Novartis AG (NVS) 2008 Q3 法說會逐字稿

Good afternoon.

This is the Corus call conference operator.

Welcome and thank you for joining the Novartis third-quarter/nine months 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, CEO.

Please go ahead, sir.

Thank you very much.

Good morning and good afternoon, ladies and gentlemen.

It is my pleasure to start with the conference call.

I am here with a number of my colleagues.

I will quickly introduce them and then I will pass them over to John Gilardi for the Safe Harbor statement.

With us is Raymund Breu, CFO; Joe Jiminez, CEO of Pharma; Joerg Reinhardt, CEO Novartis Vaccines and Diagnostics; Andreas Rummelt, CEO of Sandoz; David Epstein, CEO of Novartis Oncology; Ludwig Hantson, Head of Pharmaceuticals in North America and CEO Novartis Pharmaceuticals; John Peacock, who is our Chief Financial Officer in Pharma; Manuel Peitsch, Global Head of Marketing and Sales and General medicine; Trevor Mundell, the Head of Global Development Functions; Andrin Oswald, Head of Global Development Franchises; and I also have here Jeff George, who is the designated Head of Sandoz and a number of other colleagues and of course our IR team, led by Ruth Metzler.

With that, I would like to ask John to read us the Safe Harbor statement.

Please, John.

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.

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

Thank you very much, John.

I would like to add that of course George Gunn is also with us.

He is also filling in for Thomas Ebeling, who could not attend today because he had an emergency privately.

With that, let me start with slide number one, which gives the overview on our results so far.

What strikes is that pharmaceuticals has really accelerated in growth and also profitability, while all businesses have contributed to our growth overall.

Then we will discuss the new structure we have on the Group level and nomination of several leaders.

If we look at our strategic actions of course first, the business portfolio, the Alcon transaction is through, the 25% are acquired.

Speedel and Protez are being integrated.

And on the R&D side, we also made significant progress with a number of submissions which are being planned, several large Phase II -- III trials underway and also some interesting compounds as you know in vaccines.

Project Forward has gone even better than we anticipated.

We are not only on plan but ahead of plan and the impact on the organizational behavior is also positive.

There is a lot of simplification, which went on and speed has accelerated.

So with all of that, we are on track for a year with record net sales and earnings.

Looking at the figures, I don't want to spend much time.

You have seen the nine months continuing operations.

That's the next slide, with a growth in topline of 4% in local currencies, 12% in dollars.

Operating income up 24%, net income up 19%, and EPS up 22%.

The number of employees has been slightly reduced, which is also a consequence of Project Forward, as well as a change in the marketplace in the US especially.

And Joe will talk more about this.

In Pharmaceuticals, as I mentioned, we are ahead of what we had communicated initially, which was I think a realistic plan.

Nevertheless we have exceeded it.

I think it has to do with the energy and the determination the team is moving.

On the other side I won't hide that Andreas and I are disappointed with the results of the Sandoz business.

I will come back to that later on.

Novartis Consumer Health on track and Vaccines and Diagnostics, a strong topline growth.

The third quarter from a point of view of turnover has accelerated mostly by an acceleration in pharmaceuticals.

Operating income, very dynamic growth and net income up also.

And I'm sure Raymond will comment more about these numbers and how they have to be seen.

On the geographies, good growth and what is remarkable is that from a point of view of negative growth in the US, we are now turning back to positive growth and that is due to the digestion of all the disappointments we had with the various products last year, which had of course impact on the first half.

Slide number numeral mine shows you the priorities we have in the Group and we continue to pursue.

First of all to really strengthen our existing franchises in our business portfolio, which of course aims at addressing customer needs.

The second is to continue to invest into R&D so that we can have a continuous flow of really differentiated products.

Third, to invest in the real growth opportunities as it relates to geographies is our emerging growth markets in most cases.

Last but not least, work on the organizational efficiency and we have still opportunities as we move forward to improve the ways we operate.

With that, I would like to ask Joe to guide to us the pharma results.

Thanks, Dan.

Okay, starting on slide 11, performance in pharma continues to be strong.

In the third quarter, our sales were up 9% versus year ago in local currency.

As Dan said, this is ahead of where we expected to be by the third quarter.

It was really driven by two things.

The end market brands performing better than expected but also the launches are ahead of where we thought they would be at this time.

Now importantly the US showed good growth, up 9% versus year ago and that's really the first time that the US has grown since early 2007.

Operating income was up 13% and that includes the Aurograb impairments.

So our productivity initiatives are really benefiting the bottom line.

