Novartis AG (NVS) 2008 Q1 法說會逐字稿

Good afternoon, this is the [Chorus] call conference operator.

Welcome and thank you for joining the Novartis first-quarter 2008 sales and results conference call.

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

After the presentation there will be an opportunity to ask questions.

(OPERATOR INSTRUCTIONS).

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

Daniel Vasella.

Please go ahead, sir.

Thank you.

Good afternoon, ladies and gentlemen.

I'm here in Basel with my colleagues Raymond Breu, CFO; Joe Jimenez, CFO Pharma; Andreas Rummelt, CEO Sandoz; Thomas Ebeling, CEO Consumer Health; Trevor Mundel, Head of Global Development Functions; Andrin Oswald, Global Head of Development Franchises; Emmanuel Puginier, Global Head of Marketing and Sales [General] Medicines; Joerg Reinhardt, CEO Novartis Vaccines and Diagnostics; David Epstein, CEO of Novartis Oncology; and Ludwig Hanston, CEO of the North American pharmaceutical operations.

And before we start we have John Gilardi who will read the Safe Harbor statement.

John, please?

The information presented in this conference call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors.

These 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 Form 20 on file with the Securities and Exchange Commission for a description of these factors.

Thank you, John.

With that I will turn to the presentation.

I will give a brief overview followed by Raymond who will discuss the financials, Joe pharmaceuticals, Andreas Sandoz business and then I'll close with an outlook and, of course, everybody here is then ready to answer any questions you may have.

I'm going to slide number 4.

If we look at the first-quarter 2008 the performance I believe is on track and we see that sales and earnings in dollar reported are higher from continuing operations in local currencies and we'll come back to that.

The picture is a little bit more differentiated, but overall pharmaceuticals had a very strong underlying growth in all regions which offset the drop which we saw in the U.S.

to a very large extent.

Vaccines and Diagnostics continued the double-digit growth rate and is now in a preparation phase for Menveo which is the promising meningitis vaccine.

Sandoz has a first quarter which is in some parts soft, in other parts of the world very dynamic and Andreas will tell us more about that in consumer health and a strong steady performance with a good contribution of all its businesses.

If we look at the first quarter, my most pleasant surprise was the RAD001 results where we are in a situation to have now filed earlier as the patients with metastatic renal cancer who were resistant to all other treatments responded unexpectedly well to this treatment and also the data on STY continues to be positive.

Then not really effective in the first quarter, but the strategic announcement on the outcome intended transaction was certainly news for the market, while the efficiency program "Forward" is just the implementation of what we have announced last year and I think we were well advised to go in this direction.

Overall 2008 should be a year with new record sales and earnings.

Slide 5 -- you see the sales which increased to $9.9 billion, flat in local currencies, up 9% in dollars; operating income 2.488; net income $2.3 billion; and EPS $1.02, all up significantly while we were able to contain the growth in headcount to a large extent.

If we go to slide number 6, it is striking that all regions performed well but the U.S.

and here the biggest impact certainly was the pharmaceutical business which suffered from the generics and the withdrawal of Zelnorm which occurred last year.

Next slide, the emerging markets continue to grow dynamically from local currencies 13% in Pharma to 38% in consumer health, and it is striking obviously that Vaccines and Diagnostics is limping behind a little bit; that is only do to facing of tenders and over the course of the year they will go to double-digit growth in these countries also.

On slide number 8 you see the increase in the different businesses of sales and operating income and local currencies and you see that the most striking improvement in operating margin was in Pharma which offset what is a little bit weaker in Sandoz and consumer health from a margin perspective.

Vaccines and Diagnostics, the next slide, had a great expansion on the Tick-borne encephalitis vaccines and also the diagnostics and is on track to deliver 40 million plus doses of flu vaccines to the U.S.

market.

Even more importantly, the Phase III vaccine trials and registration preparations are on track; Menveo had the best results ever seen in the immunogenicity of the vaccine infants and with that I think can cover a very important market need in the future.

Meningitis B results after three doses administered in infancy will be presented in May and then the Phase III will -- has started in fact in Q1.

Consumer health, slide number 10 -- OTC is driven by Cough & Cold products from a top-line perspective, but also a strong performance of Voltaren and Neo-Citran in Europe and, as already mentioned, the expansion in countries like Russia and in Latin America is double-digit and very dynamic.

Animal health continues to gain market share and this is led by the companion animal products and with double-digit sales growth in Europe, Latin and Asia-Pacific and also in this business the U.S.

performance was rather soft.

CIBA Vision going well, DAILIES especially with their new Aqua Comfort Plus growing very strongly.

And obviously we are coming out of the production problems on (inaudible) optics with AirOptix now and that's going also according to plan.

And the product supply now is fully restored after the 2007 challenges.

