Novartis AG (NVS) 2006 Q1 法說會逐字稿

Good afternoon.

Welcome and thank you for joining Novartis first-quarter 2006 sales and results conference call.

As a reminder, all participants are in listen-only mode and the conference is being recorded.

After the presentation, there will be an opportunity for you to ask a question. (OPERATOR INSTRUCTIONS)

At this time I would like to turn the conference over to Mr. Raymund Breu.

Please go ahead, Sir.

Thank you.

Good afternoon and good morning.

I welcome you to the first-quarter Novartis conference call.

With me on the call we have from the Novartis management three division heads -- Thomas Ebeling for Pharma;

Andreas Rummelt for Generics; and Jorg Reinhardt for Vaccines and Diagnostics.

In addition we have from Pharmaceuticals, David Epstein, the Head of the Oncology and Specialty business.

And then we have James Shannon, the Head of Development and Alex Gorsky, the Head of our North American business and Kurt Graves, the head of Global Marketing.

In addition, we have a number of financial people here, the CFOs of the various divisions, and the entire investor relations team.

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

Thank you very much.

This is actually the last time I'm reading this message to the audience, as I'm moving on into another role.

I am moving into the Vaccines and Diagnostics organization.

I'll be heading up the BD&L efforts there.

So, the Safe Harbor statement is the information presented in this conference call contains forward-looking statements that involve known and unknown risks, 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 20-F on file with the SEC for a description of some of these factors.

Thank you.

Thank you, Karen.

As you have heard, Karen is moving on into operations, into the Vaccines and Diagnostics business to help BD&L.

We will obviously miss her greatly; she has led the investor relations team for more than five years very successfully, but I think it's the best reward that she now moves on to an even better position.

We will announce her replacement shortly.

But at interim Jean-Jacques [Charon], the Head of Global Businesses & Analysis, will be covering investor relations for the entire team.

Let's now come to the short summary of the numbers.

We are referring to the slides that you should have received.

I'm starting with the group overlook, and I move directly to slide number 5.

As you have seen the, group has increased sales in dollars by 13% and in local currencies by 17%.

Operating income went up 31%, net income 32%, earnings per share 32% as well.

And obviously the margins at the operating income and net income level both were increased significantly, and we will later on comment on the main reasons for this very strong growth and for the margin improvements.

Moving to slide number 6, you can see that currencies in this quarter had a relatively large impact on the numbers.

U.S. dollar growth at the sales level of 13%, currency corrected, would really be 17%, so 4 percentage points of growth was lost in the currency translation.

The growth in local currency is equally split between volume and price and acquisition impact.

On slide 7, we indicate that the currency impact at the operating income level was more balanced, as transactional gains contributing 6% were more or less offset by translational losses of 8%, so that the U.S. dollar operating income growth of 31% translates into a currency corrected operating income growth of 33%.

On slide 8, you see that the growth rates for sales in all the divisions are very strong.

In pharma -- and I am always referring now to the local currency numbers -- in pharma 9%, in Sandoz 88%, obviously driven by acquisitions; excluding acquisitions the growth rate will be 9%.

Consumer health 7%, and for the group 17%.

Operating income growth on the next slide, for the group 31%, for pharma 19%, for Sandoz 116%.

If we take out in Sandoz the acquisition impact, the operating income growth would be 14%.

And in consumer health, the growth is 60%, and excluding onetime items, we still have a high growth rate of 18%.

Very important to realize is that for that group, if you take out the onetime income from the sale of Nutrition & Sante nutrition business, which generated 129 million pretax, then the group operating income growth would still be 29%.

And apart from this onetime income from this divestiture, we have no other big exceptional items at the group level that we would have to mention here.

Operating margins on slide 10 go up in all three divisions -- in Pharma from 28.5 to 32.2%; in Sandoz from 13.7% to 16.6%; in Consumer Health from 16.4% to 25.2%.

And then in the group we have the increase from 22.9% by 26.5%, so almost 4 percentage points.

On slide 11, we give the main axis.

COGS was a negative on the margin related to two elements.

One is increases in Other payments that are now shown on the cost of goods, in particular higher royalty payments or recall payments for the Foradil Certihaler, or lens care supply issues in Consumer Health.

And then, obviously, another important item is the mix, as now the generics business accounts for a relatively larger share of the overall business.

We have positive effects on marketing and selling, 3 percentage points, as we have reduced launch investments in the first quarter and productivity improvements.

R&D, positive contribution of 1.1%, as late last year or in the second half of last year we have completed a number of large Phase III trials and a further increase in development is only expected in the second half of this year.

G&A, a positive contribution of 0.5 percentage point, reflecting mostly productivity improvements in synergies at Sandoz.

Other income and expense, again a 0.6 percentage point positive contribution coming from the onetime gain of the divestiture in Consumer Health.

I'm moving to slide 12.

For the non-operating -- operating income items, the result from associated companies was up sharply 215%, to 104 million, resulting from Roche and from Chiron now for the last time.

In both cases, apart from the share in the normal net income of these companies, we have catch-up items as we had underestimated their profitability in the fourth quarter of 2005.

Financial income stood at 50 million, up 11%.

This is a very strong performance considering the fact that average net liquidity was down 55% as a result of the acquisitions.

The return on net liquidity in the quarter was 6.3% compared to 2.4% in the quarter a year ago.

The details here can be seen from slide 70 and 71 in the pack.

