Novartis AG (NVS) 2006 Q2 法說會逐字稿

Good morning and afternoon. This is the Chorus Call conference call operator. Welcome, and thank you for joining the Novartis second 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 questions. (OPERATOR INSTRUCTIONS)

At this time, I would like to turn the conference over to Dr. Daniel Vasella. Please go ahead, sir.

Thank you. Good morning and good afternoon, ladies and gentlemen. It is my pleasure to open in the Q2 conference call now, and would like to start by quickly introducing the participants from the Novartis side. We have Raymund Breu, CFO; Thomas Ebeling, CEO, Pharma; Kurt Graves, Chief Marketing Officer, Novartis Pharma AG; then Joerg Reinhardt, CEO of Novartis Diagnostics and Vaccines; Andreas Rummelt, CEO of Sandoz; James Shannon, Head of Global Pharma Development; Jean-Jacques Garaud, Head [Group EPA] and Investor Relations; Malcolm Cheetham, Head Group Finance Reporting and Accounting; John Peacock, Chief Financial and Administration Officer, Pharma; and David Epstein, CEO, Novartis Oncology; and Alex Gorsky, Chief Executive of the North American business -- who are in the U.S. and participating.

Now I would like to ask Silke Zentner to give us the usual statements.

The information presented in this conference call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that might cause actually 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 Securities and Exchange Commission, for a description of some of these factors. Thank you.

Thank you, Silke. We will follow the presentations as outlined in slide 3. I will be followed by Raymund Breu, Thomas Ebeling, Joerg Reinhardt, and then I will conclude the presentation part, and we will go to Q&A.

On slide 4, the highlights of the first half and specifically then on the second quarter -- the sales performance was strong in the first half, and we continued to gain market share in all our major businesses. And obviously, you have seen that there was an impact on operating income and net income, which was due to the charges we decided to account for in the second quarter, and we'll come back to these charges which are related to Chiron. Excluding the Chiron charges, the income would have advanced strongly, operating income, by 27% and net income by 23%.

If you go to slide number 5, I would like to just comment the free cash flow, as you might be surprised that it didn't develop stronger, in view of the strong operations. And that is due to the acquisition of intangibles, about 300 million in M&A, and then also lower sales of assets in pharma, where last year, we had the sale of -- Ciba [sale mainly], which was a big number. And this year impacted also by the Prevacid rights we have for OTC and several milestone payments.

Slide number 6 shows that this occurred mostly in the second quarter, but that the second quarter was very strong in topline growth and dynamic in development.

Slide number 7 details the various divisions, and obviously you see still the impact in Sandoz, which is strong due to the acquisitions. And pharmaceuticals, you see in the second quarter has had double-digit growth, clearly gaining market share.

On the other side, the consumer health -- mid-single-digit growth. This is a mixed picture between a very strong performance of OTC and a weak performance of CIBA Vision, still suffering from the production problems in the liquids for the eyecare. However, meantime, these problems have been fixed. And we're back in the market, and the uptake has been very positive, but obviously not positive enough to make up for the previous losses.

Slide number 8 shows you the profitability. And here you see that in all divisions underlying, we have a very strong productivity development, with gains in margins, and that there has been a very good achievement of the profitability, especially in pharma, if you looked that they had to account for the Chiron costs in the second quarter, and still were able to perform at the very highest level. And with that, group operating margins reached 24.4% in the first half on slide number 9.

I would like now to pass over to Raymond.

Thank you, Daniel. On slide number 11, we give you the details of the Chiron charges to operating income. In the first of half June 2006, these charges amounted to 209 million. And they are composed of the inventory step up of 67 million, of restructuring charges of 108 million. These two are long-time effects. [And then] the first time amortization of intangibles that were acquired with Chiron were 34 million.

[Third on the line] is associated income. That's detailed on slide 12. We have an additional 53 million coming from some of the charges that had to be account for at Chiron before the closing of the transaction. They are relating in particular to stock option accelerated vesting and parachutes for the executive management. Then in addition, with the tax effect on the 209 million operating income charges that I mentioned, the net effect on net income from these charges was 183 million.

On slide 13, we've highlighted that the growth rate is composed mainly by 2 elements -- volume growth of 7% and an acquisition contribution of 9 percentage points, which then add to 17% sales growth in local currencies, or 15% in U.S. dollars.

On slide 14, you can see that the operating income growth was very strong. Even corrected for all for currency impacts, you know, we had a strong increase of 23% in the six months. Where is this coming from? On slide 15, we give an explanation of the various cost categories (technical difficulty)

Pardon me, this is the operator. Please hold the line; the call will be continued shortly. Thank you.

-- increase in income from associated companies of 72% is mostly the result of an increased contribution from Roche. Financial income net is down 49%, as we had significantly less net liquidity. Net liquidity in the first half was down from 6.1 billion a year ago to just 0.7 or 0.8 billion this year. On this reduced net liquidity, the (inaudible) significant -- 14.4%, significantly higher than in the comparable period a year ago (inaudible).

