Novartis AG (NVS) 0 Q0 法說會逐字稿

Good morning or good afternoon.

I'm Dino, the Chorus Call Operator for this conference.

Welcome to the Novartis half-year second-quarter 2009 sales and results conference call.

Please note that for the duration of the presentation, all participants will be in listen-only mode, and the conference is being recorded.

(Operator Instructions).

This call must not be recorded for publication or broadcast.

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

Joerg Reinhardt.

Please go ahead, sir.

Thank you very much.

So good morning, good afternoon, everybody, and welcome to our second-quarter conference call.

Before we start, I would like to ask John to read the Safe Harbor statement, please.

John?

The information presented in this conference call contains forward-looking statements that involve known and an 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 our Form 20-F on file with the Securities and Exchange Commission for a description of some of these factors.

Thank you very much, John.

Together with me this afternoon we have Raymund Breu, our CFO, and we have the CEOs of our businesses -- Joe Jimenez for Pharma; Andrin Oswald for Vaccines and Diagnostics; Jeffrey George for Sandoz; George Gunn for Consumer Health; and David Epstein for Novartis Oncology, and as well we have Trevor Mundel, the Head of Global Development.

So let me start with the presentation.

I'm on page number four, which is essentially summarizing the key messages for the first half of this year.

Novartis showed a strong operational performance with net sales of $20.3 billion, which is plus 8% in local currencies.

However, we did still see a strong currency effect.

So in dollars this corresponds to minus 2%.

Operating income is $4.7 billion, which is 11% up in constant currencies and excluding exceptional items and minus 5% in dollars.

Also very strong free cash flow before dividends up 33% as compared to last year.

Pharmaceuticals showed an outstanding performance with net sales growth of 12% in local currencies, mainly driven by recently launched products.

We also showed a substantial focus in our R&D business with approvals of Afinitor, Allaire, Ilaris, Ixiaro and also Prevacid 24 hours among others.

Novartis reaffirms based on these good results the expectations for strong operational performance in 2009 and also for record earnings in constant currencies.

On page five you can see that we had a very solid performance in the second quarter, which contributed to the good results in the first half.

In the second quarter, we had net sales of $10.5 billion, also up plus 8% in local currencies, and an operating income of $2.4 billion, which is up 8% in constant currencies and even 13% in constant currencies and excluding exceptional items.

Also very strong in the second quarter, the cash flow before dividends is up by 57%.

When we look at the divisional performance on slide six, we see that Pharma had an outstanding performance, growing by 12% in sales and local currencies and 11% in op inc, mainly driven by good performance of launched products and also the good performance in emerging markets.

Vaccines and Diagnostics had a difficult quarter, mainly driven by significant one-time effects with regard to sales.

So for example, we did not have any pandemic influenza on sales in this quarter, which we did have last quarter -- in last year.

also in terms of op inc where we saw a depression of op inc by an exceptional charge for legal issue.

Sandoz showed dynamic growth in emerging markets, leading to a 4% increase in local currencies and also a continuing focus towards US turnaround.

In Consumer Health we saw good growth in CIBA Vision.

We also saw overall good performance resulting in a 1% growth in local currencies and actually a 7% growth in constant currencies in op inc.

On page eight, when we look at it from a geographical perspective, we see strong growth in all regions of the world with strongest growth in the top six emerging markets with 20% growth for the Company, but also we see good growth in the US and in Europe with 7% each.

On page nine, very significant contributions to sustain growth momentum are coming from the more than 10 new product introductions in Pharma in the last two years.

Now these new products contribute no more than three times as much as new product contributions on average for our competitors.

We believe that this is a very strong proof of our innovation power in the Pharma business, and this makes us very confident also for the future.

On page 10, also in the future we will continue to build on our innovative innovation capabilities, which we have been demonstrating with a number of important approvals that you can see on this chart in the first half of this year.

On page 11, now looking forward we believe that the strong growth prospects that we have through our rejuvenated portfolio will mitigate the so-called 2012 patent cliff.

We show great growth with our recently launched products.

We have a strong pipeline in all divisions, which is expected to continue to drive growth through the 2012 period based on assets like Afinitor, FTY, QAB, our meningitis vaccines, also the field of biosimilars.

Our productivity efforts deliver a buff target, enabling us to invest even more in even quicker and earlier in R&D and also our high-growth markets.

We do expand our strong position in the high-growth emerging markets, and last but not least we do expect a limited impact and we do have a limited exposure to the US health care reform.

And with that, I would like to hand over to my colleague, Raymund Breu.

Thank you.

I'm now on slide 13, and I concentrate my comments just on the Q2 numbers for ease of understanding.

The second quarter was really impacted significantly by the currencies, and then it is characterized by a very strong growth in free cash flow before dividends of 57%.

And I will explain later on the factors that have contributed to it.

On the next slide, the currency impact on sales was 10% on operating income, 12% negative.

Excluding this there was a strong underlying growth of 8% operationally both in sales and in operating income.

On the next slide, you can see that our operating income margin as reported dropped 0.5 percentage point.

But if you adjust for the exceptional items and for the amortization of goodwill and intangibles, then the margin was up 0.6 percentage points.

The driving factors were really broad activity improvements in cost of goods sold, in marketing and selling, and in general and administrative.

And these productivity improvements allowed us to invest more in research and development and allowed us to invest in launches in particular in pharmaceuticals and in expanding aggressively in the emerging growth markets.

On the next slide, you can see that if we correct for the major exceptional items and look at operating income, then you can say that the underlying growth in adjusted operating income in constant currencies was 13%, and this compares very well with the constant currency sales growth of 8%.

The exceptional items are two in this quarter.

One is less divestment gains, in particular in pharmaceuticals, and the other one is that in the comparator this quarter in 2008 we had a $104 million release of provisions in pharmaceuticals.

Vaccines and Diagnostics in this quarter, we had $45 million for a legal charge that has impacted the results in this division.

On slide 17 we show you the nonoperating items, and it is reasonable that net income from continuing operations was down 10% in US dollars compared to operating income being down only 4%.

Net income was impacted by financing costs, financing the outcome 25% stake, and then additional unnatural expense related to the bond issues that we have done in the last year and in the first half of this year, which now amounts to $8.5 billion, and obviously the expense there will now show up in the financial results.