Then I move to slide 13, cash flow.

Strong development, cash flow up 41%, cash flow from operating activities up 68%, and free cash flow even turning from negative to positive.

You'll remember that this is free cash flow after dividend payments, and we always have in the first quarter a big amount for dividends, and it is now the first time that the free cash flow in the first quarter after dividend is already a positive 373 million compared to a negative 269 million in the quarter a year ago.

With this, I hand over to Thomas Ebeling for (technical difficulty).

Pharmaceuticals had a reasonable Quarter 1, with high single digit sales growth ahead of market, strong performance of major in-market brands, improved operating income margin and continuation of exciting pipeline news.

On page 16 you can see the 9% growth in local currency, which results in a market share gain, with a return on sales of 32.2, which would be, if you would exclude the divestment income, 30.5%.

Page 17 details the cause of change of the operating income levels last year.

As Raymond said, we had growth in research & development, a relative high cost base in 2005.

Marketing base was as well high in 2005, and we will increase marketing investments in the U.S. the second half.

And we had a favorable -- there was impact of the pipeline rebate, the content change we did in Quarter 1 2005.

Overall, we believe the underlying margin of 30.5% is a solid number going forward.

We continue to grow ahead of the market, with almost 8% growth compared to market growth of 5%, which is relatively robust since the last three quarters.

And this is pretty much in line with our guidance of mid to high single digit growth.

Regarding the regions, we are very pleased with the performance in the U.S., in Latin America and in the emerging growth markets.

Japan is growing only by 1%, which was partly driven by destocking at wholesale level, which took place ahead of the price reduction which we start as of April 1st.

In Europe, the two markets which were diluting growth were Germany and France, that you saw both forward buying of patients and wholesalers at the end of last year.

Our key franchises continue to grow very dynamically; cardiovascular, oncology, neuroscience and infectious disease is very dynamic, double-digit growth rate.

On page 21, our top 10 products performed very well.

Very dynamic growth of our four most important products and only one out of the top 10 products is not growing.

We are extremely pleased that Diovan continues to extend its global leadership position by growing market share by 0.4 percent points to 30 on a global base, driven by the U.S., a little bit supported by Europe, and a bit offset by Japan because of more intensified competition in the first quarter.

In the U.S., our TRx share growth is now -- we have market share of 38.1, which was a growth of a 0.5 percentage point of market share.

And even more impressive is our value share growth, which is 1.4%, and now reaching 39.3.

We are pleased with the TRx growth of 9.2%, especially when you compare it to last quarter in 2005 -- that was around 5%; this is a substantial acceleration of dynamic.

You can see here all the effects which have contributed to the growth.

I should add that pricing helped us as well regarding the value share improvement.

On page 24 you can see the market share improvement in patients new to the brand, where in the last three months we continued to gain significant new market share, which was driven by the initiatives which are shown on page 25.

I think on the last half of 2005, we started a lot of competitive and innovative new initiatives aimed at physicians and patients to further extend our leadership in the ARB segment.

Another brand which is doing extremely well in the U.S. is Zelnorm, where we continue to grow dynamically, supported by DTC campaigns, which we repeatedly do.

Xolair is performing well in the U.S., and we have started to roll out Xolair in Europe.

And the intention to prescribe of physicians is relatively high, but as you know in Europe, we have to wait until we have reimbursement to see stronger sales growth.

But for the time being, the willingness of physicians to prescribe our product is high.

Prexige is a nice surprise in Brazil.

You should not read too much in the successful launch of one product in one country.

But nevertheless, having already a higher market share than Celebrex in Brazil gives us hope for launches in other markets.

Page 29, you can see here our CNS brands, and Enablex doing very well.

The brand which is a little bit concerning is Elidel, where we have clearly seen an impact of the change of the label in the U.S.; a spillover effect as well into Europe.

So we have to see how the brand will do in the next 12 months to see and determine the future potential.

Our oncology portfolio continues to perform very well.

Glivec had a sales growth of 18%, and we've submitted in smaller and more rare diseases.

Zometa continued to grow positively, and we received a patent extension to 2012 in the U.S.

Femara, 33% growth and continued market share gains, so that is in line with our expectations.

And Exjade had a very strong launch in the U.S.

Despite our very strong penetration of patient segments with Glivec, we believe that the brand has still very good potential to grow, based on new indications, dose optimization and extended survival, obviously a little bit offset by new competitors entering the market in the second half of 2006.

You can see here the first insights about the Exjade launch on page 32, where -- what I'm really pleased that 40% of the patients are really new and not conversions just from Desferal.

Page 33, you can see here brands which will be impacted by either generic competition and/or pricing.

Lamisil will face marginal competition in Europe, as does Foradil.

We expect the entry of an AB-rated generic product from [Meyer Kaisek].

And Sandostatin SC has already generic competition since Quarter 1 2005.

Equally important, we expect price cuts in Japan, France, Germany and Italy.

So these negative tendencies will be offset by new launches, by new marketing and sales initiatives.

And as you can see on page 34, by an increased benefit from Medicare, where we believe that the market uplift due to Medicare will be in the range of 1 to 1.5 percent points.

And on page 35, we illustrate that we have a very strong position within Medicare.

We have a coverage more than 80% of lives for Tier 2 formulary access are covered for Diovan, more than 70 for Lotrel and more than 80 for Exelon.

