Novartis AG (NVS) 2009 Q3 法說會逐字稿

Good morning and good afternoon depending on where you are attending from.

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

Welcome to the Novartis Q3 2009 sales and results conference call.

(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.

Daniel Vasella.

Please go ahead, sir.

Thank you very much.

Good afternoon and good morning, ladies and gentlemen.

It is my pleasure to be this afternoon with you to discuss the Q3 sales and results of Novartis.

I have with me as presenters Raymund Breu, the CFO; and Joe Jimenez, the CEO of our Pharmaceuticals business.

Then also in the room here and able to answer any questions you might have later on is Joerg Reinhardt, the Chief Operating Officer; David Epstein, the CEO of Novartis Oncology; Jeff George, the CEO of Sandoz; George Gunn, CEO of Consumer Health; Trevor Mundel, the Global Head of Development in Pharmaceuticals, and Andrin Oswald, CEO of Vaccines and Diagnostics.

With that, I am turning to towards the Safe Harbor, read by John Gilardi.

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

These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements.

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

Thank you very much, John.

With that, I am turning to slide number four, and we see here that sales reached $31.3 billion, an increase of 8% in local currencies.

Operating income rose to $7.3 billion, up 11% in constant currencies, excluding exceptional items.

And if one looks at these results, one can see that we had a strong underlying growth year-to-date, which was led really by the Pharma double-digit expansion, which we will discuss a little bit later.

What is also positive I think is the progress we have achieved in innovation.

One, with the approval of the anticancer therapy Afinitor, which has a lot of promise for additional indications which we are investigating.

We have a large Phase 3 program underway.

Then the new biologic, Ilaris, which is approved for a rare indication, CAPS, for a start.

But again, we have very promising results in additional indications.

The H1N1 pandemic flu vaccines and the positive data, Phase 3 data on QAB where we have received also a positive CHMP feedback in Europe, while in the US it will be delayed for a while, and then FTY720 with very positive results.

So we are on track for record sales and earnings in constant currencies, and depending on the currencies, we might even make a full year of record results in dollars.

But that future will tell.

Turning to slide number five gives you the details of -- some details of the P&L.

There I would just like to point you towards two factors.

One is that net income has declined by 8% in dollars.

And there we have really a few one-time items.

One is the income from associated companies -- Raymund will go into more details later on -- the Alcon financing, and then a little bit higher tax rate this quarter than we had in the past.

The free cash flow had a very positive development, and that has also to do with our capital management and inventory management, which we are putting more attention now and in the future than we did in the recent past.

Slide number six shows you the performance of individual divisions -- Pharma, Vaccines and Diagnostics, Sandoz and Consumer Health.

I will come back to that.

Just maybe one word on Vaccines and Diagnostics.

You have to be aware that in the previous period we had still sales of the bird flu, and these were not compensated by swine flu sales yet.

So these sales will be booked -- will occur in the fourth quarter only and not in the third quarter.

And then we had low TBE sales -- so tick-borne encephalitis sales this year.

But, otherwise, the business has developed nicely.

And I'm very confident that we will in the end have a good year for vaccines due, of course, to also the swine flu vaccine sales in the fourth quarter.

Slide seven shows how successful we have been over an extended period of time in getting approval for new products.

And slide number eight gives you a little bit more detail what we achieved this year.

In quarter three you can see Extavia, Tekturna, Valturna, which I think is a promising combination between Rasilez and Diovan, which really offers an opportunity to safeguard a considerable amount of Diovan sales.

It is working very well and well tolerated.

Then we also got tacrolimus approval in the US, which allowed among other things to turn around the performance of the Sandoz business in the US, and that was a very welcome development.

Then in Europe importantly QAB149 with a positive CHMP recommendation, which generally will be followed in a number of other smaller approvals.

So if we looked at slide nine, I think we are well underway in 2009 to deliver on the priorities we have set, and we have a number of products which are in a global rollout mode -- Afinitor, Extavia, Lucentis, Rasilez to name the most important ones in Pharma.

And then also we have seen a positive trend now in Q3, and hopefully this will continue in Q4 in the Consumer businesses where we have seen that after a rather difficult beginning of the year in OTC now that consumers are buying.

