Novartis AG (NVS) 2007 Q1 法說會逐字稿

Good afternoon.

This is the Choruscall conference call operator.

Welcome and thank you for joining the Novartis first-quarter 2007 sales and results conference call.

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

(OPERATOR INSTRUCTIONS).

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

Raymund Breu.

Thank you.

Good afternoon and good morning, welcome to this conference on the first quarter.

Together with me we have here on the conference call Thomas Ebeling, the CEO of Pharmaceuticals; Joerg Reinhardt, the CEO of Novartis Vaccines and Diagnostics; Andreas Rummelt, the CEO of Sandoz; and then from the Pharmaceuticals Division, Kurt Graves, the Chief Marketing Officer; James Shannon, the Head of global Pharma Development; David Epstein, the CEO of Novartis Oncology; and Alex Gorsky, the Head of our North American business.

Before we start I would like to ask Richard Jarvis to read an important statement.

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

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

We would now like to give a short presentation on the performance.

I hope that you have received the slides so that you can follow our comments.

We will refer to the slide numbers as we go through it.

I would start with an overview.

I am now referring to slide no.

5.

We are very proud to report a strong first quarter.

Double-digit sales growth, 18% in U.S.

dollars.

Pharma in particularly strong with 17%, with pharma as major launches today now have initiated.

Sandoz again, performance driven by product launches in particular in the U.S., so up 19% in U.S.

dollars, and group operating and net income and EPS [rounded] 11%.

Finally, in this first quarter, we have agreed the divestment of our Gerber baby food business.

On Slide 6, you can see that the performance of our continuing operations, so excluding the Medical Nutrition and [Vitisonison] of divestitures, it's even stronger.

Operating and net income on a continuing basis are up 18% and 17% and EPS is up 18% too.

Talking about sales growth on, on slide 7, we show that the majority of the increase is coming from volume growth which added 10% to the local currency growth of 15%.

On slide 8, you can see that Pharmaceuticals and Sandoz have been driving the group growth; Pharmaceuticals up 14% in local currencies driven by Diovan, Glivec of Lotrel.

Sandoz up 12% in local currencies, driven by launches in particular in the U.S.

And then Vaccines and Diagnostics, first time in the quarter here because in the first quarter of 2006 they were not a part of the consolidating group.

On a comparable basis their local currency growth would have been 39%.

And for Consumer Health, as a continuing operation, the increase is 6% in local currencies.

Just a few comments on the non-pharma divisions.

Highlights from the first quarter, that's on slide 9 for Vaccines and Diagnostics.

The division is on track in the quality remediation effort and expects to produce more than 35 million doses of Fluvirin for the U.S.

market in 2007.

The flu cell culture launch for Europe, OptaFlu is on track for the 2007/2008 influenza season.

They have submitted the monovalent oral polio vaccine dossier to the Italian Ministry of Health, so that they could sell to the UNICEF.

They have FDA approval to the TIGRIS instrument and the West Nile Virus blood test.

And finally, they received a positive opinion from the EMEA on Focetria, a pre-pandemic vaccine.

On slide 10, a few highlights regarding the generics business.

I mentioned a very strong U.S.

sales performance, but in addition we have seen good growth in Germany, Eastern Europe, Canada and LatAm.

Finally, the operating income was very positively impacted by productivity gains in development, in manufacturing, in marketing and sales and in G&A.

So that the operating income in the quarter then was up 34%.

The performance in the U.S.

and in the other markets has benefited strongly from difficult-to-make products.

On slide 11, in Consumer Health, the highlights were really driven by over-the-counter medicines, where we are seeing strong growth in the cough and cold brands and a good expansion into emerging markets.

CIBA Vison is on the mend.

In terms of men's care supplies, we have returned to the full supply strengths there.

And in terms of O2OPTIX, the manufacturing redesigning has been put in place, and production has now been stabilized.

Let me then move to operating income, slide 12.

Operating income 11% up, or 18% on a continuing basis.

The increase in Pharmaceuticals driven by efficiency gains that have mitigated a large increase of 31% in reserves and development, and then 18% increase in marketing and selling.

In addition, we have booked $52 million for the Zelnorm suspension -- cost for the Zelnorm suspension in the U.S.

Sandoz has benefited from productivity gains that I have already to show an increase of 34%.

On slide 13, you can see that the group operating margin was slightly reduced from 26.5% to 25%; I will later on have some more detailed comments here.

But it's important to notice that this was heavily impacted by a change in the portfolio.

With Vaccines and Diagnostics entering the portfolio this mix change has had a fairly significant impact on the overall group margin.

In Pharma and in Consumer Health, the margins are slightly down because of marketing and sales and research and development investments.

On slide 14, we break down the 1.5 percentage point margin drop in the first quarter compared to the first quarter 2006 by the major components.

We have positive impacts coming from other revenue, which is mostly royalty income profit sharing.