So we believe that we are very well positioned to benefit from the market growth driven by Medicare.

And we have now for the seventh consecutive term received by our customers number one managed care ranking, and as well the number one ranking in Medicare.

So we are really very pleased with the performance of our key account management teams in those two important channels.

As in the past years, licensing in is a key activity for us, and we continue to be successful.

We have concluded in Quarter 1 five [invections].

We in-licensed Agomelantine, which is an antidepressant in Phase III.

We exercised our option to in-license NM283 for Hepatitis C. We in-licensed a compound from Kyorin for transplantation, MS and other autoimmune diseases.

And we started two early research collaborations in the field of oncology.

Page 38 details the profile and the background to Agomelatine.

I think it's a potential blockbuster in the large U.S. market, based on the sale of its tolerability and side effect profile.

Our late-stage pipeline, which doesn't include Agomelatine yet, is very attractive.

We had exciting news for almost all products and we started now Phase III for FTY.

The only delay here on this list is that the QAB Phase III trial will start in the second half of this year and that for NM283, we have to do a dose finding before we can enter Phase III.

Our cardiovascular franchise will have a strong presence at key events in the next couple of months in 2006, which will continue to prepare the market for the launch of those products.

Overall, the newsflow, which you can see on page 41 is very, very strong.

And we are very pleased to have such a dynamic newsflow in 2006.

Regarding the outlook, we will not change the guidance of mid to high single digit local currency growth, ahead of market.

We will continue to grow our operating income despite competitive investments in marketing.

Sales force, specifically in the U.S. in 2006, we intend to hire personnel for two additional mass-market field forces to support the launches of our cardiovascular portfolio in 2007; improved operating margin and continued strong newsflow from our pipeline.

With this, I would like to hand over to my colleague, Andreas Rummelt.

Thank you, Thomas.

Sandoz showed a strong performance in Quarter 1 2006.

I start on page 45.

The Quarter 1 sales are driven by the Hexal and Eon acquisition, and underlying organic sales growth of Hexal and Eon added 603 million in the first quarter, and the old Sandoz alone grew by 9% in local currency.

The Quarter 1 sales overall were up 88% in local currency, which then brought our operating income of 238 million, up 116% in U.S. dollar.

On page 47, we show that the operating margin improved by 2.9% over the first quarter of 2005.

The main elements here are that the gross margin is up due to product mix and operating efficiency improvements; also productivity gains in development and registration.

I will come back to this.

Strong economies of scale caused a significant decrease in G&A.

And on the other side, we had a onetime gain in Quarter 1 2005 from a Lek distributor business divestment.

And of course, there were restructuring costs of 23 million in the first quarter of 2006.

With respect to the synergies of 200 million we have indicated for the acquisition, we are fully on track.

The Quarter 1 gross margin on page 48 is 4 points ahead due to product mix; it is plus 5% in product mix, offset by 2% due to additional purchase price accounting, plus a productivity gain of 1%, which leads to a combined 4% improvement in gross margin.

On page 489 (sic), some details on the productivity gains in development which we expect through 2006.

We will still capture synergies due to the elimination of overlapping projects in the portfolio.

Then of course, there are economies of scale.

Also efficiency gains in the network.

Due to a restructuring of the overall network and specialization of some of the centers, we will strengthen our vertical integration, which is the in-house manufacturer of active ingredient.

And the cost per filing, I expect it to go down by 17%.

The bottom-line growth in Quarter 1 was driven by ongoing business, so as we heard from Raymond, the old Sandoz contributed with a 14% change in –- or increase improvement in U.S. dollars.

And Hexal and Eon Labs added 186.

Amortization of intangibles from the acquisitions were 50 million in the quarter, and restructuring costs, as I already said, 23 million, which led to the 238 million operating income as we reported it.

Business is performing overall well.

Retail net sales were up 122% in local currencies, mainly driven by the acquisitions, but also underlying volume growth.

Key growth drivers here are Germany, the U.S., France and, again, Russia.

Our anti-infectives business, which contributes 11% of overall sales, declined in sales in the first quarter 3% in local currency.

This is mainly related to the closure of our Indonesian operations, which we did because of very low or negative margin.

Overall, anti-infectives showed a significant improvement of productivity, which resulted in a double-digit operating income growth.

The biopharmaceutical sales declined by 25% versus first quarter 2005, mainly because we are using the capacity now for Novartis pharma product and not for co-operation business.

Page 52, we have a strong growth of our retail business basically in all regions.

On 53, you see that we have significant launch activities in Quarter 1, mainly in Europe here with 19 launches, Germany and the Nordics.

U.S., only two launches in the first quarter; this is mainly due to (technical difficulty) more to come in the remainder of the year.

Short summary on the integration on page 54.

The acquisition is continuing to exceed expectations.

The delivery of synergies is fully on track.

The integration of our commercial operations is almost completed.

All our key integration milestones have been achieved, many of them ahead of target, especially in terms of timing.

We have identified a significant savings potential in technical operations and development from network rationalizations to come in the next couple of years.

And we have initiated major projects to harmonize our enterprise results planning landscape, facilitating improved efficiency and effectiveness.

So this is basically an IT tool which directs and supports the overall supply chain.

On page 55, in terms of outlook, how with the market environment and competition in the year 2006, we expect ongoing price erosions in key markets.

In the U.S., this is continuing.

Of course there will be more pressure in Germany and in some European markets, like Spain and France.

