Novartis AG (NVS) 2006 Q3 法說會逐字稿

Good afternoon.

This is the conference call conference operator.

Welcome and thank you for joining the Novartis third-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 to ask questions. (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 Novartis third-quarter teleconference.

With me on the conference call, we have Thomas Ebeling, the head of the Pharma division;

David Epstein, the head of Novartis Oncology;

Kurt Graves, the Chief Marketing Officer of Novartis Pharma;

Jorg Reinhardt, the CEO of Novartis Vaccines & Diagnostics;

Andreas Rummelt, the CEO of Sandoz;

James Shannon, the head of Global Pharma Development; as well as Alex Gorsky, the head of Pharma North America.

Before we start with a short summary of the developments and the numbers, I would like to ask Silke Zentner to read an import statement.

Thank you.

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 Securities and Exchange Commission for a description of some of these factors.

Thank you.

Thank you, Silke.

We will now start by giving a short summary of the key numbers and the key events.

We are referring to the slides that you should have received or that you can access over the Internet.

I will start now with the group summary.

I'm on slide number 4.

We are very proud to report that the dynamic expansion of the Group continues.

We are (indiscernible) 14% operating income growth in the nine months of 17% and net income of 16%.

For the third quarter, the sales growth 13%, operating income 11, and net income growth 12%.

So you can see that we have double-digit growth numbers.

I have to add here that the operating and net income growth is after absorbing significant one-time and exceptional charges related to the Chiron acquisition.

If you go to slide number 7, you can see that, for the nine months, we have absorbed $462 million of purchase price accounting and integration costs that are related to the amortization of intangibles, inventory step-ups and restructuring charges.

For net income, the corresponding impact is $339 million because, in addition to the elements mentioned already, we (indiscernible) the tax effect of these charges and exceptional charges that we have accounted for under the line of associated companies' income before we closed on the transaction of Chiron.

So excluding these charges, the operating income growth in the nine months would have been 26% and in the third quarter, 24%.

If we continue on slide number 9, sales growth driven by volume, 6% and the contribution from acquisitions of 8%.

Operating income on Slide 10, corrected for currencies, it would even be 2 percentage points higher at 19%.

Slide 11 breaks down the sales growth by divisions.

Here, it's important to realize that we have strong underlying growth in pharma and in consumer, so (indiscernible) acquisition 9%, the consumer health, if we correct for the divestiture of Nutrition & Sante, it's another 9% sales growth in the nine months.

Then we had a strong contribution from acquisitions in the Sandoz division and in Vaccines & Diagnostics.

On Slide 12, we give the same analysis for operating income growth, and we have excluded here, in the calculation, all of the exceptional items.

If you look at the U.S. dollar growth numbers net of exceptional items for the nine months, you'll see that we grow faster than sales in the group, in pharma and in Sandoz and consumer health, so we are very clearly having here an improvement in our underlying profitability of the Group.

I should mention that, in the third quarter, we have two effects to notice.

One is that, in pharmaceutical, we are competing against a very strong Quarter 3 in 2005, so we have a (indiscernible) effect.

And in Sandoz, we had exceptional impacts there related to the trading environment in Germany and an accounting adjustment in Sandoz France.

I'm moving to slide number 13.

Operating margin for the Group up 0.5 percentage point thanks to improvements in Sandoz and in consumer health.

You will see that the margins there are significantly up, the Pharma margin only slight down to 30.7%, but this is after taking a charge for, taking all the charges for the integration of the biopharma business of Chiron.

Excluding those charges, the Pharma profitability would be 32.4%.

On Slide 14, I can give you a high-level analysis of how this margin improvement of 0.5 percentage point was achieved.

In costs of goods sold, we have a negative development of 1.9% related to the Chiron acquisition charges of 306 million, higher royalty payments in pharmaceuticals.

Then the consumer (indiscernible) supply issue that we have mentioned in earlier teleconferences, and most importantly the change in mix as Sandoz and Vaccines & Diagnostics have higher cost of goods sold than pharmaceuticals.

Marketing a change, a positive impact of 2 percentage points, reduced marketing investment thanks to focused investment strategy in pharma and connectivity gains that we have achieved in a number of divisions.

R&D, positive improvement of 0.2 a percentage point related to synergies at Sandoz, and again, synergies and productivity improvements explained the improvement in G&A.

Other income and expense was the other negative item with 0.6% impact related to the Chiron acquisition charges of 142 and higher restructuring costs in Sandoz.

On the next slide, we give the same breakdown for the third quarter.

I should only highlight here that the positive impact on the marketing and selling side is less pronounced.

As in Pharma we are now starting the prelaunch expenses coming through, and we had reduced productivity improvements, reduced impact to consumer health, all at Sandoz.

On Slide 16, I would like to comment briefly on the non-operating items.

It's very visible here that the operating income growth of 17% is driving the improvement in net income, so the contribution from the non-operating items is very minimal in the nine months.

Taxes are up 20%, nine months compared to nine months, and we have a tax rate of 16% in the nine months compared to a tax rate of 15.5% in the corresponding period a year ago.

Financial income significantly down to 50 million.

The reduction is entirely linked to a significant reduction in average net liquidity.

Average net liquidity because of acquisitions in the period was down by $4.4 billion.

Associated income up very strongly, all thanks to the Roche contribution.