And we have with our cough and cold range, of course, also a good range for the current season.

We work and we will continue to work very hard to improve our productivity.

That is not really an option.

It is a must because we will also in the future face some headwinds in pricing in Pharmaceuticals.

But I am confident that we have room for further improvement as to the way we operate.

With that, I would like to hand over to Raymund.

Thank you, Daniel.

I can share with you a few data points on non-operational items.

I'm on slide 11, and I put them into the context of the Q3 numbers.

But these elements obviously then apply to the year-to-date numbers as well.

If you look at the Q3 performance, you can see that the underlying operational performance continues, but that the reported numbers have benefited from better currencies.

But on top of it, operating income being up 13% has benefited from an exceptional item where in 2008 we had an impairment of $225 million.

If you correct for these exceptional items and if you correct for currencies, then you still have an increase in the operating income of 9%.

So clearly a margin improvement even on a corrected basis.

The net income is only up 1%, and the reason is related to special non-operational factors, which I now can explain on the following slides.

On slide 12 you will see the impact from associated companies is fairly negative in the quarter.

Similarly the financial result [is found in] financial expense, and then the tax rate is up from 14% a year ago to 15.2% in this quarter.

And the 15.2% is our current estimate for the full-year tax rate as well.

On the next slide, you will see there the deterioration in associated income is coming from and related to two special events.

One, in the Roche contribution, we had to account for the Genentech restructuring, and our share in the one-time Genentech restructuring expense was $97 million.

Similarly, in the associated income from Alcon, we had to impair an intangible to the tune of $92 million since Alcon has decided not to continue the development of this R&D project called [Retain].

On slide 14 we give you the breakdown of the financial results.

The swing to a $122 million expense is explained, one, by a lower income.

Income is down 27%, and this is a result of much reduced yields in the financial markets given the very low interest rate environment.

So the average yield here was 1.7%.

Second factor, interest expense is significantly higher at $129 million, up 47%.

This is a result of the US dollar and euro bond financing that we did in the first half of the year.

Then I'm moving to slide 15.

We have indicated that we will switch to core EPS with the full-year results of 2009.

Why are we now intending to change the focus of the presentation?

Two reasons.

One, to allow the shareholders and you to have a better insight into the underlying performance of the Group.

And secondly, we feel that this makes our numbers more comparable to what our large pharmaceutical peers report already.

On slide 16, we give you an indication for Q3 what the major adjustments will be and have been in Q3.

We would adjust for amortization of intangibles.

We will adjust for impairments or write-offs.

Further, we will adjust for acquisition-related restructuring and integration expenses and then for exceptional items, but only if they exceed a threshold of $25 million.

Typical items will be litigation provisions or exceptional settlements or other restructuring expenses.

Finally, the various items will be corrected in the associated income line.

So amortization, impairments and restructuring expenses will be adjusted there as well.

In the appendix to the slide presentation, you will find re-stated numbers for all quarters of 2009 and for the fourth quarter -- and for all quarters of 2008.

So that when we will go into the fourth quarter reporting at the full-year results report, you will be able to update all your models to the new basis.

Finally, on slide 17 you see the impact or the comparison of core EPS to reported EPS.

Operating income will be approximately $325 million higher when you only look at core operating income.

And core net income will be $567 million higher in the quarter or 26% higher than reported operating income since we have significant amounts for amortization and impairments and exceptional expenses.

With that, I hand over to Joe Jimenez for Pharmaceuticals.

Thanks, Raymund.

So starting on slide 19, the Pharma division had a good third quarter.

So I think we are executing well on the new launches, and this is driving our top line.

Our cost savings efforts are driving operating income ahead of sales, and we had some very strong pipeline news in the third quarter, which I will talk about in a minute.

Slide 20 shows our net sales in the third quarter, $7.2 billion, which is up 11% versus year ago in local currency.

The OpInc up 27% in US dollars, but as stated earlier by Raymund, this was inflated due to a suppressed base.

So if you take out the charge that we had a year ago and currency, our organic operating income was up 16%, still well ahead of the 11% sales growth.