Generic penetration, on the positive side, is increasing in key markets.

Originator defense strategies are increasingly successful.

In terms of biogenerics, we had the first approval of Omnitrope in -- well, it was the second approval after Australia -- in Europe, so here the pathway for biogenerics is open.

We also have a positive court ruling in the U.S., so the FDA now has to make a decision on our Omnitrope application, which we consider a success.

In terms of competition, the industry consolidation is ongoing.

The most recent example is Actavis and Pliva.

The Asian players are starting to get a stronger control in North America and in Europe.

I think here it is just the recent acquisition of Betapharm by Dr. Reddy.

And we also see an increasing power of wholesalers.

We expect the strong performance of the first quarter to continue through 2006.

So here, mainly the performance will be driven by the acquisitions.

Synergies are on track, as I indicated.

We will see continued strong productivity gains in production, development and registration and fixed costs.

And we also see the volume expansion continuing, particularly in Eastern Europe, Russia, South Africa and Australia.

Expectations for 2006, we expect to grow with or even above market.

We will see an over-proportional bottom-line growth.

And the acquisitions are ahead of expectations and are on track.

And with this, I hand back to Raymund Breu.

I am now on slide 58 for an update on where we stand on Chiron.

As you know, the deal was completed on April 20th.

We will now consolidate Chiron results into balance sheet, as from this date approximately.

We would expect that all the results of Chiron, including an estimate of the opening balance sheet, can be reported in our Q2 numbers.

At the moment, we have no good information yet on what the purchase price allocation and the purchase accounting will do to these numbers, so we ask you for a bit of patience there.

But by the end of the second quarter, we should be in a position to give here detailed information and detailed transparency.

But it's clear in our minds that for 2006, the operating income contribution of Chiron will be more than offset by inventory step-up, restructuring and integration charges, and the amortization of intangibles.

Excluding all these Chiron numbers and the Chiron impact, and barring unforeseen events, we can confirm the financial outlook that we already have given in January for the entire year 2006, which means we are expecting high single digit sales growth in local currencies, that we will continue to gain market share in all of our businesses.

We have a sustained positive pipeline newsflow, and expect that we will achieve record operating and net income for the full year.

I would now like to open up the conference call for questions and answers.

(OPERATOR INSTRUCTIONS) Kevin Wilson, Citigroup.

Thanks very much.

The question I have was about European growth.

Just first, a point of clarification.

Slide 19 indicates that local currency growth in Pharmaceuticals in Europe was minus 2.

But in the press release, you have a number which is plus 1 in local currency.

So I must be misunderstanding something.

Could you clarify that?

And secondly, could you give us a sense of how your core brands are doing in Europe, excluding those brands that have obviously been genericized?

I think -- let me first start with the clarification that in the investor relationship deck I just shared, the region Europe, how we defined it, is excluding some markets, which in our organization are reported under emerging growth markets.

In the press release, we were referring to the whole Europe, including those markets on the emerging growth market.

So there is a certain inconsistency in the way we talk about our regions, but the Europe you know is reflected in the press release.

And the Quarter 1 was overall very much impacted by the stocking movement of wholesalers in France and Germany, some forward buying of patients, specifically in Germany in Quarter 4 2005, impact of generics, specifically for Lamisil and Foradil, a very challenging, as you know, pricing environment in Europe.

For the full year, we believe Europe will be a low single digit growth environment for us.

The key brands is basically Diovan.

And you see (indiscernible) are doing well in Europe, and Diovan is gaining overall on a regional level market share by 0.1 percent points.

The two countries where we are slightly losing market share is Germany and France.

In Germany, when you take a look at the MS numbers, they are a little bit inflated for one of our competitors, (indiscernible), which is actively exporting from Germany into other markets.

If you would exclude this, we would lose 0.3% to 0.4% market share in Germany, and the same we would lose in France.

And this is basically driven by more intense marketing activities of our competitor on the statin and on the statin in combination with HCT is recently launching and getting a little bit more ground in those two markets.

But overall, I think our market share performance in Europe is positive for valsartan —- it is a molecule.

You should not forget that in some markets we operate with co-marketing partners and we need to take a look at the full molecule market share, not only at the brand market share of Diovan.

Graham Parry, Merrill Lynch.

Good afternoon.

It's Graham Parry at Merrill Lynch.

I've got a few questions.

Just starting off with Sandoz and the operating market margin.

You know, 316% in the quarter and you did say you expect the strong performance to continue throughout the rest of the year.

How sustainable is that first-quarter margin?

Do you expect to be able to hit your 15% operating margin target this year already?

A couple of questions on some of the products -- just Glivec -- a bit of a dropoff from what was a fairly strong fourth quarter.

I was just wondering if you could give us a little bit more behind the dynamics of that move, both up in the fourth quarter of '05 and the falloff in Q1.

And then on the pipeline products, on Rasilez, the data coming up at ASH, do you expect to see any secondary biomarker measures in any of the data presented there?

And both at ASH and ADA, are you still planning investor events?

And then finally on Agomelatine, could you just give us a feel for what the next steps are with that product in the U.S. and any potential filing timelines?

Thanks.

Okay, Andreas.

Okay.

With respect to the margin, what I said is that we expect to have an over-proportional bottom-line growth.

So basically, what you can see is that the Quarter 1 is certainly not indicative for the full year for a couple of reasons.