On slide 18, we (inaudible) down the contribution from Roche even further, and you can see that it is in effect the estimated share, being Roche net income that accounts for the significant increase.

Finally on slide 19, we give the summary of the free cash flow developments. Cash flow was up 20%; cash flow from operating activities 19, but then to a very strong business performance that has flown through to the cash flow statement. And in particular, working capital management has been continued -- been handled very well, so we have a positive contribution there in changing other net current assets, which is up 31% -- the contribution, not the assets.

And then finally, Daniel Vasella mentioned that the positive development of the cash flow was in the first half offset by higher investments in intangibles in particular, and lower divestiture proceeds.

[With this], I hand over to Thomas Ebeling.

Thank you very much. Pharma had double-digit sales growth, ahead of market. Excluding Chiron, the growth would have been 9.3%, or very dynamic as well. The performance was driven by oncology, cardiovascular, and neuroscience, and from the region standpoint, we are very excited by the dynamic U.S. performance, which grew by 18%. Pharma improved margin, and further strengthened the pipeline through BD&L activities, and provided exciting newsflows on upcoming cardiovascular launches.

On page 22, you can see that pharma were able to deliver a double-digit operating income growth, and growing return on sales by 0.7 percent points, despite the Chiron costs.

On page 23, you see the changes in the margin, and those changes are including Chiron. Excluding Chiron, the margins of pharma both for six months and in quarter two would have been 32%, and would have been representing an increase of 2.2 percent points.

Page 24 is showing the regional growth, where we basically have three major growth regions -- U.S., Latin America, and rest of world, which includes Asia-Pacific, China, [and India]. [There] 2 regions are showing only modest growth, which are Europe and Japan.

Page 25 is showing that our top franchises are demonstrating dynamic, double-digit growth. And on page 26 you can see that our top three products, Diovan, Gleevec, and Lotrel have a very dynamic performance.

Talking about Diovan on page 27, Diovan has now reached a 30% market share globally, based on higher strength, new indication, and innovative marketing programs. The most impressive growth has been shown in the U.S. on page 28, where Diovan gained a percent point of share in dollars. And on the right side of this chart, you can see the different contributors to that achievement -- efficacy messages, strong share of voice, better formulary positions, effective leverage of Medicare Part D, pricing, and shift to higher dose.

Zelnorm continues to show excellent script uptake, and we're very happy that our relentless efforts behind these brands are continuing to pay off. Xolair as well has a very dynamic sales growth, and continues to perform well. The year-to-date sales in the U.S. are already $200 million.

Gleevec has an outstanding five-year track record with excellent (inaudible) and an outstanding tolerability record. Tasigna, the next product in the segment, has a very competitive profile regarding its [efficacy], which you can see on 32 -- and as well important, on page 33, an excellent tolerability profile.

Femara has experienced very good market share growth after the early adjuvant approval, and has had very strong growth of 30% in local currency [that is by a year].

Exjade is doing well. We have now reached 50 million in sales in 2006. And what is really encouraging is that 40% of Exjade patients are basically new patients, and have not been treated so far by Desferal.

Page 36 shows you our most important BD&L activities in the first half. And you can see here a blend between interesting [markets] like depression, focus on hepatitis C, and cancer. We not only concluded licensing-in activities, we are very successfully acquiring NeuTec. And on page 37, you see some information about the major product of NeuTec, which is called Mycograb, which has demonstrated strong [effectiveness] antifungal, and has been submitted in Europe and the planned U.S. submission in 2009. On page 38, you can see Aurograb which is an add-on antibiotic agent where we expect submission in 2010.

On page 39, you can see the compounds which are in registration. Galvus, Rasilez and Exforge have all been accepted by FDA; Lucentis has been filed, and Sebivo as well. For Prexige, the resubmission is underway for 2006, and the U.S. submission is planned in 2007.

And on page 40, you can see the Phase III product and Phase II product. I would just like to highlight that we have started our Phase III U.S. program for FTY, and that we intend to start phase III for QAB COPD in quarter four.

Page 41 is highlighting, again, the attractive launch schedule we have. We have an opportunity to launch several attractive new products over the next two years, and I just want to highlight on page 42 Galvus. Galvus has an outstanding efficacy profile, proven to be as effective as TZDs. It's a excellent body weight profile, especially when you compare it to TZDs, and very good tolerability and ease-of-use. And we have developed a mega-trial program called GLORIOUS, and first clinical trials already underway.

Page 44, you can see the newsflow. We hope to get a regulatory decision for Galvus and Rasilez December, but there's always some workload of the FDA in December, which -- you should please keep this in mind.

Page 45, you can see the planned filings in 2009, which (inaudible) signals again that we have a very attractive pipeline.

Regarding the outlook, I would just like to make you aware that in the first half -- excellent performance, we expect some dimensions of this performance to continue. We believe that the prescription trend, the momentum behind our key in-market brands is positive, specifically Diovan and Zelnorm. We are very confident about a strong U.S. performance, good Medicare uptake. We will see new products continuing to perform well, and we have the Chiron sales impact.

