Novartis AG (NVS) 2004 Q3 法說會逐字稿

Welcome and thank you for joining the Novartis third quarter 2004 sales and results conference call. (Operator Instructions).

At this time I would like to turn the conference over to Raymond Breu, CFO.

Thank you.

Good afternoon everybody, welcome to the third quarter telephone conference.

I have here on the conference call from Novartis Corporation, Thomas Ebeling the head of Pharmaceuticals, Jörg Reinhardt, the head of Pharmaceutical Development, David Epstein, the head of the specialty business in pharmaceuticals, Paul Costa, the head of the Western Hemisphere pharmaceutical business, Kurt Graves the head of marketing for pharmaceuticals, John Munza (ph) our group treasurer, and Karen Huebscher with the entire investor relations team, and in addition Malcolm Cheaton (ph) our chief accounting officer.

Before I start I would like to ask Karen to read an important message.

The information presented in this conference call contains forward looking statements that involve known and unknown risk, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements.

Please refer to the Company's Form 20F on file with the SEC for a description of some of these factors.

Thank you.

Thank you Karen.

As usual at the beginning of the conference we are going through a short summary of our numbers.

I hope that you have received the slides from us, because you can refer to the slides.

I will start and first talk about the group operating and non-operating performance.

I am starting with Slide No. 5, which is the overview of the nine-month numbers.

You can see that we have achieved strong growth in terms of sales, operating income and net income with clearly double-digit growth rates in US dollars and margin improvements at the operating income and net income levels.

If you go to Slide No. 6 then you see the same key figures and what is very striking is that the growth rate for sales for operating and net income are virtually the same, that you are seeing for the first half of the year or for the nine month numbers, it means that our third quarter really reaffirms the strong performance that we have seen throughout the year so far.

If you move on to Slide No. 7, you will see that growth -- that the sales level is driven by a volume growth of 7 percent and minor additions from price increases and acquisitions of 1 percentage points each.

Moving to Slide No. 8, you can see that both divisions Pharmaceuticals and Consumer Health are contributing to this growth and that they have seen the growth rates for the nine months and the third quarter.

In the case of Consumer Health, the local currency growth is accelerating from, is really 7 percent in the third quarter which is higher than on average for the first nine months.

Pharmaceuticals, a very strong double-digit growth rate of 11 percent in constant currencies, and 15 and 16 percent in Swiss francs.

Slide No. 9, I turn now to operating income.

The operating income growth of 17 percent in US dollars reflects a strong underlying currency corrected growth of 13 percent, which is faster than our constant currency growth at the safe level of 9 percent.

So you see that we have margin improvements coming through here.

On Slide 10, we should mention that the strong operating income growth is driven by pharmaceuticals.

Consumer Health was affected by a number of one-time factors that I will explain later on.

The margins, that's on Slide No. 11, for pharmaceuticals for the nine months have jumped from 27.9 to 29.6 percent, and for the group from 23.6 to 24.2 percent.

On Slide No. 12, you will see that all of our expense categories have grown under-proportionately, that means less fast, than the sales, which would hint to productivity improvements and tight cost control.

Before I pass on to Thomas Ebeling I would like now to say a few words about the Consumer Health Division.

On Slide No. 13, I tried to summarize the key messages here.

The growth is really driven in the division by over-the-counter medicines and medical nutrition.

The generics business faces this year a very tough year, tough because of the comparison with an exceptional prior year and challenging markets in the US and in Germany, in particular.

And then the operating income is affected by one-time charges.

Let's look at the sales, that's on Slide No. 14, you can see that the weaker sales performance of our generics business, which is virtually flat compared to the same period last year -- that the weaker performance is compensated by stronger growth in over-the-counter medicines and medical nutrition and maybe we can add here, infant and baby as well.

Turning to Slide No. 15, we then have the same presentation of the operating income, and here it's now very visible that Sandoz and animal health in the fourth quarter have practically zero operating income, and this is driven by one-time effect in Sandoz.

We have in particular booked a one-time impairment of goodwill and intangibles of $73 million relating to an acquisition that we had made in Germany in 1996, of Oxopharma (ph).

In Animal Health we have booked in the third quarter an $18 million inventory adjustment and then thirdly in Medical Nutrition we have a one-time effect from the integration of the medical nutrition acquisition of the Meade Johnson business that is another $13 million.

If you add all these one-time items together then for the division we have one-time costs of $104 million in the nine months and of $87 million in the third quarter and excluding these one-time costs, the operating income would be up 11 percent in the nine months and 12 percent in the third quarter.

Finally on Slide No. 16, just to sum up Sandoz again I already talked about the tough comparison.

I remind you that in the previous year the AmoxC launch was very successful, and obviously against that base effect of the very high level in 2003, it was difficult to achieve similar rate in 2004.