Moving directly to slide number 18, where we are looking at the cash flow development, cash flow from operating activities up 10%, free cash flow in the nine months reduced by 13%.

And obviously this needs a bit of an explanation which we are giving on Slide 19.

The very positive development in operating cash flow has been offset at the moment by higher capital investment, which is 372 million higher than in the comparable period.

Higher investment to the intangible and financial assets, again around 346 million, and then lower asset sales which contribute another 343 million.

So, this explains entirely the reduction in free cash flow, which stands, after nine months, at the very high number still of $2.7 billion.

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

Hello.

Pharma had a very good year, the first nine months showing a very, very dynamic sales and operating income growth, driven by our cardiovascular oncology and neuroscience franchise, resulting in market share gains up to 4%.

From a geography standpoint, U.S., Latin America and the emerging growth markets are driving our growth, whereas Japan is lagging a bit behind.

And we have improved our operating income margin, if you exclude the current effects.

And we have presented strong clinical data on upcoming launches.

On Page 22, see the key statistics highlighting the very dynamic net sales and operating income growth.

On Page 23, you see the margin development.

The Quarter 3, excluding Chiron, (indiscernible) slight erosion which was driven predominantly by a base effect.

Last year, Quarter 3 was almost a record low on M&S and R&D investment as a percent of net sales.

And on a nine-months base, you can really see that we've managed to improve our margin, excluding Chiron, by 1.2 percent points.

Page 24 illustrates the performance in the different geographies.

As I said before, very strong in the U.S., Latin and emerging growth markets.

Europe, only mid single digits, driven basically by price cuts and generic competition, and the 1% growth in Japan is influenced by this year's general price cut in Japan.

Our three leading franchises continued to grow very dynamically, all around 15%, and that is certainly a major driver which is reflected as (indiscernible) on page 26 in the performance of our top ten brands.

Specifically, our top three brands are all showing very dynamic growth rates.

If you go into marketshares on Page 27, you can see that we have now exceeded significantly a 10% market share of hypertension in the U.S., driven by strong performances of both Diovan and Lotrel, based by superior share (indiscernible), strong formulary [exits] and innovative marketing and sales growth supported by the introduction of new strengths for both drugs.

Globally, we are now at a 30% market share.

Our golden geography is the U.S. where we have a [varying] market share of 39.3, but as well in all other geographies we are the number one and significantly ahead of the competition.

In Japan, again strong market share with 27.

Here we still have to fight to get the number one position.

Zelnorm is reaching new highs.

Year-to-date, the sales of Zelnorm and (indiscernible) combined globally are in excess of $400 million, so we are very pleased to see that our resilience in supporting this brand has paid out and we are very happy to see the continued growth of Zelnorm. (indiscernible) is a drug which came later than expected to market but has already sold in the U.S. more than 300 million in sales and is on a very dynamic growth path.

That has received now approval in 51 countries.

Obviously, we have to secure reimbursement in a lot of those countries so that the brand can really take off.

We have received encouraging feedback from some countries in Europe.

We have one and the (indiscernible) award in the UK, so I hope that the award win will translate as (indiscernible) to favorable reimbursement recommendations, which is not always very easy in the UK, as you know.

Gleevec is continuing to perform very well.

Page 31 illustrates again that the share of GIST is different in the two geographies, especially in the U.S.

We have more of the GIST patients as a percent of the total patients in Europe.

We continue to grow very dynamically in both geographies.

Together with [CIGNA], Gleevec has really, we are having now a very strong position in the (indiscernible) franchise.

Dosing continues to go up, as is illustrated on Page 32, and we are progressing as planned with Tasigna.

Femara benefited superbly from new data and continues to gain market share.

The (indiscernible) share in the U.S. is now approaching 34%, so again, here our constant good news flow on this drug really has led to continue to gain market share.

On Page 17, you see the success story of Exjade, and 50% of Exjade users are non-pharma (indiscernible) users.

They are new to the franchise. 43 million sales in quarter three alone, so I am very, very confident that, in (indiscernible) Exjade will be an outstanding success at the launch.

Page 35 illustrates again that we have a very strong relationship with our customers and especially in cardiovascular, we are the leading field (indiscernible).

Not only with customers but as well with partner companies, we have a good position.

On Page 36, you can see that we have concluded year-to-date 12 transactions.

I think it's a nice blend of very early deals, late stage deals, a nice blend of general medicine products and more specialty medicine-oriented drugs.

Page 37-38, you can see the latest on our late-stage pipeline.

I judge this as that we have not experienced any major setbacks on those 12 late-stage projects.

Most projects advance very well and especially our key late-stage projects.

Galvus, Tekturna, Exforge and Tasigna are continuing to develop in line with our expectations.

On Page 39, you can see outstanding results in the pivotal or supposed studies from Aclasta which really confirm our judgment that Aclasta has, in terms of efficacy, clearly best-in-class potential.

The data on [STI] are known and confirming the (indiscernible) can be very promising once it (indiscernible) completes Phase III.

Galvus has been received very warmly by the medical community and by the press.

This is a drug, the (indiscernible) has really a huge potential and the community is waiting for the launches.

Page 42 illustrates that Galvus is the true, once-a-day drug which now is very important in selling this drug.