Slide 21 shows that our sales remain at the top of the industry as measured by IMS.

This is driven by the new product launches, but it is also due to a solid base business.

Most of the compounds are up mid to high single-digit growth.

If you look at 22, our strength continues to be broad-based across all therapeutic areas.

Among the fastest-growing is neuroscience and ophthalmics behind Lucentis.

In the third quarter, our Lucentis business was up 60% versus a year ago.

Twenty-three shows that the new launches are steadily becoming a larger percentage of our portfolio total.

So in the third quarter, they were 18% of our total sales and reached $1.3 billion in total sales.

These launches, as shown on the next slide, are really helping us to jumpstart growth in what has previously been some stagnant countries such as Japan.

You can see here the level of new launch activity in 2009.

It is leading to IMS sales up almost 11% versus year ago in Japan.

And in 2010 we have a number of launches planned, which will be important because we do face the biannual price cut in Japan in 2010.

Now the next slide shows our hypertension franchise, and we continue to perform very well.

I think the third quarter shows that our plan to shift the portfolio away from Diovan is working.

So this franchise in the third quarter was up 8% versus year ago, and that is despite the fact that Diovan growth was only 2% in the quarter.

So we are continuing to shift sales and marketing resources towards Tekturna, Tekturna HCT, Valturna and Exforge as Exforge has data exclusivity far beyond the Diovan patent expiration in certain regions of the world.

Our cost savings efforts are shown on 26.

It has really been critical to our margin improvement.

So to date we have generated over $700 million in savings, and this is primarily through procurement and marketing and sales.

On slide 27 I want to remind you of the three growth drivers that will help us get through the Diovan patent expiration -- the current launches, the late stage pipeline, and emerging growth markets.

Now since we had so much news around the pipeline, I would like to spend some time talking about that.

So look on slide 28, starting with Tekturna -- I'm sorry Tasigna, this week we released topline results of the Tasigna/Gleevec head-to-head trial.

This was the largest head-to-head trial among newly diagnosed patients in CML.

And we are very excited that we met the primary endpoint and delivered significantly faster and deeper major molecular response.

So we are going to be releasing the full data at ASH in New Orleans in December.

The next slide shows our two-year Phase 3 study on FTY delivered very encouraging results.

So if you look at the charts, the 0.5 milligram dose delivered a 54% reduction in relapse rate, and a 30% reduction in disability progression, but probably more importantly, the 0.5 milligram dose had a safety profile that looks very good.

So we are very encouraged by that.

Slide 30, we were, as Dan said earlier, pleased to receive positive CHMP opinion for both doses.

So right now I will tell you that the European operation is preparing for launch once we get the EMEA approval, and that will begin in 2010.

And while we did receive the complete response by the FDA, we had I think previously said we did not expect first round approval, and we will be working with the FDA to do what is required to get QAB approved in the US because this is a very powerful bronchodilator with a very good safety profile.

Slide 31 shows that we also had very positive Phase 2 results for ACZ in gout versus standard of care, which is an injectable corticosteroid.

We had better efficacy, faster onset, and importantly, over a 90% reduction in the risk of flare recurrence.

So the other important point here is that there are over 3 million patients with chronic, difficult to treat gout who could eventually benefit from ACZ once approved.

And then finally, we recently announced two new in-licensing opportunities.

The first is iloperidone under the name Fanapt.

This is already approved in the US for the treatment of schizophrenia.

We will launch in early 2010, and this is a US and Canadian license.

And then also PTK-796, which is a broad spectrum antibiotic with both IV and oral form, and we will be launching post-2012.

This is a good complement to our current pipeline of antibiotics.

So to summarize, we are executing well, we are strengthening the pipeline, and we now expect double-digit sales growth for the full year 2009.

Now I will turn it back over to Dan.

Thanks, Joe.

Sandoz, if you look at slide number 35, had a third quarter which was in line saleswise with Q1 and Q2 in local currencies, and you can see that in retail and biosimilars sales in the US we had a clear improvement, which I mentioned earlier.

