Novartis AG (NVS) 2007 Q3 法說會逐字稿

Good morning and good afternoon.

This is the call's call conference operator.

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

(OPERATOR INSTRUCTIONS).

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

Daniel Vasella, CEO.

Please go ahead, sir.

Thank you.

Good day, everybody, and welcome to our Q3 conference call.

Let me first start by telling you who is on the call on our side, and then Richard Jarvis will read the Safe Harbor statement, and then we will go into the content of the presentation.

Aside of myself we have Raymond Breu; Thomas Ebeling; Joerg Reinhardt; Andreas Rummelt; Joe Jimenez; Emmanuel Puginier, Global Head of Marketing and Sales in General Medicines and Pharma; James Shannon, Head Global Pharma Development.

Then we have also on the phone Alex Gorsky, the CEO of Pharma North America, and David Epstein, the CEO of Novartis Oncology business.

With that I would like to ask Richard Jarvis to read us the Safe Harbor statement.

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

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

Thank you, Richard.

I will start together with Raymond to give a few words of introduction and then hand over to Thomas for the Pharma business.

Joerg will cover Vaccines and Diagnostics, Andreas Sandoz, and then I will close with an outlook, and we will have enough time for Q&A afterwards.

I'm starting with slide number four, which shows that we had year-to-date dynamic growth of 13% in US dollars and 9% in local currencies, driven mostly by Vaccines and Diagnostics in Sandoz but with a good performance in pharmaceuticals up-to-date and then Consumer Health with double-digit growth of 10% and 6% in local currency.

On a continuing basis, the group operating income increased by 9% in US dollars if one excludes the onetime charge of the increase of the environmental provision.

Slide five you see here again the growth in topline and operating income, and then net income takes into account the $590 million which makes the net income is increasing by 7% to $5.6 billion.

Slide 6 and that complicates obviously a little bit of reporting this year.

The onetimers and the biggest effect or impact is due to the divestment of the medical nutrition business and Gerber.

The Gerber business so that the group net income for the nine first months is $11 billion.

In slide seven one can see that the portfolio strategy, which the group has taken and reenforcing the non-Pharma health care businesses focusing on one side on health care but diversifying at the same time is paying out.

We have very dynamic growth rates in vaccines, diagnostics, solid growth rate in Consumer Health, and then obviously we have some risk impact here of pharmaceuticals, and we will come back to that later on.

Slide eight you see the corresponding figures or growth figures in operating income, and in slide 11 we go now to Q3.

And in Q3 we see not a different picture in vaccines, Sandoz and Consumer Health, but here we see clearly the negative impact we have had by some anticipated and some unanticipated events in Pharma.

The loss of Zelnorm, Lotrel, Lamisil and Famvir on one side, the withdrawal from the market and then the generic competition.

And what I can already stress is this is a phenomenon isolated to the US market, and all other markets have performed really strongly at a double-digit growth rate.

Operating income on slide 12 shows now the deep impact it has in percentages on the Pharma business and, of course, in the absolute numbers.

Since Pharma is the biggest business, the impact is also visible.

On slide nine net income decreasing by 12% obviously is the impact of the $590 million, which we have taken in the third quarter and one could debate to what the degree this is just a onetime or should be an operating income.

We have treated it as a onetimer and excluded it from the reporting of continuing operations, but accounting-wise you could also include it.

And then on slide 10, you see the impact of the divestment gains, and on the next slide, I'm going to 13 now, we have the margins.

On the margins on nine months, we see that pharmaceuticals is being hit by the mentioned events.

Vaccines and Diagnostics has turned much faster than anticipated into positive numbers.

Sandoz improves its margin like we have planned.

Consumer Health is about flat.

If now one excludes the onetimers intangibles, the effect of the acquisitions on slide 14, you can see that on a normalized basis the margin in the vaccine and diagnostics business and also in Sandoz is significantly better than on the reported basis.

I'm now handing over to Raymond Breu to go into a deeper analysis of the figures.

Thank you.

I'm on slide 15.

The slight drop in operating income from continuing operations of 0.7 percentage points is the result of a couple of major factors.

One is in the cost of (inaudible).

We have booked Famvir impairment charge of $320 million.

Then R&D, another negative impact there of 1.2 percentage points.

It was growing much faster than sales as we have large investments in the Pharma late stage pipeline projects, and we have a positive impact in offsetting these margin deteriorations.

We have a positive impact of 1.6 percentage points in other income reflecting the gains that we have booked in Pharma in 2007 of $166 million, and then we benefited from onetime Chiron acquisition charges that we had booked in 2006 in the comparable period.

On slide 16 I can comment on the non-operating elements, and you will see that the result from associated companies into financial income net are significantly up.

And the other very positive development that we had in the nine months was the taxes from continuing operations where the tax rate is only 11% compared to a 15.1% in the same period a year ago.

On slide 17 we explained the main factors that have to be taken into account when one analyzes these numbers.

The rate of 11% has benefited from a 2.9 percentage point from reduced profits in the US in particular.

Obviously profits in the US are taxed at a higher rate of 39.5%, and too much reduced profits (inaudible) in the US there had a positive impact.

Then we had a reduction in the German corporate tax rate.

The overall tax rate was reduced from 37.5 to 28.5 percentage points, and to catch up on all the items for the new tax rate improved the tax rate by 1.2 percentage points.

And finally, the restructuring of the Chiron acquisition in the Novartis organization had a deferred tax credit impact which improved the rate again by 1.6 percentage points.

The environmental charge of $590 million had a small positive impact too, but that impact is approximately 0.5 percentage points only.

So one has to take these elements into account because obviously the rate excluding these onetime effects of 16.7% is more indicative of the underlying tax rate going into next year.

Obviously for the remainder of this year and for the fourth quarter, I think the 11% is the best current estimate that we have.

On slide 18 a short summary of the cash flow.

Cash flow from continuing operations was up 15%, but the free cash flow after dividends was then down 33%.

The main reasons are a much increased dividend and secondly higher investments in plant and equipment in particular.

The capacity expansions in manufacturing in Pharma and in Sandoz.