The profile of Galvus is a true blockbuster profile, based on its once-a-day dosing having a powerful (indiscernible) reduction is a (indiscernible) of 1.8 percent points in combination with Metformin adding another 1.1%.

In initial combination with TZD's 2.8% drug responder rate, which is normalized at 65% (indiscernible) reduction relative to TZDs, it is a significant profile.

I think equally important that the tolerability is great and so far, we don't believe that dosing adjustments for difficult-to-treat patients will be necessary.

Tekturna, which is the product formally known as Rasilez, and that illustrates again the (indiscernible) to get trademarks approved with the FDA.

I believe the current projection rate is 40%.

At the end, it is not so much a trade name; it's more the profile which matters and Tekturna has a fantastic profile.

BP-lowering efficacy is very powerful; it's better than some [places].

The 24-hour blood pressure control we believe is the most complete in the market and will be a differentiating feature, as well as the absence of a rebound effect and certainly launching a new class after ten years in these categories of patients need more than two drugs to get to the goal of a superb potential for Tekturna.

Exforge on Page 45 has a blockbuster potential.

I don't think I have to drill in on this one; that's very obvious if you say the two most-likely prescribed compounds in one period.

Page 46 illustrates that we had really good news flow and that we have an excellent record this year in development.

Now, to the [out] drugs, barring unforeseen events, we can confirm the double-digit topline growth for the year, including Chiron in quarter 4.

As we have proposed, we will have intensified pre-marketing activities in the U.S. and in other markets, and the stronger impact of genetics, and we will have [more than three] study investments.

We expect to continue to gain market share for the year.

We will have, if you would take the margins, excluding Chiron, our margins at the end of the year above prior-year levels and we expect to have strong news flow at our pipeline update in London at the end of November.

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

Thank you, Thomas.

Good afternoon.

Year-to-date performance of Sandoz is very strong.

This is driven by the Hexal and Eon Labs acquisitions beating expectations.

Our organic retail sales growth is particularly strong in the U.S. and Eastern Europe, Switzerland and Austria.

We could improve the gross margin by 3.7 points due to mainly product mix, operating efficiency improvement and paying [non-requiring] inventory step-ups which we did in 2005.

Again, productivity and achieved synergies in production development, amortization and G&A, and the major restructuring costs or the major restructuring for 2006 is more or less completed in this quarter.

The operating margin now reaches 12.4%.

If you look at the quarter, just take out the exceptional items, the underlying sales growth is 6% in U.S. dollars, again driven by Eastern Europe, the U.S. and Australia.

We could gain volume in Germany from recently launched products which are more than offset by the impact of the price cuts which we announced in the second quarter of this year.

The baseline of 2005 is distorted by the first-time consolidation of Hexal, so last year, we had four months of Hexal and two months of Eon left, so therefore it's not absolutely comparable.

We had to do a 20 million sales adjustment for a sales reduction in France.

The operating income is affected by the already mentioned price reductions in Germany.

We have a lower price level, as already indicated, in the U.S. versus previous years.

And we have to take a US$58 million one-time charge in France on operating income.

On Page 51, you see the statistics are net sales going up 38%, operating income 139%.

If you do the comparisons, then the main effect is on gross margin plus 3.7 out of the 5.3 point increase.

This is due to the nonrecurring inventory set up of 2005, 2.7 points, then productivity gains, especially in development and registration, 1.7 points, and a 0.7 improvement in economies of scale in country operations on the G&A line.

If you compare, on Page 53, the operating income, it is advancing much faster than sales.

If you compare like to like, the change is 63% in U.S. dollars versus 9 months '06 versus the first nine months '05.

Looking at our different businesses, in retail, generics, which is 87% of our total business, we grew 40% in local currencies mainly driven by the acquisition and underlying organic growth.

The key countries I've already mentioned.

In anti-infective, which is 11% of our business, we have 6% lower sales.

Basically, if you were to focus on higher-margin business, as you know, we closed our operations in Indonesia, which has had a major impact here.

On the other hand, we have a double-digit operating income growth in anti-infective, which is a superb performance.

In biopharmaceuticals, which is still only a small part of our business, we had a 3% increase in sales, mainly due to our third party cooperation business.

On Slide 55, you see the sales growth in all regions and the distribution of our business where we have still more than half in Europe, 27% (technical difficulty) in the U.S.

On slide 56, we show the launch activities of the first nine months and the distribution over the countries.

Key launches of course were the (indiscernible), the fentanyl patch on [Downs Syndrome] and I would also mention the (indiscernible).

In July of this year, we entered an exclusive collaboration with Momenta Pharmaceuticals in Boston.

Momenta is a biotech company with leading characterization technology and engineering technology of complex sugars.

We have the exclusive rights to utilize the technology, the know-hows, the capacity and capabilities for the characterization of selected generics.

Including here a number of (indiscernible) similar products.

The goal is to leverage our analytical tool box, which is then complementary to our development expertise to clinical and efficacy and safety trials we're doing to characterize these complex products.

There might be additional potential of this technology for research in Vaccines & Diagnostics.

We purchased common stock for the aggregate price of (inaudible) US$75 million.

Concluding performance nine months 2006, [six] strong bottom-line growth driven by the productivity gains in our production across all the business units.

We achieved economies of scale and operational improvements and all functional areas, and we have factored an unanticipated realization of synergies.

Barring unforeseen events, we expect full-year retail growth with the market.