More importantly, I think, we were able to slightly increase the number of new approvals, which is critical in this business, and I'm sure that the EBEWE acquisition adds here potential as we are not only strengthening the injectable line in the oncology line, but also have a strong pipeline, which is waiting there.

We were pleased that the FDA reinspection of the plants that were in Wilson was without any complaint and passed well.

And in order to make up for price pressures which Sandoz is under as a generic manufacturer, we look at about 8% to 9% price decreases per annum.

Productivity programs are crucial, and our program COMPETE is leading to very good numbers.

Consumer Health, with their three businesses -- OTC, CIBA Vision and Animal Health -- saw a very strong third quarter.

In OTC we have the momentum of cough and cold, CIBA Vision doing very well also in the US market, regaining market share, and Animal Health had a US performance and Aqua) business performance, which was strong.

What will, of course, have a deep influence in the fourth quarter then and in the near future is the Prevacid launch.

It is the first once-a-day pill which covers really 24 hours of heartburn, and positive is the three-year Hatch-Waxman marketing exclusivity, which has been granted.

So we have a chance to really make Prevacid 24-hour a top five OTC brand in the US.

Now Vaccines and Diagnostics, I will just talk about vaccines.

We were, of course, confronted with a massive demand.

The demand exceeds our production capacity by far, certainly in the short term.

But we were also confronted as others in the industry with a strain, seed strain, which had very low yields, about 22% of a normal influenza yield.

And so the overall volume we were able to produce was somewhat constrained.

But we started to ship in the US and in Europe.

We also started to ship MF59 to various countries -- so either in a finished form or separate depending on the country -- and we continued to produce at very high intensity in all of our sites in the UK and Germany and Italy.

In fact, we have transferred almost 300 employees from other divisions to help out in manufacturing in vaccines.

So we could increase the volumes and produce seven days a week.

We received FDA approval on September 15 for Fluvirin in the US and in the EU for Focetria in September 29.

We anticipate that for our new cell-based product we will get approval in Q4.

Here it is not very clear when exactly, but we are fairly confident that in Q4 this will happen.

Quite large trials still ongoing.

Over 8000 subjects are still involved in clinical trials.

But what has become very clear from the first results is that even with one injection you can get a very good coverage, over 70% positive response rates; and even with low doses of 3.75 micrograms in adults up to age 50 roughly and after age 10 you get a very good response.

In the elderly you need a little bit higher dose when it is augmented with MF59.

Which is also -- a government can vaccinate many more people than if they use unaugmented vaccine.

Overall we expect the year, and I'm on slide 40 now, to be a good year for Novartis overall, reaching hopefully record results not only in constant currencies.

We have a number of products which were launched or where we have received positive feedback, and I don't want to omit that in vaccines we have Menveo, which is hopefully going to get approval in the first quarter of 2010.

So that will also be a very important product to have less cyclical sales in this division.

Productivity efforts will continue to go on in 2010 and beyond, and, of course, we are looking like Joe mentioned to increase dynamically the sales of new products to anticipate the patent losses we will see after 2012.

Of course, these products will not go to zero.

We have still hundreds of millions in sales of Neoral and Voltaren; and on the other side, of course, the life will be in innovation.

Slide 41 summarizes our outlook for 2009.

The big swing factor in quarter four are the H1N1 sales, and I'm sure we will come back to that question a little bit later when we open the Q&A, which, in fact, I would like to do right now.

(Operator Instructions).

Tim Anderson, Sanford Bernstein.

A couple of questions, please.

On the recent FDA decision on indacaterol, I guess I have some concern that this represents something that seems to be happening with Novartis in the US too often, which is that in an effort to get to market quickly you are not delivering what FDA wants.

And in the case of indacaterol, I think that abbreviated Phase 2 trial looks like it could jeopardize the timing of various combination products, which then ends up backfiring on that initial speed to market approach.

So I'm wondering if you can give any perspective on your approach to this sort of thing in the US.

The second question is on R&D spending and really longer term.

I am wondering if and when Novartis might give some form of guidance on what long-term R&D spending might look like given that, as a percent of revenues, you spend a fair bit more than your peers when looking at the Pharma P&L.

I'm wondering if that is the sort of thing that might be delineated more clearly once Jon Symonds comes on board?

