Earnings Call Transcript - GSK Q2 2024

Operator, Operator

Hello everyone. Welcome to today's call and webcast. The presentation was sent to our distribution list by e-mail today, and you can also find it on gsk.com. Please turn to Slide 2. This is the usual safe harbor statements will comment on our performance using constant exchange rates, or CR unless stated otherwise. Please turn to Slide 3. Today's call will last approximately 1 hour with the presentation taking around 35 minutes and the remaining time for your questions. Today, our speakers are Emma Walmsley, Tony Wood, Luke Miels, Deb Waterhouse, and Julie Brown, with David Redfern joining for Q&A. Please ask 1 to 2 questions so that everyone has a chance to participate. Turning to Slide 4. I will now hand the call over to Emma.

Emma Walmsley, CEO

Welcome to everyone joining us today. Please turn to the next slide. I am delighted to report that GSK's momentum this year continues with excellent second quarter performance. Sales grew 13% to £7.9 billion. Core operating profit was up 21% to £2.5 billion and core earnings per share rose 17% to 43.4p, all excluding COVID solutions. This reflects our continued focus on operational execution and the strength of GSK's broad portfolio to prevent and treat disease. Sales growth was reported across all 3 product areas for the first half. For the second quarter, vaccine growth was driven by international expansion. Specialty Medicines, in particular, were up strongly, growing over 20%, reflecting successful new launches of Ojjaara in myelofibrosis, Jemperli in endometrial cancer and long-acting HIV treatments, and we also delivered a record quarter for strategy in General Medicines. All of this demonstrates the strength and breadth of our portfolio to deliver competitive and profitable long-term growth. This strong sales performance has been underpinned by effective cost control, driving operating leverage and further margin improvements this year. And these benefits are also delivering improved operational cash flow providing funds for pipeline investments as well as returns to shareholders. Our dividend for the quarter was 15p. And on the basis of our current performance and prospects, we are again upgrading our full-year guidance. Next slide, please. We continue to invest in the pipeline and are making good progress. This quarter, GSK's long-standing expertise and leadership in respiratory will once again reinforce with positive Phase III data reported for depemokimab. In oncology, we continue to progress material growth opportunities, most notably the presentation of positive second line combination data for Blenrep to treat multiple myeloma. In Vaccines, Arexvy was first again with the approval by the FDA to prevent RSV disease in adults aged 50 to 59 who are at increased risk. Although the ACIP's postponed vote on recommendation for this cohort was surprising, we have to remember, this is a brand-new vaccine. We look forward to sharing the additional data requested and more and remain very confident that the benefit of Arexvy can offer to this age group, like other cohorts, will be fully recognized and that this best-in-class vaccine will reach its full sales potential. I'm also delighted we've taken steps forward in clinical development for our pioneering ultra long-acting HIV medicines or potential functional cure treatment for Hep B and our novel antibiotic gepotidacin. Next slide, please. Building trust by delivering across the 6 key areas we prioritized at ESG remains a clear priority for all of us at GSK. Earlier this month, in partnership with Medicines Malaria, we launched faenoquine in Thailand and Brazil. This is the first single-dose radical dual medicine to prevent malaria relapse, another step forward to eliminating this disease. In May, we became a founding partner of the Fleming initiative, a new global network that brings together scientists, policymakers, and the public to fight antimicrobial resistance. We have also started a Phase III trial for a low carbon version of our metered-dose inhaler Ventolin, and using a generation propellant, this new inhaler has the potential to reduce emissions by around 90% versus the current one, benefiting millions of people with asthma. Please turn to Slide 8. I am delighted with GSK's continued progress and strengthening prospects. Before reminding you of these, I want to briefly address Zantac, given the ruling we have on the admissibility of evidence this letter. This Daubert ruling in Delaware does not determine liability, and our position remains unchanged. We will continue to defend against the claims being made. Our aim, as it has been all along, is to manage this in the best interest of the company and shareholders and to stay focused on our delivery. As many of you know, we started this year by setting out new upgraded long-term commitments, and we're all focused on delivering against all of these short, medium, and long-term goals. With our current momentum and the continued progress we're making, we have today upgraded our outlook for 2024, demonstrating the strengthening depth and breadth of our portfolio. We now expect to deliver sales growth of 7% to 9% and core operating profit growth of 11% to 13% for a short-term shift in mix that the team will comment on. For 2026, we continue to expect more than 7% sales growth and more than 11% core operating profit growth on a 5-year basis. Until 2031, we continue to expect sales of more than £38 billion with a broadly stable margin through the loss of exclusivity of dolutegravir. Remember, these outlooks do not yet include the launch of Blenrep or ongoing progress in our early-stage pipeline. I'm now going to hand over to Tony to talk you through our R&D progress in more detail.

