Novartis AG (NVS) 2006 Q4 法說會逐字稿

Good morning and good afternoon.

This is the (indiscernible) conference operator.

Welcome and thank you for joining the Novartis conference call on full-year results 2006.

You are now joined into the auditorium with Mr. Daniel Vasella.

Thank you.

I propose that we start with our meeting.

I would like to greet everyone who is here and I know many aren't here because flights were apparently shaky and only the very courageous ones did enter the planes and made it and the others apparently decided to stay in [London] or wherever they are.

But we will have the opportunity to also address some questions through the Internet and I would anticipate that we will be able to handle it this way.

This afternoon, we have a review of the performance.

I will start by giving an overview, then Thomas Ebeling, Joerg Reinhardt, Andreas Rummelt and Paul Choffat will present their divisions and Raymond Breu will give you an analysis on the detailed set of numbers and I will conclude.

If we look at the highlight of 2006, we were able to again contribute significantly to the health and well-being of people to pass along productivity savings of over 540 million to customers in the generic business and also to reach out significantly to patients who have difficulty to get access to medicines through our corporate social responsibility programs.

The strategy is really nothing new.

You know the fundamental trends which we are witnessing, which are really the growth drivers in the health industry and the healthcare industry is on one side and the cost increase is on the other and both create a pull, but also a tension.

And if we look at these fundamentals and we look at our business portfolio, then I think we have a unique position in the industry where we can address and we can take the opportunities of growing supported by fundamentals our business now and in the future and we have done in fact quite well in the past.

Industry-wise, these are how we look at the industry and the top-line growth opportunities and the margins and we have businesses, which grow somewhat more dynamically, but not necessarily have the better margin and others who have slowed down in growth, but are attractive in margins, like for example pharmaceuticals.

We have further concentrated our activities on medicines and healthcare by agreeing with Nestle for the sale respectively of the purchase of Medical Nutrition.

You have seen what numbers we did agree upon and I would say we have a happy buyer and I can say for us we also have a satisfied seller.

With that, our portfolio has further concentrated.

We are now in 96% of our activities in healthcare and that has been helped by the Chiron acquisition and the divestment of Medical Nutrition.

If one looks at a total shareholder return in the last 10 years, we had an attractive return of 11.8% compounded annual growth rate with that in excess of the SMI or the world pharma index and also in the last five years, we have beaten the world pharma index significantly.

If we look at the group performance in the short term, we have a set of double-digit increases at top-line operating income, net income, EPS and also we were able to at least slightly improve the profit margin.

If you look geographically, we have expanded significantly in the U.S.

The European number you see here is somewhat distorted by acquisition effects.

So underlying the growth in Europe is of course much lower.

And the emerging growth countries are really contributing, but from a relatively small pace as compared to the established markets.

All divisions had dynamic growth and did well in consumer health, Paul Choffat will talk about this, especially OTC and Animal Health had a superb year.

In pharma, we have a continued gain in marketshare and of course especially important, a launch phase ahead of us getting hopefully all the approvals which we hope for and we believe in, but with a certain level always of anxiety, which you certainly understand.

In vaccines, a great turnaround and in Sandoz, I think we see the effects now of the synergies and the strength in the marketplace while I mentioned the success for business units in consumer health.

The pipeline is quite full with 138 projects and 50 completely new NMEs with the Biologics, which are now more important than used to be in the past and Mark Fishman and James Shannon make a major effort to strengthen this area.

We are, as we discussed last fall, in some areas ahead of the curve and in some others, we are catching up.

We have a great pool of talent and we continue to invest notably in Shanghai.

You know our performance track record from a point of view of approvals in the past years and newly, we have decided to invest in Shanghai as I mentioned.

That is not the traditional Chinese investment where you go for paying less and basically saving money.

This is an investment which we are doing to tap talent because there is a large number of additional fresh and driven talent in China, many returning from the U.S. or from Europe to Shanghai and we also have made a commitment for innovative research, really research and not just development activities.

The expected launches, Thomas will talk more about this so I will not go into details, but it is a full list.

I have to say also with the planned rollouts and we got yesterday the approval of Exforge for Europe.

So I think as we move forward, we will get news over the year.

Our corporate social responsibility program comprises mostly access to medicine programs and it is a substantial commitment we are making, but I do believe it is the right commitment, not just from a point of view of values we have, but also from a point of view of keeping the license to operate in this industry and for this industry.

With that, I would like to ask Thomas to come and present the pharma results.

Thank you.

So good afternoon. 2006 was a fantastic year for pharma.

It was our sixth consecutive year of double-digit sales growth and the fifth consecutive year of operating income growth and we would have actually exceeded a 30% growth, but as we decided to acquire Chiron, which was a great decision, as reported, our ROS is only in line with last year.

Marketshare increased.

We have now a very rich pipeline as Dan pointed out with 138 projects, 50 NMEs, yet concluded 12 licensing-in agreements, 22 approvals and we maintained our top-rated salesforce positioning in most of the markets we are competing in.

So a really good year.

You can see here the number, double-digit sales and income growth, stable ROS and headcount growth basically driven by the acquisition of Chiron.

We have now six years of continuous growth of marketshare reaching 4% and we are ranked seventh in the market.

You can see here the margin impact and the margin growth we had in quarter four.

Excluding Chiron, our margin would have improved by 2 percentage points and over 12 months by 1.4.

And the main drivers are really increased productivity in R&D and M&S over the full year and the quarter four M&S spend was impacted by the new launches.

In terms of geography, we have seen very dynamic growth in North America, specifically in the U.S. and in the emerging growth markets.

In Latin America, all of our markets performed extremely well and in the rest of the world, we had Russia, India, South Korea, Turkey with very strong growth rates.

And Europe and Japan, they are lagging a little bit behind partially driven by patent expiries and by price cuts of governments.

Our top three franchises are all growing double-digitally; cardiovascular, oncology, and neuroscience.

So our golden franchises have a very dynamic performance as well in 2006.

And we have a world premiere.

Diovan is the first Novartis product, which has exceeded $4 billion in sales.

Our vision is now to exceed $5 billion.

We will not do this in 2007, but in the foreseeable future, it is possible.

And Glivec and Lotrel continue to grow very well.

What makes me personally very proud is the excellent performance we had marketshare-wise with Diovan in the U.S.

We are slightly below 40% after the marketshare stagnation a couple of years ago.

So it shows that our continued commitment into clinical studies into field force support and into innovative marketing initiatives and into rolling out new strengths has really paid out and fantastic performance in the U.S., but almost in all other markets, we gain marketshare with the exception of Japan.

Our four key oncology products are either first or second in the segments.

They all progressed well.

Glivec, fantastic performance.

Femara, very dynamically growing.

Sandostatin LAR.

The only brand which was not as dynamic as we visioned was.

The only brand which was not as dynamic as we wished was Zometa.

But Zometa is still the undisputed leader in its segment.

I want to point out a couple of other brands, which more recently appeared to be in reach of blockbuster potential.

Femara being the first where I am very, very confident to reach blockbuster status of growth in excess of 30% this year driven by new indications.

Zelnorm growing 35% in the U.S. and it shows again that sometimes it takes time until a product gets rolling, but certainly I can say that Zelnorm is on a trajectory to become a blockbuster.

Xolair very often gets not the visibility it deserves at Novartis because Genentech is booking the sales in the U.S., but if you include the Genentech sales, Xolair is already now after a few years almost at 500 million sales.

And again, Xolair is on its way to become a blockbuster.

Exjade was a super launch.