In there, we have a 67 million settlement in Vaccines and Diagnostics that had a positive impact.

Cost of goods, as I mentioned, is impacted by the broad group portfolio mix.

And in addition, we have seen mix changes also in Consumer Health and in Sandoz.

Marketing and sales, 0.5 percentage point positive, impacted by the economies of sales and the synergies in Sandoz that then were partially offset by increases in Pharma.

And R&D a negative 1.7, driven by the investment in Pharmaceuticals into the late-stage pipeline products.

Slide 15, currencies had a net 2 percentage point positive impact on the operating income growth.

On slide 16, you can see that the non-operating items associated companies' financial income and taxes did not change the overall growth rate, so net income is at 11% growth, similar to the operating income which also is at 11%.

Financial income was much reduced, minus 32%, but this is linked to a much lower level of net liquidity that was available for investment.

In the first quarter 2006 we had 3.2 billion on average; in the first quarter of 2007 this was down to 0.8 billion.

As a percentage of the net liquidity, the investment performance was excellent, 16% compared to 6.3% in the comparable quarter last year.

The tax rate improved to 16%.

On slide 17, you see that the free cash flow in the first quarter was reduced.

This is obviously a relatively low number because we measure free cash flow after dividends.

Obviously, the dividend increased significantly, 28,% and this had a negative impact on the free cash flow.

In addition we have seen in the first quarter less sale of assets than in the comparable quarter in 2006.

In addition, the net working capital has increased, strongly in line with the high top-line growth.

On slide 18, we summarize the Gerber transaction.

We have an agreement with Nestle for the sale of this business for $5.5 billion.

This corresponds to 3.3 times 2006 sales, and 17.9 times 2006 operating income.

We expect that this deal will be closed before year end, and we will then book an estimated gain after-tax of approximately $3.8 billion.

After this transaction, which now completes our nutrition divestiture program, Novartis will be a pure health care company with 100% of the business in health care compared to 45% after the formation of Novartis in 1996.

And with this, I hand over to Thomas Ebeling.

We have a lot of positives in Pharma in quarter one.

Double-digit sales growth, our top three brands growing double-digitly an exception performance of [Tivan] in the U.S.

and overall good growth of our U.S.

business.

Market share increase.

We launched four products with Exforge, Tekturna, Lucentis and Sebivo.

And we concluded the Betaseron agreement with Bayer Schering.

On the more -- on the less positive side, I should say, we had the [dibus] approvable letter in the Zelnorm marketing suspension.

So overall, we had a 17% growth in U.S.

dollar, 14% in local currency.

Op.

inc.

grew by 14% and our return on sales was above 30%.

On page 22, you can see we continued to gain market share, which is driven by growth ahead of competition and ahead of market as you can see on page 23.

Our growth was driven by the major regions.

Our North America business grew 17% and our European business grew 13%.

We had good quarter as well in Japan with 9%, and dynamic growth in Latin America and our emerging growth market unit.

Our key franchises, oncology, cardiovascular and neuroscience, grew all double-digitly, and the same is true for our top three brands, Diovan, Glivec and Lotrel, which grew very dynamically.

Diovan 20%, Glivec 16% and Lotrel 20%.

It's worthwhile to notice where the very dynamic growth of Femara was 32%.

Our return on sales is slightly below last year, driven primarily by increased R&D expenses, by the effect of the Zelnorm marketing suspension, and by less income from product [as I suggest], positively offset by productivity savings and the reversal of the Tekturna prelaunch inventory provisions.

On page 28 you can see the eight projects where we had an increased investment into -- for Phase III and Phase IV trials.

There are two cardiovascular brands, Tekturna and Galvus; two oncology; two neuroscience; QAB and [Ibuferon].

Page 29 shows the exceptional performance of Diovan in the U.S., where we have now a 41% value share of Diovan, which was driven by strong share of [boise], leading market [excess], new data, strong execution of our secrecy message and the introduction of higher dosage strength.

In Japan, we had data from a new landmark heart study, which demonstrated a 40% reduction in stroke if Diovan is added on top of existing therapy.

This will certainly help us to profile Diovan in the very competitive Japanese market.

Lotrel had an all-time high [puraig] share of 3.84, which was again supported by strong share for us and by the introduction of new strengths.

In Germany in Switzerland we launched Exforge.

And you can see here that the initial uptake of Exforge was better than our internal growth studied in the field which was CoDiovan, but is very better than the external [growth] in that, which was Inegy, which has been introduced recently in the European market.

So we're very happy with the first successes we see from Exforge in those two markets.

We have received a good label by the FDA for Tekturna, specifically the full 24-hour interval and coverage.

And the sustained effect at four weeks will help us to position the efficacy of the brand properly.

On page 34, you see additional -- you see new data, which demonstrates a significant added benefit of Tekturna on top of valsartan, and it shows that the combination therapy of those two agents will provide incremental benefit to patients.