Slide number 11 gives you an overview on the key initiatives which we have launched.

In research we had announced that we're opening the Shanghai R&D center, that is on track and going well.

While at the same time we also announced the closure of the centers in Vienna and Tsukuba where we are transferring a number of people hopefully successfully to either [Enbridge] or Basel.

The biologics unit, which is needed because we have now 25% of our pipeline in biologics, some very promising molecules among them, needs really a dedicated effort.

We are underway, not yet fully staffed and entirely where we want to be, but it's underway.

Step-up with the new leadership between us Trevor Mundel and Andrin Oswald is going well and we're seeing here opportunities to accelerate development focused on the right indications and also pay attention to productivity.

I think that is very promising.

And "Forward" overall is on track and I'm sure, Joe, you will probably comment more about what you are doing in Pharma.

Slide 12 -- I will not expand a lot, but we have presented the outcome deal and strategic rationale, investing in eye care which will continue to grow significantly, among other reasons, due to the aging population and the expansion in the emerging growth markets.

It's a high-growth, high margin business which will fit very well with the presence we already have in that space.

And with a blended premium of 13% I think it will be okay and deliver value, I am very confident, over time.

Project "Forward" the target to save -- I'm on slide 13 now -- to save $1.6 billion by 2010 can be confirmed.

We're on track and target $670 million savings by the end of the year 2008, by the end of the year and year-to-date the number is $160 million.

But more importantly, I think, it's not just about savings, it's about speed, it's about the efficiency and there I think we're making very important strategic progress.

And all site closures which are related to that have been announced and the social plans are either completed or under advanced negotiation.

So with that I would like to pass along to Raymond.

I'm starting on slide 15, the overview, and my intention is to comment on the margin development for operating income and net income.

The operating income margin in the quarter is reduced by half a percentage point from 25.6% in the comparable quarter to now 25.1% and the net income margin is up 0.4 of a percentage point.

If you go to slide 16 then we have the explanation for the slight drop in operating income margin.

We have positive developments in other revenue, higher royalties mostly linked to the changed accounting for Betaseron which then accounts for 0.4 of a percentage point change.

And we have a positive impact on the COGS line reflecting royalties, mostly on Lotrel, lower royalties and then favorable product mix changes in Pharma and Sandoz and improvements in the supply chain.

The negative developments are on the research and development expense line where Pharmaceuticals has invested significantly in late stage pipeline projects and Vaccines and Diagnostics in the meningitis and influenza pipeline.

Finally, other income and expense contributed a negative 1.1 percentage point linked to favorable onetime effects in 2007 and small increases in various lines across the divisions.

On slide 17 we then see that this 0.5 percentage point negative development in operating income is offset by two positives -- an increase in income from associated companies driven by Roche and then in income in the financial income -- an increase in the financial income as the liquidity was significantly increased as a result of the divestitures and then the corresponding financial income went up as well and it's also linked to an excellent currency management.

On slide 18 we give you a summary of the most important intangible asset charges and the significant exceptional items, then would allow you to arrive at an underlying growth.

In pharmaceuticals the largest onetime items are restructuring expenses of $39 million in this quarter, income from a major product divestment of $115 million.

In the comparable quarter in 2007 we had an expense for the Zelnorm suspension of $52 million and then we have the release of pre launch inventory provisions in this quarter of $45 million compared to $170 million (sic -- see slides) in the first-quarter 2007.

The other exceptional development was in Vaccines and Diagnostics where we had income from settlements of $49 million in this quarter compared to an income of $67 million in the comparable quarter.

In all other divisions these exceptional items are totally immaterial.

If you then look at the adjusted group operating income increases you'll see that the numbers are very, very similar to the unadjusted numbers as the effect is fairly small.

For Pharmaceutical the adjusted increase would be 11% versus 13% and for the Group an increase of 6% versus 7%.

So small numbers.

On slide 20 you'll see then the adjusted operating margins for the divisions in the Group.

For pharmaceuticals the adjusted operating margin would go from 32.2% now to 33.8% in this quarter.

For Sandoz and for consumer health we had slight margin decreases and for the Group the margin decrease on an adjusted basis is 0.6%, so very, very close to the reported number of a decrease of 0.5%.

On slide 21 you see that for financial income we had a contribution of $91 million in this quarter which is 168% more in the comparable quarter last year that's obviously linked to the average net liquidity that we had available for investments; it went up from $0.9 billion to $6.4 billion in this quarter.

Taxes improved slightly from 15.2% to 15% of pretax income.

On slide 22, finally you see the explanation for the development of the free cash flow.

In the first quarter of 2007 we had a cash outflow of $352 million, in this first quarter 2008 we have a cash outflow of just below $2 billion.