The next slide shows the key metrics for the third quarter.

I would just point out that the return on sales number of 26% includes the impairment so excluding that impairment, it was about 29.3%, in line with the year-to-date number.

The next slide shows the nine-month results.

You can see sales up 4% in local currency with operating income up 17% and we are doing this with about 3% fewer people than we had a year ago.

Slide 14, I wanted to put in a slide that shows that we have less exposure to the US than most pharma companies and I think this is one of the reasons why we were able to overcome some of the issues that we faced earlier this year.

It's also important as you think about the future and the fact that the US may become a tougher place to do business.

We're going to rely heavily on Europe and Asia-Pacific for solid growth.

The next slide shows pretty broad-based growth in the third quarter, so you can see US up 9%; Europe also up 9%; Latin America, a little slowdown in the third quarter but we do expect the full year to be in line with year-to-date results.

Slide 16 shows the same thing by franchise, so you can see oncology up 15% in the third quarter, cardiovascular up 20%.

And this reflects the fact that Lotrel is now out from under the base and good performance by the launches of Exforge and Tekturna also starting to kick in.

Immunology and infectious disease, actually year-to-date is our fastest-growing franchise, up 19%, and that's driven by Aclasta.

The next slide shows the quarterly progress that we have made in the US as we have gotten out from under the negative events.

So this is the true underlying growth that we are seeing in the US, and it is driven largely by good performance against the launches of Aclasta, Exforge, Exelon Patch.

And in fact, Tekturna, we even started to see a tick up in Tekturna performance.

In September we had total prescriptions of 115,000 versus previous months where we had seen 75,000, 80,000 a month.

So some of the changes that we made on Tekturna are starting to work.

Next slide shows that today we have announced a major change to our commercial model in the US.

This map on slide 18 shows how the US has moved from an open model, where physicians have good autonomy to prescribe to a more restrictive model or HMOs and payers have created more restrictions.

I said earlier in the year that we started three pilots in highly restrictive markets and we took a key account management approach and we learned a lot.

Now we are ready to roll that model out more broadly.

So on slide 19, we are moving from a national model of mirrored sales forces that are organized really by brand and we are moving to a geographic-based structure that is flexible and it will allow a key account management approach in those restricted markets but also will allow a continued share of voice model in the open markets.

So it's going to I believe really improve our effectiveness.

It's -- also make us more efficient as we are announcing today the elimination of about 550 positions and that will save $80 million a year on billing.

We will take a charge of about $20 million in the fourth quarter.

So the next slide shows the success that we are having in Europe and this is really a good story.

As you look at the new products having a good part of the reason for the success in Europe, our end market products are growing above markets so Diovan is up 13%.

Gleevec is up 13%.

And these are significantly faster rates than the market is growing.

The next slide shows some of our emerging market results.

I want to point out that China and Russia, we are growing over 30% and we see this as a big opportunity.

I know that all pharma companies say they think emerging markets is a huge opportunity, but the thing that makes us different is if you look at these five countries on this slide, they add up to over $2 billion of total business.

So if we can take this group and grow it in the high 20s, 30%, it will add significant topline to the global pharma numbers.

We had good news on development during the quarter.

So as you know, Afinitor is under priority review for renal cell cancer and we expect a decision by December.

As well, Gleevec and Adjuvent just also under priority review with a decision before the end of the year.

On 23, I wanted to point out that I am spending a lot of time with my executive team on the post-Diovan patent expiry period and in fact, really beginning in '10 and '11 when Cozaar goes generic and starts to have an impact on Diovan.

We're going to spend a lot of time driving our base businesses harder and also ensuring that the execution of our launches both for late stages -- we will list the launches that we had in 2007 continue to drive growth.

But we are also deciding to invest now in some other initiatives that will help us post-2012.

And they are shown on slide to 24.

We are accelerating our work in oncology.

We have a very strong pipeline and so we will invest more heavily in oncology to allow concurrent development of some new indications for Afinitor, and other late stage molecules, which will help in that time period.

The second thing we are doing is we are accelerating our investment in emerging markets, so that means more sales force, more market access resources.

And then the third thing we are doing is we are accelerating our general medicine pipeline.

When we reorganized into small cross-functional teams, we charged the seams with looking for ways to reduce their timelines and bring the drugs to market faster.

So you will see in the weeks and months ahead projects that have been accelerated.

So in summary, good performance and that has allowed us to raise our full-year forecast from low single-digit sales growth to mid single-digit sales growth with operating income growing ahead of sales and importantly, we are investing in projects today that will enable continued growth for pharma into the future.