Tony Wood, R&D Director

Thank you, Emma, and welcome, everybody. Next slide, please. As you know, our approach in R&D is to invest for growth in new best-in-class vaccines and medicines, combining our scientific focus on the immune system with the use of advanced technologies. Today, our pipeline comprises 70 assets in clinical development, and my priority remains the acceleration of the delivery of new vaccines and medicines for patients and to drive future growth for GSK. In the past 6 months, we secured regulatory approvals or received acceptance of submissions for 10 major medicines and vaccines and reported positive data from 7 Phase III studies, clearly demonstrating the innovation and health impact that GSK is now bringing to patients. Focused business development has continued as well. We strengthened our respiratory pipeline with the acquisition of Aiolos Bio for their long-acting T-slim antibody, which is anticipated to start Phase II in 2025, and we gained full control of our candidate mRNA vaccines by restructuring our collaboration with CureVac. Accompanying these were investments in 2 new technology platforms: the acquisition of LC Biotechnologies, which will help accelerate our oligonucleotide program, and an agreement with OkraBio that will create foundational liver biology data sets, deepening our understanding of disease and improving target identification. In all, we've advanced the pipeline across all our core therapeutic areas. Importantly, we are on track with the development of the 12 scale product opportunities as well as Blenrep that we highlighted at the start of the year. These all have the potential to deliver profitable growth in the 2026 to '31 time frame and to support our 2031 ambition of more than £38 billion in sales. I'll now take a closer look at a few important areas. Next slide, please. First, in vaccines, where preventing seasonal viral and high-risk bacterial diseases remains a key focus for us. We have an extensive development plan for Orexo and continue to see this exceptional vaccine as a major long-term growth opportunity. Arexvy is the world's first RSV vaccine and has demonstrated outstanding efficacy in adults of various ages, including more than 94% during the first season for people with comorbidities and who are at increased risk of severe RSV disease. In June, ACIP recommended the use of Arexvy for all adults aged 75 and over, and for adults aged 60 to 74 who had increased risk from severe RSV disease. However, the committee unexpectedly postponed a vote in adults aged 50 to 59, requesting additional data. This includes evidence from vaccine surveillance databases to further support the benefit/risk profile observed during clinical trials in a real-world setting. We look forward to contributing to these data over the coming months. I'm also looking forward to the data from studies 006 and 004, assessing efficacy, immunogenicity, and safety of Arexvy over 3 RSV seasons. These data will be important in helping answer some of the questions raised by ACIP on outcomes and duration of protection. As a reminder, season 2 data showed 75% cumulative vaccine efficacy against severe lower respiratory tract disease over 23.3 months. This data supports the strong and durable protection that this uniquely adjuvanted vaccine offers against RSV. Later this year, we are also looking forward to sharing more from trials in adults aged 18 to 49 who are at increased risk from RSV disease. Next slide, please. Next, a comment on the interesting data for Shingrix. We shared this yesterday at the Alzheimer's Association International Conference in Philadelphia. These data add to the growing body of evidence exploring the observed association between shingles vaccination and a reduced risk of dementia. Our study was prompted by a number of observations, some of which are summarized on this slide. There's a growing body of evidence largely generated from retrospective case studies in very large populations that herpes zoster vaccination is associated with a reduction in the diagnosis or onset of dementia. These data include a recent observational study in Wales, which concluded that vaccination with a live attenuated herpes zoster vaccine was associated with a 20% reduction in dementia diagnosis compared to people who did not receive the vaccine. Using an AI/ML approach and data from Optum's electronic health record data set, we constructed a retrospective observational study comparing matched cohorts of adults vaccinated