And finally, increased working capital needs, which are directly linked to increased stocks for Tekturna and other launch projects.

In particular, Tekturna had a fairly large impact because the cost of goods sold for Tekturna is relatively high.

On slide 19 you see that our net liquidity liquidity after the deduction of financial debt at the end of September now stood at $7.3 billion.

This is the result of the proceeds from the divestitures which contributed net of other acquisitions $7.9 billion.

And then you can see that in the period we bought our own shares for a net amount of $3.1 billion.

On slide 20 we summarize the long-time gains that we had to book from and could achieve from the divestiture of the nutrition businesses.

Overall a $5.2 billion divestment gain after-tax.

Medical nutrition contributed $1.6 billion and Gerber $3.6 billion.

And we can now say that our Novartis portfolio of businesses is 100% focused on health care with pharmaceuticals at its core.

On slide 21 you can see that we have stepped up our share buyback activity.

In the nine months 2007, we already have bought back $3 billion over the so-called second line.

These are shares that will be destroyed at the next ATM.

Our policy for share buybacks has been slightly changed.

We have commented on this recently before.

The policy is now that we will return up to 100% of free cash flow after dividends and acquisitions via share buyback.

We still have $1.6 billion open that can be bought back under the currently approved programs, and our intention is that this open amount will be bought back before our next AGM.

At the same time we have also indicated that we're currently considering a higher dividend payout ratio that then will be proposed to our next annual general meeting.

On slide 23 we explained what we did in the quarter with regard to environmental provisions.

In the quarter we undertook a thorough review of our liabilities related to pass environmental liabilities for landfills and similar events relating one has to say to companies or activities that are no longer part of Novartis or part of our core portfolio.

So these are activities that go back 20, 30, 40 years ago.

They are related mostly to chemicals and agrochemicals activities.

And there is also a decision of our Board to remediate these landfills.

As far as the Novartis share is concerned, we then have undertaken a thorough review of these liabilities and have as a result of this increase our provision by $590 million.

Included in this is the 200 million (inaudible) that we have contributed to a Swiss foundation that will undertake or that will contribute to Novartis share of the remediation in the Basel area landfills.

This underlines our commitment to a very rapid and sustainable and appropriate solution to historical pollution problems.

With this, I hand over to Thomas Ebeling.

Yes, I will start on page 25.

Pharma had a US dollar growth of 8%.

The operating income growth was addressed by the asset impairment charge of funding of $320 million, taking down the operating income growth by 6% points.

All the fundamentals remain strong.

Outside the US Pharma is growing double-digit.

The two key brands, Diovan and Glivec, are performing really well with Diovan reaching 40% market share in the US, and Pharma has achieved five FDA approvals, seven positive approvals in Europe and two positive CHMP opinions in Europe.

These approvals will lead into a very dynamic growth period starting in the second half of 2008.

On page 26 you will see the P&L.

As you would draw the attention on the adjusted return on net sales, you can see here that this level would be 31.6 which would represent a reduction of 1% point which can be explained by an increase in marketing and sales and investments based on new launches and an increase in clinical development because we have significant higher number of patients in Phase III and Phase IV, which will hopefully translate soon into increased sales.

Page 27 in a simple way illustrates the different growth dynamics we have in our business where the US is (inaudible) and the rest of world is growing.

On page 28 you see that the dilemma of the US basically that they got hit by the impact of Zelnorm, Lotrel and Lamisil generic.

Lotrel alone would represent 3% point growth reduction, and if you think about this, the trial is not yet completed.

I think this would give you an idea how much we could have grown if we would have kept Lotrel in the market.

Page 29 shows the different dynamics and different regions.

You can expect that geographies like (inaudible) and emerging growth markets are growing double-digit.

So I am very pleased to report that Europe as well had double-digit growth, which is a great turnaround driven by markets like France and Germany.

Our top three franchises are all growing nicely.

If you would exclude the Lotrel impact, actually all three would demonstrate double-digit growth.

And on page 31 you can see that our top two brands are both growing double-digit and are defending the number one position in their segment.

Page 32 shows the achievement of 40% market share for Diovan in the US despite the launches of Exforge and Tekturna, which was illustrated on the next page where you can see that we are gaining net market share.

The new written prescription level of Tekturna is still around Benicar, which we consider to be a good success given that this is a new class which always takes a little bit more time to be built.

And on page 35 we tried to explain a little bit the gap between the written prescriptions and the dispense prescriptions.

The last time we met we talked to you about the higher rejection and reversal rate at the pharmacy level.

You can see here that over the months these rejections (inaudible) rate actually has been reduced.

At the bottom of this chart, you can see the managed care gains Alex Gorsky and the team have accomplished in the recent months, and we estimate a two to three-months timelag for [convents] to finally impact Rx growth.

So maybe that has to to model a little bit the growth potential of Tekturna in the upcoming months.

Page 36 illustrates that the majority of our account gains actually have been in the Medicare channel and a little bit in commercial.

Exforge on page 37 is doing extremely well, also forming all launch analogs, and we're very, very hopeful that this has become a drug buster.

And on page 19, on the right side, you will see the source of the business in Germany, which is pretty much indicative of what we see as well in other markets.

And I'm pleased to report that [Biosotan] represents less than 10% of the source of business for Exforge.

So the cannibalization is fairly low, and we're getting our business from competition and not from our own portfolio.

Exjade continues to -- I'm sorry, I'm now on page 39 -- well, Xolair is growing very nicely, and this represents here the global sales which include the US sales which are booked by Genentech.

Lucentis had a very strong quarter with a very good growth dynamic from quarter one, two and three, and we hope that this dynamic will continue.

Exjade continues to perform well.

It had almost $100 million in quarter three, and the pie chart illustrates that especially in the US we are able to get a lot of new patients with this drug.

The initial feedback on reclass and (inaudible) in the US is positive, but it is too early to draw definitive conclusions.

I think we have to wait a couple of more months, and then we can report back a more robust assessment of the performance.

Page 43 illustrates the approvals we have accomplished both in US and in Europe.