One reason is the product mix; here we have significant variations from quarter-to-quarter, especially also due to strong seasonal antibiotics business in the Quarter 1, which has better margin.

A significant point here is also restructuring costs.

We said in January that we expect 140 to 160 million restructuring cost for the year; we had only 23 in the first quarter.

So there are another 120 to 140 to come in the remainder of the year.

Then what I also mentioned in the presentation, there will be a negative impact of the new pricing regulations here mainly in Germany, and here it is even unclear what the order of magnitude is because the law is not written that precisely that we can already now clearly define the impact.

And another element is the phasing of the development spending, so we have spent less in the first quarter and we expect more to spend, depending on the timing of some important studies, in the remainder of the year.

So basically we expect to get to an operating margin of 50% within three years as we said.

And the 16.6 you see in the first quarter is certainly not the number which we will see for the full year.

David, do you want to take the question on Glivec?

Sure.

No problem.

During the fourth quarter of 2005, we saw wholesaler buy-in in Europe, as well as in the U.S.

In fact in the U.S., we had showed exceptional growth -- we were up 53% in Q4 2005.

In the first quarter of 2006, we've seen just the opposite effect; we've seen inventories come down in Europe.

Also saw inventories come down in Japan.

And we saw roughly a 0.3-month inventory reduction in the U.S. market.

If you were to take the fourth-quarter results and the first-quarter results and average them, you are probably much closer to a real underlying growth rate.

James?

So slide 40 in Thomas's presentation gives sort of the outline of what we will be presenting in Rasilez at the ASH meeting.

There will be some preliminary biomarker data presented along with that, including some plasma renin activity data.

And then in Agomelatine, the next steps are to discuss with the FDA what the Phase III program needs to look like for approval.

And we are seeking a meeting with the FDA to discuss that and then we will be able to update you further.

And are you still planning investor events at ASH and at ADA?

Yes, both.

Are there any details of that?

It's on slide 40 of Thomas's presentation.

Okay, thanks.

Next question, please.

Mark Purcell, Deutsche Bank.

Thanks very much.

Just a few questions.

Given how well the integration of Hexal/Eon has progressed, are the kind of $200 million of synergies perhaps conservative, and do you really believe that 140, 160 is going to be the ultimate integration cost this year, given the fact the run rate is running below that?

I understand (indiscernible) and closure is going to take a little bit longer.

But I just wondered if the integration costs are overstated or the synergies understated?

The second question, just, Thomas, I wondered if you could just quantify some of the buildup in the third quarter you're going to expect in the fourth quarter and the second half of the year?

Thirdly, just going back to Hexal/Eon, I wondered if you could give us the sales growth rates for the first quarter.

You have kindly given us the EBIT figures, but whether you can give us the individual sales growth rates.

Also on biogenerics, I wondered if you could update us on your pipeline and which products you expect to be filing in the near-term and which are currently with the regulators and we might hear some news on over the next couple of years or so.

And just last, on FTY 720, just wondered if you could update us with what's going on with the FDA and discussions there.

Andreas, do you want to start?

Okay.

So let's start with the question on synergies.

I think we have stated that we expect to have 200 million of synergies from the acquisition, 100 million to be achieved by the end of this year.

And we stick to this number in terms of the restructuring costs.

I think here, the main restructuring costs will come from the consolidation of the manufacturing and development networks, which usually takes longer.

And these are a significant cost, as you -- the moving of products from one side to the other, as you have significant severances if you close down or if you reduce sites.

So the 140 to 160 is the number for 2006.

In terms of the biosimilars, we are not giving details on the pipeline.

We have currently six projects in development, in different phases of development, from very early on until late stage development.

And we expect to have another filing within the next 12 months, but also here for competitive reasons we are not giving details.

We were reflecting upon our event portfolio in hypertension and cardiovascular in the U.S., and we realized that for Diovan and Lotrel, there is ongoing, continued strong growth potential.

And we see that our three launches in that field, we have the beginning of next year, with Galvus, Rasilez and Exforge, all of these brands are tremendously attractive and have huge potential.

And we believe that most of these brands will be launched early in 2007.

And as we want to properly train our field force and get ready for launch, we will recruit two mass market field forces in the second half of 2006.

In the U.S. the mass market field force is roughly 500 people, more or less.

So that is as much as I can quantify now.

Is that 500 in total or --?

No, two forces, each 500.

Okay, thank you.

And just in terms of -- I had another quick question also for you, Raymund.

I just wondered if you could give me the size of the recall, the Foradil recall, and its impact on the cost of goods sold in pharma.

Well, the impact is minimal.

It is nothing to worry about.

It's in the single digit numbers.

And then we still have the question open on FTY change.

Yes, FTY720, the Phase III trials are running well in Europe.

The discussions with the FDA are the same topics as I have outlined before.

I would have to say the FDA have been a little bit sluggish in adhering to their timelines, but we are still optimistic that we will start the first patients with FTY in the second quarter of this year.

And do you have the Hexal and Eon growth rate —- [the total sales growth rates] for Q1?

Andreas.

Well, basically our accounting doesn't give us consolidated number for Hexal and Eon.

We have not done this; therefore, we cannot give any numbers here.

The problem is the comparable base.

Obviously, Hexal in the past didn't have, you know, monthly or quarterly numbers according to our accounting standards.

So it is very difficult to give here growth rates quarter-on-quarter.