In the second half, there are some, I would say, events which slow down a little bit the positive effects. We see the full impact of price cuts in Europe, Japan, and China, and less of a positive price benefit in the U.S. compared to the first half. The Trileptal will face generic competition, and we will -- and we're happy to invest behind our launches and in new, large Phase III studies [within the] FTY and QAB.

So for the full year outlook, on page 47, we believe that pharma will show high single digit sales growth, and if you include Chiron, it can even reach 10%. We will demonstrate dynamic, continued operating income growth, despite competitive investments in pre-marketing, sales force, R&D, and BD&L. Chiron will have 250 to 300 million negative impact on operating income. But despite the impact of Chiron and in spite of the competitive launch investments, we will be able to deliver margins approximately at last year's levels. And we continue to provide exciting newsflow at our pipeline update in London at late November.

With this, I would like to hand over to Joerg Reinhardt.

Thank you, Thomas. On page 49, you see that the total net sales in May and June of the new division was US$127 million. Overall revenues were [$188 million]. Operating income was 29 million excluding acquisition-related charges.

Key sales drivers in vaccines were a seasonal tick-borne encephalitis vaccine, especially in Germany, as well as the rabies vaccine, Rabervert, sales in U.S. were strong, based on limited market availability of the Sanofi-Aventis competitive product.

Key sales drivers in diagnostics are mainly the NAT business, the nucleic acid testing business, which continued to be geographically expanded, as well as the full rollout of the (multiple speakers). Now the joint business is also a stable and steady cash flow business.

On page 50, the integration is on track. In general, we did put the new management team in place. We have a draft long-term strategic plan developed, and synergy capture is on track as well, with 24% of our synergies expected in 2006.

From a TechOps perspective, the remediation has been accelerated. There is still significant work to do. Internal quality audits are ongoing. And additional actions have been identified in the meantime, and are being implemented. The development portfolio has been prioritized. From a finance perspective, the Novartis [reporting] systems are fully introduced, and we could retain all the top talent that we wanted to retain.

On page 51, I just wanted to remind you of the structure of (inaudible) 2005 numbers. You see that the flu business obviously is of major importance to us, as well as the travel business in the vaccine environment. When you look at the blood-testing business, there especially the nucleic acid testing is a significant contributor to sales. But there's also significant other revenues -- mainly royalties -- that add to overall revenue.

On page 52, you see our development pipeline in the vaccine field, which supports existing fields, but also new fields. On top of the list you see our twin vaccine product, which is a pediatric product. It is a pentavalent, fully liquid pediatric product that is currently in registration in many Asian and Latin American countries. Our flu (inaudible) well in Europe and U.S., as well as the meningitis vaccines. The ACWY vaccine has started Phase III, and the Men B vaccine has started Phase II. Also well on track is our H5N1 vaccine in Phase II.

On page 53, you see that the meningococcus and influenza vaccines are expected to be important drivers of market growth in the next five years. Flu is expected to grow at a level of 14% per year; meningococcus, even stronger at a level of 35%.

Now the flu vaccine growth on page 54 is expected to be driven by increased demand globally -- not only in U.S. or in Europe, but also in the rest of world. We would expect a CAGR of around 10%. Now (inaudible) keep in mind that despite the fact that there is a recommendation out there to vaccinate 200 million people already now, the expected vaccination rate this year will be roughly 100 million. So it means there's significant room for growth going forward.

On page 55, you see that we expect the flu vaccine business to be more differentiated going forward. Currently, all the existing products are based on an egg-based production. This will probably change going forward. We see not only cell-culture products, but also more and more adjuvanted products going to populate the market. Nevertheless, there will also in the future going to be a business for egg-based products.

On page 56, our influenza production for this year is going well. Our egg-based flu vaccine production remains challenging. But as I said before, the remediation is well on track, and we are very confident that we will produce significantly more vaccine than we did produce last year.

The MF59 adjuvant-based product Fluad, which is introduced in several European countries, has shown superior efficacy in at-risk populations, especially the elderly. The flu cell-culture project, as I said before, are well on track. We have treated more than 4,000 subjects today. Phase III has been completed in Europe. Data show good safety and immunogenicity, and the Phase III data will be published later this year in October in a conference in Vienna.

On page 57, we are obviously also preparing for a possible pandemic. As you probably know, we have filed a mock-up file with the EMEA earlier this year. And we are currently generating more clinical data to be submitted by the end of the year. In addition, we are working with a number of national governance to define how best to serve them in the case of a pandemic.

On page 58, you see that in addition to pandemic opportunity, there may be a pre-pandemic opportunity which we're working towards. There are already a number of stockpile contracts that we have signed with a number of governments -- the UK and U.S., for example; others are currently in negotiation.