with Shingrix, a competitor live attenuated shingles vaccine, and a comparator pneumococcal vaccine. Headline data on the right-hand side of this slide suggests that after 3 years, Shingrix was associated with a 27% reduced risk of acquiring dementia when compared with the competitor's zoster vaccination, and a 24% reduced risk of dementia when compared to the comparative pneumococcal vaccine. The potential relationship between shingles prevention and risk of neurodegeneration is an area of increasing interest to the scientific community. These are interesting early results, which we are investigating with additional retrospective and mechanistic studies. Next slide, please. Turning now to respiratory. We're making good progress with novel treatments that could provide more effective options for severe asthma, COPD, and refractory chronic cough. Depemokimab is the first ultra long-acting biologic engineered to have high affinity for IL-5. It enables sustained inhibition of type 2 inflammation with twice the dosing compared to current options, some of which require injections every 2 weeks. This quarter, we announced that the 2 pivotal Phase III trials in severe asthma with an eosinophilic phenotype, SWIFT 1 and SWIFT 2, met their primary endpoints, demonstrating that 2 doses of depemokimab administered over a 12-month period showed a statistically significant and clinically meaningful reduction in significant exacerbations versus placebo in combination with standard of care. We look forward to sharing full data at the ERS conference in September, and we remain on track to file the medicine for approval later this year. Depemokimab's development program is being informed by predictive biomarkers and phenotyping, which has enabled us to progress 4 clinical indications in parallel. The pivotal ANCA 1 and 2 trials in chronic rhinosinusitis with nasal polyps are now closed for recruitment, with data expected later this year. We also expect to see Phase III data on the use of Nucala in COPD this year and Phase III data for camilipixant in the treatment of refractory chronic cough in 2025. Next slide, please. You'll shortly hear from Deborah on the important advances in our HIV pipeline. So I'll conclude with a brief summary of the strong progress we've made within the oncology portfolio during the first half. We're building an emerging and high-potential portfolio of new medicines with a growing focus on ADCs, immuno-oncology, and targeted small molecules. For Blenrep, pivotal data from the DREAMM-7 and DREAMM-8 studies presented at ASCO demonstrate the potential for Blenrep to become the new standard of care for patients with multiple myeloma in the second-line setting. These trials will serve as the basis for regulatory submissions, and we are pleased that the EMA recently accepted our first filing for this indication. Additional filings are planned before the end of the year. Also stated at the recent meet the management event, we plan to start a Phase III trial in the first-line setting in early 2025. For Jemperli, recent data from the RUBY trial demonstrated a statistically significant overall survival benefit in an all-comer population with primary advanced or recurrent endometrial cancer. Jemperli is the only immuno-oncology agent to demonstrate a survival benefit in this patient population. These data have been filed with the FDA, and we anticipate a response ahead of the 23rd of August PDUFA date. Carefully targeted Phase III trials investigating these in Jemperli in the treatment of rectal, lung, and head and neck cancers are also ongoing. The first half of 2024 also saw a number of oncology indication trial starts, including Galaxy 301 and a Phase III trial investigating our TIGIT antibody, belrestotug, in combination with Jemperli in the treatment of first-line PD-L1 high non-small cell lung cancer. The glio-focused Phase III study will investigate Zejula in the treatment of newly diagnosed glioblastoma, and a Phase I study of our B7-H4 ADC JSK584, which recently entered the clinic. We're looking forward to seeing more data from our ADCs by the end of the year to inform pathways for accelerated registrations. Finally, we're pleased to announce the recent Japanese approval of Ojjaara with a line-agnostic label for all patients with myelofibrosis. So in summary, a productive first 6 months in 2024. I'm pleased with the progress we're making to deliver differentiated health impacts for people and patients. And I'll now hand over to Luke.