In addition we have now seen that the competitive environment in the US and in Germany, in particular, has worsened, inasmuch that the price reductions for new launches has become unexpectedly large very early on in the launches, which means that the sales levels and the profitability of the business in these markets is severely impacted.

I have already mentioned that we have booked the impairment for Oxopharma (ph) and I should mention here that currently we are going through various improvements in the evaluation projects in this business and that may in the third quarter lead to additional impairments or could lead to restructuring expenses, we don't know yet what the extent of it will be, but we want to alert you to the fact that here you should expect some one-time expenses in the fourth quarter.

Finally, I should mention that the business unit in generics has completed successfully two acquisitions, Sabex in Canada and Durascan in Denmark.

Then the financials, I am on Slide No. 18 now, you can see that financial income was significantly down, and is compensated by a significant improvement of the results from associated companies.

Let's look at associated companies first.

That's on Slide No. 19.

Our share in the estimated Roche pretax income for the nine months was $272 million, which is almost double of what we had in the same period a year ago, so you have a big improvement here.

The depreciation and amortization of tangibles and goodwill is very regular in its development, and then we had in the first quarter, catch up amounts for differences in estimation versus actual outcome of the previous year.

In 2003 it was a big negative number of $269 million, in 2004 it's a positive of $30 million, so that's again a positive impact.

So overall the pretax income effect of Roche is reversal of a $332 million negative into a $88 million positive.

At the same time, for Chiron where we have similar accounting procedures we have already taken into account partially the revised outlook that Chiron has given for the entire year.

You certainly are aware of the fact that Chiron has experienced manufacturing problems for the flu vaccine in the UK, which essentially led to them being unable to sell an entire season of the flu production with a revised bottom line impact.

We already have estimated the impact on our numbers.

We simply have used their guidance that they have given to the markets as estimate of our share in the remaining income for the full year, and then have taken the nine months share of it.

We estimate that the reduction in our income from Chiron for the full year, compared to what we would have estimated normally is approximately $100 million, and of that $100 million, $24 million we have already recognized in the third quarter and for the fourth quarter we would then recognize the remainder, which means that we are no longer expecting any further income from Chiron in the fourth quarter of this year.

Financial income on Slide No. 20, overall return 3.3 percent, the net financial income $161 million, 59 percent below last year in the same period, and it's really a reflection of the very low yield environment that everybody in the financial markets is experiencing.

With this I would like to hand over to Thomas Ebeling.

Let me start on page 22, with the key messages regarding the year-to-date performance of pharmaceuticals.

We continued double-digit growth ahead of the market.

We see a very positive margin development and Novartis continues to have a highly attractive pipeline.

On page 23 you can see that operating income outgrew with 23 percent top line growth of 16 percent -- top line growth on page 24, based on IMS, we grew ahead of the market.

The market growth year-to-date is only 7 percent.

Consequently we gained market share driven by a very strong performance of our cardiovascular portfolio which is predominately our two hypertension brands, Diovan and Lotrel, and by a continued very dynamic performance of our Oncology division.

Page 25 illustrates the margin improvements and you can see productivity improvements in all key functions, cost of goods, R&D, and marketing and sales, and that leads to an overall operating margin improvement of 1.7 percent points.

If you would go to page 27 you can see that we managed to demonstrate strong dynamic growth in all key regions, especially for Europe and Japan.

You'll have to keep in mind that the market environment, especially pricing is very challenging and Japan had a price cut as of April, so I think our high signature growth performance in regions like Europe and Japan without having major launches is actually a very good performance.

Page 28 you can see that all of our major categories are growing with the exception of transplantation and mature product, but this is driven by the structure of the portfolio.

Most other categories are really growing very dynamically, almost all of them double-digit.

Page 29, only two brands of our top ten brands are declining.

Seven brands show very dynamic double-digit growth.

On page 30, you can see the IMS performance of our key hypertension brands, you can see that the Diovan group and Lotrel are the fastest growing top anti-hypertensives in the IMS top 16 countries.

Page 31 illustrates that the through the approval of the chronic idiopathic constipation in the patient for Zelnorm, we added a significant patient potential and since the first week, since approval, we saw already a serious uptake of 16 percent increase.

Regarding Xolair, this brand is progressing well.

Almost 60 percent of targeted physicians are prescribing Xolair, and 90 percent of the patients are really pleased with the results, and 85 percent of patients get reimbursement, so this is going the right direction.

Page 33 you can see that we made significant improvement regarding value market share gains for Elidel in key market.

You can see here the top global markets we have, and in some markets like US we have already a value share of 30 percent, markets like Austria 20 percent, so we are pleased with the market share and the progress Elidel has made.

Our key Oncology brands are continuing to perform well.

We have created more data for Gleevec to show the advantage of treatment with higher dosages.