Trevor?

Yes, on the indacaterol, so just to refresh our minds on the situation, we have the positive opinion from the CHMP in September 4 for indacaterol.

So this was approved in 10 months at both of the submitted doses, 150 and 300, which was somewhat of a record in the recent past few years for an approval.

So really looking at a very good profile in terms of risk and benefit.

We now have the complete response at 10 months of review in the US.

We have indicated previously, as you know, that the cycle in the US has taken an average of 18 months.

So this was to some extent not unexpected.

We now have the standard process; we have to negotiate what is the data package that would address some of the concerns around dosing, and that will be negotiated in the next couple of months.

We do have some ongoing clinical studies, quite a few of them, which could actually comprise that data package.

But that will be the negotiation.

So I think that I can give you further update towards the end of the year in the situation in the US.

I don't think that it is a generalizable circumstance.

The Phase 2 study that you referenced was a study that we had pre-agreed in terms of its design with the FDA.

So we will look at what the data package is, and we will get back to you.

And are you fairly confident that they are not going to make you look at a 75 milligram dose in the usual Phase 2 sense?

Tim, the negotiation will be around the current data that we have and this new data that we have not yet submitted to them.

So I would not want to speculate before we have had that discussion as to what exactly the outcome would be.

Okay, thank you.

And Tim, regarding the R&D question, we have said previously that for the foreseeable future we want to keep R&D spending as a percent of sales very close to where it is.

So around 20% of sales in the Pharma division.

Now we know that that is at the high end of the range, but we also know that the productivity of our -- and you can see it by our launches -- what we are getting out of that pipeline is substantial.

So that does not mean that we won't increase productivity in R&D.

We will; but we will reinvest that money in new ideas like iloperidone, like PTK.

There are a number of ways that we can strengthen the pipeline while improving productivity but maintaining a high level of -- relatively high level of spend.

Thank you.

Yes, and if I may, Joe, I would just say instead of spend, I would use this word investment.

So it is really an investment in the future, and we know unless we do that we will not have the results afterwards.

Thank you.

Matthew Weston, Credit Suisse.

Thank you and good afternoon, gentlemen.

Two questions, one on products and then one on Vaccines and Diagnostics.

Regarding products in Pharma, Q3 seemed to be an inflection point for the growth of three.

Diovan in the US and Gleevec ex-US both seem to see a marked reduction in their growth rate from previous quarters, whereas Lucentis obviously saw a marked uptick.

Having had a stable growth rate of around 40%, it has now leapt up to 60%.

Can you walk us through each of those product dynamics in those geographies and explain why we saw that step change in growth?

And then regarding Vaccines and Diagnostics, clearly at the moment the business on is on the cusp of profitability, and we now have this very large arrival of the pandemic flu revenue in the fourth quarter and rolling into Q1 next year.

Raymund, can you give us some help in terms of how to model that in terms of the margins we should anticipate on that business?

How many of the costs have already been taken because manufacture is ongoing, and therefore, what will the profitability be?

Okay.

Starting with the Pharma products and specifically Diovan in the US, we did see a softening of Diovan in the US, but it is a function of two things.

The first is the recession in the US is leading to more switching we believe to generic ACEs and CCBs.

So Diovan within our category is maintaining share, but total ARBs are quite soft because of that switching.

But the second and more important point is that we are pulling resources off of Diovan and putting them on -- I'm talking about sales and marketing resources -- on Tekturna, Tekturna HCT, Valturna in a way in the US that will prepare for the eventual patent expiration of Diovan.

If you think back two years ago, who would have thought that we could generate 11% top line sales growth with Diovan globally only contributing two points?

And to me it is quite encouraging that the strategy that we have embarked upon of shifting resources to the new products is helping.

So we are not happy with where Diovan is, but we are pleased that from a total hypertension franchise we are growing and we are gaining share.

Regarding Gleevec you really have to look at Gleevec year-to-date sales ex-US or even globally to get the best predictor of its organic growth rate, and that is about 12%.

So we did in the third quarter see growth of only 6% on Gleevec, but it was almost 100% driven by the timing of some tenders that occurred in a couple of key emerging markets.