Our hypertension portfolio is superb and shaping and once Exforge got approved in the U.S.

we will have a fantastic [tedigobey] leading portfolio, and I'm very confident that we will leverage this portfolio for leading category share.

I'm as well very pleased with the performance of Glivec.

On page 36, you can see that Glivec holds a 95% segment market share, and that our competition really has not made any significant inroads.

So we're very comfortable and confident regarding the future outlook of Glivec.

Just a quick comment on the Betaseron agreement.

This product, in addition to its own benefits in terms of sales and profit, it potentially had to accelerate the uptake of FTY by establishing Novartis as a player in MS.

The Prexige performance in several end markets is very good.

We have markets like South Africa, Brazil, Argentina, where we are already in excess of 30% cost of segment share.

And in all other markets we have conquered a really good market share position and we're comfortable that we will continue to [go] share in the COX-2 segment.

Our other launched specialty brands made good progress.

The Xolair safe development is very positive.

We're trying to leverage innovative pricing models to accelerate reimbursement in Europe.

And we have ongoing negotiations with the FDA regarding the future label of Xolair.

Lucentis is off to a real good start in Europe.

And if you take a look at the performance of Lucentis in the U.S., it shows that this product has outstanding potential.

Regarding Sebivo, it is worthwhile to note that we've received an early approval in China.

Exjade is doing very well.

It's already proved in 80 countries and has a strong uptake driven by both Desferral conversions, but that's very important, as well by new segments.

In terms of Galvus there is no major news.

We will soon meet the FDA to discuss how we can resolve the issues and to agree on the path forward for Galvus.

The marketing suspension of Zelnorm was certainly not positive.

You can see here on page 41, again, the [echron] effect.

And here is where we have to sit and work with the FDA to make Zelnorm available to appropriate patients.

Outside the U.S., most authorities basically followed the example of the U.S.

and suspended the marketing.

Going forward, we expect key regulatory news flow.

We have already in Q1 seen the approval of Tekturna, of Exforge and Lucentis.

We recently had the Aclasta [Exgis] approval in the U.S.

and the positive opinion of Sebivo in Europe.

So we're making really progress in terms of approval.

And in Q3 and Q4, we expect more.

This will obviously drive a very, very positive sales momentum.

On page 44, you can see that the positive sales launch momentum is offset, obviously, by the suspension of marketing of Zelnorm; by the entry of generics regarding Trileptal and Lamisil in the U.S.

We will as well not have any more the Chiron sales acquisition benefit as of quarter two, because last year we acquired Chiron in May.

So we had basically onetime benefits still in quarter one.

We will stop booking Betaseron sales as of closing of the Bayer Schering deal; and last year in quarter three, we had a significant onetime benefit of Tricare.

Based on this, we can give you the following conclusions and outlook.

We certainly had a very strong performance in all markets.

We have seen strong performance for our top brands, especially Diovan, Glivec and Lotrel, and our key launch brands showing a good uptake.

We expect strong regulatory newsflow and for the full year low to mid single digit growth for sales.

For the period of 2008 to 2011, we expect double-digit sales growth.

And as of the second half of 2008, we expect an acceleration of growth.

We have a strong program to drive our productivity up, to continue to the margin impact of launch investments, patent expiries and Zelnorm marketing suspension.

With this I would like to hand back to Raymund.

On slide 47 we summarize.

The Zelnorm impact on the outlook one more time.

In the first quarter we still had the sales of $105 million.

We have the product recall and the suspension in the U.S.

caused extra cost that we booked in the first quarter.

Our estimate for the entire cost amounted to $52 million.

Due to the suspension, we will no longer have in the remaining three quarters the Zelnorm sales, and we estimate that the loss in sales on a budgeted 2007 basis is more than $600 million.

With this, our outlook for the group on slide 48 is the following.

Barring unforeseen events and on a continuing operations and continuing means excluding all the divestitures in the nutrition area, we would expect group sales to grow above 5% in constant currency, and group operating and net income to reach again record levels.

From the divestitures, we expect that we will have a significant boost to report a net income for Medical Nutrition, the net gain after tax is estimated to be approximately $1.5 billion.

And for Gerber, the expected net gain after tax is estimated at around $3.8 billion.

Obviously, these divestiture gains are a significant boost to our free cash flow as well.

And we would expect that our policy of using approximately 50% of the free cash flow that cannot be reinvested in acquisitions for share buybacks -- in fact, this would apply to these divestment gains as well.

With this, I open up the call to questions and answers.

(OPERATOR INSTRUCTIONS).

Andrew Baum, Morgan Stanley.

A couple of quick questions.

Firstly on Galvus, could you remind us on the timing for when the CPMP will return to for potential proof of Galvus.

Should we assume that given the U.S.

action that something similar is most likely outcome in Europe?

Second, on Lotrel, could you just remind us of where we are with Teva, who I think have tentative approval.