There are still some uncertainties due to pricing behavior of our competitors in Germany.

We don't expect further material restructuring charges in the last quarter of 2006, and we will see an over-proportion of the bottom-line growth.

With this, I hand over to, hand back to Raymund.

Thank you, Andreas.

I'm on Slide 60.

Before I summarize the outlook for the Group, I would like just to say a few words about the expected impact of Chiron on the Group results for the full year.

We have improved our guidance here.

We think that the negative impact of Chiron will be approximately $50 million less, or we have an improved outlook here of approximately $50 million because Vaccines & Diagnostics, since the acquisition, has been off to a good start.

We see very strong growth rates and good results coming through there.

We expect that the net sales contribution in 2006, since the date of acquisition, will be approximately $1.3 billion.

This includes the Betaseron sales that we are continuing to make.

The negative impact on operating income is expected to be 300 to $350 million relating to the operating contribution from this business, inventory step-ups, restructuring charges and amortization of intangibles.

On net income, the negative impact is now expected to be 350 to 400 million.

In addition to the items mentioned, we also include the lower income from associated companies and the lower financial income as a result of the much-reduced liquidity, and then the tax effect on all of these charges.

On Slide 62, we are happy to confirm the outlook for the year, obviously barring unforeseen results.

So we expect for the Group double-digit net sales growth in local currencies, continued market share gains, sustained positive pipeline news flow in the fourth quarter and record operating and net income.

With this, I would like to open up the teleconference to questions and answers.

Thank you.

This is the conference operator.

We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS).

John Murphy, Goldman Sachs.

Thanks very much.

A couple of questions, please.

On the vaccine side, whether you could give us third-quarter Fluvirin sales and tell us whether we should expect any other pre-pandemic sales in the third quarter, as we saw in the UK in this quarter.

Thomas, I wonder if you could split, in the third quarter, the pharma sales growth out by volume, price, acquisitions, and then finally, whether you can make any comment at all with regard to discussions on Betaseron.

Yes.

On the vaccine field, I can start.

Firstly, Fluvirin sales we did sell in the U.S. roughly 14.5 million doses in the third quarter, which leads to sales of roughly $135 million.

With regard to pandemic sales, this was a one-time event and will not result in additional sales in the fourth quarter.

Our split is, in the third quarter, pretty much in line with the split on the nine-month base, so volume and mix around 6%, price around 3 and acquisition around 2.

The impact of Betaseron?

Okay, on Betaseron, all we can say is that we are, at the moment, in discussions with Bayer-Schering about the restructuring of the collaboration.

We cannot give you any other guidance at this point in time, but we continue to produce and we continue to make the Betaseron sales as in the past Chiron had done.

Okay, thanks very much.

Next question, please?

Andrew Baum, Morgan Stanley.

Just a couple of questions, please.

On PTK-787, perhaps David could comment on Novartis' commitment to the molecule and whether you would seek to acquire the 50% that's currently in the hands of Bayer.

Then second is another product question.

On Aclasta, given the concerns over osteonecrosis which continue to I think intensify rather than reduce, what's the assessment of the risk associated with prolonged use, albeit it lower dose and lower frequency in a different patient population?

Andy, regarding PTK-787, we are awaiting the survival data and we think that will be presented at one of the ASCO meetings next year.

I prefer not to comment on what we will do with the drug until then.

On Aclasta, you rightly say this is a much more infrequent dosing and lower dose.

In the clinical trials in Aclasta, we have not seen osteonecrosis of the jaw in a very large number of patients.

Next question, please?

[Matthew Westin], Lehman Brothers.

Thank you.

A few questions, if I could?

Firstly, on the pharmaceuticals business, marketing and sales in the third quarter as a percent of sales seem to be the lowest level during 2006, but there were clearly significant comments in the press release regarding the buildup to the launch of the potential blockbusters at the end of the year into '07.

I wondered if you could just give us some help as to how you see those developing in the fourth quarter and at what level you think is going to be reasonable next year, given that your plans must now be relatively set in stone as to how you expect to launch the new drugs.

Also, following on from John's question about the flu vaccines, I realize that, in different years, this rate at which you can grow the vaccine sometimes impacts the quarterly delivery of doses in Q3 and Q4.

You've given us 135 for Q3.

Given our limited experience with the Chiron business, I would love to know how you see that panning out towards the end of year for the whole of this flu season.

Then finally, one question on the Sandoz business.

I understand Andreas' comments about how he sees the strong financial performance of the business, but if I look at the underlying EBIT pre all the exceptional and pre amortization, there is still a marked decline in profitability in Q3.

I wondered whether that was cyclic or seasonal, my apologies, or whether or not the 18% underlying is a more reasonable margin which we should take forward for the performance of this business, given all the different price dynamics, particularly in the German market.

I will leave it there.

Good, thanks.

Just to comment on marketing and sales as a percent of net sales, this quarter was a little bit different because we had for the first time the true impact of Chiron there.

Chiron marketing and sales as a percent of net sales was lower, so that's why this had an impact on the level of [MNS].

Secondly, our ramping up of the (indiscernible) in the year was not completed, so that in quarter three, it's basically not have a full impact on this.

Then quarter three top line was impacted by one-time effects like TRICARE, so therefore the percentage of the absolute spending has been artificially lower.