And those approvals will lead into a very dynamic period that we have between nine and 10 launches in all major markets outside the US and to the end of 2008.

So our sales forces will be (inaudible), and we will hopefully convert their activities into sales.

And these activities will lead to robust growth sales starting in the second half of 2008, which will be backed on page 46 by additional filings of an average four to six per year over 2008 and 2010.

We will safeguard all of these investments by driving productivity initiatives even further.

We have several times reported to you that we are confident to hit $1 billion savings versus our cost base 2005, which we're very, very comfortable to reach this year, but we want to go even a step further.

So on page 48, you see the headcount reductions which Alex Gorsky and his team will implement in the US, which are 1260 positions out of which roughly 1000 are coming from the field force.

Half of it is an external sales force.

As you know, the generic competition for Lotrel, the generic competition for Lamisil and (inaudible) then basically resulted in a might overcapacity, and I think we have corrected this for now.

And we will realize in use savings of $230 million.

So the outlook for Pharma is that we will have low single digit growth based on the generic impact.

We have a very dynamic growth rate as of second half of 2008.

Our productivity initiatives will enable us to limit the 2007 negative margin impact to 3% points, and those 3% points include 1.5% points coming from the asset impairment impact of Famvir.

And we have promising (inaudible) to a new slow ahead.

With this, I would like to give onto my colleague, Joerg Reinhardt.

Thank you, Thomas.

On page 51 you have the key messages for Novartis Vaccines and Diagnostics.

We had very good sales growth versus 2006 of 49%, driven mainly by the influenza vaccine but also TB vaccines and Pediatric Vaccines and Diagnostics.

We had a strong op income contribution, but due to the seasonality of our vaccine business, you should expect the fourth-quarter sales to be weaker probably much closer to the level of last year's fourth-quarter sales.

Our meningitis products are on track to complete key milestones.

On page 52 you see the numbers which have been discussed before.

On page 53 you see the reason for our good performance in the third quarter.

We could ship this year a higher number of influenza vaccines in the third quarter than last year with $26 million doses into the US versus 15 million doses last year.

Page 54.

Our tick-borne encephalitis vaccine had a very strong season this year with more than 6 million doses sold in the first nine months as compared to 3.4 million doses last year.

This vaccine is mainly sold in central Europe and Germany, Austria and Switzerland.

On page 55, Optaflu, our flu cell culture-based influenza vaccine, is making good progress.

We got approval in June by the European Union; however, we're still waiting for the season of the flu on the (inaudible), which we hope we will get soon so that we can still launch a very small quantity into the European markets.

No order launch is expected for next year.

On page 56 Fluad is the only adjuvanted influenza vaccine that is on the market at the moment, and we will in the future count more on the success of Fluad.

Fluad contains our proprietary adjuvant MS59 and has been approved 10 years ago in Europe with more than 27 million doses now in the meantime being sold.

It is listed in 23 countries but not yet in the US.

We will submit next year in the US as well.

Currently we're indicated for use in individuals of 65 years and above, but we are also working on a pediatric indication that we will develop in the next two years and we will then submit in Europe and in the US.

On page 57 Aflunov, our pre-pandemic flu vaccine, is currently under review in Europe.

We still expect a decision by the European Union early 2008.

On page 58 our meningitis franchise is moving ahead nicely.

We have two projects in late stage development.

One is the ACWY project.

The other one is a [bee] project.

Both of them are expected if everything goes fine to be indicated for infants and adolescents.

The infants first cohort in Europe and India together are more than 40 million infants that are born every year.

In addition to that, with ACWY product, there may be a catchup opportunity in adolescents as well.

On page 59 you see the next steps for these two vaccines.

We did present new data on ACWY as it showed good persistence of immunogenicity versus minimum.

We will present more data of the Phase II program soon.

Phase III is on track for completion around the end of the year and for submission next year, and the infant program is still recruiting and is expected to be submitted in 2009.

The bee vaccine is making progress as well with the Phase II to be completed before the end of the year and Phase III then to be started next year.

So in conclusion on page 60, good performance to date with good growth expected for the full-year results.

The improvement of the business operations is progressing well, and the division is as a result of that expected to be profitable on a reported basis ahead of forecast.

And with that, I hand over to my colleague, Andreas Rummelt.

Thank you, Joerg.

On page 62 you see that Sandoz continues to show good sales performance, up (inaudible), mainly driven by the retail business, particularly in the US and Eastern Europe, Germany and France.

The operating income grew faster than sales by 48%, mainly driven by strong volume growth and productivity gains across the division in production, marketing and sales, as well as in development.

With this we could reach operating margin of 15.2% adjusted for all exceptional items at 28%.

On page 65 you see the split of the performance across our businesses, the strongest contribution from our retail business, 16% in local currency.

The key countries I have already mentioned.

In addition to this, we have a very good business in Latin America, especially in Brazil in retail.

Anti-infectives grew 4% in local currencies and increased the operating income by 35% based on strong productivity gains and favorable pricing with some key compounds.

On page 66 you see that the launches we did in the US in late last year and early this year account already for 29% of our total sales, which grew in the US 28% year-to-date.

(inaudible) this by strong contribution of difficult to make products here especially Metoprolol, [Thephdaner] and ipratropium fomoterol.

Of course, also supported by products launched under co-exclusivity like the (inaudible) and the Ondansetron.

On page 67 you see that we have achieved two major successes in the biosimilars field.

Biosimilars are a key strategic pillar to increase the proportion of difficult to make products in our portfolio.

We achieved EU approval for the Omnitrope liquid, which now makes its human growth hormone version fully competitive to the originator product.

In addition, we achieved the EU approval of erythropoietin alpha, which in the meantime we have launched in Germany on the 1st of October.

Based on the results in the first nine months, the successful launch of many new products in our broad portfolio, we can confirm the double-digit sales and operating income growth target for 2007.

With this, I hand back to Daniel Vasella.

Thank you.

We are coming to slide number 70.

Having listened to my colleagues, I think we can say that the performance in the third quarter was solid.