When do you expect them to get final approval, just thinking about next steps in the evolution of that particular drug.

For Galvus in Europe, clearly, the U.S.

has an impact there.

They have asked for clarification of what the discussions with the FDA have been.

We have ongoing discussions with Europe, and we expect a response or a decision from CHMP somewhere in the third quarter of this year.

I cannot speculate on how Europe will react to the U.S.

situation.

Alex, on Lotrel?

Regarding Lotrel, we continue to believe in the fundamental intellectual property around Lotrel, which as you know goes until 2017.

We are watching events closely with Teva but we're confident in our ability to protect it.

Thank you.

Matthew Weston, Lehman Brothers.

Good morning.

Three questions, if I may.

Firstly following on from Andrew on Lotrel, I noticed in the notes to your release that you filed a preliminary injunction against Teva over the at-risk launch of Lotrel.

And I'd be interested to learn what triggered that PI.

Did you have intelligence that they were about to launch and should that cause us concerns around the IP position?

Secondly, just on the Chiron business, we are now fully consolidated for a year.

At the time that you did the deal the bit that was sort of left hanging that you didn't know what to do with was the Gen-Probe piece.

And I would love to understand what strategically you feel that diagnostic asset brings to you and whether or not your long-term plans for that side of the business are more crystallized now.

And then finally, I guess a long-term strategic question for Raymund.

Astra today obviously announced a big acquisition and made it clear that the financing for that acquisition would be done solely from the balance sheet and that long-term they felt that they would be comfortable with a single-A credit rating and a levered balance sheet.

Clearly Novartis with AAA and an awful lot of potential within your balance sheet, Raymund, I would love to understand long-term where you see that going and whether or not we could anticipate a market ramp-up in either buybacks or dividends in the future.

Maybe I will start with Lotrel.

Basically, what triggered our actions were external events where [Uppertex] basically won the court case, which invalidated the patent of Pfizer.

Now we know it's only the claims 1 to 3, but at that point in time it was clear.

We interpreted it as they have invalidated to patent.

I think a few days later, Mylan launched a launch a generic and Pfizer launched as well in generic.

So having said this, given as well what happened in other products, like Plavix, it is very difficult to forecast the behavior of generic companies and their appetite for risk.

And it's very difficult to recover if a generic launch is at risk, what we have seen as well in other segments.

So we [failed] -- it's a prudent move to have a preliminary injunction.

And it is not either in the position Alex stated that we believe our patent position is very strong and we have a patent until 2017.

But we would hated a disruption in the market by a generic launch at risk.

Regarding our asset testing business, together with Gen-Probe, first of all, we're quite happy with the evolution of this business.

We see continued strong growth of about 20%.

And going forward, there are still quite a number of markets where nucleic acid testing is not yet fully implemented, especially in the Asian markets.

When you look at China, also Russia and others, there is still a lot of untapped potential.

Going beyond that, we're very interested in exploring molecular diagnostics further.

We will build our internal capacities to do this.

We will primarily be focused on our internal biomarker business.

But we would not exclude that over time and gaining more experience in this business that we will expand this biomarker business further.

For the time being, we mostly focus on internal resources to do that.

Taking the question regarding the long-term strategy as to the balance sheet, you know that we have a AAA rating, and we expect that we will keep that AAA rating.

The only reason where we will change it will be for very large acquisitions.

But I hasten to add here that at the moment there is no large acquisition on the horizon.

So we don't expect any change here.

We would use the free cash flow according to the policy that I have mentioned.

Our dividend policy will not change significantly.

We will use it in the sense of payout.

Obviously, the dividend will increase in line with our sales growth or our profit growth.

But the payout is expected to be in this range of 25% to 40%.

In addition to that, we will use the free cash flow for smaller bolt-on acquisitions.

And unless we see those acquisitions, we would then use the free cash flow, 50% of it per-share buybacks; that will continue.

And since I have now indicated that the $8 billion pretax that we get from the divestitures will be included in this equation, it obviously means that in the absence of acquisitions we would step up the buy back program quite significantly.

Thank you.

Karl-Heinz Koch, Bank Vontobel.

Hello, good afternoon, everybody.

I've got a couple questions if I may.

Firstly on Galvus, can you tell us whether you have taken a similar prelaunch inventory provision for Galvus, similar to the one that you have taken for Tekturna, which may release upon the approval of the drug, hopefully in 2008?

Then could you update us on the Exforge U.S.

launch plans following the invalidation of the Norvasc patent?

Then on Sandoz, my understanding is that you have to take Biaxin XL off the market.

Could you give us a feel for the likely impact as we go through the year?

And also on the Bayer deal on interferon, could you tell us a little bit what the deal actually means in terms of what kind of formulation will you be launching for Betaseron?

Do you have any price limits -- limits on discounts, I mean, on the price for your version of Beta interferon?