Luke Miels, Executive Vice President

Thanks, Tony. Please turn to the next slide. In Q2, we delivered growth across all our product areas and regions with £7.9 billion of sales, up 13% versus last year, excluding COVID solutions. This includes another strong performance in the U.S. with growth of 17%. Please turn to Slide 17. Vaccine sales grew 3% in Q2, excluding COVID solutions. This performance was impacted by short-term factors and we fully expect the underlying strength of the business to continue over the long term. Globally, Shingrix grew 7% year-to-date but was down 4% in the quarter, delivering £832 million. Outside the U.S., sales grew significantly and represented 64% of Q2 revenue. Shingrix has now launched in 45 markets, the majority with less than 5% penetration, and these markets represent a source of future growth for this vaccine. Q2 growth was driven by a national immunization program in Australia, expanded European public funding, and supply to China. Supply phasing to China is now expected to be delivered evenly across the second half with 40% of our full-year supply delivered to date. In the U.S., sales decreased by 36% in the quarter due to 3 factors: first, channel inventory reductions; second, important changes in retail vaccine prioritization, in part due to a transition to a new CMS rule effective the 1st of January '24 that changed how pharmacies process reimbursements and payers. These 2 short-term effects are not expected to repeat in the second half of this year; and third, lower demand driven by challenges activating harder-to-reach consumers. Addressing this remains a priority, with cumulative penetration of people aged 50 and older reaching 37%, up 6 points since the same time in '23, based on the latest census data. We've more than 70 million adults that are still unvaccinated and recommended to receive our vaccine. We're focusing our resources and marketing content on targeting these eligible potential patients. Our expectation continues to be that Shingrix's global sales will grow this year and reach more than £4 billion by 2026, driven by growth outside the U.S. Turning to RSV. Nearly 8 million people have been vaccinated with Arexvy since launch, and we are maintaining around 2/3 of the retail vaccination share. As expected, demand levels were lower in Q2 due to seasonality. Ahead of the 2024-25 RSV season, we're well positioned in our contracting and still expect blockbuster-level sales in 2024. These sales are expected to be second-half weighted with the vast majority in the U.S. Following the ACIP recommendation, we received a universal recommendation in those aged 75 and above but now expect minimal sales in the 50 to 59 age group this year, with further potential impact in those aged 60 to 74 years. Preparation for launches in Europe and internationally are underway for 2025 and beyond, and with the best-in-class data profile, we're confident Arexvy will return to growth next year and can achieve more than £3 billion in peak year sales. The meningitis Q2 sales for Bexsero and Menveo were up 23% and 30%, respectively. Bexsero continues to demonstrate strong growth, benefiting from favorable pricing in the U.S., recommendation in Germany, and increased demand from Australian immunization programs. Menveo grew due to favorable delivery timing in international markets and U.S. CDC purchasing patterns, including our candidate MenAB.CWY vaccine. Our meningitis portfolio is expected to deliver around $2 billion in peak year sales. Given the first half performance and our latest expectation, with a tough comparative for Arexvy and U.S. Shingrix in the second half, we now anticipate vaccine sales in the full year to increase by low to mid-single digit percent. Our increased 2026 CAGR outlook for vaccines of low double digits has not changed. Next slide, please. In specialty medicines, including HIV, which Deborah will cover next, we had a very strong quarter and increased sales by 22%, excluding COVID solutions. Our expectations for the year, I'm pleased to say, have increased. Nucala was up 17%, driven by higher patient demand for treatments addressing the eosinophilic-led disease market expansion and increased buy-in penetration. Benlysta was up 20% in the quarter, driven by buy-in penetration growth from early intervention in SLE and lupus nephritis. We're also seeing growing demand in the U.S. and continued consecutive double-digit growth outside the U.S. In oncology, sales again more than doubled in the quarter. In hematology, we're continuing to see a strong uptick for Ojjaara, which launched in the U.S. last year and in the U.K. and Germany in Q1. In gynecological cancers, continued momentum was primarily driven by sales in the U.S., Germany, France, and the U.K. in the first-line dMMR/MSI high primary advanced or recurrent endometrial cancer. In addition to growth from second-line and later treatment, Jemperli is the backbone of our immuno-oncology development, and pending regulatory decisions and development beyond dMMR-driven shippers, which will drive future growth. ZEJULA's growth continued in Q2, driven by the U.S. and volume growth globally. As a reminder, for the next quarter, we will not benefit from the stocking of or the switch to the new tablet formulation as seen in Q3 '23. Given the 21% sales growth in the first half, we're increasing our full-year expectations, and we now expect Specialty Medicines to grow mid- to high-teen percent, with the second-half growth being lower due to tougher comparisons in oncology. Please turn to Slide 19. Focusing on Nucala for a moment. The chart on the left of this slide demonstrates Nucala's continued leadership in IL-5 market share and I'm pleased to say that Nucala continues to grow by double digits quarter-on-quarter, despite being on the market for almost 9 years. We anticipate our IL-5 portfolio comprising depemokimab and Nucala to deliver more than £4 billion in peak year sales. Next, looking at Ojjaara. We're still seeing the fastest U.S. launch uptake in value for a JAK inhibitor in myelofibrosis, the only treatment to demonstrate clinical and durable benefit on spleen response symptoms and anemia for myelofibrosis patients with anemia. We find anemia burden to be increasingly at the forefront of treatment decisions. We continue to improve our market share. 65% U.S. and EU healthcare professionals expect to increase prescribing Ojjaara in the next 6 months. Please turn to Slide 20. Finally, General Medicines grew by 12% in Q2, reflecting a record quarter for Trelegy, with sales increasing 41% to £842 million. Around half the growth was driven by channel and segment mix as well as adjustments to returns and rebates, which were expected to moderate in half 2. Trelegy also benefited from share gains and remains the top-selling brand in asthma and COPD and is the most prescribed single inhaler triple therapy worldwide. Removal of the AMCAP on Medicaid drug prices in the U.S. was expected to impact branded versions of Advair, Flovent, and Lamictal. However, increased use of authorized generic versions of Advair and Flovent offset this impact in the quarter. Given the strong start to the year, we now expect General Medicines sales to increase low to mid-single digits for the full year. I'll now hand over to Deborah to cover HIV.