Okay, thank you.

Next question, please.

John Murphy, Goldman Sachs.

Thanks very much indeed.

Thomas, two quick questions for you, please.

Could you talk a little bit about the pharmaceutical gross margin dynamics through the rest of the year?

And second, the Exelon performance for the quarter.

And just one question for Andreas.

You mentioned the success you've had in Europe and the U.S. with regard to the biosimilars and saying the pathway is now open.

Do you now feel much more optimistic on products coming through this pathway or do you still expect it's going to be a very slow evolution, really on a product-by-product basis?

Okay, the pharmaceutical dynamic of the margin.

I mean, I tried to be simple.

I think if you would take out the divestment income on Quarter 1, the underlying margin would be around 30.5.

And what you can expect going forward is that we have -- we had a little bit of a pickup in development because some Phase III studies will start, predominately FTY in the U.S., in Europe we have started already;

QAB and oral Exelon.

We will hire the sales reps in the U.S. and we will intensify a little bit our premarketing investments behind new launches.

And we have obviously extra going on.

On the other hand, please don't forget that in Quarter 4 last year we had a significant asset impairment.

We are not assuming that an impairment of this size will occur in 2006.

So we have our guidance of the margin, which is basically around 30%.

The gross margin is a key factor, and we believe that the current decline will be caught up during the year so that for the full year, we still forecast a minor improvement in our cost of goods.

Obviously, gross margin is impacted as well by pricing, but that is a different story.

So for the cost of goods, we will have an improvement.

In terms of Exelon, you see total different dynamics between rest of world, where Exelon is still growing, and in the U.S., where Exelon is declining.

And the main reason in the U.S. is basically that there is intense competitive initiative and we have lost a little bit share of (indiscernible).

We believe that we had good news for the brand with the new indication, that we have a lifecycle management development which is promising.

So we hope at some point in time, we can turn around the performance of Exelon.

But in the short-term, I would not expect a dramatic change in the U.S.

In the rest of the world, we believe we can continue to grow.

Thanks.

Well, with result respect to the biosimilars in Europe or the follow-on protein products in the U.S., I want to differentiate between the situation in Europe and the U.S.

In Europe, our understanding is that the pathway is pretty clear; we now are getting guidelines per product.

And as long as these guidelines are being followed, I don't expect to have major regulatory hurdles for future biosimilar products to come.

In the U.S., the situation is different.

You know that we have filed our Omnitrope application under 505b2.

Here, we have now the court ruling that the FDA has to decide, based on the available application following this road.

The more general pathway to get follow-on protein products to be approved in the U.S. has yet still to be defined and has to be written in law.

So this will certainly take some longer time.

So here, I expect a slower, basically product-by-product approval process until we have these guidelines defined and written in law.

Thanks very much.

The next question please.

Jo Walton, Lehman Brothers.

A couple of questions, please.

You've in-licensed five compounds into R&D in the quarter, but you've had a relatively low R&D spend.

Do I assume that there were a significant amount of onetime costs that were capitalized, as they are under the new accounting standards?

But could you give us some idea of the aggregate capitalization of R&D that has occurred in the quarter?

Secondly, on biogenerics, if we look at like [Tevatrotid], which have been remarkably unsuccessful in gaining share, do you expect biogenerics to be able to penetrate the market to anywhere near the same extent as traditional generics have, given it's a price sensitive area?

Or do you think it's going to take a long time before we can see that?

And maybe -- I don't know how well established your product is in Australia -- maybe you could use that as an example for us.

And could you also please tell us, if you can, what the actual impacts on the P&L of Exjade and Enablex was.

Presumably, the sales were small, but it would be helpful if we knew them, please?

Okay, Jo, maybe I take your first question.

If you look at page 16 of the press release, we have the table of consolidated income broken down by divisional segments.

We have included at the bottom of that page information on how much we spent for goodwill and other intangibles in the quarter.

So you can see that we have capitalized 96 million for acquired rights here, 74 million of it in Pharma.

So you have the full details on that page.

Then on biogenerics -- Andreas?

Well, basically, this is looking a little bit in the crystal ball.

But when you look at the current discussions on the biogenerics, it's a little bit comparable to the situation that you have seen with generics 25 years ago.

So this takes a while until these new products are fully accepted by the prescribers and also by the patients.

So it will be this (indiscernible) a slower uptake than with the standard generics.

What you also indicated, the price versus the originator will certainly be significantly lower, but not as low as we see for some generics.

This is just not possible because of the higher cost in development due to clinical efficacy and safety studies, and also higher manufacturing costs.

But the prices will be significantly lower and therefore very attractive for the healthcare system.

So in the long run, I see that the penetration of these compounds will increase significantly, as we will be showing that we have the same product with the same efficacy and the same safety profile and then the acceptance will increase.

It's just a matter of time.

It is very difficult to calculate the rough impact.

The only thing that I can -- I mean, the sales figures -- Enablex sold 21 million and Exjade 19.

And each of the brands, our investment was significant for each of the brands, below $50 million so far.

So obviously, at first it was dilutive.

But I can tell you both brands are not significant marketing investment eaters, and actually it's a specialty brand, so I would say not a big negative impact overall.

Thank you.

Next question.

Ms. Alexandra Hauber, Bear Stearns.

Good afternoon, I have two questions, one for Andreas and one for Thomas.

