with you on our plans and opportunities in respiratory before the year-end. In oncology, we are progressing with our regulatory submission for momelotinib following the US FDA’s recently extended review date to September. We're confident this new medicine will help tackle the significant and debilitating unmet needs of myelofibrosis patients with anemia. Given our current portfolio and capabilities, our approach in oncology is to prioritize developing novel medicines to treat blood and women’s cancers and explore potential breakthroughs in immuno-oncology. JEMPERLI, our highly effective PD-1 inhibitor, is central to this approach and exploration is a backbone treatment using combination with currently approved or promising therapies in development. Next slide, please. You'll see how many of the elements I've just touched on are expected to play out over the next 12 to 18 months. I believe these, together with targeted business development and a series of important Phase I and Phase II investment decisions will lead to significant progression in this pipeline in the short term. Slide 13, please. Along with the resources required to prioritize and accelerate clinical development, I want us to continue to improve overall R&D productivity. We've made progress. Success rates and cycle times are improving, but more needs to be done. For me, this really means two bits: firstly, doubling down on leveraging our scientific capabilities with the use of new platforms and data technologies; and secondly, developing our partnering and external sourcing capabilities. With AI and machine learning applications rapidly maturing, access to proprietary data to feed models and generate novel insights is a key strategic differentiator. For example, we recently presented data from the B-Clear Phase IIb trial. This deep multimodal analysis helped us develop a clear stratification of chronic hepatitis B patients treated with distinct clinical, urological, and molecular trajectories associated with various markers. These predictive models provide greater precision in existing markets and suggest potential enrichment strategies. We're competitively placed in platform technologies and have laid strong foundations in data technologies. I want us to vigorously scale and build on these foundations to better derisk targets and rapidly test and progress high-quality first-in-class candidates, all with the aim of accelerating and improving success rates of our developmental progress. In summary, let me close by saying I'm pleased with the progress we've made so far this year and that we have clear plans in flow to move forward at pace to deliver on our key R&D objectives and support the overall growth ambitions at GSK. I'll now hand it over to Luke on slide 14.

Luke Miels, Chief Commercial Officer

Thanks, Tony. Please turn to the next slide. I'm pleased to say that Q2 was another quarter of continued strong commercial execution with growth across the business. All three of our product groups; Vaccines, Specialty, and General Medicines were up in the quarter with growing contributions across all three regions. Please turn to slide 16. In Q2, we delivered £7.1 billion of sales, up 11% versus last year, excluding pandemic solutions. In vaccines, strong growth of 15%, excluding pandemic solutions was supported by Shingrix, which was up 20%, and Bexsero, which was up 18%. Shingrix delivered another record quarter of sales, marking the sixth consecutive quarter of growth. In the US, we've reached approximately 32% penetration among eligible individuals for receiving at least one dose. Moving forward in the US, we're resourcing for success by raising awareness about the importance of Shingrix prevention, especially among consumers who are less motivated to receive vaccines. We remain confident in the US opportunity and believe we can reach flu-like penetration of around 60% to 65% over time. Ex-US remains an important growth driver for Shingrix, representing 46% of the revenue in the quarter. Shingrix is now available in 33 countries, with less than 3% penetration, indicating the potential for further expansion in these populations. We've got an unconstrained supply, strong global demand, and we continue to retain high value with US-like pricing as we launch in private pay settings globally. In Specialty Medicines, including HIV, which Deborah will address shortly, we increased sales by 12%, excluding Xevudy, to £2.5 million. Our market-leading blockbuster specialty medicines, Benlysta and Nucala, continued to deliver double-digit growth. Benlysta was up 19% in the quarter, sustaining growth across all major markets, with further opportunity to increase penetration in both SLE and lupus nephritis, achieving approximately 25% biopenetration in the US and other key markets. We're focused on life cycle management opportunities for Benlysta and exploring further indications, including systemic sclerosis associated with interstitial lung disease. Nucala was up 15% in the quarter and remains the first and only biologic approved for four eosinophilic diseases, with new indications driving growth and differentiation. Severe asthma continues to grow in the US, with opportunities for Nucala to drive higher penetration among eosinophilic patients, and we look forward to having COP data in 2024. In oncology, sales were down 3%, in line with expectations; however, Zejula continues to contribute to growth, and we're excited about the potential for our PD-1 development program that investigates opportunities to help all patients with endometrial, ovarian, and other potential indications. Our General Medicines portfolio grew 8%, primarily driven by Trelegy, which was up 30% in the quarter. Trelegy continues to exemplify best-in-class access compared to competitors, holding a leading share in key specialisms and analogues. Given this strong Q2 and H1 performance, we now expect Specialty medicines to grow in the high single digits and General medicines to grow in the low single digits for the full year. We still expect Vaccines to grow on Rotarix. Please turn to slide 17. We're very excited about the upcoming launch of Arexvy, believing its profile will support our market leadership and position with multibillion annual sales potential. Additionally, the CDC has now adopted the ACIP recommendation made last month, and this is being communicated broadly to healthcare providers, an important step that sets earnings guidance and establishes a trigger for group coverage. Launch is currently underway, and we have a clear understanding of what is required for successful commercial execution. We're also building on our relationships with retailers, leveraging our expertise in the older population from Shingrix, and we're playing to our strength using our deep respiratory expertise along with our experience with Trelegy across all regions. We've already shipped doses to distribution centers, and we look forward to the impact that this medicine will have in preventing the severe consequences of RSV in the U.S. and globally as we prepare for this season across Europe. With that, let me hand over to Deborah on slide 18.