Zometa, despite some challenges is expected to become a blockbuster in 2004, and Femara has seen tremendous [year X] growth post CMA 17 data.

Our pipeline is very strong and continues to get strong recognition by third parties.

Our major projects are on track and our key performance indicators are signaling us that our development team has a very high productivity.

Page 36 summarizing the key approvals and submission for Q3, I think you should be aware of all of them.

Page 37 showing the most important data we have created in Q3, especially the Xenon data, they are very strong regarding the efficacy and repeated use for patients with CIBS.

You are familiar with the target study so we produced for some key brands some pretty good data.

We continue to improve our pipeline with licensing and agreements.

We had two very early stage deals in quarter three, the compound from Xenon which represents another target in obesity, diabetes and (indecipherable), and we concluded an agreement with Emisphere for the oral treatment (indecipherable) in pediatrics.

Consequently, on page 39, you can see that we have a full pipeline, and this gives you the latest updates.

With this I would like to hand back to Raymond Breu regarding the outlook.

On Slide 41, we summarized the outlook for 2004.

You will notice that it has not changed so we expect strong business expansion, high single digit sales growth in constant currencies for the group, and high single digit to low double digit for pharmaceuticals.

Operating business will continue to be the key driver for net income growth, and we expect for operating income and net income markedly higher numbers obviously barring unforeseen events.

Finally on page 42 we would like to remind you of the upcoming planned event.

As you will have noticed we have shifted our next update from the 30th of November to the 20th of January next year so that it will coincide with our full year results conference.

The reasons for this were twofold.

First we had noticed a collision with Pfizer on the dates, secondly we wanted to make the communication very timely so throughout the year we will have several events so that the new information and data would always be very up-to-date.

On the 3rd of May we plan the pharmaceuticals research day in Boston and on the 20th of September another pipeline update, this time in London.

With this I would like to open up the question and answer session and hand over to the conference call operator.

(OPERATOR INSTRUCTIONS).

Mark Clag (ph), Deutsche Bank.

Good afternoon, or good evening.

A couple of questions, firstly on slide 26, where you show the quarterly value growth against the market.

For quarters one and two, the IMS numbers very closely track what you reported.

For quarter three, for July and August, it's coming with only 7 percent growth for Novartis.

Question then is, did you have an absolutely barnstorming September, or is there something funny about your Q3 numbers, for example, is there stocking up in the US that's inflating the current sales growth.

That's the first question.

Second question is for Thomas or Jörg, on the pipeline, if I look at the planned filings on slide 39, several compounds in the (tensor area) have slipped, for example, PK3, SOM230 and also two earlier stage products LAQ and XAA have disappeared altogether.

So I wonder if you could give some, in the absence of an upcoming R&D day, give us a little update on what's happening with oncology pipeline.

And the third question is the obvious one, have you had any discussion with the FDA regarding any additional data (requirements) for Prexige post Vioxx, thank you.

Thanks.

Let me take the first question.

There are basically three components.

Number one is September.

Number two is that the IMS data here are reflecting only the 16 countries and this is a guess which is 1.5 percent (clagmore) and then there is a little bit of inventory in the US which was driven by two factors, we had a system change to SAP, which forced us to have a little bit more stocks available and shipped in order to avoid out-of-stocks.

And there were a little bit of speculative buying from wholesalers around Diovan.

But otherwise-so that's why these 7 percent are a little bit too low.

And can be explained again by the gap, because here are only 16 countries and normally that represents more than 1.5 percent.

Okay, I can take the other two questions.

Let's start with (indiscernible).

No, we have not had clear guidance from the FDA as to what new, if any studies they would expect us to do.

As we had told you earlier, we have submitted the target study a few months ago.

The FDA is currently looking at that file.

They have not completed their review.

We get additional questions regarding target which we are currently answering, so we are in an active discussion with the FDA.

But we have no clear guidance as to what potential additional data they would like to see from a cardiovascular perspective.

However, as you saw, we have shifted the filing date for Prexige from 2006 into 2007.

We believe it's prudent at the moment to expect that further cardiovascular data may be requested, and this shift would reflect an additional two-year trial.

Obviously if the trial has to be longer than two years we would have to look at the timelines again.

But 2007 would reflect additional data from a two-year trial.

But again, that's an assumption at the moment, it has not been agreed upon with the FDA, and needs to be confirmed.

We expect to have some more detailed discussion with the FDA once they have completed their review of the target data.

That's probably going to be early next year.

Regarding the pipeline, yes, obviously Prexige has shifted, LAQ has been terminated, that's a Phase I project in oncology that was terminated in the meantime.

There is no other delay in the pipeline.

I think we have, earlier this year, indicated that SOM may shift from 2005 into 2006, but other than that, there are currently no expected delays as compared to what we have discussed earlier.

John Moffy (ph), Goldman, Sachs.