Going forward, you will see, in quarter 4, certainly more marketing and sales investments, and in 2007, keeping in mind that in most markets, we launch several products.

In the U.S., we intend to launch at least three and hopefully up to five products next year.

I would be surprised if marketing and sales would not grow a little bit stronger than the top line growth for next year.

(indiscernible).

I think, yes, in terms of quarter three in profitability, yes, I think you have to take out the exceptional items, as you said.

I think what we also see in quarter three is we have a good quarter of the impact of the price reductions in Germany which we announced in quarter 2.

In addition, we have higher R&D expense in the quarter 3, which we also indicated at our last call, so this basically led to the performance of quarter 3.

While we look to maintain, mid-term, our direction that we want to achieve, 15% profitability for the overall business.

Okay, and then on flu?

On flu, you're absolutely right; this is an extremely seasonal business and it's really, each year, it differs a little bit as to when you make the major part of your sales.

In any case, it's certainly in each year either in the third or in the fourth quarter where you have your peak sales.

For example, Chiron last year did not have any sales in the third quarter for flu and did all of the sales in the fourth quarter.

This year, we have been lucky by being able to grow the (indiscernible) relatively well in our Liverpool plant so we could deliver quite a significant amount of the overall sales in the third quarter.

I understand, for some of our competitors, most of the sales will be in the fourth quarter.

So from our perspective, I would think that we would have seen roughly 40% of our sales in the third quarter for Fluvirin, but this depends a little bit on how the season develops, etc.

But that could be a rough guidance.

Thank you.

If I could just have one quick follow-up, staying with Chiron and just how the costs pan out, again really looking at cost of goods sold.

Do I assume that, by the time it comes to 4Q, the vast majority of COGs has already been incurred, so the profitability basically ramps up very aggressively in the third and fourth quarter for the business, certainly from a gross margin perspective?

That is certainly true.

I think you have most of your sales actually in the third and fourth quarter.

The cost of goods in both quarters is significantly lower than obviously it would be (indiscernible) basis in the first and the second quarter.

But I believe, to really have a good perspective, we should have a full year and then we would understand this better.

(indiscernible) this excludes this year all the accounting, purchase price accounting effects, because that distorts the profitability significantly with the inventory step-up and so on. (multiple speakers) but Jorg was commenting on this, the ongoing underlying performance of this business (indiscernible).

Perfect, understood.

Thank you.

Next question, please.

Marcel Brand, Cheuvreux.

Good afternoon.

Thanks for taking the question.

Could you maybe tell me what the impact so far of the healthcare reform in the U.S. on key products in the U.S., how much additional volume versus price you got, what your latest [sentence] there is?

Also, could you let us know whether there's any stocking movements, particularly on Lotrel?

The second question simply related to financials, why the low tax rate?

Then a question on generics.

If I remember correctly, we were to expect, for the rest of the year, about 100 million or so restructuring.

With that restructuring in France, was that already on your minds at that stage?

Why is there suddenly no more (indiscernible) in generics?

Thomas?

I'd like our head of (indiscernible), Alex Gorsky, to take this question.

Alex?

Yes, this is Alex Gorsky in the United States.

Due to our significant formulary access with Medicare, I mean for products like Diovan in excess of 90%, and for Lotrel close to 80%, combined with the growth that we've seen on the commercial side of our business, we estimate that, of the growth with both of those products, a range of (indiscernible) 20 to 25% is due to the Medicare Part D passage.

Inventory, Alex, on Lotrel?

We approximate about 2.5% of Lotrel is due to inventory movement over Quarter 3.

but there was already some stocking in Q2, if I remember.

That's correct.

On a year-to-date basis, the inventory effect is around 3 percent points.

Yes.

This is 3% of the growth that you've shown, okay.

Yes.

Then we have to take the question relating to the tax rate.

Marcel, as you know, we estimate the tax rate on a full-year basis as we go through the year, so every year, we update the full-year estimate.

Then we reflect that tax rate in the quarterly closings.

So the 16% that we now have disclosed in the third quarter is our best guess for the full year.

You know, obviously, this is not a precise science; there can be variations around it, but we are at the moment expecting that rate to be around 16%.

This is obviously a similar expectation for Q4.

Thank you.

Brand, restructuring expense, Andreas?

Well, basically, the answer to [France] is no, we have not anticipated this.

Last time, this only came up during this quarter and was addressed during this quarter.

We told you last time, we expect restructuring costs of 100 million for the full year.

This currently looks like we are spending about 60 million this year.

We have delayed some of the manufacturing-site consolidation into the next year and the following year.

Additionally, we have some restructuring costs, especially in the IT area, that we are building a new ERP system for the whole division, which cannot be counted as restructuring costs; they are part of the normal business and are counting as such.

Thank you.

Marcel, to avoid any of misunderstandings, the 58 million charge in France is not related to restructuring.

This is an accounting correction where, this quarter, we discovered accounting irregularities where we then investigated the case, where based on what we found, we had to make these accounting adjustments, 20 million in net sales, 58 million in operating income.

So that's in the other income operating expense line?

That's in the various, in various lines.

(multiple speakers) because it couldn't be, the number would tell me it cannot be only in nonoperating income (multiple speakers).

No, all right.

If you give me a second, I can give you the lines there; it [shows] up.

You know, we have 20 million in net sales and adjustment there.