Again, also in this context, clinical trials are ongoing. We have 2 major trials, one in the U.S. and one in Europe, with 400 or almost 500 subjects each, where we look at non-adjuvant vaccines, but also at vaccines with our MF59 proprietary adjuvant as well as Alum. Endpoints will also include cross-strain protection, which may be a specific feature that could, especially with our MF59 adjuvanted products, turn out to be very promising and excellent news for a pandemic situation.

Now switching to the meningococcus situation, on page 59, you see that the meningococcal meningitis is called by caused by multiple serogroups across the world. And it's not always the same, but the B strain is the most common strain.

On page number 60, you see that the youngest are most at risk. Especially patients in the age group between or below one year to up to four years are at high risk of meningococcal disease after an infection.

Now on page 61 you see that's very relevant, because the currently available vaccines do not treat patients at these young age groups, with the exception of the serotype C. All the other serotypes are not actually available at the moment, or vaccines against serotypes for young patients at the age between less than [one] and 10 years. You see that for B strains, no vaccine is available at all.

Now on page 62, you see that our efforts for meningitis ACWY vaccine as well as for a meningitis B vaccines are well underway. As I said before, ACWY has entered Phase III. We have as of now more than 2,500 subjects exposed to this vaccine. And it has shown good immunogenicity in wide age ranges. Meningitis B is not as far along than ACWY. Phase II has started earlier this year. But also here, Phase I data show very promising results.

On page 63, as you know, we have already in-licensed our first travel vaccine that will support our travel franchise, which is a vaccine against Japanese encephalitis, which is a disease that is very prevalent, especially in Asia, in particular Southeast Asia and also the Western Pacific region. There are roughly 12 million travelers that visit these sites at the moment, and only 1 to 2% of those are vaccinated, mainly based on the fact that the currently existing vaccine is not very well-tolerated, and has significant risk of severe side effects.

Now this new vaccine which was developed by Intercell, which we will distribute and market, has a significantly improved side effects profile, and also shows Phase III efficacy data that are very promising. These data will be presented later this year in November in Atlanta. Submission is expected before the end of the year.

Going on to the blood-testing business on page 64 -- overall, there are 68 million blood donations expected this year, with Chiron having a market share of 33%. We are especially strong in America, with a market share of 78%, but also in Asia Pacific and EMEA, where we still expect to gain further market share in those areas, and especially we also expect to penetrate some emerging markets where you see that current market share is relatively low.

Now, on page 65, geographic expansion is currently going well. We expect to introduce the products in Slovenia and in India this year, among other countries. We will also fully rollout West Nile virus testing in the U.S., and we have with the Ultrio testing and also the TIGRIS new machine platform, two further approvals where we expect the FDA to act on before the end of the year.

In addition, we have signed a seven-year agreement with the American Red Cross which covers roughly 50% of the overall U.S. market [enough]. And we are the exclusive supplier for the next seven years for the American Red Cross.

Now on page 66, you see top priorities for this year. Obviously, we need to complete our integration tasks. We need to ensure supply, not only in flu, but also in other areas. We need to improve the quality focus in our operations, accelerate innovation, and globalize our business. We also do want to expand the diagnostic business. And last but not least, we need to upgrade our talent through focused training and some more key hires.

Now with this, I give back to Raymund Breu.

(inaudible) it's okay, Joerg. I just want to end this formal part by going to slide 68, which I will not comment, as it is self-explanatory. Rather, I would say that if we summarize what we have heard, that we have a very strong topline growth in pharma, with a rich pipeline and exciting launches coming up with Galvus, Rasilez, and Exforge. In Sandoz, we see that the synergies from the acquisitions are paying off -- not just from the topline, but also from the bottom-line part, and that we are gaining market share, and that in Chiron we have exciting buildup to achieve -- on one side, really profiting to the maximum from existing businesses, mainly the flu vaccine business, and then having the meningitis vaccines really reaching the market and building the pipeline.

All in all, enough to generate significant organic growth and significant investment opportunities, so that you shouldn't expect any major transactions from our side, and you can forget when you hear rumors about AstraZeneca or other companies -- certainly not generated by us.

Regarding the full year, we expect double-digit sales growth in local currencies, and continued market share growth. I think the pipeline will continue to deliver well. We will hear, towards the end of the third quarter news about the flu production, and should end up the year with record operating and net income.

With that, I thank you for your attention, and would like to open for the Q&A. Please go ahead.

(OPERATOR INSTRUCTIONS) John Marcy, Goldman Sachs.

Thanks very much indeed. I got three quick questions, if I might, the first two in pharma. Thomas, you spoke about the U.S. being very strong, around 20% growth. Was there any inventory or price impact there, and any particular products impacted?

Second, just wondered what your latest thoughts were on the threat of Lotrel genetics. And third, maybe a question for Raymund -- whether you could update us on the share buyback outlook for the second half of the year, given the current debt situation, please?

In terms of the U.S., the second quarter growth was 20%, out of which roughly -- a majority was volume and mix. In terms of pricing there was mid-single-digit effect in there, and there were mild inventory effects. However, on the first half year level, there was no inventory effect at all. The inventory effect was only mild, and was only in quarter two, but not in the first six months. And obviously, there was the acquisition effect of Chiron in the 20%, which is roughly 3.7 percent points.