Deborah Waterhouse, CEO

Thank you, Luke. Next slide, please. We're pleased to see continued strong performance and sustained double-digit growth in Q2, delivering 13% revenue growth. Our growth is driven by continued strong patient demand for our industry-leading medicines, which has led to an increase of 2 percentage points in global market share versus Q2 2023. Our oral 2-drug regimens and long-acting injectables continue to transform the HIV marketplace. Dovato delivered sales of £551 million in the quarter. The strong body of clinical data and real-world evidence reinforcing the efficacy and durability of this medicine continues to grow. At the International AIDS conference last week, results of the PASO DOBLE study, a large head-to-head randomized clinical trial of Dovato compared against the 3-drug regimen, Biktarvy, showed non-inferior efficacy and significantly less weight gain. This is important because we know people living with HIV are concerned about taking more medicines as they age, as well as the long-term risk of metabolic diseases that can come with weight gain. Our long-acting portfolio also continues to perform strongly, delivering more than 50% of total HIV growth. Cabenuva grew 42%, driven by patient preference and proven and durable efficacy. CASM LATITUDE data presented at CROI and data from real-world cohorts that include over 10,000 people living with HIV in diverse settings has resonated strongly with physicians and has supported increased breadth and depth of prescribing. Apretude grew more than 100% in the quarter. This medicine has demonstrated proven superior efficacy compared with daily orals and a positive safety profile and high patient preference. As a reminder, the registrational HPTN 084 study of PrEP in women was the first to show 0 infections in participants who received injections as described per protocol. We believe that long-acting therapies are the future of HIV care, empowering people impacted by HIV with choice and addressing the barriers standing in the way of reaching the end of the HIV epidemic. Looking at the long-acting market, we can see that the treatment market is currently approximately 10 times larger than the PrEP market at about £20 billion, which will have a significant impact on the sales potential for long-acting options. In the long-acting inject for treatment setting, there are no competitor launches planned before 2028. We continue to see strong progress across our pipeline. At the AIDS Congress, we shared first-time-in-human data for our third-generation integrated inhibitor, VH184, demonstrating strong efficacy and a unique resistance profile. Building on our strong legacy of developing powerful integrated inhibitors, these positive findings reinforce that integrated inhibitors will remain the gold standard in HIV, trusted for their efficacy, long-term tolerability, and high barrier to resistance and make VH184 an excellent candidate for further development for both ultra long-acting and self-administered therapies. In PrEP, we have committed to move forward with our registrational studies for cabotegravir ultra long-acting Q4M with confidence in the efficacy and safety profile. In treatment, we've selected rilpivirine as a partner for cabotegravir ultra-long-acting Q4M. This regimen selection is based on progress in formulation studies for rilpivirine and builds upon existing positive patient and physician experience with these medicines in our current portfolio. We remain on track to deliver the first ultra long-acting 4-month treatment regimen in 2027 and 4-month dosing options for prevention in 2026. We continue to progress our ambition of extending the dosing interval of our long-acting regimens to enable every 6-month dosing towards the end of the decade. Our strong performance over the first half gives us confidence to increase our guidance to low double-digit percentage growth in 2024.

Julie Brown, CFO