Deborah Waterhouse, CEO, GSK HIV

Thanks, Luke. Our HIV business delivered sales of £1.6 billion in the second quarter of 2023, growing 12%. This growth was primarily driven by demand, which contributed eight percentage points of that growth, alongside US pricing favorability, which contributed a further two percentage points. Our performance benefited from strong patient demand for our oral two-drug regimens and long-acting injectable medicines, which now constitute more than 50% of our total portfolio. This demand has helped grow our global market share by two percentage points compared to last year. The inventory build that we saw in the US by the end of last year has now been materially burned off, and we don't anticipate any further significant burning this year. Dovato delivered £430 million in the quarter. Market performance reflects HCP belief in Dovato, which is now our number one selling HIV medicine. We were also pleased that dolutegravir received U.S. FDA pediatric exclusivity in the quarter, extending dolutegravir's loss of exclusivity in the U.S. by a further six months to April 2029. As a reminder, for Europe, it is set for April 2028. We aim to further consolidate our leadership in pediatric HIV by following a similar approach with our foundational medicine, dolutegravir. Turning to Cabenuva, sales for the quarter were £176 million, reflecting strong patient demand with high levels of market access and reimbursement across the U.S. and Europe. Growth is being driven by positive sentiment towards the data presented at CROI earlier in the year and strong commercial execution. It is particularly pleasing to note that more than 70% of Cabenuva sales are originating from competitor regimens. Moving on to prevention, sales of Apretude, the world's first long-acting injectable for the prevention of HIV, delivered £6 million in the quarter, and we are pleased by the growing momentum across the U.S. We were delighted that earlier this week, the European Medicines Agency granted a positive opinion for this medicine. With more than 100,000 new infections every year across the continent, we very much look forward to the approval of Apretude, which has the potential to significantly reduce the transmission of HIV in Europe. We're encouraged by 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 treatment and prevention, with dosing intervals of three months or longer. I'm pleased to confirm that next month, we will begin our Phase IIb study in collaboration with our neutralizing antibody, N6LS, which strives for the potential ultra-long-acting dosing. We are very excited about the potential of these medication profiles and will be ready to propose a regimen in 2024. We remain very confident in our ambition to achieve a mid-single-digit sales CAGR through 2026. Our strong Q2 performance allows us to raise our outlook for 2023 from mid-single digits to a high single-digit growth rate. And with that, I will hand over to Julie on slide 19.