Thanks very much.

Raymond, a couple of questions for you, firstly.

You were talking about the Sandoz business and talking about the potential for impairment and restructuring.

I just wondered if everything is up for discussion.

Does that include the strategy of that business longer term, and should we read anything into the fact that in the press release today there's a new head of that business?

Second, in the Other Operating Expense, I think, $195 million in the third quarter, is there any major charge within that at all that would be of interest.

Okay, let me start with the questions about the Sandoz impairment.

Obviously you're seeing that we have appointed a new head for the Sandoz business.

That is a reflection of our assessment that we think that the times are changing.

Over the last years, Christian Siewald has successfully grown the business to a number two position worldwide and he has done a number of acquisitions and integrated them well.

We now feel that going forward that the key competencies will be more in the manufacturing and development area.

And the new appointee, Andreas Orfanos obviously has very successful track records and experience in these two areas.

So in my assessment it's not a shift in strategy, it's more a recognition that sometimes you have to pick [causes for causes] so if times are changing you have to bring in the appropriate management.

Obviously the market environment is much more difficult in the US and in Germany, and that forces us to look at all our intangible and good will assets in those countries, and make sure that they are not impaired.

We have already recognized $73 million in the third quarter, and we are now, as we would have done normally in the fourth quarter, reviewing all the assets.

Could be that we have further impairments, could be that there are no further impairments, we don't know yet.

At the same time we are looking at various business systems, and setup, and evaluating whether we have to restructure or organize it differently.

And usually that would lead to one-time restructuring expenses that again, in all likelihood would have to be recognized in the fourth quarter.

I'm not expecting very large numbers.

If I would have to give you guidance I would rather talk about double-digit numbers.

But we really have no vector of indication of value at the moment.

Then you asked about the $195 million in operating expense.

John could you help me there, to what number?

Are you looking at the third quarter-

Yes, the third quarter, I'm just looking at Other Operating Expense of $195 million.

Okay, that's very much in line with the third quarter, 2003.

Obviously in there you have the impairment of Sandoz, in Germany, of $73 million, in there you have the $18 million inventory write-down in Animal Health.

So those are the two biggest items.

That's great, thanks very much Raymond.

Tim Anderson (ph), Prudential.

A couple of questions, a broad one and then a product specific one.

The broad one first, which is that, at least thus far in the pharma earnings season it seems like cost management in response to a shrinking top line is a very common theme.

But if I look at Novartis it seems like you guys are still very much forging ahead with getting bigger and stronger, and is that the sort of thing that will likely continue at the same pace as long as your top line outperforms, or could you, too, reassess the landscape and look at things a little bit differently seeing as your competitors are, for example, downsizing a bit.

I'm trying to figure out if you look at this sort of thing is absolute terms or in relative terms.

And then on PTK787 if you have good progression free survival data coming out of Confirm 1 (ph), would that be enough to file on and potentially get you filed for that product earlier than what you currently guide for?

In terms of your first question, obviously all of our marketing investments are really related to top line response, and so you cannot disconnect this.

And to give you and answer, in terms of share (indiscernible) we very much look into relative terms of our investments, so if competition would dramatically downsize I think we would certainly still try to keep a superior share of (indiscernible).

But there are some investments that you cannot take a relative look like the investment for a DTC campaign, for example in the US, you have to invest a certain amount in order to be effective.

But for most, especially our (indiscernible) related investment, you would rather take a relative look and not an absolute look.

Regarding PTK787, we would plan to file, assuming robust progression free survival advantage on Confirm 1 (ph).

We're expecting to have that data as previously communicated in the second quarter of 2005, which should allow us to file in the second half of the year.

Claudio Verder (ph), Toburg (ph).

Good evening.

I would like to know why Zometa is going down in gross sales to minus 4 percent in the United States in the last quarter alone.

Zometa has been competing in a very difficult environment in the United States this year primarily due to Medicare reform.

There have also been some issues around the perception of safety for the few cases of osteonecrosis of the jaws.

The main changes are due to changes in inventory.

There's roughly a 0.2 month drop versus the second quarter of this year and a 0.3 drop in inventory versus Q3 of 2003.

So the product continues to grow, albeit at a slower rate than historically.

Alexandra Hauber, Bear, Stearns.

Good afternoon.

Alexandra Hauber from Bear, Stearns.

Raymond, a question I didn't get to ask at the second quarter, is really, nine months into the year, can you just tell us what went so much better than what you were guiding last year?

Do you have (such leverability) on your margin development, or did you actually change the way you run your business?

The only thing I can figure out is that you actually have 11 percent local currency growth (ph) year-to-date compared to the 9-10 percent you were guiding on earlier in the year.

Does that make all the change that you that much margin improvement, that little ahead of schedule top line gross.

That's question number one.