Virtually, it's an adjustment of rebates.

Then we have 29 million that show up in cost of goods sold as inventory write-downs.

Then we have an adjustment in marketing and selling of 9 million.

That should add up to 58 million.

Thanks.

Next question, please?

Graham Parry, Merrill Lynch.

Thanks for taking my questions.

A couple on the Pharma division and then a couple on Sandoz.

Starting off with Pharma and your guidance for the margin this year, I'm just trying to work out whether that's an improvement or deterioration on your guidance for the second quarter.

I think previously you had said you would maintain your margins despite the Chiron charges.

Now the current charges are now lower, so can we assume that we will now see higher margins after Chiron charges?

Then secondly, on Sprycell, the Sprycell launch in the U.S., do you have [cold-faced] feedback how this product is being used yet?

Are you finding patients that are [inadequately] responding to Gleevec 400 mg are being switched, or is it really through treatment failures that are being switched to Sprycell?

Thirdly, could you update us where you are on Tasigna in first-line therapy in the start of Phase III there, perhaps some timing on the top state of publication?

Then on Sandoz, just backing out all the one-offs and amortization charges, it looks as if your underlying cost of goods is around 52% of sales, which is about 150 basis points worse than the previous two quarters.

Is that about the right estimate we should be using for the impact of the pricing reductions in Germany and price pressure in the U.S.?

Then one final one on Sandoz, any reason why you haven't launched your (indiscernible) product there yet?

What's the name of the products, Michael?

Two products, (indiscernible).

So, Thomas?

(multiple speakers) on the margins, (indiscernible) on that guidance which basically said that, including Chiron, we would come up with a margin which was approximately around last year's level.

So if you have concluded that the Chiron margin (indiscernible) is less than originally anticipated, but that does not necessarily lead to an increase in margins.

So we maintain our guidance which we have given you at the end of Quarter 2.

The Chiron improvement, Michael, really relates to Vaccines & Diagnostics.

You know, we have a good start in Vaccines & Diagnostics (indiscernible) an impact which is less reduced by 50 million negative, so a positive development is there.

In the Pharma side, where we had the biopharma integration, the outlook is unchanged.

Okay, thanks.

As you can see from the Q3 Gleevec number, the growth for this business remains quite strong.

Sprycell's launch at the end of June appears to be expanding the market.

It would appear to me qualitatively that most of these patients are Gleevec failures or they are in last crisis.

Regarding your question on Tasigna, we'd like to update you at a pipeline date in November.

I believe you also asked me about the TOPS trial which is the head-to-head comparison of 400 versus 800 mg of Gleevec and de novo CML.

We are on track to finish accrual into that trial by the end of '06, which would indicate data sometime in 2008.

Okay, on these two questions on Sandoz, the (indiscernible) certainly impacted by like, as Raymund just said, by the situation in France, more importantly by the price reductions in Germany and the U.S., so here you're right.

Of course, what we expect, over the next couple of, over the next months and years through the manufacturing site consolidation, that we will have an improvement on the COGs line.

In terms of the [metaprolol] in the U.S., you know that there's just a few in the field phase but we expect to launch very soon.

Okay, next question please?

Michael Leacock, ABN AMRO.

Thanks for taking my questions.

I've just got two questions, if I may, one on flu vaccine and one on Sandoz.

On the cell-based flu vaccine, I wonder if you could just comment a little bit on your expectations for the regulatory process involved in that.

Will that be any different because it's a cell-based product?

Then also, in terms of your potential commercialization, I think you just started to build a big capacity plant in the U.S.

On Sandoz, I wondered if you could update us on any changes in biosimilars.

I think there have been some citizens petitions filed by a few state governors recently.

I wondered if that might be of interest.

Okay, thank you.

Jorg?

Yes, I can start with flu.

Well, as you know, we have submitted the dosage for this drug culture product in Europe in the [Sensolite] procedure in June.

We do expect this process to go on a normal kind of review process.

That's why we still believe and expect that we will get approval for this product next year in Europe, and we do still intend to launch the product next year in Europe.

You should know that we do have two plants, actually, to produce cell-culture products.

One is in Marburg, in Germany, where the product was developed.

There, we have limited capacity at the moment but we are actually increasing capacity at the moment.

The second plant is in the U.S., which will be a significantly larger plant, but that will obviously only be ready by 2010 and 2011.

Now, with regard to the U.S. markets, we are currently in discussions with the FDA on what exactly a file for a product in the U.S. would have to look like, but we assume that we can base this file in the US on a significant amount of (technical difficulty) data but the exact timing is currently still open and I can give you more details on that early next year.

(indiscernible) biosimilars are a launch plan (indiscernible) human growth hormones are on track.

We have launched in a couple of European countries and we are awaiting finalization of pricing and reimbursement in Russian, in other European countries (inaudible).

In the U.S. we are preparing the launch, which will also clear soon.

With respect to the other projects in our pipeline, this is about following the [reached] development plan.

I think, in terms of regulatory movements, I think with the initiative of Senator [Rexman], I think he now really our first step has been taken in getting to, yes, basically clear regulations for biosimilars in the U.S., which then will eventually be written into law.

So the first statement is out now for comments by the industry.

We see this as a very positive first step to get to more certainty and a clear regulatory pathway for biosimilars in the U.S.