The main differences in dividends.

Two reasons -- first, we increased the dividends, that accounts for $744 million; and then we had in addition in this first quarter the full effect of the resulting tax on the dividends.

In the comparable quarter 2007 this $806 million of the corresponding figure fell into the second quarter because of the dividend paid being a bit later.

With this I hand over to Joe Jimenez for Pharmaceutical.

Thanks, Raymond.

There are two key messages to take away for the Pharma division during the first quarter.

First, we're on track to deliver solid financial results, so we're particularly pleased with our profit performance.

And then secondly, the changed management program that we've put in place to position Novartis Pharma to win in a tougher pharmaceutical environment is underway and already improving performance.

So I'll take you through some of the progress that we've made.

On slide 25 you can see that first-quarter sales increased 6% to $6.3 billion, that's down 3% in local currency.

This was expected due to the continuing effect of the 2007 negative events in the U.S.

such as the Zelnorm suspension and the genericization of Lotrel.

Profit was up 13% due to good cost management, foreign exchange and onetime factors.

We've also begun delivering on our 2008 headcount reduction goals with headcount down 3%.

On slide 26 you can see that underlying sales growth was strong at 10%.

This was not, though, sufficient to offset the continued effects of the major negative events in the U.S.

that hit us for 13 points.

And as previously discussed, we expect to have relatively flat sales in the second quarter and return to growth in Q3 and 4.

Slide 27 -- the first quarter has historically been strong for us on return on sales and this trend continues.

Cost savings and productivity improvements have helped and we also benefited from a onetime gain from the divestment of some minor brands during the quarter.

Slide 28 -- every region delivered strong growth except the U.S.

Europe was up 9% and emerging markets were up 21%.

We had strong underlying growth in all franchises in Q1.

Oncology was up 15% to over $1.9 billion and immunology and infectious disease grew 18% driven mainly by the Aclasta launch.

Slide 30 shows that Glivec, our franchise oncology drug for CML, was up more than 20% versus prior year in local currency.

Exjade and Femara also continue to grow nicely.

Slide 31, our hypertension portfolio is gaining share despite the genericization of Lotrel last June.

This growth is driven by continued strength in Diovan, up 11% in local currency, and the 2007 launches of Exforge and Tekturna.

Slide 32 -- as we've stated in the past, Tekturna is a long-term play for us and we're going to invest heavily over the next five years.

In the first quarter we launched Tekturna HCT which is our fixed dose combination.

We're going to generate strong news flow through ongoing clinical programs designed to further strengthen the promotable data regarding the organ protecting properties of Tekturna.

On slide 33, you can see that Lucentis is off to a strong start in the first quarter with sales approaching $200 million.

Lucentis is the only approved therapy for wet AMD that actually improves vision.

ExelonPatch for Alzheimer's dementia also had strong uptake in Q1 and Aclasta is doing very well behind strong reimbursement levels as well as the start of direct to consumer advertising in the U.S.

in March.

Now I'd like to provide a quick update on our progress to position Novartis well in a tougher pharma environment.

So three months ago I described this Pharma "Forward" change program that we began in fourth quarter, and we have made good progress in all four areas in Q1.

In development our new project-based model is up and running.

We designed and implemented new commercial model pilots in the U.S.; we delivered on our productivity targets in Q1 and our emerging markets are performing well.

Slide 35 -- we strengthened the leadership of the division in many areas including development and the commercial organization.

On slide 36, in development our Q1 highlights include the FDA approval of Tekturna HCT which has now launched in the U.S.

We also received approval from the European Health Authorities of Eucreas, our fixed dose combination of Galvus and metformin and we'll launch that right aside Galvus in Europe.

And also, the early unblinding of the RAD001 pivotal trial that Dan talked about earlier.

On page 37 you can see six of our most exciting pipeline projects including FTY720 which has the potential to be the first once daily oral therapy for multiple sclerosis with best in class efficiency -- efficacy.

Our development pipeline includes more than 136 different projects of which 59 are new molecules.

On slide 38 you can see some of the progress we're making on our innovative commercial models.

This is changing our customer adaptation away from physicians and towards payors and providers.

So in the first quarter we started three pilot tests in highly restrictive markets, we built cross functional teams which include health economics, marketing and account management and we'll be monitoring these pilots very closely.

From a productivity standpoint on slide 39, we're on track with almost 30% of our targeted savings delivered in the first quarter.

Additionally, we reduced account in our global and regional headquarters by more than 25% to streamline decision-making and to clarify accountability.

And then finally, on slide 40, in Q1 we grew nicely in emerging markets of Russia, China and South Korea.

These markets are going to be increased areas of focus in the coming years as we build our business in high-growth markets.

Now I'll conclude by providing an outlook for the rest of 2008.