Julie Brown, CFO

Good afternoon, everyone. I am delighted to be here for my first set of results as the CFO of GSK. The biopharma industry is incredibly special to me; it's where I spent most of my career, and it's a sector that can create tremendous value for patients and shareholders. GSK is a company that I've long admired, and it has a clear purpose of positively impacting the health of billions over the next decade. I am truly pleased to be part of the team that is going to deliver this. This is my first time speaking to you, and before we cover the financials, I want to take this opportunity to highlight three areas of focus that are important to me as CFO. First, disciplined capital allocation, with two clear priorities: investing for growth and delivering improved returns to shareholders. Second, partnering with Tony to enhance returns on investment and improve R&D productivity, with a strong focus on resource optimization and efficient funding. Lastly, identifying sources of business efficiency to fund investments and deliver a competitive P&L. Turning to the next slide on capital allocation, our first priority is investment in the business, driven towards pipeline development through both organic and targeted business development. We will also invest to support new product launches. My intention is to be laser-focused on prioritizing and accelerating investment in assets and technologies that will help us achieve growth. I intend to achieve this through an increased focus on ROI for organic and business development-related investments. This includes assessments of market opportunity, first-in-class potential, best-in-class potential, probability of success, and expected financial returns. Through returns to shareholders, our primary mechanism for cash distributions will remain through the delivery of aggressive dividends. Last year, the payout ratio of 40% to 60% over the cycle was established, and we expect to maintain dividends within this range as earnings increase over time. For completeness, in the event of a surplus, excess cash would be returned to shareholders using the most efficient mechanism available. However, we do not expect excess cash in the medium term given our priority to invest in growth. Finally and very importantly, we remain committed to maintaining a balance sheet with a strong investment-grade credit rating. Taken together, I believe this represents a sensible capital allocation framework for GSK, aligned with our strategic priorities and supportive of our commitments to deliver profitable growth through this decade. Now, transitioning to our financials, references to growth are at constant exchange rates, unless otherwise noted, and I will focus my comments on adjusted results. Starting with the income statement, sales increased by 11%, excluding COVID solutions, and were up 4% overall, reflecting the strong delivery that Luke and Deborah have discussed. Operating leverage, primarily from COGS, drove adjusted operating profit growth of 11%, with the margin increasing to 30.2%. Excluding COVID solutions, adjusted operating profit grew by 12%. The total profit growth was driven by strong operating performance and favorable contingent consideration liability re-measurements. Please turn to Slide 22 to discuss margin dynamics. As mentioned, the adjusted operating margin was 30.2%, a 200-basis point increase versus the prior year at constant rates. Excluding the impact of COVID solutions, the margin increased by 20 basis points. Cost of goods sold decreased, primarily reflecting reduced sales of low-margin COVID solutions in Q2, resulting in a gross profit increase of 11%. Excluding COVID solutions, COGS increased in line with sales, showing a neutral gross margin impact, with favorable mix and efficiencies offset by higher freight and energy costs. SG&A reflects investment behind product launches, such as Shingrix, geographic expansion, HIV, and preparations for Arexvy's imminent launch. We expect the SG&A growth to reduce in Q4 as investment levels stabilize and to be broadly in line with sales growth for the full year. In R&D, there was increased investment across a range of early and late-stage programs, including several that Deborah and Tony discussed earlier. Our royalties benefited from sales of Biktarvy, and there was a 70-basis point adverse move from foreign exchange. Next slide, please. Earnings per share were positively impacted by lower net finance expenses and non-controlling interests. In summary, our total and adjusted operating profit were similar in Q2 at $2.1 billion and $2.2 billion, respectively. In addition to contingent consideration liability re-measurements, the main other adjusting items of note were divestments, significant legal costs, and other charges. This included dividend and distribution income received, including from Haleon, as well as fair value movements relating to Haleon shares, partially offset by significant legal charges. Legal fees consisted mainly of increased charges related to Zantac, most of which pertain to prospective legal costs for defense. Next slide, please. Cash generated from operations was $1.9 billion in the first half, which is $2 billion lower than the prior year. Key drivers for this decrease are similar to those discussed in Q1 and include the Gilead settlement, timing of Xevudy collections received last year, alongside pension payments and increased working capital this year. There was no change to our expectation that 2023 cash generated from operations will be slightly lower than in 2022, and we remain committed to our 2026 projection of more than £10 billion. Net debt increased to £18.2 billion, reflecting the free cash outflow and net acquisition costs of BELLUS Healthcare, partially offset by the disposal of investments, including the monetization of part of our equity holding in Helion. Moving now to guidance on slide 26, we've delivered a very strong first half, and as Emma mentioned, we are upgrading our guidance for the year. All of this guidance excludes the impacts of COVID-19 solutions. We now expect sales to increase between 8% and 10%, up two percentage points from our previous guidance. We expect adjusted operating profit to rise between 11% and 13%, and adjusted EPS to increase between 14% and 17%. Within the sales expectations, we maintain our full-year vaccines forecast of mid-teens percentage growth and have upgraded our expectations for specialty and General Medicines. We now anticipate specialty medicines in HIV to grow in the high single-digit percent range, and General Medicines to grow in the low single-digit percent range. Regarding phasing, we expect that second-half growth will be below first-half growth overall due to comparative impacts. Additionally, we expect sales growth to be somewhat higher in Q3 relative to Q4. As for operating profit, we anticipate that second-half growth will be stronger than the first half, with a broadly similar growth rate in each quarter, largely reflecting SG&A growth expectations as mentioned earlier. Next slide, please. In summary, our business is performing well and achieving strong momentum. I look forward to connecting with you and updating you on our progress toward our 2026 and 2031 goals in the upcoming quarters. With that, I would like to share how we plan to keep you informed in four key areas: execution, portfolio, capital allocation, and investor events. Execution shares notable earnings reviews. The portfolio component builds on the R&D catalysts shared in Tony's presentation. Capital allocation has been clarified further today. The Investor Relations program outlines how we plan to provide you with building blocks supporting our goals while creating opportunities to meet the management team at the two more events scheduled this year. The first will focus on HIV in September, followed by respiratory and immunology in the fourth quarter. We will also continue our comprehensive program of meetings, participation in investor conferences, and updates during key medical events. Thank you. And with that, I will hand back to Emma.