Dan?

Thank you, Joe.

I take your promise.

With that, I would like to discuss the other businesses briefly.

Vaccines and Diagnostics had a dynamic growth, 15% growth in local currencies and 20% in dollars.

The flu market has become somewhat more challenging in two ways.

There is a lot of supply, and the prices are under pressure but nevertheless, we are on track to have a good result in that area.

What is very important for the future is obviously that we succeed with our Menveo submission.

It is a very important medication and Joerg put some graphs, some pictures there, which showed you this disease is often deadly.

And progress is very, very rapidly if not diagnosed quickly.

So these vaccines will add substantial medical benefit and I have no doubt that will also be commercially successful.

Sandoz grew in the first 11 months by 1% in local currencies, 11% in dollars.

It is really a mixed picture between some countries who have had a great performance and some with a weak performance.

Even in the weak performance, I would separate two groups.

One of the weak performance is the US.

Here clearly we are underperforming.

That is mainly due to lower prices and the delay of approvals.

Then we have the German market, where we perform well.

We gain market share, but nevertheless, it is a [growth] performance overall because the market is contracting.

Then we have the good news which are most of the emerging growth markets where there is very dynamic growth and Sandoz does extremely well.

What is satisfying is to see that from a profitability point of view, Andreas and his team have reached the objectives they had put forward a few years ago.

So it's over 15% gross and if you exclude the goodwill, then it's even over 20%.

So by all means, the productivity and improvement here has been achieved and of course the battle continues.

If we look at Consumer Health, finally, finally CIBA Vision is delivering good numbers.

The operations are going in the right direction and we see that plus 6% in local currencies and 13% in dollars.

OTC on the other hand had a weak performance in the US market.

It's not really entirely clear yet what all the reasons are, but we have also management change there, which certainly didn't help.

In Animal Health, a split picture really.

The farm animal business is suffering due to the economy, the high commodity prices for the feed, the animal feed, and so people treat -- or farmers treat their animals in a restrictive way.

And on the other side, the companion animal business, which is performing very well and contributes to this good result.

So hopefully the global farming crisis will soon be resolved.

Next slide describes where we stand with Project Forward, so we have still quite a way to go until we reach our $1.6 billion in savings in 2010, but we already have realized now over $700 million and we are able to partially reinvest this money and partially it's a savings and you can see here different initiatives taken by the various businesses.

So far I think most has been expected.

What may have been less expected are the organizational changes we have announced today and they comprise really two things.

One is a slight change in the structure by creating a job as chief operating officer, and then the second is changes in the leadership of three divisions and that is substantial.

Having said that, I start with a simple change, which is the nomination of Thomas Werlen, our Group counsel for -- who is becoming a member of the executive committee of Novartis.

And secondly, I would also like to acknowledge that Thomas Ebeling, who is now pursuing or going to pursue a career outside our company, has made major contributions to building the pharmaceutical division and to our results.

So I am very grateful to him and we are leaving each other in very amicable terms.

The second change on a divisional or the related change on the divisional level in Consumer Health is a little bit untraditional in the sense that George Gunn agreed to keep the Animal Health leadership and at the same time the divisional chief, so there we are combining two jobs.

George Gunn is a very experienced leader who has worked in many countries and in several companies.

So I think he knows exactly what he has agreed to.

Then we have two young chaps who are taking over one Sandoz and the other Vaccines and Diagnostics.

Obviously with the promotion of Joerg Reinhardt to become chief operating officer, we had to also address his succession and Andrin Oswald is by background and M.D.

with also international experience in McKinsey training, who has worked as a general manager in Korea, as my personal assistant, and then in development is going to take over this job.

Then Andreas Rummelt and I myself had a discussion about his next job.

He did an outstanding job in integrating Hexal and Eon Labs.

And we had a very unfortunate event in the fact that our global head of QA has unexpectedly passed away and so I am grateful to Andreas that he agreed to take over these responsibilities on a group level and we combined it with the manufacturing job because Andreas has a lot of experience in manufacturing.

And when we had big difficulties in pharmaceuticals a few years ago, he really fixed it.

And with that, there is a new opportunity for another very promising leader, Jeff George, who will take over the Generics business.

So overall I think the changes indicate that we want continuity, that we want to give opportunities also to younger people, and it also indicates that Joerg and I will share some of the workload I currently have and the demands on a Chairman and CEO have increased over the recent years.

It's good fortune that Joerg and I have worked together in the past in fact for many, many, many years sometimes in a reporting relationship, sometimes not.