Thank you, Deborah, and good afternoon, everyone. Next slide, please. Starting with the income statement for the second quarter with growth rates stated; sales increased 13%, as Emma mentioned, reflecting continued strong business performance, particularly within oncology, HIV, and Trelegy within general medicines. Core operating profit grew 21%, excluding COVID and 18% overall. Operating profit grew ahead of sales as we continue to focus on disciplined resource deployment and delivery of a competitive P&L. Core EPS grew 17%, excluding COVID. Turning to the total results, operating profit decreased 22% to £1.6 billion, predominantly reflecting charges arising from the CCLs, primarily due to improved longer-term prospects of our HIV business and less favorable foreign currency movements. Next slide, please. Moving to the core operating margin, this increased 190 basis points to 31.9% year-on-year, excluding COVID. This reflected cost discipline, the drive of productivity improvements and targeting resources to the key commercial and R&D assets in the business. Additionally, the gross margin benefited from a positive regional mix. These factors were partly offset by the impact of the loss of Gardasil royalties, as guided. In the first half, we saw a significant margin improvement of 380 basis points at CER to 32.5%, with strong operating leverage underpinned by 13% sales growth, gross margin mix benefits, and a one-off favorable impact arising from the Zejula royalty dispute. Next slide, please. Cash generated from operations in the first half was £2.8 billion, representing an improvement of £0.9 billion versus half 1 last year. This was primarily driven by core operating profit growth and favorable working capital, with the latter benefiting from higher receivable collections. Free cash flow was £0.6 billion relative to an outflow last year, and therefore, improving year-on-year by almost £1 billion. As usual, we expect to generate the majority of our free cash flow in the second half of the year, given the seasonality of the vaccine business. Next slide, please. Slide 26 shares our net debt position since the 31st of December and how we've actively deployed capital in the business in line with our capital allocation framework. Net debt was £1.1 billion lower compared to the end of 2023 at £14 billion, and this included the monetization of our remaining stake in Helion. We have a strong balance sheet to support continued investment in future growth, including business development as we look to deploy funds to enhance growth and deliver attractive shareholder returns. Now, with that, I'll turn to our latest full-year expectations. Next slide, please. Given our strong start to the year and continued momentum, we are pleased to upgrade our 2024 guidance today. You've heard Luke and Deborah refer to our updated product guidance. In summary, the strong upgrades to Specialty Care and General Medicines more than offset our lower expectations for vaccines this year. Overall, for full year 2024, we now expect group sales to increase between 7% and 9%, and core operating profit to increase between 11% and 13%, notwithstanding the loss of Gardasil royalties, which will reduce profit growth this year by 6 percentage points. Turning to the P&L, the gross margin has been strong in the first half. In the second half, we expect to incur costs to drive future supply chain efficiencies as well as lower positive mix benefits given the phasing of the launches last year. In addition, we continue to expect SG&A to grow at a low single-digit percentage and we now expect R&D spend to increase slightly below sales growth with royalties for the year to be around £600 million. Core EPS is expected to grow 10% to 12% due to an increase in the tax rate under OECD legislation. I am confident in our underlying business momentum. But obviously, the second half growth rates are very different from the first, with the second half significantly impacted by the very strong launches of Arexvy and in oncology last year, as well as the initial stock builds. In addition, Gardasil was stronger in half 2 last year, which will impact our profit growth in this upcoming second half. In summary, we are pleased with our first half performance and confident in achieving our upgraded full year guidance as well as all of our medium and longer-term outlooks.