And also, does that deal limit your ability to launch a generic anytime soon.

And if so, for how long, etc.

Thank you.

Thanks a lot for the excellent list of questions.

In terms of Galvus, yes we have a similar provision, but very small.

Don't add the same amount in case that Galvus gets approved; it's significantly less.

In terms of Exforge launch timing in the U.S., we still believe that the 25th of September and the pediatric exclusivity of Norvasc will expire with our intended launch date.

And we're obviously open and ready to launch earlier but that's a different discussion.

And in terms of Betaseron, you're asking really for very detailed commercial information, which I'm not willing to disclose yet.

But when everything is ready and public, we can certainly have a discussion around this.

And it doesn't prohibit us from competing in the generic arena regarding Betaseron.

It does not.

With respect to your question on Biaxin, it's true that the court has granted a preliminary injunction in Abbott Laboratories versus Sandoz against our sales of Clarithromycin.

As part of this injunction, we have stopped selling Clarithromycin ER immediately and we will recall the sale of these products from our customer.

This recall is based upon a legal ruling.

There are no quality issues we see with the product.

The patent litigation that forms the basis of this decision is still ongoing, and it is tested and litigated already for over two years.

We maintain that the patents in issue on this product are not valid, or should not be enforced against Sandoz.

With respect to the valuation here, Abbott has posted a $40 million bond as security against Sandoz winning the lawsuit.

Okay.

Next question?

Alexandra Hauber, Bear Stearns.

Good afternoon.

I have a couple of questions on Thomas Ebeling's slide 39.

In terms of, you mentioned reimbursement in Germany is on a patient-by-patient basis.

Can you tell us what that means and whether that can be expanded into more general reimbursement?

Also, could you elaborate a bit on the innovative pricing models you have been alluding to for Xolair?

Then secondly, David Epstein said last week in an interview which was on the wires that he expected the [adjuventist] opportunity to be about the same as the metastatic opportunity.

And I was just wondering to get some color on this, given the duration of therapy would be significantly shorter.

And also wondering whether we could get an update on the number of patients which are currently enrolled into the expanded access program for Tasigna.

Third question is whether you could give us your read across of the recent Arcoxia panel with regards to Prexige.

I know these issues are different, you have a different comparator.

And also, any idea whether you're going to have to go to a panel?

In terms of Lucentis, the answer is relatively simple.

They [decide] so-called pre licenses, where one has to basically get approval on a patient-by-patient basis.

Once (technical difficulty) has approved, and fully reimbursed, basically, then this will not be necessary any more.

In terms of innovative pricing and reimbursement models, with a product like Xolair, one could for example have ideas to offer that they only reimburse -- they only ask for reimbursement from patients who respond, or that for patients who might get despite the treatment of Xolair have to be hospitalized; for those patients, we pay the money back in.

So kind of a success guarantee.

And this depends by country.

And we would like to use this brand to see if we can come up with innovative schemes which would accelerate the penetration.

[Dens], would you mind to take the question on the panel on Arcoxia?

So the Arcoxia panel of 10 days ago or so raised several issues.

I think it's important just to remind you on the data we have with Prexige.

So we did compare to what were regarded as more or less approved comparators, so ibuprofen and naproxen.

And in the target study we did not show a difference in cardiovascular risk against NSAIDs overall.

We did very clearly demonstrate a significant and important GI benefit of 79% reduction from the NSAID issues.

And so I think the issue is very clearly between Prexige and the issues which were raised as the safety concerns from Arcoxia are very different.

It would not surprise me.

We do not have a scheduled panel yet, but it would not surprise me if we had a panel for Prexige.

Regarding just -- Alexander, you're right.

The efficacy data were extremely impressive; that's why the trial was halted early so all patients can get Glivec.

The unknown question is how long these patients should be dosed with Glivec.

In this trial they were dosed for one year.

And in another trial that is currently running, there is ARM dosing of three years versus shorter period of time.

Sorry, you said three years?

Three versus one is the other trial.

So the sales forecast that we generated of around $500 million assumes that patients are on drug for about a year and a half.

As you can imagine, if that period is longer, the sales would go up, and if the period is shorter then the sales would be a little bit less.

Regarding Tasigna, we have almost 300 clinical trial sites open, and there are just over 700 patients that have been dosed so far in the expanded access program.

Thank you.

Can I just follow up onto the Sandoz Germany situation, because isn't that unusual, because normally Germany has free pricing?

Can you tell us why [folo] Sandoz's would be different?

I would have to come back to you on this one.

Kurt Graves.

It's Kurt Graves, maybe I can add in a little bit.

Right now in Germany and in some of the other European countries until full reimbursement is granted they're managing this process through the hospitals.

And they just want to make sure that the patient has been appropriately diagnosed and that specialists are administering the drug correctly; that's all it is.

Thank you.

John Murphy, Goldman Sachs.