The other item which contributed to the net income development was an increase in the tax charge.

We have re-estimated our tax rate for the full year this year, and our estimate currently is that it will be 15.2%.

As a result, we then have in the second quarter booked a catch-up for the first quarter as well from 14% to this 15.2%, and then the tax rate for the second quarter amounted to 16.3% compared to a 13% in the comparable quarter last year.

Finally on slide 18, I mentioned that the free cash flow before dividends from continuing operations went up 57%.

This is mostly driven by the cash flow from operating activities, which is up 41%.

And there are two explanations for these very good developments.

One is improved working capital management, and the other one is that we had lower tax payments and financial payments in this quarter compared to the quarter two in 2008.

With this, I hand over to Joe Jimenez, the CEO of Pharmaceuticals.

Thanks.

Okay.

I'm on slide 20.

Pharma performance continues to be strong.

I think we are executing well against the new product launches, but our established products are also performing well.

Our focus on cost reduction has ensured that we are delivering solid operating income performance, and our pipeline continues to deliver.

I will talk more about that in a minute.

On slide 21 you can see that net sales continued to grow at double-digit rates.

So in the second quarter, we were up 11%.

I'm also pleased with the operating income performance reported 2%.

So that is more than offsetting the currency hit, and on an organic basis, that operating income growth is around 17%.

So we are pleased with the organic operating performance.

Slide 22 shows that we are outperforming our key competitors as shown by IMS.

And the combination of the new launches but also the fact that you have got established products like Gleevec growing at 15% and Diovan growing at 6%, so good base, good solid base, and then the new products come on top.

Slide 23 shows that -- this is broad-based.

I think the most encouraging thing that we have seen in Pharma is that the strength is across all therapeutic areas.

So in the second quarter, we grew all therapeutic areas at double-digit rates in local currency.

Slide 24 you know we had good pipeline progress in the quarter.

In June the FDA approved Ilaris, which is our IL-1 antibody.

It was approved for a rare set of autoimmune diseases known as CAPS.

This really is though just the beginning for Ilaris, which is proving to be a phenomenal IL-1 blocker.

So we have seen positive Phase 2 data in systemic juvenile arthritis, and we are testing the compound in gout and Type II diabetes.

But I think it is a great example of Novartis's pathways approach to R&D.

On 25 you can see that Afinitor is off to a very strong start in the US.

So in renal cell cancer, we have already delivered 1500 prescriptions, and that is in less than three months.

In Europe we had a positive CHMP opinion in May, and we expect a positive EMEA decision this summer.

So, as we have said before, we are very bullish on Afinitor, and we have got a very large parallel development program that is listed here on this slide across a broad range of indications.

So up to -- if you add up the patient population, up to 500,000 patients could eventually benefit from Afinitor.

I'm also becoming more encouraged with the data on Tekturna.

So on slide 26, if you step back, there is still a tremendous unmet medical need in hypertension.

Even though the ACE and ARB treatment is widespread, there are still high levels of negative cardiovascular events.

We know that Plasma Renin Activity, PRA, as a biomarker is highly correlated with negative outcomes.

And we conducted some retrospective analyses on some large outcomes trials which confirm this, and we think it's a real point of difference for Tekturna because Tekturna is the only RAAS agent that reduces PRA.

In fact, ACEs and ARBs increase it.

So it gives us confidence that when we get the ASPIRE HIGHER outcomes data, that we will have positive results, and it could be an inflection point for Tekturna.

On 27 you see that Galvus continues to grow nicely, so it generated about $40 million in the quarter.

I think we have demonstrated our ability to compete against Januvia.

I have listed a couple of markets here, fast uptake markets like Brazil and Greece.

We are increasing our investment in some large markets in Europe.

We have also got some big key launches coming up with Galvus in Asia -- China, Japan, Korea.

So we expect Galvus to be over 500 million by 2012, and that is all outside the US.

Our cost savings are shown on 28.

They are paying off.

So we reduced costs over $240 million in the second quarter, coming primarily from procurement and from marketing and sales.

On 29 you can see the buildup of our cost reduction.

You know it is important not only because it improves margin, but also because it ensures that we can continue to invest in R&D and emerging growth markets while showing good operating income progression.

On slide 30 we do expect US health care reform to impact us beginning in 2010.

We have said that we support the industry's position on helping fill the Medicare doughnut hole, and we strongly support the effort to increase coverage in the US.

We are going to have to pay for this through increased productivity, not only in the US but also coming from other markets.

Now on slide 31, I think it is important that we restart the discussion of how we are going to offset lost sales due to the Diovan patent expiration.

And I think our first-half results are a strong indication of our strong foundation as we approach that time period.

There's basically three primary growth drivers.

The first is our current launches.

We have talked about that.

They are 16% of our sales today, $2 billion year-to-date.

So this year they are going to be over $4 billion, and they are going to continue to ramp through that period.

The second growth driver is the late stage pipeline with QAB and FTY coming.

And then the third is the acceleration of growth in our six key merging markets.

So I think the fundamentals are very strong, but the point here is that there's not one silver bullet.

This is a complex issue, and we are approaching it in a multifaceted way.

But the second part of the story is shown on slide 32, and that is really the shape of the Diovan patent expiration.

There's two things to note here.

First, this is a three-year event.

So this is not a cliff.

It begins in late 2011 and goes through 12,13.

But the second thing to note is that even when it is over, Diovan still will be over $2 billion in sales.

Today we have a substantial business in Latin America and in Asia, and we are already facing generic competition, and we are continuing to grow Diovan.

So we have proven that this is going to still exist as a product for Novartis.

Slide 33, the most immediate impact that we are going to see is the Losartan generic event.

But you have to really sit down and look at Diovan.

Diovan has some clear advantages -- superior blood pressure reduction.

So this is a superior antihypertensive.

Secondly, we have got additional indications of heart failure in post MI.

But I think most importantly we are managing our hypertension portfolio as that, a portfolio.

This is not just about Novartis.

We have multiple single pill combinations, which gives us some kind of defense against this event.

So I'm not saying there won't be an impact; there will, but it is not going to be as severe as some might think.