So on slide 41, the first quarter was on track and in line with expectations and we're reaffirming or full-year outlook for Pharma and that is low single-digit sales growth for the year driven by the impact of the 2007 events which will negatively impact the first half of this year, but we will see growth accelerating in Q3 and Q4.

And profit will grow ahead of sales as our operating income margin improves over 2007.

Slide 42 shows the sales progress.

We expect relatively flat sales in Q2 accelerating to high single-digit growth by Q4.

Now I'd like to turn it over to Andreas Rummelt.

Thank you.

I will start with slide number 44.

Sandoz grew strongly in many emerging markets, especially in Central and Eastern Europe.

Many of these markets, most notably Poland and Russian, now contribute even more to the overall Sandoz business.

In Germany we saw a significant market share upswing after the end of 2007 when the old contract with the (inaudible) ended and new contracts came into place.

Sandoz will continue investments into growth in the emerging markets here with a special focus in the future also on Japan where, from the 1st of April onwards, substitution becomes [the forward] rather than the exception and we expect increasing generic penetration.

We will also continue to strongly invest into development and registration and here especially in difficult to make products like the Enoxaparin.

Slide 45 -- looking into the numbers, product sales are up 2% in local currencies, 12% in U.S.

dollars.

Central and Eastern Europe grew by 17% in local currency, especially fueled by marketing initiatives increasing of field force.

In Germany, as I said, we see a market share upswing which is not yet visible in the numbers as we had an extremely strong first quarter in 2007, especially a strong March before the legislative changes 1st of April 2007.

Operating income expanded by 8%, mainly by a gross margin improvement which came from favorable product mix and productivity gains here especially in procurement and our overall supply chain.

Slide 46 shows that the operating margin is at 18.1%, 0.7% lower than last year and this is basically due to the effect of the favorable gross margin increase of 3.7 points was offset by the increased activities in R&D, marketing and sales and also our investments in IT systems in the supply chain.

Slide 47 shows the growth in the emerging markets and here are most notably Russia and Poland, as I've mentioned.

Also Brazil and Latin America is developing very nicely as does Turkey.

On slide 50 there is a closer look into the situation in Germany, we see a positive marketshare development of the Sandoz Group.

The reason for this is -- are mainly new contracts with (inaudible).

After the court decision that the tender process has to be stopped now the regional offices of (inaudible) have decided to also go into portfolio contracts or sign portfolio contracts as all other health insurers in Germany have already done.

We have signed contracts with 10 out of 16 [Alca] regional offices which are currently in the implementation, [FIFA] already visible for the pharmacists in their software which is the basis for substitution.

[FIFE] will become available in the software in May so we expect to see a continuous marketshare increase in an overall still difficult market.

Slide 51 -- in the U.S.

we had a slow start in the first quarter this year.

We are comparing against an extremely strong quarter in first quarter 2007 which was driven by the Fentanyl sales and semi exclusivity on Ondansetron and Clarithromycin.

Quarter one was weaker because so far there were only a number of small launches, the more significant launches to come later in the year.

And we also saw some higher-than-expected price erosions on our products; most notably on Omeprazole and cefdinir.

Key launches in 2008 which are Enoxaparin and Metaxalone are expected to come later this year, although the timing is difficult to predict due to the legal situation, due to citizen petitions on Enoxaparin.

We have two (technical difficulty) and see regulatory approval.

Overall we have currently 108 pending ANDAs with the FDA.

Slide 53 gives a closer look on the Enoxaparin situation.

So here we are moving forward and we expect to launch this product in 2008.

We expect to reply to the FDA deficiency letter answering the immunogenicity questions in the next few weeks, but it's still (inaudible) and difficult to predict in terms of timing as the appellate court decisions of Sanofi against Amphastar and Teva which is pending and, as I said, to open citizen petitions.

So taking all this into account, counting on continued high-growth, especially in the emerging markets in Central Eastern Europe and the situation in the U.S.

with some launches to come which are, as I said, difficult to predict and create a high level of uncertainty for our forecast, we still count on high single-digit net sales growth in local currencies for the (inaudible) Sandoz business.

And with this I hand back to Daniel Vasella.

Thank you.

And just closing with the outlook, barring unforeseen events Group sales for continuing operations are expected to grow at mid single-digit rates in local currencies and Group operating and net income for continuing operations should reach record levels.

With that I close the presentation section and am opening it for questions and comments.

(OPERATOR INSTRUCTIONS).

Paul Mann, Morgan Stanley.

Thank you.

Just three questions.

First, going back to the diagnostics because you talk about prelaunch marketing costs.

Could you just remind us exactly what products these are for, the number of doses of those products you intend to launch during the year?

And two other questions, one on stocking.

Was there any significant stocking or destocking during the quarter?