And then just a question on [SPP100] and I may have missed that.

You're saying in the press release that we're soon expecting Phase 3 data for the [SPP100] Diovan combination.

And I think last year you said the Phase 2(b) date, the trial was run earlier this year and have results in the third quarter.

Now do you run this in parallel, or have you dropped the Phase 2(b) for the combination?

Let me then start.

Alexandra, why are we doing better than we initially anticipated.

A couple of reasons.

The top line growth in pharmaceuticals is very strong, stronger than we anticipated.

Second reason, the product mix is beneficial, very clearly if you have product like Gleevec and Diovan who have strong growth rates and are very large, that has a beneficial impact on product mix.

And the size of the impact has been underestimated a bit by us.

Thirdly, we have done exceedingly well in pharmaceuticals this year in terms of managing the functional costs, the operating expenses, in particular in G&A, or in cost of goods in manufacturing.

So those are the main reasons.

So basically, it is, if it's mostly the top line gross, is it really-you're that sensitive that the incremental (inaudible) percent gross is-

No, I mentioned the three elements, and you really have to look at the product mix impact and you have to look at the margin improvements that we have achieved in cost of goods, and in the other areas.

It's all of those elements together.

Well, then of course I'm going to ask you, can you break out the elements in roughly of the proportion, and isn't argument one and two one and the same thing.

Because the top line is stronger, but mostly because of those two products.

I think that's the best that I can do is, well, for cost of goods I can tell you from the 0.9 percent margin improvement, half of it is mix and volume and half of it is true productivity improvement. (So that's an example) but it's really mix and-

(Something) regarding SPP100, there might be some confusion here.

It's the same trial we are talking about.

Obviously we have several ongoing trials that are being run in parallel, but the trial that will come up with data towards the end of the year, and that's what we always said, is this trial that looks at the combination of Diovan and monotherapy with SPP and that's the Phase 3 trial.

Okay, so that was not a Phase 2(b).

No.

Okay.

Thank you.

Stuart Atkins (ph), Lehman Brothers.

Yes, good evening everyone.

My question concerns Certican and the future of the transplantation market.

My understanding is that Certican has been, I won't use the technical terms, but let's say rejected twice by the FDA.

What is the status of this today, and is this not really the stock horse that allows you to grow in its entirety the transplant marketplace through Myfortic plus Certican plus Neoral which then leads you into FDY720 and if Certican doesn't make it, does everything else fall over like a pack of cards?

Maybe I can take the regulatory question and David takes the market question.

Regarding regulatory, it's not really the terms, it was not rejected, it was twice approvable.

This is something different.

It's correct nevertheless that we are still in discussions with the FDA as to what further data regarding that file they want to see.

And at the moment we cannot exclude that we would have to create new clinical data to have the FDA agreeable to an approval of this product.

We are in discussions with the FDA, there is no clear plan yet as to what exactly will have to be generated in terms of new data, but we expect that that should be clarified within the next 3-4 months.

We've launched Certican now in Germany, Austria, Portugal, Greece and a few other countries.

True we would like to launch it in the US, and I believe eventually that will happen.

The product is not absolutely pivotal to our transplant strategy, in effect, it's projected to be one of the smaller products in the portfolio.

So I don't think it changes the dynamic for us in transplantation.

Jo Walton (ph), Lehman Brothers.

Sorry, two people from Lehman here.

Could you tell us a little bit more about your patient assistance program with Gleevec.

Your commercial sales seem to be reaching a plateau.

Are you actually seeing more and more patients taking this, but coming up against, sort of lifetime cost limits.

And I'd just like a more general conversation from you as well if you could about how you see cancer drug pricing.

And a little bit more, has Zometa got some reimbursement issues in addition to the side effect problems that you talked about.

And could you also just give us some more background on your market share for Diovan.

Although you've shown growth in that franchise, if we look at the IMS data recently, it would look as if you've reached a plateau.

Could you tell us how you anticipate growing that again, and update us on the Healthy BP campaign.

I'll start with Gleevec, you're right, we have a large number of patients currently 9400 patients on our Gleevec patient assistance program, as we committed to try to make this drug as readily available as possible.

Despite that large number of patients in our program, Gleevec continues to grow very dynamically, and we would expect a sales potential for CML Ingest (ph), should be in the order of magnitude of about $2 billion.

Future growth beyond that will come hopefully from new indications.

Regarding Zometa, the reimbursement challenge is not Zometa specific but for all IV injectibles in the US market, which is changing in 2005 to an average selling price plus 6 percent model.

We think that will actually help this product because the outside profits that oncologists were making on generic (permidinate) will go away starting next year which should allow us to regain some market share.