So based on our 2009 performance to date, we are raising our guidance for the full year to at least high single-digit sales growth, and I think we are executing well, and we are going to continue to execute well through the end of the year.

Thank you, Joe.

So I'm on page 36.

So we continue to deliver on our priorities for 2009 with dynamic expansion of the new Pharma products, successful new launches, return of Sandoz and Consumer Health to growth in the US.

With Sandoz's return to growth in the second quarter, Consumer Health had a 3% growth in the first half in the US.

We continue to expand strongly in the emerging markets and to improve our operational performance.

Forward is a good example for that where we did exceed our cumulative savings, a target of $1.6 billion, now one and a half year ahead of schedule, and we continue to drive our additional projects in that area like compete and customer service.

On page 37 you see that Sandoz is showing a dynamic growth in most emerging markets in the first half with 14% growth in the top six emerging markets and still a good performance also in Europe with 3% growth in a difficult environment.

Overall on page 38 Sandoz is on the right track with global sales now in the first quarter and in the second quarter of this year growing 4% in local currencies after a difficult 2008.

And you also see with regard to the US sales on the bottom of the chart, that again 2008 was a very difficult year.

But you see also here improvement in the first and second quarter, and we hope that that trend will continue for the rest of the year.

On page 39 you also see that Sandoz is doing a great job in Germany with significant market share gains over the last years actually.

Sandoz Germany now achieved a market share of 29.1% in May with Hexal clearly being the number one generic company in Germany.

1A Pharma is growing very, very nicely, and in the month of June, 1A did actually achieve the number three position among the generic companies in Germany, which again is quite an achievement.

This is all based on successful new product introductions, including [clopital gel] or [puntapozal].

On page 40 Sandoz is also continuing to build its biosimilars franchise with the approval of the first approval of a biosimilar in Japan with Omnitrope, and overall the biosimilar sales are up 62% in the first half of 2009 in local currencies.

Still Novartis is still the only company or Sandoz the only company with biosimilars on the market in all three important regions -- the US, Europe and now Japan.

On page 41 Sandoz did also extend its technology capabilities with the acquisition of EBEWE Pharma, which is a specialty generic injectable business focused on anticancer medicines.

Now EBEWE as part of Sandoz now will be able to expand its global reach significantly, which will then also help to launch the strong portfolio that EBEWE has been building over the last few years in the coming years.

On page 42, of course, last but not least, also the Wilson plant remediation is on track.

Quite significant changes have happened at Wilson.

So, for example, there is a new site management team appointed with replacements of more than 20 senior managers at the site.

We will also refocus Wilson on the manufacturing core competence at that site, and we will shift the R&D focus from Wilson to the Novartis campus in Jersey.

There is the FDA inspection anticipated now for this quarter.

The remediation activities are all proceeding according to plan, and I believe it is important to remember that the Wilson facility continues to operate during all of this remediation work with now more than 30 products being actively shipped from that site.

Consumer Health on page 43, solid growth in emerging markets with the US showing improved performance.

You see in the top six emerging markets 4% growth in the first half in the US, 3% growth in the first half of this year.

On page 44 this growth is mainly driven by these 15 major plants that are listed on this page, all of them selling more than $100 million at least and most of them gaining market share, which then leads to a market share situation of 3.5% in OTC, 21.6% in CIBA Vision and 7.4% in animal health.

In the attractive OTC market on page 45, Prevacid 24 hours will be an important new player.

It is our aim to make Prevacid 24 hour a top-five OTC brand in the US based on the strong label that the team has achieved for Prevacid 24 hours, which is very similar to Prevacid Rx.

Also, in addition there is a three-year marketing exclusivity period that will last until May of 2012.

Coming to V&D on page 46, V&D is continuing to make progress with its R&D pipeline.

As you know, we got a complete response letter from Menveo, and we believe that we can answer all the questions before the end of the year.

In Europe the CHMP opinion for Menveo is expected in the fourth quarter of this year.

MenB has completed their recruitment for the pivotal trials or pivotal Phase 3 trial in Europe.

Its results are expected as planned next year.

Ixiaro was approved in Europe and in the US, and the launch is going well.

Optiflu got a license in Switzerland, and we do intend to submit a NDA before the end of this year.

Just as a reminder, on page 47 the Menveo situation, as you know, it is filed in the 11- to 55-year-old category in the US and in Europe.

The filing is planned next year for the category between two and 10 years and then next year also for the category between two months and two years in Europe and in 2011 in the US.

On page 48 obviously there is another investigational vaccine that is generating huge attention and interest at the moment, and that is the H1N1 vaccine.

This chart actually summarizes the status as of today.

In terms of demand, we do now have two contracts with HHS both covering the antigen, the H1N1 antigen, but also our proprietary MF59 adjuvant.

In addition to that, there are a number of agreements formed with other countries, and there are ongoing discussions with quite a large range of governments.

Now from a manufacturing supply perspective, we can say that the production has started at all manufacturing sites in Europe with the cell culture-based manufacturing being first in Germany.

We do expect deliveries in 2009, but they will depend on the yields.

And as you might have also heard from WHO, these yields are currently low.

There is work ongoing to improve them, but it is very difficult to predict what it will be at the end.

Also, regulatory timelines and timelines for clinical studies, etc.

will have an impact on deliveries and on doses actually.

Nevertheless, we do expect to have first deliveries in late 2009.

Clinical trials are planned to start in July of 2009, and we hope for the earliest licensure potentially later this year, somewhere in late autumn.

This gets me to page 49 -- Novartis group outlook.

Bearing any unforeseen events, the group net sales are still expected to grow at mid single-digit rate in local currencies.

We are, of course, very pleased with the pharmaceuticals performance where we see net sales growing at a minimum at high single-digit rates in local currencies, and we stick to our projection of record operating and net income in constant currencies.

So thank you very much, and with this we open the Q&A, please.

(Operator Instructions).

Matthew Weston, Credit Suisse.

Just a couple of questions if I could.

Firstly, I think some surprise on your comments on the potential of Galvus given the regulatory history there.