We have already almost $150 million in sales in the first seven, eight months and Exjade has potential.

An outlook which might surprise you is that we have upgraded internally Prexige to blockbuster potential.

I should underline the word potential here.

But nevertheless, it is in reach and we have received approval in Europe.

We will launch Prexige this month in Germany.

We will file this year in the U.S.

So if we get the U.S. approval and if we see a revitalization of the market, Prexige can certainly surprise all of us positively.

Scripps has awarded us for the second year in a row the award for the best pipeline and again, we are very proud of this.

And here's a look you are familiar with, our 138 projects with 94 projects being in late phase, well spread over very important and attractive disease categories.

In terms of licensing-in, we continue to be a leader.

If you will combine 2005 and to mid 2006, no other pharma company has concluded more deals than Novartis and so there was a survey with [VCs], which rated Novartis to be the best company for collaborations.

So I am very confident that we will continue to have a very good track record in licensing-in new products.

You can see here the 12 deals we have completed last year.

In all the franchises where we aim to strengthen our position; oncology, infectious diseases, respiratory, neuroscience and autoimmune.

Our field force rating continues to be outstanding.

In eight of our top 10 markets, our cardiovascular sales force is rated the best in class and in the other two markets, we are the number two.

In managed care, since years, we are the leading company and as well in Medicare.

So if you think about [being] a (indiscernible) leader, sales force (indiscernible) leader, we have a very good R&D productivity.

I can certainly say that in 2006, we have proven again that our underlying fundamentals of operations are very good.

That was maybe one reason why Med Ed awarded us the title of most admired pharma company for the first time and we are happy to have received this award.

So key strategies, successful launches, leadership in high-growth, high-margin sale project areas, new commercial and new development models, an increased focus of emerging markets and driving productivity.

Let me illustrate these points.

Dan has showed to you the list of our new products and rollouts and you can see here that they are nicely segmented into mass-market launches, mixed market launches and specialty market launches, which is certainly helpful in managing the investments and managing the margin.

Exforge clearly has the potential to become the efficacy leader in [prescription] hypertension and we will launch Exforge in Europe, in Germany relatively quickly, most likely already in February, our reps will be out to sell the product and we have approval as well for the U.S. where we have to wait for the patent expiry of amlodipine.

Just a quick reminder to Glivec, superb five-year outcome. 93% of patients are not progressing to more advanced disease stages and the outcome will get better over time over the years the patients are taking Glivec.

But we should not forget that 4% of patients are intolerant to Glivec.

A very tiny amount of patients is developing a resistance and for these patients and for others, the signal represents a very viable alternative with outstanding efficacy results in first second line treatments.

And I have collected here some quotes of KOLs for you, which indicate that the key opinion leaders are viewing to signal not only as an effective treatment, but very importantly as a relatively safe treatment.

So it represents a great alternative not only to Glivec, but especially to Sprycel.

You can see here how we are lining up our products to strengthen our market position in key franchises.

You see the in-market products, the products we intend to launch over the next two years and the next wave of products, which are all products which we will file between 2008 and 2010.

You can see that our position will be very strong, not only in cardiovascular and oncology, but as well as neuroscience, respiratory and in anti-infectors.

So by 2010, we will have five franchises where we have a strong position.

You can see here the key USP of the products I just mentioned on the previous chart and all of these products certainly have the potential to have a very competitive profile and you might notice that this is even more of a shift into specialty markets.

In terms of new commercial models, you know we still spend more than 30% of our net sales into marketing and sales.

So that represents the single biggest line of opportunities to drive productivity.

We have three clusters of ideas; category captainship, new selling models and new tools and productivity.

I would just like to share one example with you about our success.

Since the initiation of the program, we have enrolled 500,000 patients worldwide into our [EP] success compliance initiatives.

And we believe based on our analysis that those patients, which were enrolled and stayed on the program, the compliance rate was increased by 50%.

That is one of the reasons why our marketshare in the U.S. has recovered and we have fantastic results as well in Brazil.

So that tells me that we have a great opportunity to further drive drug usage through innovative compliance initiatives.

Emerging markets, very good success in 2006 and for me, even more important, over the next years, markets like China and Russia will add an absolute dollar the same amount of growth like big markets like Germany and France.

You can see here the accumulative incremental sales over the period from 2007 to 2011 by the markets and clearly Turkey, China, Brazil and South Korea and Russia are very important markets.

India from a sales perspective is not yet there, but all other markets represent a huge opportunity for Novartis.

And in those markets, we have already a strong position.

We are ranked fourth and last year, we outgrew multi-national competition significantly with 17% versus 10%.

You have to know that in these markets, local competitors are still very active.

They compete very aggressively, but a 17% growth rate relative to 10% of the market is very dynamic.

Productivity is for us very important.

Next year, we have eight launches for rollouts.

We intend to continue to invest very competitively in R&D.

So in order to manage the margin, we have to deliver productivity savings.

And our aim is to deliver 1 billion by 2008 relative to the cost base of 2005.

In 2006, we have already realized 500 of this amount, basically coming through shared services, offshoring, procurement and innovative IT programs and we are confident that the remaining 500 will be realized until 2008.

So the outlook, you can expect strong regulatory news flow from Novartis in 2007 for all major geographies with obviously the key highlight being in quarter one, the news flow regarding Galvus and Tekturna in the U.S. and therefore for 2007, we are suggesting that our growth will be mid-single digit in line with the market impacted by the new generic competition for Lamisil and Trileptal in the U.S.

You will see a strong launch performance of the brands we will launch and the aim to contain the margin erosion to a percent point relative to what we have reported.

Obviously our objective is to do much better, but we will say definitely not more than a percent point and we have set up sufficient productivity initiatives to accomplish this.

The period of 2008 to 2011 will be very exciting.

We have eight launches in 2007.

In those years, we will launch 10 and more brands.

So we are very confident that the growth rate in this period will be double-digit, will be very dynamic and that you will continue to see marketshare gains of Novartis.

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

So good afternoon. 2006 was a good year for the new division.

We had good progress in stabilizing and integrating the business.

We saw an accelerating sales growth in both divisions in diagnostics and in vaccines.

We had a strong operating income growth despite higher investments in research and development and also in our technical infrastructure.

We advanced our pipeline with the first cell culture influenza vaccine filed in Europe and we made a number of contributions to pandemic preparations of several governments.

We signed stockpiling contracts with the U. S., with U.K. and France.

We did start our cell culture facilities supported by a 200 million U.S. grant and you may have seen last night there was another press release indicating that we got another 50 million support from the U. S. government for the development of our proprietary MF59 adjuvant.

And last but not least, we did also file the first pre-pandemic vaccine in Europe for public use, as well as a mockup file for pandemic use.

Financially, we had good results in 2006.

Net sales grew by 42% for the period between May and December.

So after the acquisition.

Operating income, our loss was 26 million, but when you look at operating income excluding acquisition effects, this actually grew by 63% as compared to the year before to 307 million.

Return on net sales is 48 months period 32.1% for the full year.

Return on net sales would be around 20%, mainly based on the fact that in the first quarter, Chiron made a loss.

The first quarter is traditionally a very, very weak quarter since you have no seasonal influenza vaccine sales obviously.

When we look at the full-year performance and sales growth over the last few years, you of course see on this slide the disastrous year of 2004.

Then there was some recovery between 2004 and 2005 with an acceleration, as I mentioned before, between five and six, mainly driven through the good performance of influenza vaccines.

Now, in addition to our focus on growth of the business, we did also make good progress stabilizing the business.