This is (Kurt Graves) with regards to your question on Diovan, market share worldwide continues to do well for the product, obviously it's the leading R. The US marketplace right now, we just moved up to 38.3 percent in the latest monthly prescription data, and for the first time achieved an all time high of 9 percent in the broader age-wide category, and I think when you look at the growth of this product, whether it's in the US or on a global basis, while we definitely want to, and intend to continue to grow share in the R category we also have to look at the growth of Diovan in the broader age-wide category and the underlying growth rate of the R class as a whole, which is very dynamic at 18 percent.

Predicted to be one of the fastest growing classes of pharmaceuticals over the 5 years.

So that's the story on market share.

In terms of the Take Action program, what I might do is hand over to Paul Costa in the US so he can update you on progress for that program.

Yes, I'll talk about Take Action for Health, BP.

The campaign had two components to it, a professional campaign and a DTC campaign.

The professional campaign has been very successful.

We have had, year-to-date, over 130,000 patients sign up for the campaign and actually got prescriptions through the Take Action for Health, BP.

And we say a clear uplift pre-launch of the campaign and after the launch of the campaign in terms of prescription volume, so it had its intended effect.

The DTC campaign, one, we didn't see as much of a response as we had expected and then there were some issues with (DD Mac), the (DD Mac) asked us to revisit and remove some of the elements of our DTC commercial, and we decided that at point that it didn't make sense for us to continue the DTC campaign.

We are going to be looking at other alternatives to reach out directly to consumers and we will be testing a couple of things early next year.

But the professional campaign has been successful and we plan to continue to leverage that through partnerships and expand the scope of the campaign.

To date there have been 40,000 physicians that have signed up patients on it.

Carlheinz Coh (ph), Lombardo Diedre Hench (ph).

Good evening gentlemen.

I've got three questions if I may.

On Prexige, firstly, could you give us an update on the MRP process in Europe.

And have you had any indications of any countries to opt out of the process, and possibly, could you comment on one of the recent statements in one of the local newspapers that you have long-term studies, how long are these studies, how helpful are they in backing the CBD (ph) safety profile of the product.

Then, on Xolair, could you just remind us in which aspects does the expected label-you differ from the label you have for the product in the US.

And lastly, on Lotrel, the RX market share in the US seems to be leveling off, Norvasc seems to be regaining some ground also in Q3, were there any stocking effects that impacted on the sales number.

Let me take these questions.

The MRP process has started several weeks ago and it's at least at the moment running according to schedule.

We have not yet had any specific official country feedback, and there is no indication as of today that any of the countries would opt out.

However, as you may know, there is actually ongoing, while we speak, there is a CHMP meeting where they look at safety of Cox IIs as a class, and I think it can be expected that maybe in general review of the Cox IIs will be decided at that CHMP meeting, which may then lead to, probably to an overall delay of the MRP program as well.

Whether it's going to be 3 months or 4 months of whatever, remains to be seen.

We currently do not have long-term studies that go beyond the 12 month target data, I'm not sure where this statement comes from.

All the long-term data that we have in a controlled [section] are based on the target study.

Regarding Xolair, well it's a bit premature to talk about label in Europe, we would hope that the label that we get in Europe is not dramatically different from what we have in the US, but it remains to be seen.

As you know the file has been submitted, we expect our first feedback from the process in the next few months.

In terms of Lotrel, I don't see, really, this leveling off in terms of market share of our performance.

We are gaining in terms of quarter-over-quarter growth.

It's actually very dynamic in the twenties, but Paul, do you want to comment more specifically?

Sure.

Our growth rate in the last 3 months in TRXs was 14.3 percent, and we did have inventory fluctuations.

We put in a price increase in the second quarter, so there was an inventory drawdown that impacted the quarter 3 results by about 11 percentage points.

When I look at the market share versus Norvasc I actually see a small increase versus Norvasc.

We don't-that's not our major-we track our performance versus the broad [haberdensha] market where we have drawn from 4.5-4.6 percent.

But when I look at directly against Norvasc, if I look just in the last 20 weeks or so we have gained a little bit of market share.

So, I don't really see that Norvasc dynamic that you indicated.

Mark Philbrand (ph), Cheveraux (ph).

Good afternoon, thanks for taking the question.

A question on Myfortik very simple, what's the sales you have been posting during the last two quarters.

Second question is on the (sales force) in the AT2 markets, do you expect any impacts from the Vioxx disaster, meaning that market is likely to shift some of their marketing resources to Kozar Hizar (ph).

Do you see any indications of that, and what is your likely response?

And then on generics, I remember Dr. Breu, you've always given guidance of 16 percent for longer term margins of that division.

Now given the trouble in Germany and possibly also additional countries where we have relatively high reference prices, would you stick to that long-term, or let's say base case guidance for generics?

Thanks.

We'll start with Myfortik, we typically don't report sales for the smaller brands, but just to give you an idea, the sales are still quite small, we've done $12 million for the first 9 months of this year.