So for me I think I would be very interested in just a little bit more detail as to why you think you can hit the $500 million and whether that really is going to be focused on some of the less mainstream markets or whether or not you are confident that you can take on Januvia in Europe.

Also, a short update on generic Lovenox from the Sandoz perspective.

I realize that has been a feature in the past.

I wonder if you could give us an update of expected timelines there.

And then Joerg, you have made a number of comments about the lack of erosion of Diovan, the potential of the pipeline in smaller products such as Galvus.

I wonder if we can push you for a longer-term growth outlook for the Pharma division, or, Joe, of course, and whether or not you think that Novartis can continue to grow through its patent expiries, or whether or not the message is, yes, there will clearly be some revenue and earnings loss but that it will be mitigated by some of these other products?

Thank you very much for these questions.

So I think we should start with Galvus.

Joe?

Yes, the $500 million forecasts were at least $500 million by 2012 is an ex-US number.

So if you look at where we currently have Galvus already approved and you take out and you look at the ramp that we have currently seen in those markets and you treat it as you would any analog, we feel very comfortable that we will be able to generate that level if the product continues to progress and the reaction that we have seen by physicians continues.

So we have been able to go head-to-head against Januvia and in many markets outsell Januvia.

I think we probably under resourced it in Europe because we were not -- we were a little bit surprised by the reaction that we got by physicians and the uptick that we saw.

So we are at this time really adding resources to the European markets where it already is being sold and expect to see a nice trajectory.

Again, that is 2012, so that is still aways away.

Joe, do you want to comment on the more long-term outlook?

Yes, no, I think it was important to start talking about the growth drivers.

You know, the one thing about Diovan and the reason why I wanted to show the fact that this is a three-year event is that because we have got three pretty significant growth drivers to replace that lost revenue, the fact that it is a three-year event gives us more time for the growth drivers to kick in and to create a trajectory for total Pharma that may be better than what people are expecting.

I don't want to forecast what our growth rates will be, but I will tell you that we are spending a lot of time internally, a lot of time and attention thinking about 12, 13 and 14 and putting things in place right now to be able to replace that lost revenue.

Jeff, on Lovenox?

Yes, on Enoxaparin a couple updates.

The most recent one is that the FDA inspected our Kundl, Austria site on July 6 to 9 as part of their ongoing heparin supply quality control actions, and I'm happy to report we received no 483 and no significant issues identified to us.

And that is coming on the back now of all four of our Chinese heparin suppliers, which have been inspected again with no significant issues identified to us.

On the patent front, you will recall probably, Matthew, back in April, late April, the Supreme Court declined to hear the case brought by Sanofi-Aventis.

So that effectively ends the patent litigation.

But the final decision pending from the FDA on our ENOX application is still outstanding, and that against a backdrop of about 1600, 1700 Endos that are in backlog.

So it is hard for me to speculate on timing, and there do remain two outstanding citizens petitions.

So we will see how things evolve, but, of course, we aspire to launch as soon as possible.

Amit Roy, Nomura.

Just a couple of simple questions.

You have upgraded the pharmaceutical sales guidance to mid to high single digits -- to high single digits, pardon me.

But the group sales guidance remains unchanged.

Can you give some indications of what you are steering in the second half there?

And secondly, on Project Forward, you have now delivered 1.7 billion 18 months ahead of schedule.

Any sort of -- is that all we are going to see, or any indication of how much more we may get on that?

And lastly, the fixed combination of Diovan and Tekturna I believe was filed in December 2008.

Any update as to where that it is progressing?

On the first question, regarding the group guidance for the second half, I can maybe add the following.

This group guidance does not include any contributions from pandemic sales in V&D.

Currently the timing and the amount of these sales is still highly uncertain.

So we don't know how much we can sell in the second half of this year and when exactly it would happen.

That is why in the guidance we have excluded these.

The second element you have to take into account that for the vaccines and diagnostics for the Sandoz division, we still feel that there are some uncertainties in the second half.

In Sandoz obviously we have to see what will happen to our pending approvals for Lovenox and other products in the US.

Secondly, we have to see when the remediation of Wilson will be accepted by the FDA.

That is uncertain.

In V&D the outlook for the non-pandemic products at the moment is a bit clouded for the second half of the year.

And finally, I could add that the impact of the global recession on Consumer Health it still has to be seen how that will develop in the second half.

And given these elements in the non-Pharma divisions, we feel that it is at the moment the right guidance that we say that the group will increase or is expected to increase sales in constant currencies at the mid-single-digit rate.

Regarding Forward, I mean we have always been saying that these principles that we apply in the Forward project in terms of how we deal with purchasing, etc., that they will continue to exist at Novartis.

So we will certainly -- we do certainly expect to continue to see savings from the principles of the program.

However, certainly for 2010 we see this to be our basic business, and we will obviously strive for finding even more money and I'm sure we will.

But we may not continue to report it as Forward savings.

So you will probably see the Project Forward disappear from the radar screen at one point in time, but it does not mean that the savings will disappear.

And your third question, the Valsartan -- (multiple speakers).

Sorry, the Valsartan/Tekturna combination was filed in the US at the end of '08, and the action date is in the fourth fourth quarter.

We expect obviously to receive approval and to be selling it by the fourth quarter.

Tim Anderson, Sanford Bernstein.

A couple of questions.

The first one is about your levels of investment you did in emerging markets.

You and other companies have talked about how resources are essentially being transferred from slow growing, established markets to the faster growing emerging markets such that the overall cost savings for the organization may not be that great.

My question is at what point in the future will you have sufficiently built up your infrastructure in emerging markets to the point where the ramp up in spending begins to lessen or becomes at a steady-state?

Second question is on your meningitis B vaccine.

I'm hoping you can go into more detail on when Phase 3 might begin in the US and what exactly the FDA wants to see before you move into Phase 3.

I would also like your understanding of where the competition is in this area.

I think Wyeth is supposed to make a Phase 3 go/no go decision for their own vaccine by the end of this year, and I'm trying to figure out if they might leapfrog ahead of you in the US.

Thank you.

Joel, on emerging markets?

Okay, Tim, regarding the investment in emerging markets, it is a good question.

As you look at our marketing and sales spending in the first half of this year, in the press release in the back, you can see that it was a year ago 30.4% of sales, and this year it is 29.6% of sales.