We completed more or less our integration efforts.

The synergy targets were achieved and we are actually a little bit ahead of schedule.

We established a new management team, a combination of former Chiron people, Novartis people and external people.

We started a number of training courses across the Company at all levels of the organization.

We focused very early on supply issues, especially in Liverpool and as a result of that, we had better than expected production output from Liverpool and good performance at the other sites.

We will continue to improve our quality focus.

This is still not done despite the fact that we had good inspection results from the FDA, from some European governments or authorities, but the program is still ongoing.

We advanced our pipeline, especially with a focus on flu and on meningitis, and we did build coherence among the different sites and we selected, as you know, Cambridge as the center for the headquarters.

Cambridge was just pretty much in the middle between Emeryville and Basel at least from a flight time perspective.

We developed a pipeline further with having now three projects in registration. [Korean] vaccine is our [Penta Valent] pediatric vaccine, mainly for developing countries that we developed together with [Berno Acuso].

The Optaflu is our flu cell culture project in registration in Europe and the H5N1 vaccine is the pre-pandemic vaccine for public use, also in registration in Europe.

Our colleagues from Intercell did start to submit documentation for U.S. approval for the Japanese encephalitis project and then the two meningitis projects moved into Phase III and Phase II.

Now let me focus on two franchises.

One is influenza; the other one is meningitis.

We believe that in the influenza market, there is going to be a continued increase in demand.

We see this in high single digits at around 8%, but also, as you know, there is a continued increase in supply.

Influenza vaccines are still being seen as more or less commodities and in order to gain marketshare, it will be necessary to come up with differentiated products in the future.

Now the bulk of our influenza vaccine production is still in Liverpool.

You can see here the development of Liverpool production output over the last few years. 2004 -- a difficult year, 2005 -- some recovery, 2006 -- not bad, but 2007 -- we would like to get to an even higher output of at least 35 million doses.

But then going forward, we see several segments of the influenza vaccine market and we would like to be and we will be players in all four of them.

Obviously there will still be a strong basis on the egg-based products where we actually have three products in the market with Fluvirin, Agrippal and Begrivac.

Then there will be a new category of enhanced products or immune-boosted products that have adjuvants and we have one product here in Europe with Fluad, which we would like to introduce in other markets as well.

So we will focus more on Fluad, which contains MF59.

Then the third category will be cell culture-based products and there, we have Optaflu, which will come to the European market before the end of the year with better tolerability and at least the potential for better efficacy.

And then pandemic products, the H5N1 products, where we also have a leading role with the file that we have submitted for public use in Europe.

Now our cell culture-based Optaflu product will be produced in two sites.

One will be in Marburg.

The other one will be in North Carolina and you'll see on the bottom of the slide that we have just started to get ready or to install the first steps of the new production site in North Carolina.

On the top of the slide is the new production facility in Liverpool.

So we will move out of the existing old-fashioned and not state-of-the-art anymore facilities and we will move to a new state-of-the-art facility, which will be operational in 2009.

The North Carolina plant will be operational in 2011.

As you know, we have, as I said before, submitted Optaflu.

Here, you see the results of the Phase III study in different strengths;

H3, H1 and [V] and also in two different age groups; elderly and adults and you see that the level of immunogenicity or zero protection is exactly at the same level than the egg-based product.

From a tolerability perspective, we also saw very, very comparable results.

Optaflu is on track for 2007.

We submitted in June.

So we have the first questions, which we did respond to and we expect that approval should come in time for launch for the influenza season, which will be a limited launch, limited to Germany since we have limited supply coming from Marburg.

We would expect this to be broadened in the years to come when we have further supply coming from Marburg.

We would then launch in further European countries in 2008 and beyond.

From a U.S. perspective, we are in discussions with the FDA.

They have indicated that they don't want to see a full fledged program.

So we will not -- probably not have to do a Phase III program, which will enable us to submit the same file more or less with some additional Phase I data that we have already collected in the U.S. in 2008.

Meningitis -- a devastating disease.

If the infection hits, especially young children, it is especially problematic in infants.

Kids below one year, but also in small children between one and five years.

The disease is really devastating with a high level of mortality and long-term consequences that are severe.

The most common strain to cause this disease actually is the B strain.

Now when you look at the current situation, there are five different [xeno] groups that may lead to an infection, which is A, B, C, W and Y and there are different age groups for which vaccines are available and not available.

The current situation is that for the Z xeno group, you have a vaccine available for all different age groups.

For A, B, W and Y, that is not the case.

For A, W and Y, there is just for the 11-year-old and older vaccine available, but not for the other age groups.

Now when you look at the first of our two meningitis vaccines, which is the ACWY vaccine, that is going to be available for all age groups for A, C, W and Y. We're currently in Phase III with this program and it is actually progressing very nicely through Phase III.

You'll still see that there will be then medical need for a B product, which is the second product that we have currently unavailable.

ACWY, the Phase III started in April of last year.

We will, as I said, look at this product in all four different age groups.

We will have non-inferiority data versus Menactra and Menomune and we do also studies with concomitant use of other vaccines, intend to file in 2008.

The B vaccine is in Phase II at the moment.

Currently there is no vaccine available as I showed before.

This is a new vaccine, a modern vaccine, a recombinant vaccine that covers quite a number of strains within the B xeno group because even there, you have different strains in Europe than in the U.S.

So it is important that you come up with a vaccine that covers several of those.

Phase I was positive, good tolerability, good indication of an immune response and currently Phase II is ongoing in different age groups.

Actually, there is also an infant trial ongoing in the U.K.

Our priorities going forward, we do want to expand and strengthen our commercial operations not only in emerging countries, but even in Europe.

There are a number of countries where we are not strong at all and that we want to change so we will have a focus on Europe and emerging countries in 2007.

We need to further strengthen our production infrastructure.

This will be the case in Europe, in Asia and in the U.S.

We want to further accelerate the innovation potential of our pipeline.

We want to strengthen the discovery operation.

I said before that we moved our headquarters to Cambridge.

As you know, [Nimba] operations are in Cambridge as well and we will actually be very, very close to Nimba and we will actually make sure that our researchers and Nimba researchers will work together, in some instances on the same floor.

So we will look for a lot of synergies between these two research groups.

We will continue to improve our quality operations.

This is a multi-year project that is not done within a year.

So there is still a lot to do and we want to strengthen the talent base further in our group.

From a diagnostic perspective, actually there are two objectives.

One is to continuously expand the business in new geographies.

We do intend to add five to six new countries to the existing business in 2007.

In addition, we would like to use the molecular diagnostic base, research base, technology base for expansion into the biomarker field where we will collaborate with our colleagues in pharma and we will look at further investigation of biomarkers that are potentially predicting for example responders or patients that are at risk for side effects.

We do anticipate significant news flow in 2007 with a number of new clinical data coming up.

At the same time, some submissions and approvals, approvals for the cell culture business, but also for the H5N1 vaccine and some submissions in the U.S., in addition to new data for meningitis and for flu vaccines.

Conclusion, we had a successful turnaround in 2006 with good financial results.

We see a very good exciting growth potential for the seasonal influenza business, mainly based also on the introduction of the cell culture technology.

From a pandemic perspective, there is reason to be optimistic that also that could develop into a business.

At the moment, it is roughly only 10% of our overall seasonal business, but could become more.

And then from a meningitis perspective, we believe that products, the ACWY and the B product, have the potential to be strong growth drivers.

Thank you very much and with this, I hand over to my colleague, Andreas Rummelt.

Good afternoon.