Emma Walmsley, CEO

Thanks, Julie. So to summarize, GSK continues to deliver on its commitments and perform to a new standard. Our excellent performance in Q2 underpins the strong momentum across the business. We're pleased to be upgrading guidance and expect 2024 to be another meaningful year of growth in sales, profit, and earnings as we continue to focus on prevention and changing the course of disease for millions of people. We're confident in delivering our growth commitments, and we continue to progress with the development of meaningful innovations in our core therapy areas. Our strong momentum underscores our confidence in profitable growth through this decade, delivering scale health impact and attractive returns for shareholders, combining science, technology, and the talented GSK people to get ahead of disease together. With that, I'll now open up the call for the Q&A with the team.

Operator, Operator

Thanks, Emma. We're going to take our first question from Peter Verdult, Citi.

Peter Verdult, Analyst

Peter Verdult, Citi. Two questions, please. Just firstly, Emma and Luke, I'm sure you're going to get a lot of questions on this, but let's just head it straight off. In light of the vaccine dynamics that you are calling out today, and yesterday's comments from Pfizer and Merck, can I just push you a little more on firstly, what you're seeing in China, when you think realistically you can return U.S. Shingrix to growth I realize that's sort of a difficult question to answer, but I'll try. And then lastly, how are you feeling about the contracting for 2024 U.S. RSV in both the retail and non-retail channels?

Emma Walmsley, CEO

Thanks very much, Peter. Let's go to Luke on all 3 of those. I just would refer you back to my introduction earlier today; the update has shown some short-term impacts on our vaccines portfolio. But we remain very confident in our medium-term outlook and the strength of our products today and their prospects, as well as the pipeline that continues to develop in vaccines. But Luke, both on China, U.S. Shingrix, and I know you have great confidence in the contracting for the season.