To remind you, transplant drugs start very small, develop--a very long uptake curve, and then they're sustainable for quite some time.

In this case we are actually slightly ahead of the similar uptake of Rapimmune (ph) in the same time period.

With regard to the second question on [share a voice] related to Merck, we, of course it's hard to predict what Merck is going to do on this, and we're watching the scenarios very closely.

Obviously with Vioxx going away they have extra rep capacity at this point in time.

But whether it will go on a product like Kozar Hizar (ph) or to Mytorin (ph) or [singulaire] is really I think more the question because those two brands probably have more potential for that company than Kozar Hizar (ph).

Regarding the question on the expected average or target operating margins of generics, you know, if you exclude in the third quarter the one-time impact from the impairment, then the operating margin was 10.7 percent.

This is obviously below the 15 percent that we have mentioned in the past.

I think the development depends on two key factors, one is market dynamics in the large markets.

This is not a new phenomenon that you have cyclical developments here.

If I remember correctly you had a similar downturn in the late 90s and in the early 90s, and usually the market after a while has bounced back to normal behavior or profitability levels.

The same factor that you really have to monitor very carefully is the pipeline of new launches.

So development efforts that can focus on generics and generic (blocks) that have additional benefits in terms of delivery, can be very important for the overall profitability.

Our guidance, or our target is that obviously we would like to achieve in the longer term over an average of these (items)] around 15 percent, but we have seen that the volatility can be fairly high.

Has the volatility surprised us?

No.

I remember that I've warned several times about this, and said please keep this in mind.

What is clear is that the current downturn in the two markets is (vicious).

Ben Yale (ph) AB & Emery (ph).

Hello, it's Ben Yale and AB & Emery.

Two questions if I may.

One on our sales force and one on Zometa.

Just on your sales force, some of your competitors have indicated a scale back of some of their sales force, and (increasing drive for efficiency).

I was wondering in the near to mid-term is your sales force more likely to decrease or increase, or simply stay the same.

And could a decrease actually be beneficial for margins, while not really impacting your sales.

Secondly on Zometa, we know it's been a difficult reimbursement environment in the US this year, how certain are you that will pick up in the US when that changes, and what do you think the impact on gross was in 2004.

So what sort of uplift basically could we get in '05 from the reimbursement getting better?

(inaudible) sales force related, and here our objective is to have higher productivity than other competitors regarding the share, (whole) share of market share ratio.

But especially in highly competitive segments like cardiovascular I think we need to really have a strong sales force.

In terms of size of sales force currently our plans are not yet finalized and one reason is we are launching a couple of new products where we have to build selectively sales forces for specialty segments.

For example if you would launch a product like Enablex which would require to call on urologists, then obviously we would consider to build a urology sales force in selected countries.

Then in terms of oncology if we get, you know, positive data for Femara we might expand our sales force there.

But overall I agree with you, the competition is scaling down, and so if we might scale down, we would certainly take a re-look would analyze but we do a very thoughtful analysis by brand, by market.

If our sales force investment makes sense or not.

If we would believe it would be economically more profitable to reduce the sales force we would do it.

If we would believe it would be beneficial to increase sales force we would do it as well.

For the time being you don't have to expect dramatic changes on our side.

Great.

Would you be disappointed if you weren't to get further efficiencies going into 2005?

I know this year you've been slightly surprised perhaps, by how efficient you have managed to be?

Again, obviously I would be very disappointed if we would not get more efficiencies for the brands we have already established in the markets, but we have to obviously take into consideration the mix of your portfolio and if you have new product launches and the marketing investment obviously, this is then offsetting some of the efficiency gains we have for some other brands.

So I judge efficiency gains on a brand by brand level, and we measure, you know, there is one of your colleagues, I guess it was Lehman, has established some curves for (our eyes) by brand, by year, and he reassured we are benchmarking all of our brands against the toughest (vendors).

Regarding Zometa there are actually multiple factors to be considered.

So this year we see increased penetration of the [disphosphonate] market, having reached as much as 85 percent of the breast and myeloma segment, which is slowing the market.

In addition Medicare reform has slowed the market.

On the other hand, we've continued to grow the brand as we have penetrated metastases of these solid tumors such as prostate and lung cancer.

Looking forward to next year we would expect new competition in this market, and in addition the change to (ASP Plus 6).

I think when you put it all together we would expect that the brand's overall growth will continue to slow, albeit it should be able to grow at least in line with our overall pharmaceutical business.

If you ask me about how certain I am, for this brand I would say I'm less certain than with some of the others, simply because there are so many shifting dynamics.

Beatikit Couroff (ph), Banks and Oppenheim (ph).

Good afternoon.

I have a couple of financial questions first.

Could you tell us, (indiscernible) improvement that we've seen for OTC and for CIBAVision are sustainable, also for 2005.