Good afternoon, gentlemen.

A few questions.

Thomas, the European performance in Pharma, very strong.

Was there anything standout there as to why it was so strong or is this something you anticipate persisting?

And second also within Pharma you mentioned a couple of times productivity improvements, I wonder whether you could build anything more around those bare bones?

What's driving them?

How long any numbers may be?

And then finally for Raymund, just wanted to confirm that the $52 million for Zelnorm is the final charge and that we won't be saying anything more later in the year.

Europe, the key growth drivers basically are the two large countries, Germany and France, Spain is as well doing exceptionally well.

This is basically driven again by benefiting from the Chiron acquisition, but very much so on launches.

And in Europe we will not have similar generic effects like we anticipated in the U.S.

Europe last year had 40 generics, Lamisil and other brands.

So I think Europe -- the quarter one was maybe a bit on the high side.

But I think Europe will not see such a change in the growth dynamic as we would expect for the U.S.

And I am pretty comfortable that the Europeans would have a reasonable performance this year.

In terms of productivity improvement, we announced a couple of months ago that we will carve our roughly $700 million out of our 2005 cost base.

We have accomplished this number already now.

Basically we have taken out some money from technical operations, from development, from G&A and from marketing.

We have used outsourcing, procurement, IT initiatives.

We have an internal program which we call IQT, where teams are really evaluating how to cut out costs.

So it's -- there is not one single magic bullet.

There are approximately 50 sub-initiatives which add up to this number.

And without such productivity improvements, we will not be able to achieve our objective to contain the margin within 100 basis points of what we had last year.

So from that perspective it's really difficult to give you again the one initiative.

It's a lot, and we're monitoring it every month.

I think, Thomas, the $700 million that you mentioned is the amount that we have already achieved.

Until the end of next year, our aim is to go up to $1 billion.

So I think there is more to come if we succeed.

Then John, on the charge for the Zelnorm suspension, the $52 million which we booked in Q1 is our current best estimate of the entire cost.

We do not expect that there will be further charges in the quarters to come.

Many thanks.

[Diler Lorris], Baker Investments.

Just one question, Thomas, unlike your U.S.

pharma peers, you did not introduce significant price increases in Q1.

The market just does not allow for any significant price increases, or did you want to reserve the introduction of new price increases for later during 2007, when the positive Medicare part D effect on volumes runs out, and the Zelnorm withdrawal effect becomes even more negative than in Q1?

It's actually a little bit the contrary that we have done price increases in January, (multiple speakers) in the U.S.

On all the other markets, it's simply difficult to do price increases.

So in the U.S.

we've done this.

And the pricing benefit was substantial, and the question for us is how much of the substantial pricing benefit can be sustained because this is still a very dynamic field in terms of general development, increasing rebate demands of customers.

But we had a good price increase in line with our competitors.

And actually Q1 was a little bit higher than usual.

Marcel Brand, Cheuvreux.

Thanks for taking my question.

A quick item on Diovan.

Diovan growth obviously in the U.S.

is strong, 27%.

We saw prescriptions going 12%.

We know that there probably were some of the usual destocking that you have seen in some years in Diovan.

But still even including some price increases, how can we account for the difference in growth in prescriptions here?

I mean you mentioned in the press release already that there's a move towards higher dose strengths, but could you maybe explain how you come from the 12 to the 27?

So stocking, price, strength?

That's an excellent question.

I think we have certainly our price increase that you have to add to the 12.

And then there were some -- I would say exceptional price benefits where we are not sure if we can sustain them through the course of the year, which we are more of a onetime nature, so to speak.

And they represent roughly 7 percentage points.

So if you take the 12, you add roughly 8 for the normal price increases, and the 7 for -- it's not sure if you can sustain those for the full year, then you come to the 27.

So 20 is pretty much a robust number for Diovan, the U.S.

Thanks.

Mark Purcell, Deutsche Bank.

Thanks very much.

You mentioned how R&D was going up significantly on a couple of products, two of which were RAD001 and SOM230.

Could you remind me of the Phase III trials you've just initiated there?

Secondly, with your discussions with the FDA on Galvus, how long do you think these trials have to be to prove that your drug is 80% [CK] excrete and doesn't have a skin lesion issue?

The third one is I think that consensus top-line growth in Pharma '08 to 2011 is about 7%, and you're now confirming a double-digit growth rate.

Where do you think the main difference is to your and consensus expectations lie?

And Raymund, could I just ask of the $52 million charge on Zelnorm, is it all recall, or how much of that is potentially provision?

David, why don't you start with RAD and SOM?

Sure.

For RAD, as you know, we've started now a pivotal registration trial in refractory carcinoid tumors, pancreatic islet cell tumors as well as renal cell cancer.

And for SOM, we're studying the drug in three endocrine diseases, including Cushing's, carcinoid and acromegaly.

Where are you, David, in terms of the Femara, had a combination study as well?