Gentleman, thank you very much.

Okay, next question, please?

Alexandra Hauber, Bear Stearns.

Thank you very much.

Just could you briefly go over that TRICARE situation again?

Is that the same charge from the first quarter, just reversed?

Then secondly, just again coming back to the France accounting, (indiscernible) you said [Novicin] is good.

I was just wondering whether, obviously we do think this is an isolated event, but whether you can give us any assurance that it actually is by giving us some background how it was discovered and that next time this is going to happen in France and some other countries.

The third question, just briefly on, you have now, for Pharma, you have now seen the Januvia label in the (indiscernible) dosing adjustment.

Do you believe your label for Galvus look similar or are there other points of differentiation?

Maybe I start with the brands this year and then I handover afterwards to Thomas for the pharma-related (technical difficulty).

Alexandra, the accounting irregularities in France only relate to the Sandoz operation in France.

They were discovered in the course of a regular review that we undertake, so they were discovered by our quarter accounting people when they visited France.

It would seem that members of the management of Sandoz France were colluding to change or report incorrect numbers.

We have obviously looked into it and whatever we have found we now have corrected in the numbers.

We have dismissed the CEO and the CFO, and further actions are pending or are under discussion.

We are convinced that this is an isolated event in as much that it only relates to the Sandoz France operation.

I think, in a large organization Novartis, you know, you can never exclude the possibility that you have black sheep.

What you want is that you discover irregularities very soon, that you then correct them and that you take the necessary action.

This is exactly what we did.

Quickly to the TRICARE, it's a true one-time event because of potential obligations and U.S. government agency program we have spaced reserves, 41 million for prior year and 21 for this year.

There was the decision by a court that clarified the situation, so we could release the provisions and had a one-time gain of $62 million.

And for the Januvia/Galvus question, I would like to handover to Kurt.

Yes, this is Kurt Graves.

Specifically to your question on the Januvia label and in particular on the renal profile, when we look at the label, there is nothing really surprising I think from what we saw in the Mexican label that was approved by them recently.

AS it relates to the renal profile, we do believe we do have a different renal profile than Januvia.

One thing is that Januvia is excreted about 75% through the kidney.

Galvus, on the other hand, is only slightly excreted by the kidney, only 23%.

We don't see the same levels of accumulation.

So we still have to have our discussions with the FDA but we do fundamentally think it's a different renal profile.

Okay.

Next question, please?

Kevin Wilson, Citigroup.

Thanks very much, two questions, one on U.S. pricing.

Given the strong position of Diovan in the Medicare Part D formularies and we note with interest that you've moved up again in Tier 2 for the 2007 formularies.

Could you give us some flavor of the level of discounting that is currently ongoing?

Secondly, whether you think that the growth that you are seeing in the U.S. as a consequence of Part D will indeed tail off next year or perhaps that there are more people coming onto Diovan and therefore the growth will continue?

The second question is with respect to the restructuring costs for Chiron, which in the third quarter were clearly much lower than those reported in the second quarter.

Is it still reasonable to assume, Raymund, maybe 300 million in total spread out over two years in order to get the 200 million benefit?

Thank you.

Thanks for the question.

I mean, you certainly understand that we cannot disclose rebate levels and I appreciate your understanding.

But what we can say is that obviously, in categories where you have multiple competitors and the degree of differentiation is not too great, you can expect a more heated discussion around rebates with customers.

Ultimately, those companies that have a leading position have a leading brand and have very intelligent payor partnership initiatives can mitigate the requests more effectively and can create a more effective win-win solution for both the customers and the Company.

Going forward, with Medicare, it's difficult to prognose.

We don't as yet experience (indiscernible) [donut hole].

We don't know if more patience will enroll next year.

You can make an argument that, because there's no coverage, patients will be more compliant and more compliance will lead to a stronger sales development.

So it's difficult really to forecast if the momentum can be maintained or not.

In terms of Chiron restructuring charges, Kevin, the majority of those charges should flow through this year because we obviously have moved very fast in terms of the integration.

Currently, I would expect that, this year, the restructuring charges will be around or slightly in excess of $200 million, and that is the bulk of it.

Obviously, you have some charges that may come later by relating to integration of factories (indiscernible) but the bulk of it has flown through this year.

Thanks very much.

Next question?

Tim Anderson, Prudential.

Thank you, a couple of questions.

Going back to the potential or likely Galvus label, how do you think your efficacy will stack up in your label versus the efficacy that is in the Januvia label?

I am wondering if there's any chance that you might have a label that looks like you have better efficacy.

Then on Aclasta, earlier, you talked about some aspects of safety related to osteonecrosis.

I wonder if you can say if there's any safety issues whatsoever that maybe worrisome with this product, or should we assume that it's a totally clean drug?

First, on your question to Januvia and the labels and the efficacy comparisons, again we still have to have our discussions with the FDA but based on the data that we do have, we know for sure we are the only drug that is shown in head-to-head studies that were as effective as a TZD, which is a gold standard therapy for efficacy in the category right now.

If you look at the slide that Thomas showed, I think he quite effectively conveyed the great drops that we have with our drug.

If you pool our data together and look at efficacy, what I can say is that our efficacy is consistently over 1%, which we think is unique.

We have drops in high base-line patients up to 1.8%, in combination up to 2.8% of[company corrected after call].