Sandoz had a successful year in 2006.

We were able to grow our sales by 27%, mainly driven by our retail business, which is about 90% of the total business.

We could more than double our operating income in 2006 and here, this was driven by operational improvement.

This was of course driven by new launches and synergies coming from the acquisition.

We had an excellent launch performance across all geographies.

With Omnitrope, we were able to get the first biosimilar approved and launched in Europe and in the U.S. and we were able to file about 100 new projects around the globe and we could significantly grow our produced and sold volume.

Looking at the financials, the sales grew to about $6 billion and we could improve the return on net sales by more than 5% points to 12.4%.

The growth, as I just told you, mainly came from the retail business.

So here, the retail business grew by 32% and basically there was nice growth across all geographies.

Countries which were especially well-performing were in Eastern Europe and here mainly Russia, then some countries in Scandinavia.

Canada was performing very well, Australia, as well as Switzerland.

We had a very good launch performance.

So the output from the development organization was good in 2006.

So major and the main number of launches happened in Europe, but with also more than 20 products newly launched in the U.S.

One of our important strategies is to increase the number of difficult to make generics in our overall portfolio.

These products support margin and just as an example, I want to show metoprolol succinate, which we launched early in 2005, early 2006 in Europe and later in 2006 in the U.S.

This is a product where we developed a special technology in-house, which actually not only generates a copy of the originator, but it generates a product which is better than the originator because the product results in tablets, which are dividable, which in this indication is very important for the patient and we also introduced new strengths, different strengths than the originator.

So this is a clear generic plus and we could generate 35% marketshare in Germany and more than 50% marketshare in the U.S. where we are still alone with the authorized generic from Astra.

And also important is that we developed this product in-house and also are able to manufacture this product in-house, which allows us to keep the cost of goods low.

Sandoz is well-positioned in the market where the market trends continue to favor generics.

So there is an increasing acceptance of generics.

Across all geographies, we see significant volume growth and over the next five years, there is a very stable flow of patent expiries.

Over the next five years, we expect an annual growth of about 10% of the generic market and what you see on this slide is that basically there is equal growth in most of the geographies.

A little bit higher in southern America, also in some of the emerging growth markets, but as in the last five years, we expect the U.S. and Europe to contribute significantly in most to the market growth.

Looking at the key success factors in the generic industries, Sandoz is well-positioned.

We hold top positions in 10 of the 15 largest markets.

We have shown a good development output in 2006 and we expect again about 90 new filings in 2007.

We could improve our situation in in-house development and in-house manufacturing of active pharmaceutical ingredients, which will play a more and more important role in order to stay cost competitive in the next years to come.

On the difficult to makes, we are focusing on biosimilars.

As I have presented several times this year, we are focusing on patches, inhalers and oral solids and most focus this year was put on the inhalers as asthma is a very increasing disease with higher morbidity and mortality rates.

So here we started a collaboration on dry powder inhalation, which is becoming more and more popular and we are also investing in development and manufacturing capabilities in this technology area.

Key priorities for 2007 are to launch generic versions of key patent expiries on day one of the patent expiry.

On the development side to push on biosimilars and further optimize the level of vertical integration, in-house manufacturing of active ingredients and in the area of operational excellence, to further flexiblize the supply chain.

This should allow us and I am confident that we could grow in 2007 with double-digit growth rates.

We delivered a strong performance in 2006 in a very competitive environment and through our good position in top markets, through projects in place to further improve cost competitiveness and through our strong development portfolio with a broad range of difficult to make generics.

I am confident that we will be able to further expand leadership in 2007.

With this, I would like to hand over to Paul Choffat.

Good afternoon.

The consumer health division had strong performance in 2006, growing top line by 8% and bottom line by 12%.

The two main growth drivers were OTC and Animal Health and as you see on the screen, those numbers exclude Medical Nutrition, which is going to be downlisted this year to Nestle.

Our performance is best judged if we compare our growth rate against the market growth of the industries in which we are active and as you can see, all our businesses achieved strong positions with one exception, CIBA Vision, which suffered a couple of manufacturing issues, which led to supply constraints.

Now, let's now look at the OTC highlights.

OTC was the fastest growing company in the industry among the top 10 players.

And based on this performance and the acquisition of Pfizer by J&J, it is now ranked number four worldwide.

This success is due to the continuous focus on our strategic brands, supported by good innovation, as well as marketing and sales.

In terms of innovation, innovation is certainly one of our major sources of growth and the Athlete's Foot category and Lamisil Once are a good example.

Digging into consumer insights, we discovered that for sufferers, Athlete's Foot is a natural part of their life and they don't want to spend ages on long treatment and regimens.

Basically the problem is the fact that Athlete's Foot is not considered as a real disease and for sufferers, they have got used to learn to live with this disease.

It never goes really away and they don't take it seriously even though it is inconvenient.

Most importantly, basically many people have not experienced the benefit of an antifungal treatment because they have never complied fully with the full duration of the treatment.

So what Athlete's Foot sufferers do need is an easy, fast and effective treatment, which leads them to forget quickly about the disease and the treatment.

As a result, we developed and positioned and launched Lamisil Once, which is designed to address exactly this compliance issue.

It delivers enough terbinafine to kill fungi with one dose and it is much more convenient than the usual treatment, which lasts for seven days, twice or three times daily.

Now I would like to share with you the commercial which has been used to support the launch of Lamisil Once.

(Video playing)

I am pleased to report that the two first countries in which we introduced the product with, it has allowed us to take market leadership.

Turning now to our customers.

A good sales performance implies winning with the winners.

In other words, to build close relationships with our largest customers in order to jointly develop the categories together.

And I am pleased to report that we continue to be successful on this path, not the least with our three top customers in the U.S.

Animal Health -- Animal Health was also the fastest growing company in the industry last year.

It gained three positions and is now number five in terms of global competitive ranking.

Both companion animal, as well as our U.S. farm animal business were the key drivers for this success.

In addition, we were able to sign a small acquisition in Japan, which will not only help us to strengthen our position in the third largest market worldwide, but especially gives us access to milbemycin, which is the most important active ingredient in our portfolio since it's the active which we use for all our dewormer products and this transaction will be closed at the end of this quarter.

Now as far as the priorities for 2007 are concerned, we want to continue to focus on strategic brands, on innovation, as well as further leveraging the opportunities of the emerging countries.

Last but not least, we want to turn around the performance of the CIBA Vision supply chain.

Now as a short recap, the division had a strong performance in 2006 and two of the business units were the fastest growing companies in the industry.

Thank you and I would like now to pass on to Raymond Breu.

Good afternoon.

I have to take you back to numbers or to financial figures.

You have seen the results for record-setting exceptionally high growth rates of 15% to 18% for sales and the operating and net incomes and they are at these high levels despite high long-term investments, which we made.

We absorbed 451 million of current acquisition-related costs and we continue to invest in research and development, which went up 19% or 17%.

Thanks to the high growth rates, we have margin improvements that we achieved.

The operating income margin increased from 21.4% to 22.1% and the net income margin from 19.1% to 19.5%.

Cash flow generation of the group remained very strong with cash flow from operating activities growing at 9%, but free cash flow after dividends, while reaching a high level of 4.3 billion, did not hold pace with sales.

I will have further comments later on.

2006 extends the record of ever better results with sales, operating income, net income and free cash flow all growing at compounded annual rates of in between 15% and 10%.

Results for 2006, as I mentioned, include 642 million of Chiron acquisition-related costs at the operating income level, covering one-time inventory step-up, restructuring charges, as well as first-time amortization of intangibles.