Obviously we had some onetime events which confused slightly the picture, but underlying I think it is quite a good performance in view of the environment which has changed quite significantly in the US, namely seeing much more aggressive generic players who launch products at risk on one side and then much higher hurdles on the FDA side, mostly driven by the request for a higher safety margin than we were used from the past and some difficulties in predicting the actions really of FDA.

If we're looking, we have strategically a good performance of the non-Pharma businesses which balance and mitigate to some degree at least the risk we have in this pharmaceutical business.

And the other very significant event I think for future growth is the fact that we had 12 approvals this year and two positive views or opinions by CHMP.

So that gives us a solid foundation I think for the future.

And if you go to slide 71, we really want to take advantage of the current platform in strengthening and pursuing our strategy which is focused on innovation, and obviously productivity is a must because we must be able to fund our activities be it in innovation or marketing and sales.

We have grown our research and development portfolio in the biologics area to 25% now of our portfolio.

So it is a very rapid expansion in this field, and that requires additional capabilities and resources, and we have decided the best way to go is to create a focused biologics development unit, which we will be able to pursue these opportunities in a very dedicated way.

Secondly, development has reorganized its activities.

We announced this today also.

Also, in order to strengthen project teams, create development franchises which will have aligned decisionmaking within therapeutic areas and we will also simplify the development governance.

We are looking overall at the group to simplify the structure where appropriate to simplify the decisionmaking, and then we have also some significant savings opportunities specifically in procurement and IT infrastructure.

We want to realize, and once we're ready, we will obviously announce this.

As an immediate action, Thomas has mentioned that already.

To adapt to the new size of the product portfolio, we have reduced the sales force in the US and the marketing organization.

Having said that, I also have to say that we have lots of growth opportunities in other areas also, of course, with a new product in the US, and we do not anticipate ex-US sales force restructuring to occur.

So you should not expect there major changes.

Today we also announced that Joe Jimenez and Thomas Ebeling are swapping responsibilities in order to expand experience at top management level and at if you want to say outside in view into these businesses, we want to accelerate the growth of the non-Pharma businesses, and I think with Thomas' track record, he is very well positioned to achieve that in the future.

We are going now to slide number 73 in closing our remarks with the outlook for 2007.

The group sales are expected to grow at mid-single digit levels in local currencies and group operating and net income at record levels and here I have to say excluding obviously the onetimers we have mentioned in the presentation.

I would also like to give you a heads up on what we expect in the fourth quarter and specifically in the first half of 2008.

You have to take into consideration that based on 2006 sales, we have lost more than $3 billion in annual sales in the pharmaceutical division.

So this will have a negative effect until mid-2008.

Then the base effect will be gone, and we will fully see the effect of the new launches and initiate and have a new growth phase.

With that I would like to close our remarks and open for questions and answers.

(OPERATOR INSTRUCTIONS).

Graham Parry, Merrill Lynch.

Just firstly on the cost reductions, can you just be absolutely clear, this is all incremental over the cost reductions that you talked about at the second quarter.

Perhaps you could comment on to what extent you think this can help you grow your margins in 2008 versus 2007, or is this all just needed to sustain margins in the phase of the worsening revenue environment that you see?

Secondly, separately could you just give us a little bit more detail behind the group level restructuring referred to in the press release and actually quantify potential margin impact and cost reductions from that?

And then thirdly, does your recent increase in share buyback policy and the fact that you are now talking about increasing dividend payout ratios signal that you really don't see any major acquisition opportunities on the horizon?

Thank you.

On the cost reduction side, I can confirm that the $230 million in savings are additional savings and are not included in the $1 billion Thomas mentioned earlier as productivity improvements.

If I were or we were to give you a margin outlook for 2008 indirectly obviously, we would already include whatever is to come which I cannot do today.

So that is my short answer, but I have backed up here by Raymond and by Thomas to expand if needed.

Also, on the group side, from a point of view of margin, we have the picture where we have the underlying businesses and their margin production, and then we have as a second element obviously potential simplifications which may occur, which should have an also positive effect on growth.

Meaning these are changes we want to do for future growth, not just to have a short time cost-cutting effort.

And finally, on M&A, and, Raymond, you add whatever you think is appropriate, but on M&A I would say the following.

Our policy says after acquisitions and after dividend payout and buyback, we will spend up to 100% of free cash flow.

It does not say that we will not acquire.

But don't please read that into position that we are going to acquire now.

So we want to keep our strategic options open as we did in the past.

But we also want to apply due diligence to any target we're looking at and to remain financially disciplined and also as we have been in the past.

So, Raymond, please add your thoughts on that.

I think on the acquisitions, no change to the policy and nothing large on the horizon one really should say.

On the margin outlook for 2008, this is too early.

We're only doing the budget now.

(inaudible) the budget and before we have the impact of these initiatives that we have started, it is too early to comment on 2008.

Thank you.

Can we have the next question please?

[Bierget Kolhoff], [Ryan Boatmire].

I have two financial questions please and one pharmaceutical.

First of all, on the redundancies in the US, are there any costs associated with that?

Then on the tax rate, I think, Mr.

Breu, you mentioned that the 16.7% is the base tax rate also for 2008.

But I was wondering some elements like the lower tax rate in Germany should have a sustainable lower effect.

So could you please elaborate a little bit more on that where you see that tax rate in 2008?

And then lastly, the pharmaceutical question on Galvus.

I was wondering is there actually any progress in the discussions with the FDA what are the issues and why is it taking so long?

First, the onetime cost for the US restructuring is expected to be somewhere in the range of 20 to $25 million, so a very minor amount.

Tax rate, the adjustment for the reduction in the German corporate tax rate has a big long time impact because all the assets and liability positions on the balance sheet have to be tax-effected at the newer rate.

So that is a big long time impact that will not recur in next year or the years thereafter.

As to the underlying rate, I think the indication that we have given you in the past and that I have given again is that that rate is expected to be somewhere in the 16 to 18% range.

Obviously you can always have onetime effects to the positive or the negative side that are accounting driven.

Finally, just to repeat that we have no misunderstanding.