In terms of generics for Lotrel, the situation has not changed for us. We continue to litigate the case. And we don't believe that there will be an (inaudible) generic for Lotrel in 2007 in the U.S.

Yes, I think, Thomas, we can be very positive about it, that we feel very confident based on the expert opinion, and that we can at the earliest expect a ruling on the Teva case next year -- when exactly?

Sometime in the fourth quarter.

(multiple speakers) end of '07, yes.

So what you've heard is normal FDA communications.

Then with regard to share buybacks, John, our policy is unchanged. We intend to use approximately 50% of the free cash flow after dividends that is not used for acquisitions for share buybacks. So that is confirmed. The timing and detail I have to leave open, as that always depends on market developments and our assessment of whether these would make sense or not.

Marcel Brand, Cheuvreux.

First question is on the other operating income expense in pharma. When I strip out the 89 million, I still come to an unusually high number. If I'm correct, could you please explain why that is the case?

Then the second question, Chiron -- what impact do we have to expect in terms of longer-term CapEx trends, now that you plan to expand the business?

And last question is on the Men B vaccine. Could you talk a little bit about tolerability, specificity, and whether that is a vaccine targeted across all regions?

The one time income and expenses in pharma, the last year pharma was able to (inaudible) investment income for basically (inaudible) obviously this is now unfavorable in quarter two, 2006. So if you add this to Chiron, you can explain the deviation.

So from a CapEx perspective, I think we indicated earlier that we do expect between 100 and 150 million of CapEx being necessary for remediation efforts for our existing production sites, and that's still our assessment at the moment.

In addition to that, you know that we have the new cell culture plans in the U.S. that is going to be started very soon. Expectations for that overall is an investment at the level of a bit over 500 million. As you know, we got a more than $200 million [call] by the HHS. And this investment is not all CapEx; there's actually significant development costs included in that as well.

Now from a Men B perspective, yes, it will be a product that is expected to be actually [effect of a cost different] Men B strain. We believe that it will be a product for most parts of the world. Also, we know already now that, for example, in New Zealand, there's a very specific Men B strain that will not be covered. On the other hand, we do have a Men B product on the New Zealand markets for a number of years which was actually very successful.

From the tolerability perspective, all I can say now is that tolerability is going to expectation, and we'll obviously have to wait for larger trials in Phase II and III to really have a good assessment.

Birgit Kuhlhoff, [Rand and Bodner]

I have three questions, please, the first one for Thomas Ebeling -- was it correct that I understood that the improvement in your guidance for full year sales of pharma to high single digit was only the internal growth, and that plus Chiron, you would be at 10%, so that the improvement is based on internal growth prospects only? And if that is correct, what changed your view relative to Q1 -- so what is better? Is it only Diovan?

Second question, you have given an indication for the Sandoz topline growth, but not for the margin. Can you give us any kind of indication what we have to look for for the full year?

And lastly, on the Chiron-related amortization charges, is there any kind of guidance that you can give for what we have to expect in 2007, some kind of ballpark figure?

Your understanding is correct. The 8% growth is basically pharma before Chiron, and then if you add Chiron, it can go up to 10%.

The main reason is that we see a very dynamic performance for our main brand, specifically Diovan, but as well Zelnorm, Femara, (inaudible) did very well; (inaudible) [is] dynamic, Gleevec continues to perform well. So those are the main drivers. And from a geography, it's U.S. and emerging growth markets, and from the brands it's Diovan, Lotrel, Zelnorm, and the oncology franchise.

Okay, in terms of Sandoz margin, we continue to build our strong bottom-line growth versus last year, basically driven by the growth in retail and by significant productivity gains in anti-infective. Overall, the margins will be impacted by restructuring costs of about 110 to 130 million in 2006, which is lower than the originally expected 140 to 160 which we communicated earlier. So far, we have spent in the first half 24 million, so there's another 100 million to come in the second half.

As result of the German law change, there will be an impact of our proactive price reduction of about 50 million to the bottom line. Mid to long term, we will secure and extend our market leadership by this proactive price reduction. And in addition, there is a phasing in development spend, and we will spend about 50 million more in development in the second half as compared to the first half.

And the estimate for the recurring amortization from the Chiron acquisition -- first, I have to say that these numbers are very preliminary. We are only now in the process of establishing the opening balance sheet. And that means the allocation of the purchase price to intangible assets and goodwill is still very preliminary. So these numbers could change quite considerably during the second half of this year.

At the moment, we would expect for recurring amortization for this year, a number of approximately 200 to $250 million.

Kevin Wilson, Citigroup.

It's Kevin Wilson at Citigroup, 2 questions on U.S. pricing, if I may. The first on the broader Medicare Part D, the volume uplift, and particular Diovan -- when will you know, accurately, the level of rebates which you're going to have to pay to the plans? I understand the plans are somewhat behind in their determination of who got what.