But we know each other extremely well.

We trust each other and that makes it I think a workable relation.

And we will in an aligned way lead the Company.

So with that, I would also like to close with another important decision the Board has taken, which is to ask David Epstein to create a molecular diagnostics business.

It will obviously start with some development work and it will start obviously in oncology.

In fact, David has already started oncology, so it will be a natural expansion in (inaudible).

And he will also become like the other new nominee, a permanent guest of the executive committee and contribute to the overall strategy of the Group and I think will be a very strong team at the top.

At least if I exclude myself, I can say that.

With that, Raymund, let me ask you to take over.

Thank you, Daniel.

I would like to add a few comments on the financials.

I am now on slide 33.

First, I have to mention here that obviously all the numbers that we show are numbers on a continuing basis.

That means they exclude the effect of the businesses that we divested last year, the nutrition businesses, and the gain that we received from those divestitures.

Second remark on these numbers is that one has to take into account that in the third quarter of 2007 we booked an increase to our environmental charges or provisions of $590 million.

So one has to keep this in mind assessing the performance and the increases in the various performance numbers.

Our operating income, as Daniel mentioned, is increasing 24%, but excluding the environmental charge, the operating income would have increased 13%.

(inaudible), excluding this charge, there is a margin improvement from 23% to 23.2%.

Similarly, the net income increase of 19% translates into a 10% increase excluding this environmental charge.

On the next slide, you see the same overview for the third quarter.

The increase of 61% in operating income translates into 14% excluding the environmental charge.

We show an increase in the operating income margin from 21.2% to 21.7%.

The net income increase of 32% on a comparable basis would then be 2% and I will comment later on on the major factors affecting this.

On the next slide, I analyze further the drivers behind the increased operating income margin.

We have three sets of factors there on this.

We have higher revenues mainly from the Betaseron agreement with Bayer Schering agreement.

Then we have productivity improvements as a result of the forward initiative that flows through in cost of goods sold, marketing and sales, and G&A and then are partly reinvested into research and development, where you see an increase of these investments at a higher rate in sales.

In addition that's the third element we have one-time elements that have to be taken into account in cost of goods sold.

In 2007, we had the foundry impairment of $320 million and in R&D in 2008, we have the Aurograb impairment of $223 million.

So these exceptional items explain an additional part of these variations.

Finally, in operating income and expense, we have another set of exceptional items but those probably can best be gleaned that on the next slide where we give you the adjustments that we usually make to the income numbers, [paid] for intangible asset charges for significant exceptional items.

For the Group overall, we obviously have to take into account in 2007 the $590 million environmental provision increase excluding these adjustments are virtually at a similar level.

I think they are $57 million lower than in the comparable period last year.

The exceptional items affecting other income in the expense are restructuring of $89 million; lower product divestments $141 million versus $166 million; and the release of prelaunch inventory provisions mostly related to Tekturna, which again, was lower in 2008 compared to 2007.

On the next slide, we have the other nonoperating items.

Income from associated companies up 12%, nothing special here apart from the [first] consolidation of Alcon, which I will cover later.

Financial income net virtually unchanged from the year ago, 6.2% as a percent of average net liquidity.

This item did not increase because of the financing for the Alcon 25% stake that we acquired at the beginning of the third quarter and this stake's cost in financing and a reduction of interest income of approximately $80 million.

So that explains why this number is not increasing.

Taxes is the other exceptional development.

In the nine months 2008, the 14% is higher than the number in the year-ago period but the year-ago period was an exceptionally low number of 11% because of one-time factors.

Then on the next slide, a few comments on the accounting for the 25% Alcon equity stake.

The allocation of the $10.4 billion purchase price was done on a preliminary basis and will be finalized in the fourth quarter, but we currently have allocated $6.2 billion to identifiable net assets with an average amortization period of 11 years and $4.2 billion to Group (inaudible).

Our share of the estimated outcome net income for the third quarter is $121 million, but that was more than offset by now the charges for amortization of intangible assets and other one-time items related to this transaction of $126 million.

So the net income comes contribution in the third quarter was negative $5 million.

Finally I should say that on the IAS 39, we have concluded that we didn't have to value the outstanding options, the call option and the put option, for the remaining 52% outcome stake held by Nestle.

On the next slide, we showed a strong -- that the free cash flow increased strongly but was mostly used and for the benefit of higher dividends.

So the free cash flow of nine months 2007 of $1.7 million increased our operating activities and reduced investments in property, plant and equipment and reduced investments in intangible and financial assets, but then was partly offset by lower sale of assets and as I mentioned, an increase of $747 million for higher dividend payments.