The 11% that we now have shown for the nine months is also our current best estimate for the full-year 2007.

Okay.

Just one follow-up please.

But the negative effect that the US earnings are having will also have a positive effect on the tax rate in the first half of 2008?

That will have to be seen because this depends now how the 2008 will develop.

How the initiatives for cost reduction will develop and so on, so it is too early to comment.

Okay.

Thank you.

So as far as Galvus is concerned in the United States, I am afraid I don't have any clear news for you.

I would hope by the end of August I would be able to come to you with clarity on what the FDA were wanting, but they did not do that, and in the recent days, they have come to us with what appears to be a moving target asking for additional patients in the trials with longer follow-up, etc.

And we have not yet come to an agreement as to what we do need to do, go back -- and so the discussions continue and I cannot give you any clarity on what the FDA are really looking for.

And you do not expect to get clarity very soon?

We will continue discussions, but right now we're not at a point where the FDA are willing to give us clarity.

John Murphy, Goldman Sachs.

I have got three questions please.

Daniel, a couple for you first, please.

Just in terms of the management changes, can you tell us a little bit more why now?

What are the implications for the divisions?

I think we have known Thomas for many years, and he has presided over a period of strong growth.

We maybe don't know Joe Jimenez quite so well.

So should we think about a different focus, a different strategy?

What should we be thinking there?

Second, you just touched on the biologics and establishing that as a focus unit.

Are there implications there with regard to either internal spend or maybe external M&A?

And then finally, a question for James Shannon.

Related to Galvus, we just saw a Januvia safety label update yesterday, and I wonder if you had any thoughts or comments on that.

Okay.

Let me give a try to your first question.

You're absolutely right.

Thomas has had a seven-year run I would say and great performance in growth of Pharma, and as you may remember, when he came in, there were a ton of question marks -- how come that you take a person who only had nutrition and cigarette experience and no Pharma experience.

So I think it has proven to be a right choice at the time, the right timing and the right person, and after seven years I think on a divisional level, it is more than ready to go to a new field.

It is a little bit more complex obviously to lead in three businesses.

It is also a slightly different role than running directly a business.

So I think it offers an expansion of experience.

In reverse, that is true for Joe who has a strong background in fast-moving consumer goods, has a background where he has worked also in private equity, was on the board of AstraZeneca for a number of years, so has firsthand experience in fast-moving consumer goods and more from a strategic view on the Pharma business and obviously knows how private equity operates and how to make numbers work.

His work background since many don't know him yet is that he graduated from Stanford, had an MBA degree from Berkeley and then worked in various consumer goods companies.

The last two positions was heading the Heinz business in North America and in Europe in two positions, so he has international experience, and then went to private equity.

So just in a snapshot.

Now I understand that one is always comfortable when one knows a person and it is always raising questions when somebody new is coming.

And that is more than fear, and I don't anticipate that it is very different internally.

And I'm very confident that this is the right choice we made and the right timing.

And so I'm very optimistic as to the fresh look both executives will take at this businesses and what they will do with these businesses to bring them to new shores of performance.

With that, I'm coming quickly to the question on strategy.

Do not read any strategic change into this switch other than that we from a business portfolio point of view do want the non-Pharma health care businesses to really grow and perform.

And don't read into it that we would maybe not pay attention to specialty products in pharmaceuticals because of Joe's background in fast-moving consumer goods.

That would be a wrong conclusion.

With that, we have the other question please.

So, on the biologics piece, what we have tried to do on the biologics, as well as across the rest of Pharma, is to create entrepreneurial units which are really dedicated and focused on the business and then power decision-making at the project team level.

As far as biologics is concerned, specifically we have, as Daniel mentioned, 25% now of our portfolio, and we needed to make a decision to increase the talent pool and the capabilities, and we will try to do that both by building, as well as by looking externally for capabilities and technologies in the biologics.

25% of our portfolio certainly does mean that we will move some budget towards the biologics piece, but what we will do externally I cannot say.

Galvus, Januvia, the Januvia label update yesterday on Stevens-Johnson.

We have not seen Stevens-Johnson with Galvus in the clinical program in a very large number of patients.

I have not seen the complete data on Januvia with regard to Stevens-Johnson.

So I cannot make any comment on that.

Alexandra Hauber, Bear Stearns.

Firstly, I just have a question on CapEx.

When you said you are adding capacity both in genetics and then Pharma and though I do understand the generics because that is a volume business, could you give us some insight where you were actually adding capacity in Pharma.

Is that biologicals, or is that -- where is it that you need to add capacity which would require that kind of CapEx increase?

Could you just give us a little bit of an outlook on outlook on CapEx?

Because it looks like you are coming in way above the full-year last year.

Is that going to be a peak, or will you continue at that level?

Secondly, on working capital, the difference compared to last year, this nine months at $700 million, I'm really wondering given your comments on Tekturna whether there is really anything meaningful within that figure we should attribute to Tekturna given the sales so far.

Because I was wondering whether we should read across that maybe it is not quite living up to it as much to your expectations as you have been guiding as you have been saying so far.

The third question is on the genetics business.

We have seen an announcement from [Schneider] about a restructuring in Germany based on, of course, ongoing changes in the business model in Germany.

I was just wondering whether Andreas could give us an idea whether he thinks he needs to do something similar.

And the fourth question, on the Exelon Patch, when you actually look at the very early prescription trends so far, it looks like it is just basically a straight switch from the tablet.

And I was wondering what -- whether you really have any confidence that you can expand the market share over all of the product?

Because it looks to me that the real issue is actually that you cannot -- that you need to gain market share from Aricept, which has the combination data (inaudible) which you do not have.

Can you just comment on this, please?

Thank you.

CapEx?

The increase in capital expenditure is really linked to manufacturing expansion in Pharma for the launch products, Tekturna in particular and for Diovan and then for general chemical productions.

The level of CapEx that you now -- and then in addition to Sandoz, which I mentioned, the level of CapEx that you now see evolving this year as a percentage of sales, I think is a level that will persist for the foreseeable future.

Working capital, yes, Tekturna has a big impact there.