Excluding these Chiron-related charges, operating income (indiscernible) even 28%.

Excluding the same Chiron-related charges and the few additional ones of a non-operating level, the Chiron acquisition-related charges added up to 451 million net after tax at the group level and here I have to apologize for a mistake that was in the press release.

The two numbers were transposed.

I made this mistake so I can happily apologize for it.

In the press release, it said 541.

The real number is 451 as it is in your documentation.

So excluding these costs, the underlying net income grew 25%.

Apart from the Chiron investment that we absorbed, I mentioned that research and development costs [pent-up], looking at the timeframe of five years, we have a compounded annual growth rate for research and development of 17%.

So clearly higher than sales.

So we have continued to invest.

Operating margin, as I mentioned, up 0.7 percentage points.

If you look at the divisions, high volume growth and significant productivity improvements at all divisions, but in particular Sandoz and pharmaceuticals accounted for this.

The numbers for pharmaceuticals and vaccines and diagnostics are obviously distorted by the Chiron-related expenses.

So I show here the margins for 2006.

If you correct for the Chiron-related charges and other one-time charges, then you can see that the pharma margin increased to 30.4%.

Vaccines and diagnostics had a margin of 32.1%.

Productivity improvements were achieved mostly on the lines of marketing and sales, which contributed 1.3 percentage points and research and development, which added half of a percentage point, but one has to say that correcting for the Chiron-related charges, cost of goods sold would look good too in their development and the other part of the Chiron-related charges showed up in other income and expense.

That is why we have a negative contribution of 0.4 percentage points there.

Now moving on to non-operating levels, income from associates, which is mostly Roche, improved 37%.

Net financial income, down 47%, but this is entirely linked or to a large extent linked to the drop in liquidity.

Average liquidity was down $3.8 billion as a result of acquisitions.

Gross financial income as a percentage of average liquidity invested was a decent 3.9%.

I say decent because obviously it is reflecting a much lower level of liquidity, which forced us to adopt a more conservative investment policy.

As I said, the reduction in net liquidity to just 0.7 billion at the end of the year is due to the fact that acquisitions of 5.7 billion significantly exceeded the free cash flow of 4.3 billion.

Liquidity then at the end of the year stood at 8 billion.

Now a few comments on cash flow.

Cash flow is up 19%, operating cash flow from activities 9%, but then after that, we noticed that capital expenditures increased 53%.

That is mostly related to capacity expansions and the investments into production in vaccines and pharmaceuticals.

We have another 18% increase in intangible investments.

These are up from payments and [mindstorms] related to in-licensing activities and then a 30% reduction in asset sales and this explains the development then of free cash flow, which went down 7%.

Looking over a period of five years again, cash flow from operating activities grew at a compounded annual rate of 14%.

So the cash generation power of the group is undiminished.

While EPS and dividend per share increased 17% and 16%, the share price development in the year obviously was a bit underwhelming.

In Swiss francs, the share price only went up 2%, but that means now that the valuation metrics, the fundamentals of the Company have improved and the multiples around 18.8 for P/E and 13.2 for EVO or EBITDA.

I think we understand though that for performance, long term is very important.

One element is the dividend.

You can see that over the period since creation, we have increased the dividend 10% on a compounded rate.

For 2006, we are proposing to the Board an increase of 17% to 135 francs per share.

Daniel has already shown the total shareholder return over 10 years.

I want to add here just the one over five years as well to show you that we have not just picked one of the periods to please us.

Over five years, we clearly outperformed the pharmaceutical world index as well.

So I think in a conclusion, it's good to remember again the improvement in the fundamentals, the 15%, 18% and 17% growth in sales and income.

We have integrated the large acquisitions in the generics and vaccines area.

We have sold medical [notaration].

The free cash flow is at the high level of 4.3 billion.

We continue to enjoy a AAA rating from the rating agencies.

Thank you and I pass back to Daniel Vasella.

Thank you, Raymond and I will come to the conclusions.

We have a portfolio, which is really mirroring the needs of our customers and the growth opportunities last year with a strong growth and I would say with all of our divisions having substantial strength not only in the past and today, but also from a mid to long-term outlook.

Barring unforeseen events, we anticipate mid to high single digit sales growth and a record operating and net income and especially we believe that 2007 will be a very exciting year as to product launches.

So it will really be a year of the future and we are looking forward for 2008, 2009, 2010, 2011 double-digit growth rates in pharma.

With that, I would like to close the presentation and go to question and answers if I may to ask my colleagues to come to the podium.

Thank you.

Okay.

Who would like to start?

Yes, please?

Karl Heinz Koch from Bank Vontobel.

I would like to ask you the question of the guidance for this year.

Mid single digit pharmaceuticals growth seems quite cautious.

I would like to understand what is behind those numbers.

Especially how you and when you expect generic competition to Trileptal, which was supposed to happen for two quarters now and I'm just wondering what is holding it up.

And also how you account for new products feeding in.

Do you risk-adjust them or how do you look at that?

Thank you.

We believe that the global market, net branded market, will grow mid single digits next year.

In 2006, there was a benefit obviously in the U.S., which had increased the market growth, which we don't see happening at the same intensity for the market.

So for the growth rate of 2007 versus 2006, for us, we see a reduced market growth.

Secondly, as you mentioned, generic competitors coming into the U.S. for Lamisil and Trileptal.

Lamisil is mid-year.

Trileptal, we believe quarter one, we might expect generic competition.

And we are still expecting an AB rated generic for (indiscernible), which might come as well.

So these three products will face more generic competition.

This obviously will be offset by the introduction of new products.

There, obviously we have a certain risk adjustment always in our guideline.

We are very optimistic that these drugs will be approved, but there is always a little bit uncertainty for example when you get reimbursement in Europe.

So that is adjusted.

So those are the main drivers for our top line.

We hope of course all that Trileptal will hold up for a little bit longer, but you know.

If I remember correctly, there was a patent pending, a formulation patent pending sometime last year.

Was that issued by now and how much would that have an impact on the potential launch of a generic?

It was issued, but it will not prevent generics to come to market.

Alexandra Hauber from Bear Stearns.

I have two questions on pharma and then a few questions to Europe and the vaccines.

Thomas, you mentioned that by 2010 or 2011, you will go from two key franchises to five.

And while for respiratory we can see the concept of respiratory captainship shaping up quite nicely, the portfolios in CNS and anti-infectives as well is impressive, but looks still a bit random.

So should we expect that that is the key focus of more business development activity in the coming years?

And the second question is on -- in view of the pending launch of Lucentis in Europe, can you give us some color on whether there is extensive use of (indiscernible) AMD in Europe, which I believe is the case in the U.S.?

And I would like to ask Joerg after those questions.

Okay.

I think I agree with you that in respiratory, you could really see the franchise is coming.

There are really significant blockbusters.

In anti-invectives, there's more -- several specialty blockbusters rather than big blockbusters.

I think the first step is we need to ensure that we finally will launch products in hepatitis C. I think we have to get our presence in hospitals up for the launch of [micrograb] and [oralgrab] and we generally believe that anti-infectives is a very attractive market.

So if we would see opportunities for in-licensing of our internal development, we would certainly pursue them.

In terms of CNS, we have, [algobalentine], which could become a blockbuster for the U.S. market.

We have FTY, which is a big blockbuster and we have other projects as well.

So I don't think that is really random in a way.

I think it is a bit understating it.

So I think it can be a powerful franchise.