And finally, tax.

Obviously your tax rate at 15% was slightly below your guidance of 16% to 18%.

Where do we see tax for the final year?

Thank you.

Thank you.

Joerg, would you please start?

Yes.

So the increased expense primarily for our product Menveo, which is the ACWY vaccine, which we intend to file in the U.S.

and in Europe later this year and will expect approval somewhere next year.

We will start to build a salesforce effort by the end of the year and we'll obviously fully expand the salesforce next year.

With regard to doses, we have so far not given explicit numbers as to how much doses we will be able to have available at the time of launch, but I can assure you that it's going to be sufficient to cover a very strong launch.

Joerg, do you want to add something on stocking?

We have started to put use -- launch material for ACWY this year which is also included in other income and expenses in the first quarter which was one contributing factor that our overall margin this year was lower than last year.

We will continue to build inventory during the year so that for launch in the second half of next year we should be all set.

I was actually referring to stocking in the Pharma division rather than vaccines (multiple speakers).

Stocking is not an issue in pharma, no changes consumer health neither.

So nothing on that front.

And then Raymond will comment on tax.

Yes.

The 15% is our forecast for this year.

Why is it lower than our mid-term guidance?

This year we have a positive impact from a reduction in tax rate here in the (inaudible) city; they are reducing the tax this year from 24.5% to 23% and next year to 22%.

So the onetime effect of these tax changes has an effect of reducing the Group tax rate by approximately 2.2 percentage points.

Okay, thank you.

Thank you.

Next question.

Marcel Brand, Cheuvreux.

Thanks for taking my question.

I have a question first on the gross margin.

I appreciate that there's less royalty payments to Lotrel, but still this is almost one of your record gross margins and you've achieved that in spite of a negative transaction impact by the U.S.

dollar, and also on the back of significant generic erosion of product losses.

So could you maybe comment a bit more on that and how you see that going further?

The second question is on tail products.

I noticed that the tail products, or the below 20 productline, was down significantly, -47% in the U.S., -14% in rest of the world and that compares to a much more stable situation last year.

And then the last question is on generics.

You're guiding for high single-digit increase and obviously the first quarter was substantially below that.

And if I remember correctly, for the next quarters you're going into some baseline issues, namely Toprol, Lotrel and Omnicef, which started making an impact, and please correct me if I'm wrong, starting Q2 last year?

Thanks.

Thank you.

Gross margin, John Peacock will comment.

On gross margin I think the COGS performance we're happy with in Q1.

I think it does reflect good cost management and productivity in the quarter.

We should expect though that the recent currency exchange movements, particularly the strengthening of the Swiss franc against the euro, will have an impact on the COGS for the balance of the year.

The tail products are declining a little bit faster than last year so --

Yes, what's going on in the U.S.

is expected and if you look -- in terms of tail products.

So if you look at the total products where we lost expiry or including Zelnorm, you look at those businesses -- back in 2006 they were $3.2 billion, last year they were $1.7 billion and this year we're projecting them to be $400 million for the full year.

So we will lose $1.3 billion, so in total we've lost $700 million as disclosed out of the $1.3 billion that we expected.

So they're essentially on track and that will be offset towards the back end of the year in the U.S.

with the launches of Exforge, Aclasta and Tekturna and the rest of the launches.

On generics, we see a very strong growth in the number of markets, especially in Eastern Europe and in South America.

These markets have become important growth drivers for our business as their relative size (technical difficulty) significantly as I count on the contribution here.

In terms of the U.S., you are right, it's becoming more difficult.

But as I said, most of our launches are rather back end loaded.

And of course now after three months the unpredictability of these launches in terms of the legal and the regulatory situation caused a high-level of uncertainty for (technical difficulty) than before.

But I'm still confident that we can make it.

Thank you.

Obviously that is all dependent on these launches.

So there is a level of uncertainty which remains despite (technical difficulty).

Next question, please.

Tim Anderson, Sanford Bernstein.

Thank you.

A couple of questions.

On generic Lovenox, in the comments you made earlier you described this as an '08 launch, but the tone of slide 53 seems to suggest that a delay is more likely.

My question is if the launch does not occur in 2008, when would it most likely occur?

Would it be an '09 event?

And the second question I have is on FTY720.

I think a lot of people look at that product and see good efficacy, but also quite a few side effects.

And I think -- wonder how FDA and other regulatory bodies will come out on the net benefit with that product.

What is your level of concern about FTY clearing regulatory authorities?

Thank you.

Lovenox first.

Well, on Lovenox, again, is very difficult to predict the outcome of timing far FDA approval.

The situation is that we have to answer the deficiency (inaudible) immunogenicity which will happen very shortly.

We expect that with these answers we have replied satisfactorily to address the immunogenicity issues.