So it is about an 80 basis point improvement in total spend -- sorry, in total efficiency of the marketing spend.

Now that includes a significant investment in emerging markets, the six that we talk about, the six key emerging markets.

So my expectation is -- your question about at what point will the ramp-up be complete -- we are going to continue to invest in those key emerging markets, but we are going to do it in a way that continues to improve the overall efficiency of the marketing spending.

So we will improve in the developed markets such as the US and Europe in a way that more than compensates for the emerging market buildup.

I have to also say that we did this in the face of all of the new product launches.

So we are still able to show marketing spend efficiency and EGM buildup, and as long as I can continue to drop my M&S as a percent of sales, then I think that is a long-term play.

Maybe I can add for the other divisions -- Sandoz, Consumer Health and V&D.

Obviously there is also significant growth, and we showed this already in the emerging markets, and we will continue to build infrastructure as well.

But the same principles apply then for Pharma.

We will certainly invest obtainable but also profitable infrastructure.

But we see this to continue for quite a number of years, because we see also the potential in those markets to be very, very significant.

Okay.

On MenB, Andrin?

On MenB with regards to what the FDA had requested, there were two things.

One was some more clinical data with regards to safety in infants, not because something unexpected was seen in the trials, but simply because they increased their standards of what they would want to have before one would start a large-scale Phase 3 study.

This data is almost completed and will be submitted in the second half of the year.

The second was in some pre-clinical data they wanted to better showcase the broad coverage that the vaccine would have if it were to be in a Phase 3.

There are about 2000 relevant MenB strains circulating in the US, and this is one of the reasons why it is so difficult to develop a MenB vaccine and there is currently none available.

You can not in a clinical trial test the efficacy of a new vaccine in all those 2000 strains.

This is, of course, impossible.

So you have to develop a model based on which we could better predict based on the vaccines efficacy in a few strains, how it would also perform in all the other 2000 strains.

And that data is currently completed, and based on an agreement with the FDA on how we would do that, we will also submit that data in the second half of the year.

And based on those submissions, then we will have a next end of Phase 2 meeting in a few months, and we will then with the FDA discuss how we would go into a Phase 3.

With regards to Wyeth and competition, I cannot comment on Wyeth.

Our vaccine and the composition of it is somewhat different to the one from Wyeth.

I mean that we can say.

And our composition is based on experience we had with a large-scale outbreak response campaign in New Zealand where we have gained a lot of experience on what could work and whatnot.

And based on that, we have feel confident that we have a good solution that could really make a difference here in developing the first MenB vaccine, which has been one of the, I would say, outstanding pillars in infancy, even in advanced industrialized nations.

So on Phase 3, is it safe to assume you might be able to go into Phase 3 by the end of the year or early 2010?

Is that the timeline --?

Yes.

If the data that we submit here is satisfying to the FDA and we find an agreement on how to move forward, then we will start Phase 3 in 2010.

Andrew Weiss, Bank Vontobel.

Congratulations on a good result.

I have two elements.

Number one, if you could go through how you see the Diovan franchise beyond 2014 remaining at $2 billion, I've still got a bit of difficulties in understanding how that franchise can be so high.

If the prices cross, most of the markets are going to be plummeting.

And number two, the Wilson plant issues there seem to be a lot of things happening there that at the beginning you suggested that it was actually a minor issue that was happening there.

I was wanting to understand is all of it necessary or just some of it coming as part of the Forward program being implemented also in the Sandoz division?

Joe, Diovan beyond 2014 --?

Andrew, starting with the question -- in 2014 why we think it will be at least $2 billion -- if you right now look at the franchise in Latin America and in Asia, parts of Asia where we are already facing generic competition, where there was never patent protection, we are right now it is a substantial business there and it is continuing to grow.

So it is in a number of countries where, for example, in Venezuela there are multiple Valsartans on -- generic Valsartans on the market.

In China there's more than 10 generic versions of Diovan.

So we have been able to prove -- so this is -- that will be unaffected by the event of the genericization in the West.

And what we are finding is that we are able to operate in those markets in ways that we build the brand -- you know, some of them are self pay markets.

So we have got very aggressive point-of-sale programs at the pharmacies that are really proving that this is a sustainable business, not everywhere.

So not where the price collapsed in Western Europe or in the US.

You know I think you're going to see it become 100% generic in the US, but in some of those other markets, it should be a sustainable business.

Can you give us an indication of the $878 million of Diovan revenues that are ex-US?

How much of that is in those type of markets where you think you have got a branded competitive advantage that will be retained?

You are talking about the second quarter?

Yes, the second quarter was $878 million, ex-US.

Yes, you know, I would not get want to get into the specifics of the country by country, but I think you can -- you know, if you look at --

Would you suggest that like one third of that business is probably associated with that type of brand capture?

You know, I would not want to speculate on what percent, but I think if you went and you looked at what markets are primarily self pay that don't have right now protection on Diovan, you could figure it out.

Okay.

Jeff, on Valsartan?

As Joerg said earlier, we continue to work closely with the FDA on remediation plans, and Andrew, we anticipate a Q3 reinspection from the Atlanta district of the FDA, which has the power to lift the warning letter.

The leadership changes with respect to your specific question around Project Forward, they are not actually related to our operational excellence initiative, which is Project Complete at Sandoz, but rather really to the need to upgrade and strengthen site leadership to really refocus the site on higher quality standards around documentation and validation where we have the issues.

We did earlier this week take a decision to close the R&D function, as Joerg had mentioned, and to refocus our R&D efforts at our East Hanover Novartis sites that were closer to our sister division, Pharma, and really can access the deep pools of talent in generics in the New Jersey area around formulation and analytical development in some other areas.

But things continue to move on track at the Wilson site, and I think what is also important to keep in mind is that Wilson is one of over 40 global manufacturing sites that we have.

And, as Joerg mentioned, we continue to ship over 30 products from the Wilson site to the US market.

Florent Cespedes, Exane BNP Paribas.

I have a few quick questions.

First, on products, on Lucentis could you give us an idea of why the performance was so strong in Q2 and how is it sustainable going forward?