And margins in (pharma), I think has already been mentioned that there were productivity improvements, and on cost of goods sold and on G&A.

I would guess that these are sustainable.

What is your guidance with regard to the R&D development in percentage of sales for 2005?

And lastly, two product questions.

It was mentioned that both Lotrel and Diovan slowed down because inventories were downsized, is that a process that will continue in Q4, or has that already finished.

Thank you Ms. Couroff.

First the question on OTC, and CIBAVision, in our assessment these margin improvements should be sustainable.

In OTC it's driven by the strong growth of the strategic brands, and as long as those brands will continue to grow at these rates, the margin should be sustainable.

In CIBAVision it was related to our restructuring.

We have discontinued two loss making businesses in that business unit, refractive surgery and the research effort in diagnostic lenses. (In total) the discontinuation of those two ventures, the margin has rebounded very strongly and should be sustainable too.

Thomas do you want to comment?

In terms of the margin sustainability, we expect that the margin improvement and cost of goods are clearly sustainable.

In terms of R&D investments, clearly our guidance was always that they should grow more or less in line with top line growth, and that is the (our) position going forward.

In terms of inventory, I think the best guideline I can give to you is that we expect for year-end a similar inventory level as we had last year at year-end.

Andrew Fellows (ph), Iktay.

Hi there.

I guess my question if for Raymond really, it's on the bottom of page 3, it's (indiscernible) the fourth quarter, and this can be higher you say than the fourth quarter last year.

And that was the highest quarter of 2003.

Are you talking about absolute numbers, especially the sales numbers, or are you just kind of wanting us to be cautious and-

Andrew, when you started we all here had difficulty understanding you.

Could you just repeat to what you are referring to?

Yes, in the press release, you say about operating expenses in Q4, being substantially higher, or significantly higher than Q4 in 2003.

In marketing and sales and R&D.

And those items in 2003, Q4, were the highest of that year.

Are you referring to absolute numbers or are you referring to the (percentage) of sales that those numbers were, but we're talking of, basically $1.1 billion in R&D in Q4 last year, and close to $2.2 (billion) in marketing and selling.

Yes, we were referring to the growth rate for these areas of the relative numbers compared to the sales.

We simply wanted to signal here that we expect that development expenses in the fourth quarter could grow faster than sales.

We need to relate it to new Phases 3 studies that are starting up now.

Sebastian Bethdal (ph) Exant (ph).

Yes, hello.

Two quick questions, the first one is when should we get some Phase 3 results for XTY720 and the second one is what is the average daily dose that patients are using with Greevec right now?

Regarding, this is David, regarding FTY we will see the Phase 3 results at the end of 2005, and the Greevec dose, I'm going to actually just look up for you, give me a second.

The average dose in the chronic setting is 400, of (cmls), 429 milligrams, it's 614 milligrams in the accelerated phase, and a little over 700 milligrams in the blast phase.

Could we then have the last question please because we are approaching the end of the allotted time here.

Eddie Glibbetygoh (ph), Raymond James.

Yes, good evening.

Two questions please.

First one on Neoral which will be around $1 billion this year, but which was ex-US, sales are (indiscernible) 80 percent.

Could you remind us what's the status in terms of (patents) coverage for Neoral outside of the US and what we should focus on for the 2 or 3 coming years?

And the second question is related to the tax rates, it's always amazing to see financial income going down, US exposure going up and tax rates remaining at 17 percent.

Could you really say that there is not any sensitivity of your tax rate to profit mix and that there won't ever be in the let's say, 2 or 3 coming years?

Let me start with the tax question first.

You have seen that our tax rate is around the 17 percentage points at the moment.

This is not related to the mix of the profits between operating and non-operating profits.

That has been asked a umber of times.

It's really related to the fact, how we operate our operating business, how it is set up and how the business systems are organized.

Since we have implemented these systems since a very long time ago, and since we have been audited regularly on all these items, we feel quite comfortable that for the foreseeable future the tax rate can be expected to stay in this range approximately.

You know, it could be a bit higher, but we do not expect that it suddenly will jump up quite a bit, at the same time we do not expect that it would go further down.

But obviously there is no guarantee that it will stay at this level forever.

All I'm saying is that as far as we can see, we see no major changes in the tax rate.

Thomas?

The Neoral question.

I'd be happy to take it Raymond.

So there are generics available for Neoral in most major markets in the world, despite that the brand is declining at a high single digit rate in part because we continue to promote the benefits of this medicine.

You have to remember it's a (narrow) therapeutic index drug.

You should expect more of the same in terms of declines for next year, probably high single digit to low double-digit.

Thank you David.

We have come to the end of this teleconference call, I would like to thank you for your attendance and your interest.

We all look forward to seeing you at the January 20th full year results, and pipeline update conference next year.

Good evening.

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