So we don't believe that there is any fundamental issue with Gleevec.

And then Lucentis is just firing on all cylinders.

You know I think we have got this thing figured out in that from a disease awareness campaign standpoint that we have going on in a number of countries, together with helping retina specialists with the layout of their clinics so that they can improve the flow of patients, and then together with innovative pricing schemes that we have been able to put in place in Europe to ensure rapid and full reimbursement.

So those three things are working together to really drive nice growth.

I have one quick follow-on, which may be better to take before Raymund comments on vaccines.

Regarding Diovan, given the accelerated generic switching that you highlighted, how do you envisage those trends changing when we have generic Cozaar at the beginning of next year?

Is that going to accelerate that decline, and what plans do you have in place to counter that?

You know, I do think that when generic Cozaar comes, there will be an impact on Diovan.

I also think, though, that the switching that we are seeing to generics today is largely driven by the recession in the US.

So I would say that long-term or depending on how long you think the recession is going to last, that part might become mitigated.

But I do think it would be fair to say that you should expect that when Cozaar goes generic in April that there would be an acceleration of that Diovan decline.

And then on the question on vaccine profitability you have to understand that I am not in a position to give you an outlook on the gross margin of this H1N1 business.

All I can say is the following.

Obviously the fixed cost of the production or the fixed cost of the selling effort has already been spent.

Now the cost that we had for the production, the variable costs and so on, that is currently [seeping] in the inventory.

And depending on when this inventory will be sold and at what price, will then have an impact on the profitability for the period.

It will be in our expectation a very profitable, a profitable business, but I cannot at this point and I don't think I should give you guidance on the gross margin that you could expect.

But it will clearly elevate the profitability of vaccines and develop at a much higher level.

Maybe to build on what Raymund has said, one needs also to take into account the pricing variation which we have.

Andrin, would you say two or three words about that?

Yes.

So, I think we expect to produce 100 million doses by the end of the year, despite the very low yields.

And I think clearly, as said before by Daniel, the demand is outpacing that.

So we plan clearly to sell these 100 million doses.

And the prices, they vary quite widely between $8 to $20.

Especially countries who have ordered small volumes and who have ordered late, they, of course, have higher prices than countries who have ordered first.

Overall for Q4 the current best estimate is that we would have sales of $600 million.

And that has some variation because?

Well, a lot of the volume will be coming in December because this is when the better and the new seed strain that we use now for production will hit in, and we will see a lot of volume being shipped in December.

And, of course, with biologics and because of the quality release and you know they can always take one or two weeks more or less, very quickly you move a bit of this volume over into January, and because it's a high volume, we will see there some variation at the end of the year.

Okay, thank you.

Jeff Holford, Jefferies.

You have been highlighting in your presentation this afternoon the new product growth that you have, how your productivity efforts are running ahead of schedule, and also some of the reinvestment opportunities that you have.

Now this gives you some flexibility, and if you can just give us a bit more detail on how you are thinking to manage during the period of slowing and negative Diovan sales and the patent expiry that then follows, how you are thinking about that flexibility to maintain margins and bottom-line growth?

And then as a second question, there were some comments on the wire today regarding Nestle and Alcon, more specifically about timing of a potential purse in the cash payments.

I wonder if you can just run us through this, how you understand that from your side with any financing commitments and the timing they would be?

And also just invite any comments that you might have on the options you think you have got open to you to deal with the potential minority that might be left in that instance?

Okay.

Starting with the allocation of resources, if you look at our productivity, for the year to date, we have delivered about $700 million, just over $700 million of savings.

And if you take our sales of 11% and say no margin increase would be 11% OpInc, but then you add the productivity on to that number, that would take you to about 22% OpInc growth.

But we reported 16%.

So the 16 points of growth represents essentially half of the productivity that was generated in the first half of the year, and that investment was around the same three areas that I talked about earlier that will drive growth in a post-Diovan period.

The first is new launches.

So we invested about two of the six points in new launches, ensuring that we have strong marketing and sales programs.

We invested another two points in the pipeline, specifically around oncology and the Afinitor multi-indication development program, so that will help us in that post-Diovan period.