And secondly, with respect to the U.S. generic market, could you talk about price in aggregate in the second quarter, first half, and the outlook for the rest of this year in U.S. generic pricing?

Yes, in terms of Medicare impact, I think it's still too early to come to a full assessment of what the Medicare impact is and what the (inaudible) understanding what we believe will be the [rebate] impact but it's not yet finally validated. Products like Diovan obviously benefit from Medicare, and we believe that roughly 20% of our gross for Diovan could come from Medicare.

I think in terms of U.S. price erosion, we have seen ongoing price erosion in 2006. Basically, it's due to the competition, which is increasing as Asian players are significantly increasing number of filings and new products to the market. It's hard to predict how many competitors will actually launch. Also, the competition in key launches is expanding. For the full year 2006, we expect double-digit price erosion versus 2005, but also expect to offset this erosion with volume increase and with new product launches.

Could I ask for a repetition of the first answer? Because it faded on my line -- it faded away. I'm sorry, Thomas; could you repeat? You said it was too early to say on Medicare Part D and Diovan?

That's an excellent summary of my answer.

Tim Anderson, Prudential.

A few questions -- I think if I've heard you right, you said the pharma operating margins in '06 would be about the same level as '05, and I'm hoping you can give some directional guidance on operating margins for the overall group for '06 relative to '05. And along these same lines, can you tell us how many sales reps you plan on hiring over the next six to 12 months?

And then Zometa -- sales were pretty weak in the quarter. I'm wondering if it's possible that we might actually see negative year-on-year growth for this product in U.S. and international markets.

I certainly can only speak for pharma margin, and the pharma margin guidance is that despite the impact of Chiron, which is between 250 and 300 million, and despite the prelaunch investment, we will come around the same level as a percent of net sales like last year. We have announced that we will hire approximately 1,000 sales reps in the U.S. in the second half of the year, which is well underway. And that's basically -- in terms of Zometa, I don't believe that you'll see a negative growth, but I will give David Epstein the opportunity to give a little bit more detail.

Yes, hello. Zometa should realize growth at least in the mid single digits. What we're seeing is very full penetration of big segments of breast cancer and myeloma in the U.S., and as a result, some slowdown there.

The most dynamism for the brand is actually coming from our recent launch in Japan, as well as continued growth in the emerging growth markets.

And if I could just follow up, David, is that mid-single-digit growth in the U.S. or globally?

No, that would be a worldwide number. The U.S. number would be lower.

And then past '06, you're talking about hiring 1,000 reps over the next six months. How about, let's say, the first six months of '07 -- are you going to hire more reps?

First six months of '07, probably not. (multiple speakers) And then finally, with regard to the group margin development, at the operating income level, we expect that group margins will be approximately the same as in the previous year. That means that the impact of the Chiron contribution and the Chiron charges are some 400 to 450 million negative, will really be [covered] by productivity improvement and synergies that we are experiencing. So the net of all these charges, still the margin maintained at the previous year's level at the operating income.

At the net income level, we will have a small margin deterioration because of the significant reduction in financial income, as a result of the acquisitions [there as] net liquidity is now significantly reduced.

And that's for the entire group?

That's for the entire group.

Duncan Moore, Morgan Stanley.

Yes, thank you very much. I may have missed it a couple of things because, similar to a previous questioner, I think the line is cutting in and out on the conference call. But I just wanted to go back to the reason why you are expecting a little bit of a slowdown in the pharma division in the second half. It strikes me that there's been acceleration from Q1 to Q2. And I don't see what is really going to slow things down, particularly as it would appear as though the Medicare Part D benefit wasn't really there in Q1. It was there in Q2, and presumably will persist throughout the remainder of the year. So I just wondered whether I missed something on the call.

And then the second question is for David Epstein. Given that you now know presumably a bit more than we did last time around this call about Sprycel and the competitive profile of Sprycel, any thoughts on what happens to Gleevec going forward?

In terms of second half, the explanation is that in the U.S., we benefit the timing [buys] from price increases over [proportional], and we don't expect the magnitude of this pricing benefit to continue into the second half. The price cuts in Japan, in Germany which will be as well relevant for our competitors will have a stronger impact in the second half.

And thirdly, we will face probably at year-end the generic competition for Trileptal. So those are the three main drivers -- partly industry-related, partly Novartis.

So regarding Gleevec, if you look at a couple factors, first the main drivers of growth continue to be survival, the addition of new patients, and to a lesser extent, dose increase. The introduction of a new drug like Sprycel is certainly good for those patients who have failed optimal doses of Gleevec. The biggest surprise actually for us at the ODAC meeting was learning about Sprycel's overall side effect profile, which portends to have certainly more challenges than Gleevec, and at least on the surface would appear to be more difficult to tolerate than our new drug, Tasigna.

So I think it's hard to give exact guidance. I think clearly, looking forward, Gleevec will slow, particularly into next year, and then once Tasigna launches, I would hope that we would see the franchise then pick up again.