But, as you know, CNS is a difficult franchise and to get approval is not always as certain as in other categories, but we feel that we have a great, great position for all the franchises.

In terms of AMD, the usage of Avastin off label in Europe is relative to the U.S., very limited.

But on the other hand, if you think about how people were concerned about the potential of Lucentis in the U.S. because of Avastin.

If you take a look how much Lucentis has already sold in six months, it shows that once Lucentis is available, most physicians would opt for the drug, which is indicated for the usage and has a track record in efficacy and safety.

So I don't think for the time being that this is a major concern for Lucentis in Europe.

And then just a few questions on the vaccine.

First of all, Joerg, when will you -- on the division overall, when will you start to provide a breakdown of your sales, at lease between diagnostics and the vaccines.

Secondly, on capacity, there is still not much information here.

And obviously I do realize that's something that is shaping up over time, but could you give us a bit of color of where you are with Begrivac in Germany?

Sort of what sort of sizes you target for the cell culture and also for the new Liverpool [eggplant].

At least like target, not what you have in the next two years.

And then conceptually on the pricing of the cell culture and potentially the adjuvant and the flu vaccine, is that going to be a price premium of let's say 10%, 15% or is that more like a doubling?

Okay.

A break down of sales, I don't think that we will give you exact numbers in terms of breakdown of the two business units.

I think obviously the vaccine unit is significantly larger than the diagnostic unit.

But I believe that we will have to leave it at the relatively rough estimate as to how this combination could look like and it is probably in the range two third/one third, something like that.

Is that going to change at some point?

You will see the vaccine business to grow stronger than the diagnostics business.

I mean the disclosure.

Oh, the disclosure.

It depends on how large this division becomes.

Obviously at the moment, to break it down is not advised because they are not material yet in that sense for the group.

But if they grow extremely fast and you know become very large, then we would have to give further transparency there.

Regarding capacities, I showed the 35 million or at least 35 million for Liverpool.

We had 31 million production this year and that would correspond to 10% to 15% growth.

I would hope for a little bit more than 35, but I would not like to commit to that.

Regarding Begrivac, I believe that we should be back to full capacity in 2007, which is around 10 million doses and regarding Agrippal and Fluad, that is -- both of these products are coming from Ciena.

Both of them are the same production processes.

One is adjuvant and the other one is not.

This will depend a little bit on how the market demand is developing next year as to how much Agrippal and how much Fluad we are going to make and going to sell, but you can expect around 20 million doses coming from that plant as well.

Now regarding flu cell culture, as I said, we have very limited capacity next year for the launch in Germany, which is mainly coming from a large pilot facility that exists in Germany.

We do invest in Marburg in significant increase of the capacity up to 25 million doses that we should put use -- should be able to put to use in a number of years.

In parallel, we do invest in the U.S. plant and there, we would expect 50 million to 60 million doses that should be coming out of that plant by 2011.

Pricing is of course a touchy issue and you would expect us to go for a premium and you would expect me to not tell you how this premium will look like.

Chris Schott, Banc of America.

A couple of quick questions on pharma and then one on the generics.

I guess first with regards to Medicare Part D since there has been a benefit in '06, can you maybe give an outlook for '07?

Can we expect volume gains to continue with regards to that business?

Also with regards to Galvus, anything that you have seen from the initial uptick of [Genuvia] that surprised you?

Any comments there would be appreciated.

And with regards to the generic business, can you just maybe give us a little bit more color on the pricing environment?

Your comfort with long-term margin target of 15%?

And with regards to your scale, is this a business that you would be looking to potentially acquire additional assets?

Thanks.

For Medicare in 2006, we delivered a gross benefit to the whole industry in the magnitude of 1.3% to 2% more or less.

We don't believe that this growth rate will continue.

Obviously, we see a very strong demand coming out of Medicare.

I think patients are happy with it; the system seems to work.

The question is now how the rebates will develop over the next 12 to 24 months, but the demand -- the size will certainly continue to grow and do well and be benefited I think very well from Medicare.

In terms of Genuvia, I would say positive surprises actually.

It seems like the community has waited for this category, that the category is well-accepted and so we are pleased to see that uptick because it will certainly help Galvus then to have a fast uptick as well.

I think in terms of pricing in generics, of course this comes from two sources.

One is competition and one is legislative regulatory changes and this is always difficult to predict in the different geographies what is going to happen.

So actually in terms of further growth and further margin, what you see is that the price erosion is mainly in the older part of the portfolio.

So what is actually key is that we rejuvenate the portfolio and the number of new launches is key, especially also in the U.S.

What is important is that we increase the number of difficult to makes in the portfolio, which have shown and here, we have a big focus in our development pipeline.

And with this, I am confident that we can stick to our 15% margin guideline, which we gave before.

It's Ben Yeoh at Dresdner Kleinwort.

Three questions if I may.

I was just wondering -- it looks like there is going to be no more one-off charges from Chiron into 2007, but I wondered if you had any transparency on any other one-off charges coming through in the year.

And then some of the moving parts in terms of the margin because there will be a positive effect from divesting Medical Nutrition, but obviously it also has been a year of investing.

So I just wanted a little bit more in terms of the cost.

Second question was just on the CIBA Vision lens recall.

Was the magnitude of that effect essentially not material or was it just sort of a small magnitude?

And thirdly in terms of the share buyback, I noticed that you didn't buy back any shares in 2006.

Was there any particular reason for that and do you think in 2007 it is more likely that you will be buying back shares?

It is a combination of pharma and us.

I think --

I think I can answer it.

Sure.

If you're willing.

From the Chiron acquisition, we will have minimal one-off charges going into this year.

There could be a small charge for [fine] restructuring that could be in both divisions or in particular in vaccines, but they will be minimal.

Don't expect anything very large, single digit or very low double digit numbers.

Then going forward, you obviously have the full level of charges from the amortization of intangibles.

That will continue.

Then you have the margin attrition impact, the net proceeds? (multiple speakers)

Now the guidance that we have given is all for the continuing business.

So obviously we expect that the sale of the Medical Nutrition will be closed in the second half of the year.

That will generate a capital gain before tax of approximately $1.8 billion dollars and a capital gain after-tax of approximately $1.5 billion, but that will be accounted for as discontinuing business, SO you will have full transparency.

Then we will have some restructuring charges coming through in the remainder of the consumer health business obviously because we are taking out Medical Nutrition.

Where we had supply of services to the Medical Nutrition business, we left to adjust the cost base.

CIBA Vision recall materiality.

Not material, double-digit numbers.

You can make your guess variety.

So it is somewhere in between 10 million and 99 million.

And maybe just in between.

Maybe just in between.

And share buyback?

(Inaudible question - microphone inaccessible).

That is a much broader question.

I would prefer not to go into too much detail on margin guidance because we will be always pushed to give more and more and more and more and I understand your problem, but please also understand ours.

And so we give you guidance on the pharma business, but there are moving elements and I understand that this is a little bit tricky to figure out.

So we give you as many elements as possible, but I would prefer not to be too precise on that.

Sorry about that, but share buyback?

We have not bought back any shares as I mentioned because we wanted to restore liquidity levels.

The policy is unchanged.

The free cash flow and the liquidity that accumulates, we would in the first priority reinvest in the business.

Very clearly, the first priority.

Then as a second priority if we would see that the liquidity would not be needed, we would continue our policy of considering share buybacks up to approximately 50% of what is left over.

Of free cash flow.

Of free cash flow.

Rachna Upadhya from Bear Stearns.

Two questions on pharma and one financial question please.