Secondly, on Tekturna what could be the next short-term publication that could accelerate the ramp-up of the product?

And a question now on Wilson, on the Wilson plant, how fast the production could start after the inspection in Q3.

Is it a matter of months or a matter of weeks?

And maybe to come back on Diovan in 2014, is the first assumption to say that among the 2 billion there is a significant portion that is coming from a good resilience of the Japanese market?

Okay.

Starting with the Lucentis, you know we were very pleased with the performance in the second quarter in Lucentis.

And what is happening is, the business model that we are using to sell Lucentis is starting to get some traction.

And this is really where we are focusing more than just on the transaction to create some value around the pills, around the specific medicine.

We use that as kind of a metaphor here, value beyond the pale.

But in Lucentis's case, it is helping physicians understand how to improve their patient flow through their offices so that they can maximize or minimize the number of time spent with each patient around Lucentis and ensure that the patient flow is positive.

It is around creating disease awareness campaigns so that we continue to drive great patient populations to increase awareness of wet AMD.

So I think it is sustainable as long as we continue to execute against that new commercial approach where we are moving beyond the transaction.

Regarding Tekturna we do have a set of data coming from Stage 2 hypertension patients where we hope that we will be able to show very significant blood pressure drops for Tekturna, and that will be coming out later in the summer, so later this summer.

I do think -- (multiple speakers) of Tekturna performance.

If you look at Tekturnas' performance to date, it is 120 -- almost $130 million sold this year.

Tekturna could approach $300 million this fiscal year, and that is without much data.

So it is -- I'm starting to become more and more positive on it.

So you expect to release some data at the ASC Congress in August?

The ASC -- yes, yes.

And then regarding -- you want me to just jump to the Diovan?

Yes.

Your question about Diovan and also Japan -- I probably should have mentioned Japan in the previous answer.

Because as you look at generic penetration in Japan, it is very low.

And, in fact, even though the government is trying to increase generic penetration more quickly, there is a natural cultural resistance to it.

So the fact that we've got a significant proportion of Diovan in Japan I think provides a -- will provide a significant business for us in that country post-2014.

Okay.

And then the Wilson story?

As to how fast we could -- this is Jeff -- as to how fast we could restart production at Wilson, as I mentioned earlier, we are continuing to produce a broad number of products at the Wilson site as I mentioned in response to Andrew's question.

I think your question probably specifically was referring to the new products we recalled --

Yes, of course, yes.

(inaudible).

Omnitrope for competitive reasons we are not to speculate as to when we will bring the products back on market.

(technical difficulty)-- some of the other products.

The (inaudible) will resume production after the warning letter is lifted.

It can move forward.

Thank you, Jeff.

Graham Perry, Merrill Lynch.

Firstly, just on the swine flu contraction, the HHS, I was wondering out of the sort of current yields you are getting, how many doses those two contracts would equate to?

And given the low yields, there will actually be takeup in the majority of your capacity, i.e.

you would not have many scope to fill orders from other countries.

Is the product also going to be on a fairly standard marginal with low yields?

Meaning this is going to be a much lower margin product than your seasonal vaccine?

I was wondering if you could help with timing, the realization of orders?

Do you just think really a handful of orders or deliveries at the end of this year, most of this is really going to come through in 2010?

And then on Project Forward, you are exceeding your goals, but you're still not really beating numbers or raising your group guidance, so I was just wondering what is happening to the savings, what proportion is being reinvested versus what proportion is maintaining margins?

And then just a quick question on healthcare reform.

You referred to the impact as being moderate and manageable.

I was just wondering if you could help us by defining what moderate is?

Is that a 5% to 10% profitability impact or a 2% profitability impact?

And on the manageable part of that statement, I was wondering what steps you think you will have to take to actually make that manageable?

So let's start with H1N1.

Andrin?

Yes, I think you know with regards to contracts like the ones at HHS, I think the first important thing to emphasize is that those contracts and the values that are given in the press are, of course, theoretical values.

I mean all these contracts are set up with assumptions and clarities discussed with the partners about uncertainties in terms of what is going to happen in the months to come.

With regards to the impact of the yield, I mean all contracts clearly specify that delivery of any vaccine will depend amongst others on the yield.

So also a US contract in terms of execution, there would be more or less doses delivered at a certain point in time depending on how the yields will look like.

The same is true for our other contracts as well.

But, of course, the yield is not the only uncertainty with regards to when potential sales could kick in.

Clinical trials are the second one.

We will see first results at the end of September, and for the large-scale, more [field] bottle studies probably will take even a bit longer.

So it is simply too early right now to say how much we can really deliver at what point in time.

We said in the past that we would have capacity for about 150 million doses and to be produced this year if everything goes well.

This was under the assumption of a normal yield as seen with seasonal flu.

Right now the yield is significantly lower, and WHO is commenting on that and probably between 30% to 50% of what was a normal seasonal yield, and then, of course, potential deliveries would have to be adjusted for that.

Given the uncertainties, it is too early to speculate on profit.

It is clear that the more we can deliver, the higher a profit would be given that most of the production costs are fixed.

So the yield will make a big difference there.

On (inaudible), Joe?

Yes, based on what is happening in Washington, things are changing pretty rapidly.

So obviously we don't know what the full impact is going to be.

But if you just look at where we think it is going to come out, I used the words moderate but manageable.

And rather than put 2%, 5% on it, what I mean by that is that we're not going to use this as an excuse for poor performance.

So what it means is, look, we are going to have to get the specific actions that we are going to have to take once we determine what the total cost will be from a Novartis Pharma standpoint.

We are going to have to take more aggressive action on the procurement side and the sourcing side.

I think I have said before that when I first came to Pharma only 3% of our indirect spend, which is a multibillion dollar spend, had been pushed through an e-sourcing event.

Now we are now up to 13% of that indirect spend push through e-sourcing, but that number has to be up 20%, 30%, 40% quickly.

So we are going to have to get much more aggressive on the sourcing side, particularly in the US.

The second key area that will help us offset is that if you remember back a year ago, we moved to a geographic structure from a salesforce standpoint, not just because we wanted regionalization, but because it was going to force better resource allocation decisions down to the BRIC level in the US.