On the last slide, I would now like to make a few comments on the direct impact of the financial crisis on Novartis Treasury operations.

We have had no equity or bond investment exposure to any of these (technical difficulty) financial institutions.

We have no counterparty exposure to any insolvent financial institutions through financial contracts, (inaudible) swaps, or options or other financial instruments.

We continue to have a very sound ability to issue US commercial paper.

There is no substantial limitation to some very fine rates.

And finally, our defined benefit plans as of the end of the third quarter are fully covered.

With this, I hand over again to Daniel.

Thank you, Raymund.

This brings us to the outlook.

Barring unforeseen events, Group sales for continuing operations are expected to grow at mid single-digit rates and the Group operating and net income for continuing operations should reach new record levels.

With that, I close the presentation and would like to open the question-and-answer session.

(Operator Instructions) Tim Anderson, Sanford Bernstein.

Thank you.

I have a few questions.

At the current exchange rates -- if you extend those into 2009, can you give us an idea of what the impact would be to sales as well as to operating income?

Second question is on emerging markets that you mentioned, can you tell us what Novartis's top five products are at present in the emerging markets and how that might shift over time?

What could be the top five products maybe five to 10 years from now?

Again last question on generic Lovenox, any increased visibility whether that will be a fully substitutable true generic product in the US such that you will have rapid erosion of branded Lovenox?

Tim, on the foreign-exchange impact on 2009, that's a bit of a hypothetical question because it depends to a very large degree where the rates will move to.

If they would stay at current levels, you know at the average rates that we had for 2008, obviously the impact would be minimal.

But one has to assume that they will move about.

And on slide 70 of the analyst presentation, you will see the impact that any currency changes would have for example if the US dollar/euro rate, if the euro were to move up 10%, then you would have a 3.2% positive impact on Group sales, with a 4% positive impact on operating income.

Obviously if it moves down, then vice versa.

Similarly we give these impacts for the other currencies, but I think the euro (inaudible) better strengths are the two most important ones.

Tim, regarding the EGM markets and the pharma brands, generally the top five brands are quite similar to our top five brands with a couple of exceptions.

So you'll see Diovan, Gleevec, Neoral for transplant, but you'll also see Voltaire in the emerging markets.

And we have done a very good job with some of our more mature drugs continuing to grow them in emerging markets.

In terms of what we expect to see, to be honest we expect to see continued growth, so there is -- there are generics on the markets against some of these drugs already and we continue to grow them because of the self-pay nature of some of the markets.

We've done a good job from a branding standpoint and would not expect to see a material change probably for the next few years.

Okay, on Lovenox, you know that we have filed it as an ANDA in the US.

We received a set of questions on immunogenicity last December and this was the only set of questions we received on enoxaparin where we needed to file an amendment to the end of May ANDA and it was submitted by September 26.

And we had of course discussions with the FDA before how we wanted to address the questions.

The FDA fully agreed with our approach, so we hope that the data is efficient now and will lead to approval.

And if we get an ANDA approval, then the product is fully substitutable.

Next question, please.

Graham Parry, Merrill Lynch.

Thanks for taking my questions.

The first one is just on the management change that we've announced.

We are seeing quite a sweeping level of management change in the pharma business and you have now restructured the rest of the management there.

I was wondering particularly with the elevation of Joerg's role, to what extent you are moving to eventually split the Chairman and CEO role and what your thoughts are there?

Second question for Joe on cost savings in the pharma business beyond 2010, you've talked about the $80 million a year saving, but you're going to need a lot more than that to offset the (inaudible) loss.

So I was wondering if you could talk through how you see cost savings going for 2010 and beyond and whether you think this would be part of a companywide Project Forward II for example?

And then thirdly, just a product question.

We see both Diovan in Europe and Lucentis ex-US down sequentially quarter on quarter.

Just wondering are you seeing more price pressure for Diovan in Europe and on Lucentis, is it patients starting to cycle to less frequent dosing?

Thank you.

Thank you.

First on the creation of the chief operating officer job, has nothing to do with a split of Chairman and CEO.

Obviously the Board does reevaluate this question and concept regularly and if ever the Board feels that this is appropriate, it will split the jobs.

So it's a question which will be re-examined regularly.

Okay.

Second question was, Graham, about cost savings and you are right.

We will need a lot more than the $80 million in cost savings as we move forward in the US.

It's not just a US effort, though, in terms of overall cost savings.