Karl Heinz Koch, Lombard Odier Darier Hentsch.

Good afternoon. Actually, I would like to also have one question on Tasigna. At the ASCO meeting, you were talking about a cardiac safety review that you were performing, the outcome of which will depend when you'll add a third onto the top study. I was just wondering whether you can give us an update there.

Also, on the about-to-be-acquired NeuTec acquisition, Mycograb -- the timeline for both Mycograb in the U.S. and Aurograb in both the U.S. and Europe -- with 2009 and 2010, respectively, seem extremely conservative to us. Could you just explain the reasons behind that?

And then, coming out of the ADA meeting, you've had a look at the competitive profile of Januvia. Could you just tell us what you think the differentiation of Galvus is and what the strong points are there?

I will start with Tasigna. What we explained at the ASCO meeting was that we had changed the enrollment criteria into the study for advanced and [blast] crisis patients, those patients that had progressed on Gleevec, to reduce the number of QT millisecond elevations we would be willing to accept in the study went from 480 to 450, which is a modest change. Based upon that change, there have been no additional unexplained sudden deaths, despite the fact that we've enrolled another 300 plus patients into those clinical trials.

Additional work is still ongoing with Tasigna. In particular, we're looking at QT prolongations in healthy volunteers to try to best understand if there's any dose effect, which will then inform the dose and schedule to take into earlier-stage trials.

Regarding the [tops] trial itself -- that's Gleevec 400 versus 800 -- that's enrolling very well. And enrollment will be likely completed by the end of the year. So when we do go into the de novo setting, it will likely be a different study.

In terms of timelines for Mycograb and Aurograb, it's basically driven that we believe that we need larger studies predominant in the U.S. with more patients, and that's basically driving the timeline.

In terms of competitive profile, I would like (indiscernible) to give his assessment of the competitive profile of Galvus relative to Januvia.

Yes, the ADA meeting was very good, and I think we emerged from the meeting feeling really great about the DDP-4 class. We really think this class offers really important benefits versus TZDs and SUs, and I think after seeing all the data was exposed at the ADA we emerged feeling ourselves about Galvus that we have a really strong profile for this product, compared to what we saw for Januvia during the meeting.

Specifically, I think although there were no head-to-head studies, so it's hard to make direct head-to-head comparisons, if you look at the efficacy profile of the drug, both as a monotherapy with reductions up to 1.8% in combination with TZDs with reductions up to 2.8%, we did not see any other data for Januvia that approached those levels.

If you look at the efficacy data when you're added onto metformin, which is where we anticipate getting a lot of business and during the launch window, our reductions there were 1.1% versus 0.65%. So in terms of efficacy, which is the most important driver in this category, we feel we have an excellent profile of our product.

On top of that, we see a great profile for the class in terms of safety and tolerability, excellent overall weight profile, no edema, no weight gain, no CHF. So we feel really excellent about that. And these are both once-a-day products. So I think our conclusion walking out of the meeting and the feeling of the key opinion leaders we interacted with was a lot of excitement for the class in general, especially versus TZDs and SUs, and a really strong profile for Galvus.

Would you agree that we have stronger combination data, and we can show how it works with insulin and other drugs as compared to Januvia -- more complete picture?

Yes, we definitely have a much bigger package, looking at it as monotherapy, as you mentioned, Dan, in this combination therapy with virtually every other type of therapy that's available to patients. So it's very well profiled.

Can I just doublecheck also -- what kind of data will you be presenting at the September meeting in Copenhagen?

In terms of brand-new data, I don't think we have any planned brand new data. We will have more data from ongoing combination studies towards the end of the year, but in terms of brand-new data, not too much at that new meeting.

Mark Purcell, Deutsche Bank.

Just a couple of questions. I wondered on Sandoz whether you can give us the EBIT contribution from Hexal/Eon? You've given us the sales contribution. The second one on Chiron -- could you just comment in terms of seasonality of costs as well as sales within this business, how we should model the various cost lines going forward -- COGS, R&D, marketing as well?

Thirdly, just for Raymund Breu -- could you just discuss -- it's probably preemptive, but could you try and give us some idea as to the additional costs that could be taken -- associated with Chiron acquisition, in 2007?

And then lastly, just in terms of R&D, can you tell us where we are in terms of the European approval process for Agomelatine, and also just discuss how you're setting up the Phase III trials for FTY and QAB -- specifically on QAB, the combinations of agents and [heliotypes] that are going to be involved in the program?

Actually, the EBIT contribution of the (inaudible) business has become increasingly artificial, and therefore we have decided no longer to split this out.

With regard to the income statement of the Chiron, I have to ask you for a bit of patience. At the moment, we don't know yet really the exact breakdown of the Chiron business, the Vaccine & Diagnostics business, because we are in the process of splitting it up in between pharma and this new divisions. We expected by the third quarter, at least, we can give you a better picture on the COGS impact and the impact on other items.