The appellate court decision should be due within the next few weeks based on the normal timing of these court cases.

And in terms of the citizen petitions, the expiry is that FDA only starts to work on citizen petitions once each and every thing on the technical file is completed which I hope to be done after the immunogenicity questions are answered.

So I think we have done our part, but now to predict in which months this will happen, it's very difficult.

Based on our interaction we are still confident that there is a possibility for a launch in 2008.

And if not '08, probably '09 you know.

But who knows.

Anyway, with FTY, Trevor Mundel will comment.

Thank you.

So the recently released Phase II data which focused a lot on the excellent efficacy sustained over three years, to my mind in fact the more reassuring part of that was around the safety message.

To the extent that a number of the previously flagged safety issues turned out not to be progressive or persistent over three years of usage, including serious infections, the PML risk we talked about previously, lung changes, hypertension.

The other point I'd make is that a lot of the previous use of FTY has been at high dose, particularly the 5 mg dose used in transplant and also used in that Phase II study.

The current MS program we have is a low dose program, so it has the doses of 1.25 mg and 0.5 mg, that's a big difference.

We have now about 3,000 patients in our Phase III program and these patients are being intensively monitored.

In fact, I would have to say they're probably the most intensively monitored for safety MS cohort that has ever been tracked.

Looking at the safety data coming out of the study is an independent safety board which met as little as one month ago and they continue to support the safety of the product.

Overall I think you have to look at this -- FTY is an effective oral therapy for really a very devastating disease.

And to the extent that it has some safety issues which we can proactively identify, so far these look manageable and monitorable.

There have been reports of skin neoplasms.

Would you say a word about that?

Yes, Dan.

So actually the general inflammation on these skin lesions is not net.

It is true that effective immune modulators, and I've mentioned steroids or [tekronamus] or Tysabri as well have this issue.

And we had already seen in the transplant program a low risk of skin lesions for the high dose FTY, now the 5 mg dose, and in fact we published that a few years ago.

I would mention incidentally that five of the seven reported cases had been treated with the 5 mg dose.

So going back to the statement I made previously, we have a low dose program over here.

In the 3,000 patients that we are monitoring we have of course intensive dermatological examinations, periodic examinations and, once again, the safety of patients who have now been on drug in that much bigger cohort, for some of them more than a year, the safety in this realm of skin lesions continues to be supported.

So in summary you're saying nothing which makes us doubt about the benefit/risk ratio; that the drug should really been an approvable therapy and in fact probably one of the best therapies available in the future?

Well, the efficacy is really outstanding.

As you've seen the data you contrast this to (inaudible) where this really looks at least as effective as that drug.

I think it reflects a little bit on -- and people shouldn't be mistaken about this.

Our approach now to safety is to be very proactive and look at all potential flagged issues.

So don't mistake that proactive stance for actual issues.

Things will be (inaudible) in these big programs and as long as they are monitorable and manager that's something we can deal with.

Thank you, Trevor.

Yes, thank you.

(inaudible), UBS.

It's [Fulong Lusa] at UBS.

I had a few questions.

First of all, is there any further detail on one-offs including restructuring for the remainder of 2008?

Secondly, your previous hedging policy was to minimize exposure by engaging in transactions where management deems it appropriate.

Would you confirm that that's still the policy and, if so, how much hedging is appropriate currently?

And then lastly, on margins for the BRIC and currently emerging countries, where do they stand currently and how important will those countries be let's say five years from now in terms of sales?

Thank you.

Thank you.

Raymond?

On the exceptional items forecast for the remainder of the year, that's difficult to say, because by the nature of these items they are exceptional and not forecast.

At the moment we are not aware of major items that will be coming up in the remainder of the quarters.

For currency hedging our policy is unchanged, which means that we hedge transactional exposures when we know them.

If we think that the currency is under risk.

But if our assessment is that there is no currency risk then we would not put any hedges in place.

So it's an active program.

Currently we have virtually no hedges in place for the dollar against the European currencies, but that can change very quickly again.

Sorry, on restructuring, that is a one-off where there could be some visibility.

Are there any forecasts (multiple speakers)?

We have no further restructurings in the plans at the moment.

Obviously it's an ongoing process, but at the moment we are not aware of any further charges that will show up in the coming quarters.

And on the margins on the BRIC countries I would say it's not the same in all of these countries and it's not the same in all of these businesses.

So overall I would think that pricing wise, if you look at the products, it's often not very different from developed markets.

And in some businesses, I would mention just generics, it could be even better when it's not an [IMN] market and not a tender business market.

So I would say it's very attractive and, of course, the growth rates are high, continue to be high, but we also know that the volatilities in these markets often are -- is higher be it because of reimbursement issues, be it because of budgetary issues of the government's.