I mention because it has a high cost of goods sold, and it simply means that we have a launch of Tekturna coming in a number of countries, and we're preparing for that.

Regarding Tekturna, let me maybe elaborate a little bit on this one.

First of all, qualitatively from the market research we have done in the US, we can really clearly deduct that physicians are very pleased with the efficacy they have seen.

There are no safety issues.

I would say almost 95% of physicians are willing to prescribe the drug and are very open-minded, and actually we expect a significant increase of prescribing physicians in the months to come.

If you take a look at the new prescribers, we're gaining every week.

It's a very, very steady number between 800 and 1000 doctors every week.

Most of these doctors really become repeated prescribers, so we see a very steady growth of the prescription base.

As you mentioned before, it is much more difficult today to build a new class than it was eight years ago, and the reasons are basically driven by managed care, copay, safety concerns and other restrictions, including promotional restrictions by the way.

Secondly, I think you should not forget that our pricing for Tekturna is not a discount in contrast to what [Benicka] did when they launched their drug.

So if you keep this all in mind, we are reasonably pleased with the uptake.

We have not changed our peak sales guidance on Tekturna.

For the short-term future in the US, managed care gains, the launch of Tekturna HCT/Exforge combination and the promotion of data which are differentiating us stronger there with [ASYS] and [OPS].

We will certainly give fresh impetus into the growth potential for the brand.

And again, I think if you take a look at Exforge and Tekturna, I think we have shown that we can launch two hypertension products in the same period without cannibalizing our core business and were able to drive total share.

No doubt we wish we have sold more, but we're very, very comfortable in the peak sales guidance for both drugs.

In terms of Exelon Patch, I think it is somewhat natural that to some degree you get people who believe in Exelon to try out the patch.

I think we have seen already sufficient new patients here who have been on other drugs, and you're absolutely right.

In order to make Exelon a blockbuster drug in the US, we have to get use of some competition, and we're fairly comfortable that we will get it.

I don't know, Alex, do you have anything to add regarding Exelon Patch or Tekturna?

Thomas, on Exelon Patch I would add we're working on only a few weeks of data, as you suggested, but overall we're very encouraged by what we are seeing.

You know physicians are seeing good efficacy, solid tolerability, as well as the convenience of the patch.

We're getting all that from the market research, and what we are pleased with, if you look at the franchise share, it has actually increased by about 2 points recently, and it is up to 10%.

And that is the new to brand share.

Among PCPs, our NWRx share has shown also very nice growth, and it is up to 6.6% and 8.2% for the overall franchise.

And very encouraging, our awareness is also very high, over 90% with primary care physicians.

So we are quite encouraged, and the early data also suggests that we are seeing less than 25% of the prescriptions for the patch being direct switches from the capsule.

So we think that we have an opportunity obviously to transition patients over but also to expand our overall share.

Thank you.

Can I just quickly follow up on the Tekturna inventory question?

I'm just wondering whether I'm right to conclude taking all your comments that you have several hundred million dollars worth of Tekturna inventory on your books.

Let me pass it to [John Peacock], the CFO of Pharma.

You are right to say that we have substantial inventories ahead of several launches across Europe next year.

So more in the order of a couple of hundred million in terms of what we hold.

But clearly we have several launches coming up next year, and we're building inventories ahead of the other launches as well.

Tekturna is the biggest, but there are others as well where we're building inventory.

I think a couple you use it in the UK language.

Two.

Two.

Yes.

Okay.

Thank you.

And the generic --

We have the last question --

The generic question (multiple speakers)

Yes, on the generic (inaudible) restructuring of sales force question.

The generics business model in Germany is a model in transition, mainly through this Monday, this new rebate contracts between the health insurers and the manufacturer business moving the decision power from the doctors and pharmacists to the payers, so basically the health insurers.

Currently we have more than 30 contracts with leading health insurers in Germany covering the old portfolio.

And with these contracts, we could really achieve a very good market position increasing volumes, and this is certainly is supported by our pharmacy, as well as the physician (inaudible).

[AOK], which is the bigger health insurer in Germany, has taken a different approach.

They tend individual molecules, which was not that successful in the first year.

The process for 2008/2009 is on hold because some of the companies have taken legal action against the process.

So basically here it is too early to speculate what the outcome will be, and as a market leader, we are grasping the existing opportunities, and we believe that to get these existing opportunities as there are no exclusivities, there's always many companies, some companies where if a contract with the insurers we could use our field force.

Okay.

So no restructuring in the short-term.

Thank you.

Then next question, please.

Marcel Brand, Cheuvreux.

A few questions.

First, on the restructuring.

I'm not so surprised by that but a bit more by the timing.

Why do you restructure in the middle of four major launches in the US?

Do you want to take on the rest of the pharmaceutical majors -- the Pfizer's, the Merck's and Sanofi and (inaudible).

In hypertension the baffle continues to be fierce with Sankyo getting ready for AZOR, so why now?

And, on the other hand, when you talk about the loss of Zelnorm that is a while ago and Lotrel is exactly the same customer target group.

The second question is, related more to genetics.

Are you aware of any competitors developing a [Lazaraton][Lodapine] combination?

And then my last question is on Galvus.

How do you see the chances that after going through this useless study that the FDA is mandating that you need to do outcome studies when listening to the remarks by the head of the Avandia [Odac]?

That is it.

Thank you.

Restructuring obviously it is a question of the portfolio, the size of the portfolio.

Thomas?

I think, first of all, whenever we calculate our share of (inaudible), we use a very rational objective approach and basically be highly confident that we will be able to get synergies by detailing products like Diovan, Exforge and Tekturna.

You know this is a very defined sales force as a category.

This will allow us to basically reduce the number of calls we need.

We're very comfortable that for all the brands promoted we have sufficient share of voice, and on the other hand, we're very committed as well to drive productivity of our sales force.

So we think the cut we're making is not a dramatic one and enables us to be competitive.

On the other hand, drives productivity already a first step forward.

Alex, you commit to launch all these products and drive these products optimally?

Absolutely.