Where a really dynamic piece of the market is, if you look at our data added onto metformin versus Januvia's, our rate of drop is 1.1%; theirs is 0.65% [company corrected after call].

So we few good about our label and our data.

So, Tim, on Aclasta, I said earlier on that as far as (indiscernible) is concerned in the very large population of patients, we have not seen cases in the benign osteoporosis (indiscernible) patients of osteonecrosis in about 13 or 14,000 patient years of exposure.

You cannot assume that any drug is totally safe.

Bisphosphonates overall we know have an overall risk of renal impairment if they are used in high doses.

As far as the osteoperosis in Aclasta trials, we have not seen a high or a different rate of renal impairment compared to placebo.

Otherwise, if we look at other adverse events, the outlook is like placebo in the data package we have seen thus far.

Great.

Thank you very much.

Okay, maybe we come to the last two questions because time has advanced quite considerably, so next question, please?

Chris Schott, Banc of America.

A couple of quick questions.

Just first, you mentioned earlier that your ramping up spending for new product introductions has not been completed in the third quarter.

Could you give us a little bit more color about how much more spending we should expect to see kind of, heading into the fourth quarter, ahead of those new product introductions?

Second, on Chiron, the $79 million amortization this quarter, is that a good run-rate to use for a recurring number, kind of a $320 million per year type of number?

Then finally, with Gleevec, it seems like GIST has been a nice growth opportunity.

How much further do you think you have to grow there in the metastatic setting?

Then just some more clarity on the adjuvant opportunity.

Thanks.

So you can expect that we will have (indiscernible).

For new launches we will invest a little bit more than we have invested year-to-date in the first quarter.

So, we will basically, for new launches, double our spending in the fourth quarter, just to give you a rough dimension.

Okay.

Then with regard to the run-rate of amortization of intangibles related to Chiron, I include here both the effect that we would see in pharma and the effect that we would see in Vaccines & Diagnostics.

Our current estimate for the run-rate of the two together is approximately 400 to $450 million per year.

You could assume that one-third will be in pharma, not one-third; one-fourth would be in pharma, and three-quarters would be in Vaccines & Diagnostics.

I have to add here that the purchase price accounting has not yet been finalized.

That will now involve considerable work in the fourth quarter and we expect that, by the end of the year, we have a much more precise handle on the allocation of the purchase price.

That could have an impact on these numbers, so please take them as our current best estimates.

For Gleevec, you are right.

Metastatic GIST remains a great growth opportunity for us, in part because patients are living longer and in part because diagnosis is slowly improving in the emerging growth markets.

(technical difficulty) adjuvant setting, we see some use already in that setting in the U.S. market but virtually no use in the adjuvant setting in other parts of the world.

Thus you see that's the difference in the Gleevec split around the world.

We do have ongoing Phase III trials in adjuvant GIST and these are event-driven, so I would hope that, some time by 2007 or worst-case 2008, we would have the results.

Okay.

Could we then have the last question, please?

[Jerome Dreymeyer], Dresdner Kleinwort.

Yes, thanks.

A couple of follow-up questions.

First, on Galvus, on your expected label for that, clearly Januvia got monotherapy in combo with metformin and with the TZD.

Do you expect a label for Galvus to also include combination with the SUs and the insulins?

On Gleevec, just a quick question there, can you provide us some stats on the percent of patients who develop resistance to the drug and over what duration of use?

Two patent-oriented questions, one is on Lamisil.

That patent, as I understand it, comes off in December of this year.

Can we expect the entire U.S. sales of Lamisil to fall off a cliff after the December patent expires, or will the topical patent protect part of that franchise?

On Lotrel, both of its active ingredients are off-patent as of September of next year.

Are you comfortable that there will be no direct generic competition for Lotrel at that time?

Okay, this is Kurt Graves again.

Your question on Januvia, I mean on Galvus, the question on the label, again we have to have our meeting with the FDA.

But there is data in our submission that includes with SUs and includes on top of insulin.

In terms of Lamisil and Lotrel, Lamisil you can expect less of an erosion curve, which you can expect for general medicine products and the topical formulation of Lamisil, of terbinafine I should say, will not be in the market to get some of (indiscernible) into a topical formulation.

But in Lotrel, our position is unchanged, that we are confident in our patents and we are looking forward to clarify the situation in a court case if needed.

We do not expect a Lotrel generic competitor next year.

The question regarding Gleevec resistance unfortunately is a very complex one.

Having said that, we know that about 84% of patients on Gleevec 400 mg (indiscernible) have a complete cytogenetic response (indiscernible) doing quite well.

That means the remaining 16% have not reached a TCR, although a large portion of these patients are doing very well and in time, they will in fact have a TCR.

There are about 2 to 4% of patients who never respond to Gleevec, and there are about 8% of patients in accelerated (indiscernible) phase who may be able to benefit from either higher doses of Gleevec or another medicine.

Okay.

With this, we have come to the end of our teleconference here.

I would like to thank you for your attending this conference and your interest in the Company and the recent developments.

We all hope to see you soon at the R&D update in London on November 28, where we will give much more insight into the latest launches and latest developments in the pharmaceutical pipeline.

We hope to see you there soon.

Thank you.

Ladies and gentlemen, the conference call is now over and you may disconnect your telephones.

Thank you very much for calling.

Good-bye.