So it's easy to say it will be bigger, more important, but to what degree I would not want to venture on that in five years.

Thank you.

Karl Heinz Koch, Vontobel.

Thanks for taking my questions.

I have several related to the generics business.

To what extent is your high single-digit growth expectation for the business reliant on the launch of a generic Lovenox?

Then also on the same topic with Lovenox, would there be any certain circumstances under which you would consider launching this product through the pharmaceuticals division rather than the generics division?

For example, if you were the only approved generic Enoxaparin?

And then also, it seems that in the mature market growth in generics is increasingly becoming reliant on at risk launches, and I was just wondering what your position is regarding at risk launches and which part of the balance sheet have you earmarked to support such at risk launches post the Alcon deal.

Andreas?

Let's start with Lovenox.

Of course as I said, that Lovenox and (inaudible) are the two big launches in the U.S., our growth rates, especially in the U.S., is dependent on this launch no doubt.

In terms of have we considered to launch it not with Sandoz but with pharma, no.

We have filed an ANDA, it's in an ANDA process which will, if approved like it is filed, will go through the normal trade channels and will not require a field force investment so we can go through key accounts.

At risk launches, you have seen that we have 108 ANDAs open, 51 of them with Paragraph 4 challenges.

I think once we have a clear view on where we are with these products we will make a risk assessment and then based on the risk assessment we would decide, if we had the opportunity, whether to launch at risk or not.

So it is a product by product decision and not a general strategy.

It would be however correct I think to assume that we are not as aggressive as some of our competitors because I think really they have crossed the line in some instances and that I think is not something we think is reasonable in the mid- to long-term and therefore we are not earmarking anything of our balance sheet and don't have to earmark anything on our balance sheet.

Thanks.

John Murphy, Goldman Sachs.

First, apologies, but to return to the issue of the pharma gross margin.

To start (inaudible) and is it fair to say with the exception of the royalty change with currency and presumably with the inventory release that the ongoing pharma gross margin is a relatively sustainable one?

Second, Raymond, I wonder if you could just give us a little bit more information around the exceptional gain and the restructuring in pharma, what line items would they be in, please?

And third, for Andreas, returning to Lovenox, I guess with the ongoing issues in Baxter and in Heparin in the U.S., do you see any change in the way that the FDA is going to be looking at Lovenox as a result of that, or do you think they're two very different and separate cases?

Thanks.

To get back on the question of gross margin, the margin you see for the first quarter you shouldn't regard as sustainable for the balance of the year.

As I mentioned, the FX impact, particularly around the Swiss francs, for the balance of the year will have some erosion on the margin that you see.

If you take away the inventory release in the Lotrel, would it still be true, what you said?

Yes, it's not sustainable.

There will be some erosion at the balance of the year.

Then, John, your question with regard to these exceptional items, the exceptional restructuring would be another income and expense.

The major product divestment is other income and expense.

The Zelnorm suspension last year, only I think $12 million of that $52 million was in other income and expense, the other item I think was in COGS.

Then the release of prelaunch inventory provisions is in other income and expense.

And the exceptional settlement in vaccines in development will be in other revenue.

In terms of Lovenox, the Heparin situation has certainly taken some results in the FDA, moving from Enoxaparin to Heparin -- could Heparin or unfractionated Heparin is also (inaudible) for Enoxaparin there is a link.

I think in the meantime it is clear what the contaminant is, it is also clear which two analytical methods will be used in order to detect and quantify this contaminant.

We have used these two methods more than 10 years, so our supply chain is clean and therefore we don't expect any negative impact on our product.

So it's more the resource issue and timing.

Thanks very much.

Marietta Miemitz, Societe Generale.

A couple of financial questions, please.

The first one on restructuring the 230 million a U.S.

headcount reduction program you announced last year.

Did we already see the full effect of that in the first quarter and should we assume a quarterly run rate of a roughly $60 million benefit going forward from that?

The second financial question is the CIBA Vision profitability.

You were hinting at the time of the Alcon acquisition that you might be willing to disclose that at Q1.

And if not, can we at least assume it's reasonably close to what you reported in 2004?

(multiple speakers) visibility, sorry?

CIBA Vision.

And then I also have a few product-related questions.

I didn't know if you wanted to take them after the financials?

No, no, go ahead, just give us all the questions.

Okay.

So one question on Lovenox.

I was just wondering whether you can give us some color on the studies that you actually did to show the lack of immunogenicity and in particular what you discussed with the FDA, i.e.

whether the FDA said that if you show the following results then they're convinced; or whether the FDA is still completely unclear on what they want and you just try to anticipate what they want and will just submit the data and hope it's enough?

The second product question relates to the Diovan/Tekturna combination data.