The first one is on Prexige and how confident can you be that Prexige will get the same label in the U.S. as it has in Europe in terms of the GI benefit?

The second question is on [agomelatin].

Can you give us a bit more color on the non-approval of the product in Europe?

Your press release today states that there was insufficient data and that you don't expect this to have any effect on the U.S. approval.

Can you outline what you are doing differently in the Phase III trials that you commenced at the end of last year?

Then a question for Raymond, which I can ask after those two pharma ones.

Or you can just add it (multiple speakers).

Can you just give us an idea as to why you don't focus on core EPS in view of the significant acquisitions that you have made over the past couple of years similar to your other Swiss competitors?

Starting with Prexige, as you saw, we got it approved in Europe with good label on GI.

We have the target study, which is on record and is being used by the FDA as a prototype study, which should be used for both cardiovascular and GI risks.

So there it will be demonstrated.

A 79% improvement in GI outcome for Prexige versus NSAIDs.

So we believe that that should he reflected in the approval of Prexige in the U.S., as well as it has been in Europe.

As far as agomelatin is concerned, you should really talk to [Servia] about the reason for non-approval, but the requirements for a drug for depression in Europe versus U.S. are different.

There are different requirements with regard to long-term relapse prevention studies.

Those studies are not required for the U.S.

We have instituted a program in agreement with the FDA, which they believe would lead to approval should those studies be positive.

So the studies are ongoing, both placebo-controlled, as well as positive control.

Regarding core EPS, we always feel that you have GAAP measures and non-GAAP measures and the GAAP measure is only the EPS and once you start to add back or make changes to these measures, you obviously have to understand what it is.

What we do, I have to say, is we give full transparency so that you can do the cash EPS numbers if you want.

In the press release, there is one chart that gives you all the detail on the amortization expense that has flown through and all the one-time and acquisition-related charges.

So you yourself can add back those elements and do the non-cash item if you want.

But we felt that it is a path that we don't want to take.

(indiscernible) I have a couple of questions.

I will try to spread them evenly.

First of all, on strategy for Daniel Vasella, the press release states Novartis is sharpening its focus on medicines and vaccines.

Could you maybe give us a little bit more flesh on your strategy in the next couple of years, in particular with regard to the non-medicine and vaccine divisions?

Gerber, in particular, what is the decision process to sell it?

The timeframe?

And on the other hand in terms of acquisition, are the generics -- you need the generics, more volume.

So would you consider to look for acquisitions there?

For Thomas Ebeling, we have seen that Merck is taking details away from some of its drugs like (indiscernible) to Genuvia.

What does that mean for the marketing plans?

Is it possible to gain more marketshare for Diovan and is it necessary to add even more salespeople to detail Galvus and then for CIBA Vision, the production issues, have they been actually solved?

So is the situation back to normal?

And lastly, in terms of Raymond Breu, the extraordinary Chiron charges were actually higher than what you envisioned in the Q3 press release.

What changed?

Has the restructuring been quicker or have you discovered more problems?

Thank you.

We do believe that our core skill is really in drugs, in medicine, knowledge of diseases and fundamentally innovation.

If we look at the businesses which do not entirely fit, it is obvious that nutrition does not fulfill this criteria in that Gerber is not the core asset in that sense.

Having said that, Gerber, as you know, is a fantastic brand in the U.S. and many Latin American countries.

Highly desirable for competition and grows well, is profitable, generates value and so the decision process is on several axix.

Strategically, I think it is a no-brainer.

We know that (indiscernible) under right circumstances, probably we would divest it.

As long as it is here, we manage it as if we will keep it forever.

After the Wall Street article, we had several parties knocking at the door, writing letters saying, you are now selling it and currently, we do not have an auction process ongoing, but of course I also read the comments of the CFO in the newspaper so I know that's a reinforcement of a statement.

We knew when we had the ongoing discussions about Medical Nutrition, it was something which was more a reinforcement.

And a side of the question where we will reinvest the money, the main question is is the price which is offered attractive.

Can we find a common ground between what we believe this is worth from several aspects and what the potential buyer is willing to pay and you see where we have found common ground in Medical Nutrition.

And CIBA Vision, I can just tell you it is not fixed yet.

And we are in the process of understanding exactly what it is.

It's a very technical kind of permeability issue and has only to do with the comfort and not with the safety.

But we feel -- we audit our customers to give them a proper product.

So Paul and especially the CIBA Vision team is fully engaged in that now.

Okay.

There may be a bit of confusion because you are comparing here the one-time charges and the acquisition-related charges that we mentioned related to Chiron and to guidance that we gave at the time included these numbers plus the contribution to operating income that the business normally generates.

Now I can hopefully clear up the confusion by simply quoting to you the two numbers and then you can see how it compares.

So for operating income, the impact, we had a guidance of 300 million to 350 million negative.

The actual number is that we now have a negative of 235 million.

So we did better than what we had forecast and to doing better really is spread between lower, slightly lower one-time charges and acquisition-related charges and a better contribution from the generic business, excluding all these charges.

Generic from vaccines and diagnostics and from biopharma.

So both elements.

So we did better at the operating income level.

At the net income level, we had a guidance of 350 million to 400 million negative and the actual number is 327 million.

So again, we did slightly better because of the better performance at the operating income level.

In terms of the reps, if you take into consideration that we intend to launch eight products and have four rollouts, I think so far having added only let's say 1000 reps in the U.S. shows already that we are relatively aggressive in driving productivity marketing in the States.

If Merck really would reduce their cost on [Cosahisa], we believe that represents an opportunity for Diovan because we believe that sales reps are driving marketshare.

What this means is that they would increase their calls on Genuvia and then we have to increase our calls on Galvus.

That is not yet decided.

Currently, we don't see a need to change our plans based on what we have seen in the field first employment of Genuvia, but we have the flexibility because if you think about Exforge, you could argue that detailing Exforge includes automatically a detail on Diovan.

Currently, we have foreseen to continue to detail Diovan as a separate brand very aggressively, but if we see that Merck would deploy massive field forces against Genuvia, we could have the flexibility to match it if we want to match it without, in my opinion, significant risk on Diovan.

But we will watch closely what they will do and then be flexible, but our intention is to not massively increase the field force, but to be always competitive at any point in time.

On the generics business side, I forgot to answer that element, but we do belief that after acquisitions, you need a phase to consolidate to do it organically and not to rush from one acquisition to the next.

At the same time, if there was a really unique opportunity, of course we would consider it and specifically of course, I will not comment.

Thank you.

We have some questions from the Internet from two of our analysts who were unable to join us.

Firstly on Sandoz, so for Andreas.

Graham Parry asks -- you talked about the market growing at 10% in the '06 to '11 timeframe.

Do we expect Sandoz to grow faster or at the same rate or below that and what price erosion do we assume in that figure?

And on the same theme, [Andreas Titley] from West LB asks about what we expect to be the driver of double-digit growth for Sandoz considering the relatively lower 3% local currency comparable growth rate in Q4?

Okay.

On the growth, I think certainly after what we have done in the last couple of years in terms of acquisition to now having everything in place to be one of the market leader in generics.

We want to outgrow competition, so we want to grow faster than the 10% annual growth, which we have seen in the market.

In terms of price erosion, as I just said, it is very difficult to predict what is going to happen in the different geographies and in the different countries.

What we see continuously in the U.S., especially in the older part of the portfolio, is well in the double-digits.

With respect to the other geographies, it is difficult to predict and again driver of growth, it is new launches.

It's rejuvenation of the portfolio.