Which one, did you ask about the Femara?

The Femara, yes.

(multiple speakers)

With Femara head-to-head versus Arimidex is called a Phase trial, and that one is enrolling very nicely.

We would expect first data in early 2009.

For Galvus, just to be clear of the drug, we know is minimally excreted through the kidneys.

How long the trials that we will have to do for FDA, I honestly can't answer the question right now until we have our meetings, which as I mentioned earlier is coming imminently.

Yes, I think in terms of the growth outlook, certainly we will have in the second half of 2008 you will see an acceleration of growth, and that is partly driven by the fact that the negatives basically happen already -- will happen in the second half of 2007, so if we go into the second half of 2008 you will see then a comparison versus a lower base.

Then we have seen the washout of Lamisil and Trileptal generics, and of the Zelnorm marketing suspension.

And against this, you have to basically allocate the gross benefit of our several launches.

Especially here, I think Exforge, Exjade, Tekturna, Tasigna, Aclasta, a lot of products where I think we are maybe a little bit got more optimistic than the market, and the market has maybe still [probabalized] the launches, and not converted into sales which are unprobabalized.

The products have been approved and are about to be launched.

Okay, and then Mark, your question regarding the breakdown of the $54 million, I think approximately $39 million are sales return, and the remainder is provisions for the cost of the suspension into recall.

Raymund, could I just take the opportunity to ask, for the first time, I think you've stated an adjusted EPS number and added back intangible amortization.

How much emphasis should we put on that?

I think that's up to you.

As you know, I'm not very enthusiastic about all these adjustments, but a number of investors and analysts have asked us to provide this chart, so now we have added it so that then you can decide what you want to make with it.

Because you have all the elements.

And the reason why I am not very optimistic is very simple.

There is no agreed definition of what adjusted means.

And companies vary in what they add back or not.

So we have given you all the elements and now you can decide which ones you want to add back and which ones you don't want to add back.

Thank you all very much.

Chris Schott, Banc of America.

Thank you, just a couple of quick questions.

First of all, just talk about your SG&A kind of expense reduction opportunities with this Zelnorm temporary withdrawal and the Galvus delay.

I guess I'm specifically asking about the contract sales force.

Any opportunity just to scale back slightly in the near-term?

Second, with regards to Zelnorm, just an update on timing of when we might get further discussions with the FDA and some clarity on a potential reintroduction, even if it's just a partial reintroduction.

And then finally, going back to that U.S.

pricing question, it does seem like you and your peers had a pretty strong first quarter.

Some of that may or may not be sustainable.

But were those gains driven more on your Medicare Part D contracts or really just across your business?

The last element of the question was the cost of business, the price increases.

Secondly, cut in terms of Zelnorm, can you give us --?

We're still in active discussion with the FDA on exact timing of an advisory committee meeting around Zelnorm.

But we probably shouldn't anticipate anything until the second half of the year, maybe in the September timeframe.

Alex, SG&A in the U.S.?

Alex, are you on the call still?

I'm sorry; I've got it, Raymund.

Given the recent launch of Tekturna, which we're in the midst of, along with the other pending launches that Thomas mentioned earlier, we do not anticipate any short-term reductions.

But we're continuing to evaluate it closely.

Thank you.

Tim Anderson, Prudential Securities.

I have some pipeline questions.

In looking at Bristol-Myers Sprycel not gaining a lot of traction.

It says either that the Glivec failure market is a small one, or that their unique product just isn't gaining traction because of its attributes.

But I'm wondering what this says about Tasigna's commercial potential.

So maybe you can just talk about Tasigna and how you see that layering into the marketplace alongside Glivec.

Second question is on Reclast for osteoporosis.

Primary care drug, but in a class that has at least some safety issues that have surfaced over the last few years.

So I'm wondering how comfortable you are with the regulatory prospects for that product.

And then last question on Exforge.

I'm still unclear what gates the decision on when to launch.

Is that at all tied to your dispute with Pfizer?

Thank you.

David, you start?

I would encourage you to look at Glivec and Tasigna together and look at the combined market potential, which we said could exceed $3.5 billion.

It is indeed difficult to tell you exactly how much of that market potential will be Tasigna and how much would be Glivec.

A lot will depend upon how Tasigna performs in the de novo and suboptimal studies that will start during the second quarter of this year.

It is indeed true that patients who have truly progressed on Glivec certainly to the accelerated or blast stage is a small market, because patients do so very well on Glivec.

And I do believe Tasigna has a good combination of both efficacy and safety, which will allow physicians to consider using it when perhaps in some cases they are uncomfortable with the side effects of the competing drug.

So for Reclast, with the approval in Cushing's disease, it is clear that the osteoporosis market is a very different market from either Paget's or from the oncology indication, where we market in the Zometa.