And I will tell you that I'm very pleased with the progress that we are making already.

Once we put those general managers in place in the regions in the US, we are really seeing a new approach to more appropriate and better resource allocation on the field force.

So I think those are two big areas that will help us to manage through healthcare reform.

And you did mention R&D in there, Joe.

I mean is that still a sacred cow?

Do you think that the performance might change your thinking on the return on invested capital of investing in R&D in any way?

You know at this point we are still saying that we want to keep that number at 20% of sales or better right now.

But I will tell you we are very aggressively going in to the development side of it, and we are looking at process improvement and leaning certain operations in a way that can help us reduce total cost of development.

But at this stage because we have so many good projects to fund, we are saying that what we save in R&D is going to be reinvested so that we can maintain that strong pipeline because it is so critical through 2012, 2013 and 2014.

You asked about the forward savings and how much is falling to the bottom line or how much is reinvested.

You understand that this is almost impossible to say because obviously the savings and the money that (inaudible) that it is in the end very difficult to say where the increase in operating income or the improvement in the operating margin is coming from whether it is growth or savings and so on.

But what we know for example there are forward savings in marketing and selling.

We reinvested significantly in these emerging growth markets and in the launches.

Despite this our marketing and selling as a percent of sales is down.

So that clearly a portion of the savings are dropping to the bottom line.

Singularly you know our investments in R&D, we could not do without the savings there.

But again all these things are fungible, and we don't -- we are not in a position to say so much as dropping to the bottom line and so much is reinvested.

Brett Kaplan, Cowen & Co.

Maybe a couple of questions on the pipeline for Trevor.

On FTY720, any update in terms of infection rates on malignancies that you could give?

I know that the data is coming in Q4, but you had previously press released any serious adverse events?

And then maybe just given that you are close to the QAB149 approval in October, any visibility on where the FDA is thinking about the COPD indication?

And then last question on Lovenox generics, what is the difference between the Sandoz and the [Ebavay] Lovenox generic given that one has got tentative approval and one has not, and is there a chance for Sandoz to rather use the Ebavay generic once the deal closes there?

Thank you for directing a question to me.

On the FTY front, really no change in the safety profile from my Q1 update.

In the infection area, we have seen no unusual infections or any deaths from systemic infections, no PML.

On the QAB front, the submission progresses well, particularly on the technical side which is always an issue.

We do have this action date in the second half of the year.

As you know though, it has been the case with the FDA that the average time to approval for these inhaled has been 18 months, which would push us into 2010.

So although we might be hopeful, we are looking at that average as probably applying to us.

We would look at approval and launch in 2010 for QAB.

Jeff?

So, Brett, I think your question was on Eloxatin or Oxalyplatin, not on Enoxaparin, which is the generic for Lovenox.

That is right.

Sorry about that.

That is okay.

So Sandoz was granted a summary judgment of noninfringement in mid-June by the New Jersey District Court regarding the Orange Book patent.

That was the case that was brought by Sanofi-Aventis following our Paragraph IV filing.

But really for competitive reasons, I cannot comment further at this stage.

We are also pretty close with Mayne, but there are certain elements of the legal proceedings that have not yet worked out.

Because you probably know the patent does not expire until 2013, but the automatic 30-month stay winds up on August 9.

So we would have to wait for a final judgment on all the patents.

[Dennis Aremper], Goldman Sachs.

I just wanted to follow up on the hypertension franchise.

Could you just talk us through the outcome studies on Tekturna in terms of avant-garde and accelerate and the timing of when we might get the data on those studies?

And just to come back on the Diovan franchise, Joe, you mentioned the Latin and Asia were a large portion of Diovan.

Can you actually put some numbers to that?

What proportion of Diovan comes from Latin and Asia today, and what kind of growth rates have you seen historically from that franchise?

And then I wanted to just ask Raymund just with regards to the tax rate outlook for the full year, should we expect around the 15% level?

But going forward should we expect any sort of change in that underlying assumption based on sort of a profitability mix?

And lastly, related to working capital, can you just talk us through where you are seeing significant improvements in the working capital development?

So Trevor?

Certainly ASPIRE HIGHER program.

You know the first real outcome study that I would focus on would be the study in acute heart failure, which would come out toward the end of 2010.

That is the Astronaut Study.

The big study coming out in 2012, ALTITUDE, is looking at diabetics and looking there at progression of diabetic arthropathy and other cardiovascular events.

That is an important study for us.

And then finally, the chronic heart failure study, which comes out in 2013/2014, these are both event-driven studies.

So it will depend on the number of events.

But those are the three critical studies that we are looking at over the next three to four years.

Regarding Diovan, in these markets where we are seeing generics already in the market and where we are primarily -- these are primarily self pay markets -- we are seeing the franchise grow, the Diovan franchise grow in the high single digits.

So about consistent with where it has been on a total global basis.

And part of it is because we have had a number of years to get the model right and what kind of relationship marketing we need to do.

It is almost a branded generic strategy a little bit, but still able to command a significant premium over the generics in those markets.

I would hesitate to try to break out what percent of Diovan is in those markets.

I think it is fair to say that if you look at our forecasts and you look at the fact that in Japan in 2014 you will still have a significant business in some Latin American markets and some other Asian markets like China and others, that is how we got to our something more than $2 billion forecast.

And with regard to the tax rate outlook, two elements there.

Going forward we feel comfortable that the tax rate should be in this range of 15% to 17%.

From all the information that we have and from our business plans, that seems a very feasible range for the foreseeable future.

There is one proviso to it.

I should mention that the pandemic signs in vaccines, if we have sales there, those sales will be taxed at a higher rate given the production sites and the mix of countries.

So those sales you probably would have to tax at the rate in the 30% to 40% range.

But for the ongoing other business, the range that we expect is 15% to 17%.

The working capital improvement, the biggest improvement we expect in inventory reduction and in particular in pharmaceuticals.

Well, let's take two more questions.

Kevin Wilson, Citigroup.

Two questions on the emerging markets and one on biosimilars.

On emerging markets your aspirational target of doubling Pharma in the emerging markets as a percent of the portfolio, does that -- is that an aspirational target based simply on the organic growth of the business existing and new product launches, or do you think you will need to make some acquisitions in order to achieve that?