It is a higher proportion of difficult to make generics and longer-term of course after the patent expiries of the biopharmaceutical, the biosimilars should kick significantly in.

There was another question from the Internet from Jo Walton at Lehman Brothers in London who has been obviously looking at Raymond's back-up slides and notices that price gave a higher contribution to pharma revenue growth this year at 3% than in the past two years, which she notes was 0%.

What were the features of this and can it be repeated?

Excellent question and good observation of the back-ups.

I think the benefit is coming this year really from the U.S. where, on a rebate level, because of the shift of dual eligibles from Medicaid to Medicare, the average rebate level was slightly reduced and that was giving us the extra leverage on pricing, which will be difficult to repeat.

[Amit Roy] from Citigroup in London.

A question -- two questions.

One on generics and on Tekturna.

Regarding the generics, [Amonoxiprine] with (indiscernible), we know the filing for this was August 2005 and of course it's a generic application so it is quite difficult to understand when this may be.

Do you have any guidance as to when you think you may get that decision from the FDA or do you think it'll be an Omnitrope type situation where you will have to go through some legal wranglings with the FDA and hopefully be successful through that?

That is the first question.

And the second question just on Tekturna and the issues around the colon -- the side effects being seen in rats.

Diarrhea seen in humans, is that seen within eight weeks of taking Tekturna or is it seen afterwards?

Just trying to get a handle on the eight weeks of study that was done with a colonoscope.

Can we trust that?

Thank you.

I would say Andreas, you take the first and James the second.

Well on the non-separating of cost, I don't hope that this will be an Omnitrope case and actually I don't expect this to be an Omnitrope case.

Otherwise it is a question to the FDA, when they are going to approve the product.

Finally we are in discussions with the agency of course as we are with all the launches.

I think here we have especially a very new technology in order to characterize the compounds.

So this takes time in order to look at the science behind fully understanding what has been done.

But I am confident that the agency will make a decision, but in shorter term than as compared to the Omnitrope case.

On the diarrhea with Tekturna, yes, the diarrhea in patients, either 300 or then going up to the super therapeutic dose of 600, is seen within days or the first week or so of treatment and usually settles down over a few days also.

So it is an early phenomenon.

(indiscernible).

My question relates to the emerging markets.

Out of your total marketing expenses, what percentage do you intend to devote over the next three years to those countries and more specifically to Russia, China?

The next question is are you satisfied with the sales, (indiscernible) prices and margins in those countries?

The last question is which specific product segments do you intent to (indiscernible) in these markets?

I think we will look by business and not overall because it is more meaningful if we look first at pharma and then maybe OTC.

If you would comment about Russia, China.

The marketing investments today, I would say disproportionate to the share of sales this business has.

So these markets are for us -- most of them are very profitable.

There are a few high investment markets that have not yet the profitability, which we have in other matured markets.

But there are some markets in the field of emerging markets where we have already very decent profitability.

For most markets however, we plan to increase the marketing spend slightly above the sales growth because the growth opportunities are tremendous.

In terms of segments to push, actually we have a dual strategy.

The key task for us is to push for innovative products and in those markets, you find very often still matured old products and people tend to adhere to them because they are safe, they know what these products can sell and they like those products.

So we basically push the innovative products, but we need as well to continue to push to a certain degree the old products because we need the cash flow and this strategy has been proven to be very successful and we are very bullish for the outlook for markets like Turkey, China, South Korea, and Russia and Brazil.

So those will be from a pharma standpoint the key markets.

You didn't mention China?

I mentioned China.

The same is true also for OTC where we overproportionately spend and invest in marketing and sales to develop these countries.

OTC is very successful in Russia where again it is the fastest OTC company.

We are lagging behind a little bit in China where we are investing heavily now to build up our own network, own organization.

The same is also true for Japan, which is not an emerging country, but which is the second-largest OTC country and where we were not really active up to now.

So interestingly I think historically we rather underinvested and we, as a team, have had several discussions and we see the opportunities are very clearly here.

So for example, just to give you an indication, OTC is growing at about 40%, pharma about 100% and interestingly also generics are growing really well and we have a very strong position and also (indiscernible), it is a battle almost with the local managers that they really invest enough.

So we see more growth opportunities and we really want to realize it.

It goes from the cities, big cities, central cities to then secondary cities or tertiary cities, but there is a lot of room.

Internet any questions?

Thanks for taking my question.

Coming back again to generics, be it double-digit sales growth, could you please give a bit more color on that strong turnaround?

We talk about currently 70% volume growth, 60% price pressure.

So what you're guiding for is quite a massive turnaround and obviously you must have more cards up in your sleeve than [top all] generics.

Then could you please tell us where you are in terms of reimbursement of price discussion for Exjade outside the U.S.?

And then last question is I did not find, or maybe I have overheard it, the charge that you took for the CIBA events recall.

Is that only a charge to the top line?

I assume that is the case because it is not a in the divisional numbers.

And then last question to Paul, is there any plans to launch omeprazole OTC in the U.S.?

Thanks.

So Andreas, I think we all would like to know how you're going to make it.

Well, we expect the generics market to grow 10% next year and I think what I have presented earlier before is we believe that we have all elements in place to grow faster than the market.

So this is where the guidance comes from.

I think it is driven by different regions and some we have already mentioned and it is driven by new launches.

So you have seen that we filed 99 products this year.

So we will get significant approvals in 2007, which will generate additional sales and here of course coming back to the question before, we also see major opportunities still in Eastern Europe, especially in Russia, but also in Poland where we will invest to further grow our business, especially in the branded generics, also in the OTC generics, as well as in the new market segment, which is appearing the [INN] based on the deal (indiscernible), the reimbursement [list], which is driven by government.

And then of course, I think as we already could launch more than 20 products in the U.S. during 2006, this will also kick in in 2007.

We have a number of ANDAs open.

More than 80 ANDAs are open.

So there is also an area where we expect to grow significantly in 2007.

Maybe a qualitative comment.

We had the same discussion.

And we believe Andreas is being ambitious with his team.

But we also believe there is a probability that he can make it, but it is not a given.

Exjade?

From my perspective, there are no major surprises to answer, but David, do you have to -- can you share more color?

Reimbursers are recognizing the value we have now launched in the U.K., Switzerland, Germany, as well as France.

We're currently launching in Greece and the only two major outstanding countries at this point are Spain and Italy.

Raymond, [CD] charge.

Yes.

We took a charge for the CIBA Vision lens recall.

That was a charge for operating income.

It is not material.

That is why we are not disclosing it.

It is in the double-digit range.

We said you know somewhere in between 10 million and 99 million and somewhere in between there.

It has an impact on sales too, but the impact on sales are smaller than the overall charge.

As far as your question for where omeprazole is concerned, it is not our intent.

As you may recall, we got the rights to switch Prevacid in three years and we are fully dedicated and focused on this stuff.

A question for Raymond from Tim Anderson at Prudential in New York.

Tim notes that our tax rate guidance of 16% to 18% seems to him higher than we have indicated in the past and he wonders why this is.

If my memory serves me right, I think it is right around the guidance that we have given in the past.

I think the number for 2006 is 15.5%.

For the overall tax rate, our guidance is 16% to 18% and if I remember correctly, we always said around 17% plus/minus.

So that guidance is unchanged.

Obviously the team doing a good work in that area, but you can never be 100% precise what happens, but we are fairly confident that it will not make big swings suddenly.

With that, I think, unless there is a very urgent last question, I would like to invite you for a drink and some informal discussion.

Thank you very much for your attention.