The major safety issue is, there are a number of those; some of them are diphosphonate class-specific, and where I don't believe the once-yearly injection of Reclast will be substantially different than the oral agents, with the exception of the GI tolerability, where clearly we have a much better GI tolerability than the orally administered agents.

As far as specifically as osteonecrosis of the jaw, we have not seen any concern being raised by osteonecrosis in a benign population, either in Paget's or in osteoporosis.

But until the ink is dry on a regulatory approval letter from the FDA, I cannot give you 100% guarantee that there will be approval.

I think in regarding Exforge approval timing, it's basically different by the fact we believe the FDA has stated that Norvasc still enjoys pediatric exclusivity.

The pediatric exclusivity will be added to that end of patent life, which was March 25th, and until the pediatric exclusivity is not expired, it is not possible to launch Exforge.

That's the [current and extending behalf], that's basically driving our timing assumptions.

If I could just follow up on that, aren't we just kind of technically waiting for FDA to recognize the court decision, or has FDA actually come back and said that they believe that six months carries into September?

The FDA has said that in case that the court decision is confirmed, then obviously the patent would be invalidated.

If the patent is invalidated, then pediatric exclusivity doesn't exist any more.

But as the final, final [opportex] decision has not been made, the FDA has adopted the position that until this takes place, the product still has pediatric exclusivity.

Thank you.

As the time is very advanced, I suggest we take one last question.

Parry Graham, Merrill Lynch.

It's Graham Parry from Merrill Lynch.

Just a few points of clarification actually, just on that last point on Exforge.

The FDA has indeed stated that Norvasc enjoys that pediatric exclusivity.

But when it came to Lotrel, certainly they seem to have indicated from the orange book that that only applied to Norvasc products and not to other products.

So is it absolutely your understanding that the FDA has classified Exforge in this bucket?

Can you also clarify that for whether it has now included Lotrel in that bucket, and that would explain why we have not seen final approval yet for a generic version of Lotrel?

Also, could you give us an update on Tekturna launch timelines and preparations?

And then on the pharma margin guidance, could you just clarify your -- a slight change in the wording of your pharma guidance for margins.

Does that now mean that you're expecting flat operating margins year-on-year?

And then one final question on Galvus.

Could you give us an exact date for the FDA meeting and let us know whether you'll give an update after that meeting of your expected filing timelines on the product, or are we going to have to wait till the second-quarter results for that?

Thank you.

Maybe let's start with the margin.

I think we always expressed the desire to contain the margin impact of financing 6 to 8 launches, absorbing the generic challenges for Trileptal and for Lamisil.

Now we have the additional challenge of Zelnorm marketing suspension.

And despite all of this, we are confident that the margin -- we're within the range of 100 basis points on what the margin was last year.

Total margin was last year 29.7, so that means the margin will be between 28.7 and 29.7.

We are very comfortable to come very close to last year's level.

But we're not yet 100% (technical difficulty) on last year's level.

But you can be reassured we do our very best.

And productivity programs are one driver.

And let's not forget before Zelnorm was suspended, our underlying base trend in sales force was more dynamic than our original guidance.

So we're comfortable that we will come close to last year's margin.

In terms of the questions you asked around Exforge and Lotrel, I can only tell you that this is -- a very novel and unique situation, which is currently in the U.S.

It's very, very difficult to predict.

Actually, one could challenge some of the positions of the FDA.

One could challenge some -- maybe court decisions which are not yet final.

So it's really very difficult to predict.

And ultimately, it's the decision of generic companies if they want to launch at risk or not.

And our assessment is that there is a lot of risk for a generic company to launch a generic Lotrel.

And we have to be in active discussion with our counsel if there is an opportunity to accelerate the launch timing of Exforge.

But for the time being, it would be premature to give you guidance that we can launch ahead of September 25th for Exforge.

Nor do we believe that you should think that there will be necessarily Lotrel generic launching.

Just to clarify that, has the FDA directly communicated to you that it is including Exforge in its assessment on the Mylan injunction?

Or is that your interpretation of the broad statement that it made last week?

Yes, the FDA has not correctly communicated.

Okay.

And if you were to achieve an approval for Exforge ahead of September, would it be your intention to launch?

We would be very interested to launch before September, yes.

Thank you.

For Galvus, I will not communicate the exact date, but as I mentioned before it is imminent.

If something substantial is different from what I've communicated before on the expectations of FDA, then we would communicate to you.

Otherwise you will have an update in the second quarter.

Tekturna has, as you know, launched in the U.S.

Uptake for the launch so far is going quite well.

It's benchmarking pretty well with other ARB's -- Cozaar, Diovan, even Benicar's initial launch.

It's too early to say anything yet, but the early weeks look very good for the product and we're in discussions with health authorities in region Europe for the launch later this year in 2007.

Thank you.

I then would like to close this first-quarter conference call.

I thank you for your attention and your continued support and interest in Novartis.

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

Thank you very much for joining.

Good bye.