Andreas, you mentioned the impact from Germany, and I was wondering whether you could give us a little bit more color on that, because we have obviously two dynamics, one positive, one negative.

The price cap on the one side; on the other side, that there will be no more natural rebates.

Any indication how large one is versus the other?

And also, since you mentioned it's a bit too early to say how it's actually to work out, because the law hasn't been totally precise, can you just tell us what exactly it is you don't know yet?

And then Thomas, very quickly on Diovan pricing.

You mentioned that being a particular factor in the U.S.

Can you just run us through what you did on U.S. pricing last year?

You seem to have taken two small price increases but not on the entire portfolio.

Maybe I should start with this one.

Actually, this Quarter 1 was the period where we have benefited from two pricing increases, where in the remaining periods to come, we will benefit only from one price increase.

So I think that is the simple explanation.

And to answer -- you are right in your observations.

We do our pricing decisions very selectively.

We analyze the competitors' strength of the brands, the willingness of the payers and of the patients to accept price increases.

But for Diovan, it was a specific beneficial effect in Quarter 1 which will wash out over the balance of the year.

Okay, thank you.

Okay.

In terms of the situation in Germany, you mentioned two elements of the new law.

One is this 10% obligatory rebate for generics, and the other, basically the ban of rebate in-kind given to pharmacies.

I think there is a -- and these are more easy to calculate in terms of impact, which we have done of course for our business.

But then there are a couple of other elements in the law which are more difficult to predict.

So one is, of course, the announced change or reduction in the fixed prices, which will happen on the 1st of July.

So we don't know exactly how this will look like and what will be the impact of this reduction to the lower third of the price range for our product portfolio.

Another one, which is probably more important, is the introduction of the bonus model system for doctors, which will only come into effect early next year probably, as announced right now.

But they will start to implement it right now, and we don't know exactly what the impact is.

Then of course we have the price freeze for the next two years, which should also be mentioned here.

So there is a number of elements.

When I said that the law is not that clear, so if you read it in detail, there is a lot of room for interpretation.

And for some of the elements, we have external legal advice from three different parties, and we have totally three different interpretations of what it means.

So here, we will have a number of court cases, and only after these have been decided, we know exactly what the impact is.

But what is clear is that there will be increased pressure in Germany.

So in some way, you think that margins of the German business will be declining or is it just that volumes will be down?

I mean, the sales -- is it also affecting margins or just the sales?

Well, it will affect sales and margins, and actually I would expect to see a further consolidation of the industry in Germany, which you have already seen now with the acquisition of Betapharm.

So if we do things right, then we could see an uptake in volume.

But the fact -- the ban of the rebate in-kind, that is not going to affect the price cuts -- can you say that with certainty now?

Probably not.

Okay, thank you.

Thank you.

Next question?

Michael Leacock, ABN Amro.

Thank you.

I just have one question, if I may, regarding NM283.

I think you in-licensed the compounds at the end of the quarter, a couple of weeks after some [fairly] negative clinical trial results, I think it appeared.

Certainly the market took them fairly badly for Idenix.

I wonder if you could just tell us a bit more about the results and what is it you see in those results that clearly the market hasn't?

Obviously, we have seen the same results, but we might have a different view.

I think the drug has demonstrated (indiscernible) activity at all dose levels which have been tested.

And what we have seen on the other side is that at highest dose level, the side effect profile would look, let's say, very challenging.

We believe that a dose finding will confirm that lower doses than the 800, which was producing side effects, might be not only efficacious, but as well, you know, palatable.

In addition, we have not excluded the option that NM283 can become part of a triple drug regimen, together with ribavirin and interferon.

So we see that NM283 has certainly still significant potential, and therefore, we decided to exercise our option according to the contract.

And can you, Tom, just tell us when the dose -- since you're redoing the dose studies -- when they will be starting again?

Is that in the near-term?

That is relatively in the near-term, together with the drug-drug interaction study.

Thank you very much.

Next question.

Tim Anderson, Prudential Securities.

Thank you.

Questions on three different franchises.

On Diovan in the U.S., I think in your press release you mentioned it's the most widely covered ARB on Medicare formularies.

I'm wondering what the status now is on commercial formularies, and what has been the commercial coverage going from last year into this year for Diovan.

Second question is Aclasta in Paget's Disease.

I don't know if you've said this before, but I'm wondering what the issue is holding up full approval, and if that could be osteonecrosis of the jaw there.

And I'm wondering when you'll have interim data from the osteoporosis trials?

And then last question is on ANM107.

When can we expect trials to start in treatment-naive chronic phase CML patients?

Okay, I will take the first and then James and then David.

In terms of the commercial presence, I think we are, again, one of the most widely prescribed ARBs.

I think the access is excess of 70% --

Yes, 73%.

73%.

So here is where, if you combine commercial and Medicare/Medicaid, no other ARB is widely accepted.

And that is obviously driving that our market share is relatively higher in those segments, in those channels compared to others.

The Aclasta in Paget's Disease, the situation is not osteonecrosis.

We have not seen any cases of osteonecrosis in either the Paget's or the osteoporosis trials.

FDA wants to see longer-term follow-up, which we will derive from the osteoporosis trials, and that we anticipate to file in the middle of 2006.

In the ANM, actually the first single-center study in treatment-naive chronic phase patients has started.

There is a small study conducted, M.D.

Anderson, and you'll see the data at ASCO in June.