Emma Walmsley, CEO

Thanks, Julie. It's great to have you with us. Turning to slide 20, please. We continue to build trust by delivering on six key ESG performance areas. This quarter, we made progress on several fronts, but I want to highlight one in particular. Of the more than 2.5 billion people we will reach this decade, the majority will benefit through our infectious disease portfolio, which includes vaccines, antibiotics, antivirals, and global health products. We were delighted to see new third-party funding announced to advance the M72 tuberculosis vaccine candidate discovered and developed by GSK into phase III development. This could potentially become the first new vaccine to help in the prevention of tuberculosis in more than 100 years. It's a true testament to GSK's vaccine scientists and our ability to partner with others to develop innovative global health assets in an economically viable and sustainable way. With over 10 million people falling ill and more than one and a half million people dying from tuberculosis every year, alongside increasing evidence of drug resistance, the successful development of this vaccine could have a profound impact on human health. Final slide, please. In summary, we are witnessing strong momentum in our performance, with continued competitive sales and profit growth. We remain focused on progressing our pipeline through organic development and targeted complementary business development, and our progress provides us with high confidence to achieve our outlook and ambitions for shareholders through the decade. With that, let's move to the Q&A session with the team.

Operator, Operator

Thanks, Emma. Just a reminder for those wanting to ask a question to join the Q&A by raising your hand. I kindly ask that you ask one question initially, and we can always return for a second round. Let's start with our first question from James Gordon at JPMorgan. James, you’re now able to speak, so go ahead, please.

James Gordon, Analyst

Hello, James Gordon from JPMorgan. Thanks for taking the question. I'll keep it to one. My question is about Shingrix in the US. I noticed that sales declined 10% this quarter, although it might be flat when we adjust for stocking, but I saw you've refined the Shingrix global guidance to now high teens this year, down from double digits. Luke made some comments about having reached the most motivated patients in the US and further penetration increases, but that suggests it could be tougher with less motivated patients. My question is: where do we stand on Shingrix and US growth specifically? Are we now running out of road for US growth, and could it be declining this year, or is Q2 a blip with another one-off effect, yet there’s still plenty of US growth to come?

Emma Walmsley, CEO

Thanks, James. Obviously, we're still very ambitious for the scale and reach of Shingrix. But Luke, do you want to address the specifics around the dynamics for the US?

Luke Miels, Chief Commercial Officer

Sure, James. You're likely not the only person with that question, so I'll take a little longer to cover all those points. So the short answer is not yet. As we've discussed in past calls, we are reaching a point in penetration where we need to work harder to develop this logarithmic growth curve. I will delve into those dynamics in detail, as there is currently a notable non-retail effect. As you noted, we've witnessed some stock movements. For retail specifically, we actually saw growth of 8% compared to last year, which was driven primarily by 65-year-olds coming in following the removal of the co-pay linked to the IRA. Interestingly, in Q4 and Q1, we added about 2% to total vaccinations each time; we now have a penetration rate of around 32%, according to the latest data from Q1. If we consider that, there are still about 80 million individuals to go to reach 100%. We add about 4 million new candidates who turn 50 each year. The other crucial factor regarding stocking is that we have changed the rules regarding the amount of stock wholesalers could hold. We have Category A and Category B. Historically, Shingrix has been classified in Category B, which allowed wholesalers more room and flexibility regarding the volumes they hold. We're tightening those guidelines now, aiming to remove excess inventory. You may remember that last year we had stock movements of 1.3, 1.8 and down to 0.9. This year, we're maintaining a tighter range between 0.6 to 0.7; we expect it will rise slightly at the end of Q3 due to flu season but are trying to monitor that closely. Now, moving on to non-retail, which is a critical component in the US, this has shifted significantly. Historically, non-retail constituted around 45% to 50% of our business, but in Q1, that dropped to 34%, and in Q2, it's around 31%. This is specific to a small number of key customers, now approaching 60% of the target population and their vaccinations. However, we have about 197 additional key customers we can still work with. My take on this is that while we need to exert more effort on reaching the less motivated patients, we've understood this was coming and have plans to address it. Additionally, if we look at the markets outside of the US, we're also in good shape overall, particularly in Europe and China, where we're still in early stages. As we previously mentioned, we are less than 3% penetration in markets outside of the US and Germany, which indicates further opportunity for this asset, and we also have a wide range of pipeline products beyond that.

Emma Walmsley, CEO

Thanks, Luke. I'd like to reiterate that the cost of reaching deeper into the US has implications, mainly because we also have advertising factors and other considerations that are unique to each market. The other markets, such as those we are newly entering, remain very attractive for business in adult immunization, especially as we have additional prospects with RSV coming up.