You asked for the ongoing special charges -- for the special charges of Chiron in 2007. The one which you have to expect will be the recurring amortization -- so that will continue into next year and into many years thereafter. All the rest, like inventory step up or restructuring expenses, we expect that that will be virtually over by the end of this year.

Can you comment a little bit more on your (multiple speakers)

Yes, from an operational perspective, when you look at seasonality, obviously this is a very, very seasonal business. You can assume that research and development is least affected by that; cost of goods is to some extent impacted by that, but mainly of course it's the sales contributions, where the -- like the flu [vaccine] business actually is a three to four months business. On the other hand, you have tick-borne encephalitis which is a business that's mainly strong in autumn and early summer. So there is a tremendous seasonality to this business, which makes it not that easy to forecast.

But in average, could you say guidance-wise what you count for R&D and for cost of goods sold?

I would actually like to wait with that guidance for another quarter, because we just have 2 months. It is very seasonal, and I would be much more comfortable after this (inaudible).

As Novartis's license in Agomelatine for the U.S., I would prefer to direct this question to Servier -- [James], if you could maybe comment on (inaudible) Phase III?

So, FTY, the trials have started. We announced previously that the Phase III has started in Europe. We now have started the placebo-controlled trials in the U.S. We've reached agreement with the FDA on monitoring and also (indiscernible) trial was started.

As far as QAB is concerned, we are on track to start the Phase III in chronic obstructive pulmonary disease in the fourth quarter of this year.

And James, in terms of the studies on QAB, I know it's going to be in combination with other agents. Have you decided which [heliotype] you're going to take forward?

Say again, I didn't --?

Both in combination and monotherapy.

Sebastian Berthon, Exane.

Follow-up questions on Agomelatine and QAB. Could you give us a bit of the trial design in the U.S. for Agomelatine in terms of types of patients and controls? And on QAB, what type of inhaler have you chosen?

And regarding Chiron, what part of the 350 to 400 million charges -- effect this year will be non-recurring in 2006? And do you take into effect the sale of Betaseron to Schering?

So, for the Agomelatine trials in the U.S., we have not yet had our in-depth discussions with FDA. We've planned or we have plans to take those, the package to FDA to discuss with them what in addition to the European studies we need to do. So I would prefer to wait until we've had those discussions to tell you about the comparators and the design of the studies in the U.S.

Then the question regarding the Chiron impact -- the contribution to operating income this year is a 350 to 400 million negative, as you rightly said. That includes obviously the normal contribution of operating income from this business, the inventory step-ups, the restructuring and integration charges, and the amortization of intangibles.

The two continuing ones will be the normal operating contribution, and the amortization of intangibles. So I mentioned that we expect for this year for the amortization of intangibles 200 to 250 million, which is an eight-month contribution, so you would have to gross that up for 12 months to have an estimate for the recurring amortization for 2007 and going forward.

But again, this is very preliminary, as the opening balance sheet is not yet firmed up.

And the one time would be in what ballpark?

You know, at the moment, our numbers do not include any onetime income from the Betaseron, because we don't know yet what the outcome of the discussions with Schering will be.

Sorry, just the question on QAB -- what type of inhaler have you decided to go into Phase III?

So the inhaler for Phase III, which will start in fourth quarter, will be the concept one, single-dose, once-daily inhaler.

Can we come to the last question, please?

Matthew Weston, Lehman Brothers.

A couple of questions, if I may. Just going back to Chiron, the sales guidance for full year 2006 looks a little light. And I just could you explain why? Could it be that it excludes the collaborative revenue, which I realize is significant from the diagnostics business? Or is it that you are excluding the Betaseron royalty income, because you know that's yet to be resolved?

And then secondly (multiple speakers) -- no, go ahead?

Both those answers are correct. You know, the number that we give in the forecast does not include the Betaseron sales. That is only because we do not know what the outcome of the negotiations will be. So here, we have assumed that they would no longer continue. And collaborative income or royalty income is not included in these net sales numbers. That will be shown as another revenue.

Okay, and then if I could have a couple of follow-ups -- does that mean that the Betaseron royalty income was excluded in Q2? And if so, then what have done with it, given that was clearly ongoing?

And then just a second question, on ongoing tax rate, it looks like the tax rate is creeping up on an underlying basis. And I just wondered if you could give us some guidance for both full year and also in the medium term, in terms of group tax.

So Betaseron, we have included the income on Betaseron on the top line in quarter two, and we will continue to do that for the remainder of the year. Total expected top line from Chiron and pharma will be around 350 for the year.

Then on the tax rate, our estimate for this year's tax rate is 17%, and that's the same number that we have accounted for in the first half of the year. This is our best estimate to where it will be by the end of the year.

Going forward, we do not expect that the rate will increase further. We have always said that we expect the tax rate for the foreseeable future to be somewhere in the range of 16 to 17%.

Okay, many thanks.

Thank you. With that, I would like to thank you for your interest and attention, and close this call. Thank you. Goodbye.

Ladies and gentlemen, the conference call is now over and you may disconnect your telephones. Thank you very much for joining. Goodbye.