As Thomas commented, we have been very deliberate in our analysis and review and the number of representatives that we are applying to ensure that we've got the right share of voice with all of these products.

And I think the combination of having a category approach, plus increased productivity, will allow us to be very competitive.

Thank you.

We're not aware of any generic [Lazaraton][Lodapine] combination, and then on Galvus your concern is our concern to make it very short.

Jo Walton, Lehman Brothers.

A few quick ones please.

Just returning to the biologics theme, you have obviously got a lot of projects in this area.

Do you have enough money factoring capacity to take these projects forward, or would you be in the market for a substantial biologics manufacturing facility which might be available?

Secondly, on the consumer business, we don't have an awful lot of visibility on it as it stands today, stripped off with the bits that you have disposed of.

Is the third-quarter level of profitability a good guide for the fourth quarter and going on?

That is representative now of that business?

And, on the vaccine side, have you had any revenues this year for your HRN1 contractors?

Is there any material revenue in there, or if there has not been and up until now, will there be any in the fourth quarter?

Thank you.

And I'm sorry, one final question.

Just on the mature brands, is the decline of 9% purely related to Lamisil, or has the market conditions effectively started to turn down that sort of 20% of your business?

Thank you.

On biologics we have obviously the generic area, which has a lot of biologic capabilities to produce, and we have here a substantial amount of capacity.

Also, we have within Pharma capacity for biologics, and I do not anticipate short-term we would have to go out and buy a big plant.

Consumer business, Joe?

The consumer business in the third quarter had topline growth of 10% with animal health and the OTC business generating double-digit increases.

The profitability in the third quarter was somewhat suppressed by some incremental investment in R&D, particularly in animal health, and some significant investments in marketing and sales in OTC in front of (technical difficulty)-- business launch in the US.

So I would assume that the profit picks up and the profit growth rate improves versus the third quarter.

Vaccines and Diagnostics?

Due to the structure of the contract with the HHS, we have not yet booked any substantial revenues this year, and we do not intend to do so for the full year.

Just as an explanation of matures products, we basically have products which are either not anymore promoted and/or don't have anymore patent protection.

Usually these type of products decline between 2% and 5%.

This decline of 9% is very much as I said driven by Lamisil and really driven by Lescol or other mature products which we're holding up very well.

Amit Roy, Citigroup.

I have got a couple of questions here.

Firstly, on the Stevens-Johnson syndrome on the Januvia label, have you seen any Stevens-Johnson in the monkeys with the skin necrosis, which from the Galvus experience or in the toxic epidermal necrolysis?

That is the first question.

And then secondly, when will we be getting any data on a triple therapy combination of Tekturna, Diovan and the [Directik], the three together.

And lastly, we saw a recent announcement by Genentech on them restricting the sale of Avastin to our pharmacies to stop them from setting it up.

Do you think there's a potential of anything like that happening in Europe?

Thank you.

Stevens-Johnson in monkey we have not seen.

Then triple therapy.

So triple combination, the three combination of the triple combination, you should see data early next year.

And then the restriction on Avastin?

In Europe we knew that Roche is really making sure that the product is used within the label and ensuring proper distribution.

So basically the Company is behaving in a very professional way --

Correct.

And then it is up the physicians to prescribe and use it appropriately.

Kevin Scotcher, HSBC.

One question and a clarification.

On the pharmaceutical outlook on the margin, the negative impact of 3%, as you say, includes the 1.5 for Famvir.

Does it include or exclude the Tanox profit?

Does it also have -- include or an exclusion of any of the restructuring charges?

And the second question relates -- I hate to speak to it -- but the Januvia label changes, I understand it included the warning of angioedema and exfoliative skin conditions, including Stevens-Johnson.

And I guess my question is, do you think that these observations in humans are affecting the FDA's approach to you when it is trying to set the patient requirements for your studies, or are these two events not linked?

Thank you.

John Peacock, the first question.

Yes, in answer to the first question, the guidance does include the proceeds on the sale of Tanox shares, and it does include the US restructuring charge.

Okay.

Thank you, John.

Please.

On the label changes, I think Mr.

Brand asked the question about Avandia.

I think FDA take all of the information they have into consideration when requesting information from us.

So I cannot tell you what is driving them right now, but clearly there are events which are driving them.

Yes, but it is obvious I would say that if competition has these kind of events that they will look into this kind of stuff too in whatever new products in that class.

Thank you.

Next question, please.

Michael Leacock, ABN AMRO.

Just one question if I may.

Can you talk a little bit more about decision-making changes in the development function.

I wondered if you could just say a little more about what actually practically will change in the decision-making process and how will that help speed up the development to some of your compounds to the marketplace?

As I mentioned earlier on the biologics, we have looked at the development organization, and we have three objectives in essence in restructuring development.

One is to empower strength and strengthen the project teams which are our basic operating unit.

Second is to create better cross-functional integration with senior leadership at a level lower than myself.

And the third then is to simplify and speed up the decision-making between the project teams and the most senior management within development.

So we will give the project teams more autonomy.

We will put some more senior people into the project teams and give them an objective setting and performance appraisal to the leaders of those teams.

We will have strong people integrating cross-functionally at a franchise level within development focused on development decisions.

And then me and my senior management will work in a mentorship oversight capacity with these folks, but simplifying and minimizing the number of steps they have to go through between the teams and senior management.

Martin Brunninger, Cazenove.

One question on Sandoz.

The current situation in Germany is explained with an increasing importance of direct rebate contracts through the statutory insurance companies.

Could you shed some new light on the German generic market?

Now since pharmacists are now obliged to dispense these rebated products, in theory it seems now relatively easy for big non-German companies to gain rapid market share.

With this new situation, do you still feel Hexal was a necessary investment for getting access to the German generic market?

And if yes, how do you now defend your market share in Germany against large new entrants like Teva?

Given you are not restructuring in Germany as well as you said, what is the future role for a generic sales rep in this country?

Thank you, Andreas.

It is a good question actually.

It is true.

I think it is more -- it is more new entrants coming into the German market.

Basically following a business model result salesforce, basically supporting the [Alki] contract which I mentioned before, which is tendering individual molecules, and so far this is the only health insurer doing this.