It truly is a pharma global initiative.

So we are driving significant changes in the way that we source.

We are looking at taking lean principles outside of manufacturing and leaning processes that have tended to become bloated and bureaucratic and we are finding ways to save money.

Then finally, I do think that when you look at the US and the commercial model change that we have made in the US would -- it allows us to modify our approach as the US changes.

So as the US becomes more restricted on kind of a market-by-market basis, this regional model that is done on a market-by-market level allows us to make modifications.

I don't think you will see a Forward II unless conditions change dramatically because we are able to modify as the markets move basically through attrition given the current attrition rates in sales.

So the point is a valid one that we will need more savings than the $80 million.

Don't look at this as a one-time swat.

This enables us to really change the model in the US to adapt as the market changes.

Last question on Lucentis.

Volume growth ex-US continues to be strong.

We don't see any flattening.

We actually had some positive developments, market access in quite a few big markets.

Canada, UK, Australia, and Germany, where we see broadening access to product.

And the number of injections per year is actually going up, if I compare to last year.

And on Diovan as well?

The volume growth on Diovan is -- it continues to be strong US and ex-US.

We are gaining in the US and in Europe.

We continue to gain market share in the (inaudible) market.

Right, so for example in Europe on Diovan, we are seeing high single-digit growth and all of that is volume, so none of it is price.

Okay, does this clarify your question?

That's great.

Thank you.

Gbola Amusa, UBS.

Thanks and good afternoon.

First, could you update us on the proximity of your pharma margins in emerging markets to those in developed markets, not just in terms of what you see today, but what you might see some years from now?

Then secondly, given the very high component of out-of-pocket expenditures for pharma in those markets, there has to be some high sensitivity of sales growth to per capita income growth.

Just given your high exposure on slide 14, at what level of emerging markets GDP growth in '09 would you start to get nervous in terms of your own internal forecast?

Okay, starting with the proximity of margin, you know we don't talk about margin kind of on a region-by-region basis, but I have said in the past that emerging markets is slightly below the pharma global average and the more mature markets are slightly above, which gives us to the average market.

We are going to invest more heavily in the short term in emerging markets, so you might see a one or two point suppression in the emerging markets.

But as I have committed to the aspiration of showing margin improvement every year, we will fund the investment that we are making in emerging markets through greater cost savings in the more mature markets.

So where I would expect it to go long term is I would expect emerging markets to start to approach the pharma global average, but it doesn't need to given the portfolio plays that we are making in terms of profit growth and sales growth.

We are looking at emerging markets primarily as a sales growth driver and as long as we can show good, solid operating income improvement year after year, we will be happy.

In terms of the out-of-pocket expenditures, you are right in that there is quite a bit of out-of-pocket expenditures.

But we are also selling a lot of what we sell in emerging markets through hospitals, where it is fully reimbursed.

So I would -- we have seen ups and downs in per capita income in emerging markets and our business in our emerging markets, this pharma business the way that it is currently configured, is fairly insulated from big swings.

So it would have to really change dramatically for me to change my outlook for '09 or beyond.

Joe, to what degree do you see that there are also new healthcare systems, insurance systems, reimbursement systems which are being put in place in the countries?

Yes, if you look at what's happening in China and the plan to broaden insurance or at least healthcare coverage for a broader percent of the population, as of today only about 25% of the urban population in China is covered by some kind of healthcare program.

You are going to see more and more of that as China unveils their plan.

Paul Mann, Morgan Stanley.

Thanks, I've just got a few questions from me.

First of all, in your other operating income line, other income and expense line of 286, can you just highlight what was in that line versus the one gain from -- there was a one-time gain last year but it was quite a large number this year, any particular items in there?

Then secondly in your vaccine sales, you mentioned both pandemic sales as well as normal Group sales.

Can you just talk about what is the difference between pandemic and normal?

Then on Zometa, obviously us growing nicely following the Austrian study at ASCO.

Could you just talk about when should expect the AZURE date?

Is that going to come at San Antonio or is there any clarity on timing there?

Then finally just thinking about your version of beta interferon, how should we think about the marketing of that product and also FTY720?

Will you have to acquire an additional sales force?

Can you talk about the timing and potentially the costs, the upfront costs of that?

Thank you.

Okay, other income and expense, Paul, I think we have two elements that need explaining.

One is pharma and the other one is corporate.

In pharma, the nine months figure you mentioned, we have a swing of approximately $286 million there, so in there we have restructuring expenses of $83 million.

We have the reduced liquidation of launch, inventory launch provisions for Tekturna of approximately $66 million.