Regarding the startup of pivotal trial, we have delayed that decision until we have more fully characterized the full benefit risk profile of ANM107, particularly given the outstanding results we've seen with Glivec now, with five years' worth of data.

Okay.

And then just back to Diovan, any slippage in that 73% -- is that 73% commercial coverage in '06, and what was it in '05?

And then on Aclasta, going back to that, they want longer-term data; is that on safety or efficacy?

Aclasta is safety.

And in terms of Diovan no slippage, actually our objective is rather to extend and certainly not to slip our coverage.

So relatively unchanged.

Let's move to the next question.

(indiscernible)

When you mentioned the normalized 30.5% margin, I understood this is for first quarter?

What did you take out to get to that figure?

that's the divestment gains in the first quarter.

Thank you.

Could we then move to the last two questions, as time has advanced quite a bit?

Marcel Brand, Cheuvreux.

Good afternoon.

I have a question on Galvus first.

Are we going to see any data with Galvus on top of metformin and a comparison to rosiglitazone?

In other words, metformin plus/minus rosiglitazone plus/minus Galvus?

Second question, where does the active control study with FTY 720 stand exactly?

And then a question on generics.

You said you're launching metroprolol succinate in Poland.

Is that an extended release, so once daily?

What is the dose range -- is it also the 25 to 200 milligrams?

And then could you may be also talk about these studies in other countries, and also, your view as to why it seems to be more difficult to get generics approved in the U.S. than outside the U.S. for metroprolol succinate.

I can -- this is Kurt Graves -- I can start on the first question on Galvus.

You will see data with Galvus on top of metformin.

We also have it, as you know, head to head.

You also see some head-to-head data versus TZDs.

Right now, we are considering initiating some trials looking at it on top of TZDs, but the results of those we can talk about later this summer at some of our meetings.

But that data comparison to rosiglitazone, you also have that comparison on top of metformin, so rosiglitazone versus Galvus on top of metformin compare it, so as a second line treatment?

No, we do not have that.

And when -- I'm sure you are running such trials or I guess you are running such trials.

When could we expect such data?

We have no trials designed that way.

Okay.

For the active comparator trial with FTY, again, the anticipation is we would start that study either late second quarter, early third quarter of this year.

As soon as possible.

So timelines have moved a little bit earlier then?

They've been accelerated, yes.

Accelerated.

Very good.

Andreas?

Well, the metroprolol succinate is the extended release formulation, and we expect to launch the full range of dosage wherever possible, also in other countries.

The reason why the U.S. is slower in terms of approval we really don't know.

I think I got this question already, when we did the full-year 2005 presentation.

I asked that question.

But since I really didn't feel very successful in rolling it out internationally, I thought it was a reason to ask again.

Yes.

So, we really don't know why it is slow.

So far, nobody has approval but we are awaiting this to come during this year.

Thanks.

Thanks.

Then the last question please.

(indiscernible)

Good afternoon, gentlemen.

Most of my questions have been answered.

I just have a few last remaining product questions.

First of all, you highlighted that in Japan you are losing market share with Diovan.

Could you just tell us a little bit about the background?

What is causing this?

And also on Zelnorm, we had -- your appeal to the earlier recommendation by the CHMP was confirmed.

I was just wondering what your further plans are for European filing?

And last but not least, what is delaying the Phase III program for QAB149?

Okay, thanks for the remaining question.

In Japan, the unique situation is that there's three key players, (indiscernible) are basically selling and marketing (indiscernible).

And as you know in Japan in the first 12 months of the launch, there is a prescription [care] and duration of prescription.

And once this is lifted, the products are prescribed for longer time periods.

So that both (indiscernible) and (indiscernible) in the last two years an increased market share.

We are losing less than other competitors in Japan, but everybody is losing against (indiscernible).

We will increase our share of (indiscernible), launch some innovative techniques in Japan, and will watch carefully how good our Japanese team is in mitigating this decline.

In terms of Zelnorm in Europe, we are currently exploring a couple of options.

Should we (indiscernible) another indication by (technical difficulty).

Should we just, together with local partners, try to get the product approved in selective markets?

Is it an opportunity (technical difficulty) countries?

So these options are currently under evaluation.

The delay of QAB is simply due to the fact that we had to recall Certihaler in Germany, and that we really have to do some work on the device.

And we are currently planning Phase III of this QAB with another device.

And that was originally planned with Certihaler and because of this technical issue, we couldn't start on time.

Could we just quickly come back on (indiscernible) and the competition in Japan?

What is the marketing message that is causing you most of the problems?

Is that relate the full-day control, the 24-hour half-life that they have?

Diovan doesn't have to fear any marketing metrics from any competitor.

It's just Japan is a very unique market and they throw a lot of share (indiscernible) into the bucket.

And that is why we have to come to with even better messages (technical difficulty) globally in Japan.

I was just wondering whether that is an early indicator of the Rasilez uptake.

But I can tell you, 24 hours is a very important argument.

Actually, we have a similar message for Diovan as well, which we use, and we will certainly have this message for Rasilez.

Okay, thank you.

Thank you.

With this, I would like to close the telephone conference.

On behalf of the Novartis team, I thank you for attending this conference and showing interest in Novartis and our first-quarter results.

Goodbye.

Ladies and gentlemen, the conference call is now over.

You may disconnect your telephones.

Thank you very much for joining.

Goodbye.