I think here I cannot comment on the ongoing process, but you know that we have three brands in Germany, and we will use these three brands to optimally participate in the bidding process.

I think in the long run, if this model goes in the direction of individual tendering of molecules, then, of course, we would also adopt our cost structures.

Currently we're looking at every line in our cost structures and optimize the organization.

But as you have said before, Andreas, the pharmacy space is still a significant draw.

You have a presence others don't have.

And I think premature changes before the market is really changing and these dynamics are changing would be a mistake.

And to what Andreas tells you very clearly that he is ready to act, but it is not time to act.

But, as we said, at the current time, there is no restructuring here.

But maybe a follow-on.

You said that the pharmacist rep still has a role, if you paint the scenario when you share, for example, a molecule with two competitors once you've got an AOK contract, what is your view when you compete with a Teva or a Ranbaxy.

How much market share do you think you can make in these products?

Well, I think this is exactly the situation I described.

There is no exclusivity so, and here the salesforce can really help.

I think if the pharmacist has his choice between three compounds and we have a field force that nobody else has or that the other smaller players don't have, here we can go to the pharmacies and give them the value proposition.

Okay.

I hope that answers the question.

[Michael Loestein], Deutsche Bank.

One question for Andress please regarding the erythropoietin alpha.

Given you have approval since August, what is the plan going forward in terms of launch, capacity and so on?

And then a quick question on Exjade.

It looks like the third quarter is at least in trend and in terms of trend a bit weaker than what we have seen Q2 over Q1.

Is anything happening with that product, or it is that just an odd quarter?

Well, I think on the erythropoietin alpha we have launched as I said with Hexal in Germany, and we are currently these days launching with Sandoz in Germany.

So we go for a dual brand strategy.

We have the necessary capacities and the necessary materials for the launch.

So this is fully ongoing.

The country where we are also launching is UK.

So Germany and UK are the two markets where you can go in swiftly, and the other markets will follow once we have completed price and reimbursement discussions in Europe.

Then David, would you please take the Exjade question?

On Exjade the brand is actually growing quite dynamically ex-US where we have a lot of opportunity to convert desferal patients to Exjade.

These are primarily thalassemia markets.

In the US market there is a much greater need to create a sense of urgency around treating patients with sickle-cell disease and myelodysplastic syndrome.

So it is a bit tougher in the US, and as you know, the US represents about half of the business.

I think the brand will continue to grow very nicely, albeit the US will be more difficult to grow than the rest of the world.

Ben Yeoh, Dresdner.

Three quick questions, if I may, just on Sandoz.

I was just wondering is the Sandoz margin now sustainable or, in fact, just a real threat to continue to increase with better global efficacy coming through?

And just on the comment on several biosimilars coming through in the pipeline, I know you are quite cautious about revealing too much about that, but would we be expecting any other launches in 2008 or 2009?

I'm just trying to get a feel for whether we might expect one or two more rollouts coming through.

And then just lastly, just following on from Jo's question on biological capacity, I noticed that Pfizer stopped production of Exubera, so there could be a insulin plant for sale.

Is that the type of capacity you might be looking to buy or not?

Thank you.

Andreas?

I think on the biosimilars I don't want to go beyond what we said before.

We have currently a project in various phases of development.

We are very active in these development projects, but we don't want to expand on details and which products these are.

And then the margin outlook?

The margin outlook, we said that we will achieve the 15% ROS, which we currently have in our books.

I think the outlook for the full year is around this number.

I also mentioned that the adjusted number of ROS is about a little bit more than 20% now, also taking into account the purchase price accounting, and I'm comfortable that this is at least sustainable.

Yes, the question is, of course, can it be better?

But we do everything to improve it.

Okay.

So there are additional productivity initiatives going on.

I can also add that there are still remaining synergies from the acquisition of [EXAL], which needs to be realized in the manufacturing area.

And from that point of view, certainly there is more work to be done and more results to be achieved.

How quickly that is a second question.

So would you be disappointed if it did not sort of slowly pick up over the next two or three years?

I think you can be very confident that Andreas will be challenged, and we will ask him for more.

But we don't want to be unrealistic, and we also know that the markets move and that you have to constantly work at productivity and generics because there is a constant price erosion, as you well know.

But I think the level he has achieved, he has achieved it earlier than we had planned for.

So I'm confident that he will continue to do an excellent job in this area too.

Regarding the Exubera plant, we have no plan to look at this plant if that is the question.

You asked.

And we do not have -- if I was not clear before -- we do not have capacity constraints now in the short-term.

Thank you.

May I ask if there is an additional question?

[Asika Gunavardanis], Piper Jaffray.

I have a question -- two questions -- on Tekturna.

Building on your responses to Alexandra's question, could you give us an idea on what the typical number of refills are on Tekturna scripts written?

And following up with that, what news flow could we expect in Q4 '07 and in 2008 regarding new reimbursement accounts?

Thank you.

Alex?

The number of refills that we're seeing right now it is still very early in the launch.

And, as you know, very early during the launch phase, your NRx to TRx ratio is very difficult to read into.

So I would look at that data very cautiously.

And news flow?

In terms of news flow, as you know, we just recently have gone out with the [avoid in the lock] trials.

We spoke a little bit about that a few weeks ago, and we think that is providing very important information in both heart failure as well as proteinuria, and we have several more that will be coming out in over the next several months and early in 2008.

Just to follow-up, anything regarding new reimbursement accounts that we could expect to see?

We have actually seen good formulary uptake.

I believe, as Thomas mentioned earlier in his presentation, just over the last few weeks we have seen a doubling in the Medicare Part D taking us from 23 to 45%.

And our key account management team who overall has done an outstanding job even in competitive markets with Diovan is also making headway on the commercial side, and we expect to see more approvals in the coming weeks and months.

Thank you very much.

I think this was our last question to be answered.

I would like to thank everyone for their active participation and for their support, of course.

I wish you a nice day and a nice afternoon.

Bye-bye now.

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

Thank you very much for joining.

Good-bye.