And secondly, what guidance would you give us on the impact that that growth will have on margins, and in particular I am thinking about how far out do we have to go before emerging markets have to bear some R&D costs, which I guess may not be the case at the moment?

And the question on biosimilars is simply can you give us some sense of what you are actually selling, either as a percent of Sandoz or even, indeed, the aggregate sales in the quarter of the biosimilars if that were up 62% underlying?

Okay.

Regarding the first question on the target for EGM doubling the size of -- or the percentage contribution to that business, that is purely organic.

When we picked the six markets that we said we were going to invest heavily in, they had to be markets where we had good infrastructure, a good capability to really grow organically, and they also had to have some level of critical mass from a sales standpoint today.

So this is pure organic growth, and it is based on plans that we obviously have in place.

So specific plans, specific forecast, but I will say a lot can happen because it is a very volatile region.

Regarding the impact on margins, the way to think about our emerging growth market strategy is, while we are investing heavily in a merging markets right now to build up the capability in that market, if you look at the -- they are right now only -- I would not say slightly, but they are somewhat below the Pharma global average margin.

We have said that before.

And what that means is that we must improve margins disproportionately in Western Europe and in other parts of the world where we can so that in total we can meet the total Pharma global operating income objectives and operating income margin objectives without using the EGM buildup as a reason for dilution.

So as long as -- it's an algorithm that all has to fit together.

So the buildup has to come at a point where we are not destroying margins, and then also to fund that buildup, we have to disproportionately grow margins in some of the other more mature markets.

With respect to biosimilars, I think in the past we have reported on our biopharma division, which Kevin includes our third-party biotech collaborations business.

We don't break out our biosimilars sales, the 62% growth that you referenced, for competitive reasons.

As to what we are marketing today, as you are probably aware, for example in Europe no other company in generics has more than one approved marketed biosimilar.

We have three in Germany alone, for example.

EPO, as well as our Filgrastim, which is the reference product for Amgen's Neupogen, as well as our third product, human growth hormone, which is Omnitrope we also sell in the US, and that is where Joerg mentioned that we received approval in Japan and also the first-ever biosimilars approval in Canada earlier this year.

But as for breaking out the specific number, we don't do that.

Biopharma as a division represents a little under 3% of our sales globally.

Okay.

We come to the last question.

Marietta Miemietz, Societe Generale.

The first question on restructuring, please.

Just in terms of Sandoz, the specific measures there, can you give us any feel at all for timelines and cumulative savings potential and how much in savings has already been realized?

Because my sense at the beginning of the year was that you were really making a very serious effort to get the Sandoz margins up to restructuring.

My second question still relating to the swine flu contract, I'm still trying to get a feel for how much risk there still might be that a part of these contracts in the US does not actually rematerialize.

So I'm actually wondering is there a timeline where you need to have delivered to the US governments or else they can go to your competitors?

Or is this basically -- are you definitely going to get that $1 billion whenever you can deliver?

And you are saying you are still in talks with about 35 other governments, but realistically how much incremental capacity would you actually have at the moment to offer to these governments?

I still am not quite sure, is there actually any competition right now or going into 2010 between the seasonal and the pandemic flu vaccine productions?

And then I just had a very quick question on Galvus.

Can you just update us on your US plans?

Because you were saying a few years ago that maybe towards the end of the decade you might try to refile with the FDA after being able to show some proposed marketing surveillance data in Europe.

Trevor, should we start with Galvus?

Right.

That is simple.

We have not changed our plans in the US.

At this point we don't have a plan to refile.

But we are certainly watching the situation very closely with the other DPP-4 inhibitors.

Jeff, on Sandoz.

Yes, Marietta, we continue to really focus on Project Compete, which is a cross-functional effort to really drive cost savings in tech ops and marketing and sales and G&A and in development.

And we have made significant progress.

We are well ahead of internal objectives.

But a lot of that is baked into our targets for the year.

If you look at, for example, in Italy and Spain and Portugal, the restructuring has progressed, and those markets are showing significant improvements in profitability.

With respect to margins, you saw that in Q2 our margin was 13.9%.

That is versus 12.6% last year.

Q2 is always a bit lower than Q1, which is seasonality influenced and significantly higher because of anti-infective sales, which are higher-margin.

But we continue to make good progress against our restructuring plans internally.

And then Andrin, H1N1 again?

Yes, so I want to explain again that the contracts we have signed also with HHS are yield dependence.

So if the yield reduces -- I mean then any country will get less supply at a certain point in time.

This will ensure that we can actually deliver too many governments and would not suddenly have to deliver only to one if the yield gets lower, because I don't think that would be in the best public health interest.

The contracts aren't generally binding.

So a yield would be lower or for, let's say, regulatory reasons the timelines would be delayed, then the shipment would happen at the later stage.

It is not that governments could not simply change their minds or go, for example, to a competitor.

Not that I would be worried about the competitors because I think there is more demand than what the industry can supply, and it will be impossible, especially if the yield is lower to get supplies somewhere else.

And, of course, if the timelines eventually are such that a certain amount of delivery could only happen at a moment when vaccination would not make sense anymore, I think then, of course, one would not force that into the market.

But we are far away from that.

And with regards to a seasonal versus pandemic vaccine, for this year we said that we have produced and expect to sell the same amount of seasonal vaccine as last year, and I think that makes a lot of sense because seasonal vaccines are still needed, especially for the elderly.

For 2010 it is too early to tell how that trade-off would be made.

It is fair to expect significant demand for a pandemic vaccine also in 2010, especially from Southern Hemisphere countries that will go into the next flu season then.

And I think to what extent there we would have to make a trade off between producing more H1N1 versus starting the next seasonal campaign is not decided yet.

We will, of course, to a large extent wait on the guidance from WHO that normally gives us direction in terms of what is needed to make the right trade-off.

Thank you very much.

Okay.

With that, I would like to thank everybody for their attention and interest in Novartis and we close the call.

Thank you very much.

Good-bye.

Ladies and gentlemen, the conference is now over.

Thank you for choosing the Chorus Call facility, and thank you for participating in the conference.

You may now disconnect your lines.

Bye-bye.