Luke Miels, Executive Vice President

Thanks, Peter, and I suspect you're not alone with these questions. So I'll spend a bit of time on it. First, on contracting, very happy. Based on what we can see, we will retain market leadership. We're on track to be a blockbuster. We can cover ACIP a little bit later on. But yes, I think we're very happy with the work that has been done by the team on the ground there. In terms of vaccines in China, look, I think at a macro level, we're extremely happy with the partnership we've started, this is a strategic partnership. This is a long-term partnership. The start-up process for Shingrix has been completed in Q1. We have reps on the ground as of the end of May. If you just look at numbers, they've already expanded from 6,000 points of vaccination that we were covering. They've already hit 19,000 and are on track for around 27,000 by the end of the year. The scale of that company and the impact that they can bring to Shingrix in China is clear. In terms of broader vaccine demand, we did see some softness in servers, but it's compounded by the fact that we moved resources off the product as well. We do hear some signs that some of the local CDCs do have tighter budgets, and this is something we're going to watch very, very closely. But for us, the key here is that Shingrix is at a very different point in the life cycle compared to HPV vaccines. We're just getting started here. We have the best possible partner. We'll build the opportunity—if you look at the opportunity, it's very similar to the U.S. When you look at people in China who can pay out of pocket and that are in key cities. The numbers are very large, but we need to build that. We've just shipped 60% of the remaining, and we will ship the rest of the order. In the second half, we did have a delay of shipment, not demand-based. We just booked another £94 million in July, so we're on track to fill the full contract for the year. So that's China. As for U.S. growth for Shingrix, I mean basically for the full year, we are not going to grow versus last year. But the second half, obviously, is going to be stronger than the first half. If I expand on the 3 factors. The first one, as I said in my earlier comments, the wholesaler delta is about 300,000 doses. We finished Q4 '23 with 700,000 in the wholesaler, which is typically what we like. In Q2, it went down to around 400,000. We expect that to be rebuilt as we go into the flu season. The second factor was CMS rule changes covering direct and indirect remuneration on DIR fees, which historically the PBMs can request retroactively for up to 6 months. The new rule that was brought in removed retroactive elements. At the point of sale, all of these components had to be booked and visible. For the first 6 months, there was just less incentive for pharmacies to vaccinate patients, and we saw them shifting volumes between different types of vaccines to offset that. We've now moved into the second half of the year. We look at market research, tracking, etc. TRx trends adjusting for 4th of July are looking very encouraging. The key thing is that this is much more of a pharmacy structural element that has expired. If we look at market research for physicians, their enthusiasm to recommend Shingrix is the same as last year at 88% for those aged 65 plus. For 60 to 64, it's 80%. 50 to 59 is around 50%. Patient engagement remains stable as well, but that leads us to the third factor, which is we have penetrated the most motivated populations. The most motivated people, obviously seek out the vaccine, and we have been able to penetrate those populations to a very high degree. In our #1 segment, we're around 66% penetration, so we have to work harder to reach less engaged people. There is a huge plan to do that, so we will be looking at patients who are resident in other specialties. We're changing our marketing mix to focus on segments who need activation. We expect some growth in the second half. But we are evolving to see growth outside the U.S. in Europe, Japan, Australia, and China; once we've moved through those cohorts, we’ll reach emerging markets. We remain confident that we could hit our £4 billion target for Shingrix in 2026. Long story short, we've never lost sight of that and we remain confident.

Emma Walmsley, CEO

Great. Thanks very much, Luke. I really want to reiterate that confidence in the broader vaccines portfolio and the maintenance of our 26 CAGRs and the excitement in the pipeline ahead. We do see growth coming ex-U.S. on Shingrix but the decline in the U.S. will moderate. And I would just point out Luke's presentation that in the U.S., we absorbed a 36% decline on Shingrix and delivered 17% growth in our largest country while digesting that. So Tony on TIGIT.

Tony Wood, R&D Director

Yes. Thanks for the question, Peter. Your quick answer might get a longer answer if you forgive me. Just to remind you, we've said our focus in oncology is very much on hematological and gynecologic cancers, and we will invest outside of that in a gated way when we see data that suggest transformational opportunities. So with that in mind in terms of TIGIT, what have we seen, what are we doing about it? So what we've seen in our Galaxy's 201 platform study, and this is with 120 patients, a larger patient population than the initial data from the Cityscape evaluation of similar mechanisms. What we see is similar overall response rates, but a speed and quality of response that is differentiated from those previously observed. You'll hear more about that when we present these preliminary data at the end of the year. So I'll pause on that point for now. What we're doing with that data now is moving into the Galaxy 301 Phase III study. It's a combination study with Jemperli. We expect to see differential profiling of EO-448 or Beresofor, which means it engages macrophages, dendritic cells, and natural killer cells in the tumor microenvironment augmenting immunity. We've seen the depletion of T regulatory cells, which are immunosuppressive in this setting. We expect to see some differentiated data moving forward in a gated Phase III trial based on what we've learned from PERLA. Thanks.

Operator, Operator

Okay. We're going to go to Jefferies and take our next question from Peter Welford.