Then we have reduced gains from divestitures and we have -- that's $25 million approximately.

And then we have increased personnel cost accruals.

So that explains those changes.

For corporate, other income and expense, there you have a swing of approximately $120 million.

The main items are increased investments into the corporate infrastructure.

We have centralized the management of the IT services and infrastructure and that has a cost in there of approximately $55 million.

And then we have increased endurance payments and premium of $34 million as the main items that would explain the nine month numbers.

Okay?

Regarding flu vaccines, what I can tell you is that we had in the numbers for the third quarter of around $18 million, $19 million of seasonal flu vaccines doses sold.

And in terms of pandemic or pre-pandemic sales, it was a deal with the US government valued at $126 million in the third quarter.

David, would you please address the Zometa question?

Yes, regarding Zometa, just as background, as you have seen Zometa has returned to growth as physicians have now focused back on treating patients monthly where the real benefit is.

In addition, we have benefited somewhat from ABCSG data already presented this year.

The AZURE trial which is a large randomized trial looking at both pre and postmenopausal patients for the prevention of return of breast cancer, that trial has been looked at.

An interim look has been taken by the Independent Data Safety Monitoring Committee and they have decided that trial will continue until its completion, which will mean full results in early 2010.

However, at the San Antonio Breast Cancer meeting, you will see some data from a subset of about 200 patients who were treated in the neoadjuvant setting and I think that will be the near-term data to focus on.

I'm guessing you can't file on that data.

Is that fair?

We are evaluating whether or not it makes sense to file the ABCSG data or not and we will get back to you on that once we have clarity.

Okay, and on the beta interferon which we call Extavia, the sale of (inaudible) entry of Novartis in the attractive MS market.

Bata interferon is the standard of care that will establish Novartis' presence in this field ahead of the launch of FTY.

We will -- we are deploying small, dedicated teams of MS experts in all the key markets and marketing has started and will be accelerated in the first half of next year.

And as people are deploying a service package for physicians and for patients, which is required to compete in this category.

I would say it is an important precursor to the capability that we are building for FTY, so the two -- this enables us to build that capability ahead of FTY's wide launch.

[Richard Bulser], JPMorgan.

Thanks very much.

Thanks for taking my question.

Two quick questions.

One, just following up on Betaseron, could you give some guidance on other revenues in the pharma division as I think the Betaseron royalties from Bayer Schering cease sometime in the fourth quarter?

Second question on vaccines, could you give us an idea of the returns policy for the flu vaccine this year, whether you have sold to wholesalers or government institutions who will completely accept the 33 million or whether you think any of those are under threat of return.

And if you could give us an idea on how many more doses of vaccine you are planning to produce this year beyond the 33 million, that would be very useful.

Thanks very much.

Thank you.

So on Betaseron, just to answer that first question, we do (inaudible) obviously even royalties on Betaseron mid-October.

So we won't receive any substantial royalties for the full quarter of this year.

And as you know, we will be launching our own version of Betaseron at the beginning of next year.

So we will have -- we will stop receiving that's other income before the revenues from Extavia kick in.

Could you give us an idea of how much they would be?

Those royalties?

For the --?

I think our expectation for a full year would be around 200, so you can pro rate on that basis but we might use lose one quarter of that 200.

Thank you.

Regarding flu vaccine, this year's season not unexpectedly has developed a little bit more into a challenge than what we would have liked.

We see especially in the US market but also in some European market some levels of oversupply of material.

In addition, there is relatively weak seasonal -- has been so far.

So all together what you see toward the end of the season is that the conditions in terms of supply for wholesalers start to be [stabilized] a little bit and some of our competitors have already started to give parts of return to a large extent.

We cannot exclude that we are going to do the same going forward for the remainder of the season.

All together I believe that we will -- it's unlikely that we will be able to sell all of the 65 million to 70 million doses that we will be able to produce this year, but we are still in the middle of the season so we will have to see how the rest of the season unfolds.

So we have not given up obviously the ambition to sell whatever we have produced.

But as I say, so far it's relatively weak.

We have to see how the rest of the year will look like.

Thank you, you are --.

I think the message is loud and clear.

Please get your flu shot so you can continue to work productively.

John Murphy, Goldman Sachs.

Thanks very much indeed.

Daniel, first for you that there is a comment in the press release that talks about extending your current position as Chairman and CEO of Novartis.

Is there something new in that at all?