I we still going to see that in mid '08 and is that going to be free combination or fixed dose combination data and what study is that?

And then I finally have one question on the anemia market, I was just wondering if you can maybe walk us through the volume market share of the three generic erythropoietins that came out of Sandoz, maybe the combined share for those in the countries where you first launched, for example, Germany?

And do you actually see more pricing pressure, i.e.

the likes of Amgen getting more aggressive on pricing now that there's generic out there?

Or do you actually think that the pricing differential between the generics and the branded drugs is still on the order of 20% to 25%?

Thank you.

Thank you.

Raymond?

On the impact of the U.S.

restructuring, yes, you can assume that the effect will be spread over the year this year in approximately equal installments over the four quarters.

The CIBA Vision profitability, we did not yet disclose it, but it's fair to assume that the operating income margin of the CIBA Vision business is very close to the operating income margin of the entire consumer health division.

Regarding the fixed dose combination question on Tekturna, obviously we're working on a number of fixed dose combinations with Tekturna and four competitive reasons we have not disclosed which ones are coming when, but there will be one towards the end of 2008.

And then we have the questions about EPO and Enoxaparin?

On Lovenox since the interaction of the FDA, the FDA indicated in the letter we just published that they want to discuss with us here the answers to the immunogenicity questions.

So we are in contact with the FDA, but as other applicants have received the -- probably similar deficiency levels you'll understand the metal want to disclose what exactly we have done here for competitive reasons.

In terms of EPO, this is launched in Germany and in the UK as of last year.

We don't disclose individual market share for countries in terms of pricing.

This is currently stable between the generic versions and the originator product from Amgen.

The difference is somewhere between 25 and 30%.

Okay, thank you.

Philippe Lanone, Natixis.

Good afternoon.

Most of my questions have been answered, but can you give us some indication about what will be the pricing policy for (inaudible) post launch?

Because you have (inaudible) generics, so, as you mentioned, there will be no need for marketing.

But will you be able to come to a price or will they decline steeply after launch?

I think this will depend on the competitive situation at that time whether we are alone or there are others.

I think this is premature to speculate a broad pricing and we would not disclose our strategy currently.

In general I would say it's absolutely accurate that as long as you don't have more than three competitors in a marketplace the erosion is not as dramatic.

And I think it's also fair to assume that there will not be a ton of competitors entering that field quickly.

So I think it should be -- you should look more at an EPO kind of situation.

Thank you.

Florent Cespedes, Exane BNP Paribas.

Good afternoon, gentlemen.

Two quick questions is I may.

First of all, on your hypertension franchise, can you share with us what is your view on the new product that you are planning to file in 2010 which is LCZ696, the [mechanism of faction] and when do you anticipate to show us some clinical trials?

As far as I know there is a Phase II which is ongoing?

A second question on the Glivec franchise.

Given its strong performance during Q1 is there any chance that you will upgrade your guidance for the full potential of this franchise?

Thank you.

Thank you.

David, would you please comment on Glivec first?

Is David not in?

I thought David was here.

So Joe, maybe you --?

Let me just comment on Glivec.

We were very pleased with Glivec's growth, it grew over 20% in local currency.

We're going to continue to drive that business and, as long as the growth continues, we will continue to support it with the additional marketing support.

I won't say that we will upgrade our guidance on the drugs for the rest of the year, but we are very pleased with the growth rates that we're seeing.

Joe, I can provide more color on that.

Okay, David.

The (technical difficulty) is doing quite well as we penetrate into more of the (inaudible) segments and also we no longer see much impact from Sprycel -- new indications for filing the outlook looks quite good.

David, could you also quickly say something about Tasigna in this context?

Yes, Tasigna is off to quite a strong start.

We believe we have in the U.S.

about 25% now of all the second line patients.

That number is about 45% in Germany and Switzerland.

So we think the combination of Glivec and Tasigna really makes for an unbeatable franchise.

And last but not least on the topic of guidance, we're also benefiting from currency.

So we'll continue to reassess our numbers and get back to you.

Thank you.

And Andrin also will comment on the hypertension product.

Yes, as he said, we are continuing to develop it in Phase II.

It's a combination of mechanisms in one (inaudible) which is I think quite an interesting new concept in treating hypertension combining (inaudible) inhibitor modalities.

We do not expect major data in Phase II coming out this year, but we assume you can hear from that compound in 2009.

And do you have already an idea of how you will position this drug within your hypertension portfolio?

I think it is too early to tell.

We clearly will have to wait for this data coming out and then based on and how it looks like we will decide how it will match the rest of our portfolio.

Thank you.

Okay, with that I thank you for your attention and your questions and wish you a great day and afternoon.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephones.

Thank you much for joining and have a nice day.

Good-bye.