Second on Sandoz, you've been very clear with regard to outlook for this year from a topline perspective, but can you maybe roll on a little bit further and talk a bit about how you expect the markets, particularly Germany and US, to develop and therefore how we should think about the evolving profitability in that business going forward?

Yes, thank you.

Yes, first to my contract in the terms for new contract.

My contract is over next February when we have the AGM.

So that was the end of the term and it was a question if we prolong and at what condition.

So we have discussed that in fact over rather an extended period of time, the Board and I, and we came to conclude, and the key terms really are that it will be a contract in the first phase till the AGM in 2010.

And should I be reelected, it will be an automatic promulgation for one year, which will be basically repeated unless one of the two parties does cancel the contract with a notice period, which is usual.

And there is no severance pay and no golden parachute foreseen for that new contract.

So that has also been agreed and finally, the compensation is going to remain unchanged.

So these are really the main points and in that context, yes, that is news.

From a point of view of Sandoz, I think that Andreas will comment that my view is following the business that in the US, I don't see a fundamental shift.

It's more that one really needs to have new products and if anything has changed, it's the level of aggressiveness of generic manufacturers who take and have taken an increasing risk to attack patents and taking a bit where it takes some time until the truth comes out, until the judges and the juries have taken their decision.

So it's a short-term win for a generic manufacturer to go and launch at risk.

But we will see if it pays out in all cases.

I think in some cases it does.

In some cases it won't.

If it doesn't, it is an expensive proposal.

In Germany, the market is continuing to change.

I am not very optimistic from a point of view of the outlook.

I think we have a very strong position.

I don't see that as being endangered.

The (technical difficulty) now are trying to get better prices through negotiations and Andreas has been deeply involved in this discussion so he can comment more and maybe give some further aspect.

Thank you, Daniel, and more or less you have said everything on the US.

The issue this year is really the launch delays we have and here approvals pending of ANDAs which has been submitted long time ago.

Six of the ANDAs, some of them really important, one including enoxaparin are also on the citizen -- have citizen petitions and here it's unpredictable on how fast the FDA will act on this.

Otherwise the pipeline for the US is intact.

We have more than 100 ANDAs pending.

Half of them with Paragraph IV challenge.

It's just that the agency is not moving and approving.

So this is the issue for this year.

Germany, it is certainly a contracting market right now with the new rebates we have to give to the statutory health insurance companies.

Nevertheless, we were able to increase our market share by nearly 3% points over the last year.

So we are by far market leader in Germany and this will certainly also help us by winning either new contracts with the current health insurance companies and also winning hopefully a significant number of molecules from the new [AOK] tender which is due on November 30.

We will hear until the end of the year what the outcome is, so there will be price and margin pressure.

But through increasing market share, we hope that at least a good part of this we can balance out.

Thanks very much, gentlemen.

Thank you.

We have time for one last question.

Steve Skala, Cowen.

Actually Brett Kaplan here.

Two questions.

First, can you comment on the launch of your Plavix generic in Germany and how that plays into the German dynamics?

Second on the US Sandoz plant manufacturing warning letter from the FDA, how has that impacted the Sandoz challenge?

And that is all, thank you.

Okay.

Well, as you know, we have launched the generic Plavix local appeal in Germany.

That launch has gone pretty well.

We have achieved rapidly sales also moving faster than the only competitor here, which is RoxyPharma.

So legally everything is clarified right now so our products is fully substitutable to the Sanofi-Aventis product and we are hoping to continue this very successful launch in Germany.

On Wilson, we are in constant constructive dialogue with the agency.

We have sent in our written reply on the warning letter to give a full commitment to bring the site on full compliance with respect to the deficiency we mainly had in documentation and validation.

A direct result of the review which we did with internal and external experts was the recall, partial recall of a three-part product, partial metaprolol and full recall on [atrhitomycin] and gabapentin.

Gabapentin was not directly related.

I think the commercial impact of these three recalls was pretty small.

So we don't expect a significant impact on our US results here.

Again, we are still in discussions with the agency which is on a continuous basis and we are fully committed to fix the issues as quickly as possible.

Okay, do you have maybe one last question related to that?

Do you have any indication of any approvals are being delayed because of the quality issues?

Well, it's certainly standard that when a plant is on a warning letter that new approvals would not come through.

So we don't have planned significant launches from the Wilson plant and we are confident that until that time, we will have fixed the issues so that this will not delay any further any new approvals from the plant and impact our business negatively.

Thank you, Andreas.

Thank you very much to everyone for your interest in the question that I am closing the call.

Goodbye.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone.

Thank you for joining and have a pleasant day.

Goodbye.