And then we invested about two points in the emerging markets, specifically China and Russia and some element of Turkey.

So I think if you were to think of that as an algorithm, that is just year-to-date, and I'm not telling you anything that you could not figure out by looking at our numbers.

But if you were to say that that algorithm would help us over the next three to five years continue to show margin improvement, but continue to take a portion of the productivity and invest it in those key drivers that will get us through the Diovan patent expiration, that is really what we're focused on.

Thank you, Joe.

Alcon, we, of course, also read the wires and we read the same comment.

And since you never know what is really reported and what was said, there is little we can comment nor do we want to comment on it.

It is really something Nestle may have said or not said, I don't know.

Secondly, you know our option.

We have a call option, which runs for one and a half years, starting January 1, 2010.

Nestle has a put option starting at the same time and lasting for the same period.

So the future will tell what will happen.

Frankly, I don't -- cannot and I don't want to comment further.

But maybe, Raymund, you want to say something about financing.

In terms of financing, our plans are that we would pay for it with cash and additional financing.

Currently we are under no pressure to pre-finance or to raise financing because the markets for interest rates seem to be fairly stable and very low.

Obviously we are monitoring this, but I would assume that at the moment we have -- all I can say at the moment we have no plans to raise additional money in advance of a potential transaction.

I think this can change very quickly, so it depends on market conditions.

Final point you asked about the minority, we currently have no intention of purchasing or buying out the third-party minority.

Sorry.

But just to be clear regarding the comment that may or may not have been made, is that your understanding that it's essentially approximately a six-month period from a potential put to acquiring cash from you?

The second step, this optional second step of the outcome transaction would trigger a review by the antitrust authorities in the US, in Europe.

So we would have the normal antitrust review period.

Okay, thank you.

Andrew Baum, Morgan Stanley.

Three questions if I may.

First, you gave the long-term guidance for R&D spend that you need to invest in your business.

Could you give us some sense on SG&A spend within Pharma over that period of time?

And then with regard to the quarter, to what extent the lower SG&A spend is a function of phasing versus something that is structural?

And then second, on the lower gross margin in the quarter, should I assume that is just a function of mix, particularly the lower Gleevec and Diovan contribution, or is there other contributing factors going on?

And then the third question is on your CML franchise.

How are you thinking about the risk to your 100% market share for first-line CML with the bosutinib and dasatinib data coming over the next quarter?

Okay.

Starting with SG&A, I think what we have said -- and if you just think about marketing and selling expense and you look at the third quarter, we showed about a 140 basis point improvement versus a year ago.

So it was 27.4% -- I think it was 27.4%.

But it was definitely a 140 basis point improvement.

That is a function of investment in the new products, but also significant productivity that is occurring among the base brands.

And we are doing that through a very systematic way of looking at our investment in marketing and sales on at least in the US a physician by physician basis and outside the US on a BRIC basis so that we ensure that we are allocating those resources in the way that we will get the most bang for the dollar or the euro.

So I think our stated objective was to take our marketing and sales number, which started out over 30% a couple of years ago and continue to show improvement.

This quarter was in the mid-27s.

I think it was -- we typically have a heavier spend in the fourth quarter.

Usually 27% to 28% of our total spend occurs in the fourth quarter.

So you may not see it -- you may see a little bit of a return there.

But for the full year, you should expect to see steady improvement because it is an area of focus.

And I would not go beyond just saying that we are continuing to drive that marketing and sales ratio as a percent of sales down.

Regarding the gross margin, it is not mix.

It is actually the fact that Betaseron royalties ended at the beginning of this year.

And if you look -- so versus a year ago, there were no Betaseron royalties in there; versus year-to-date we are down about 100 basis points.

But that is primarily a function of the summer period where we produced less because of vacations in Europe.

If you look historically year on year, our production costs as a percent of sales go up in the third quarter, and it is because of spreading fixed cost across less physical production.

So I think hopefully that answers your question, that really it is the Betaseron royalties that is driving that different.

David, would you want to comment on the CML franchise?

Sure.

Just as a couple of numbers to put things in perspective.

About 75% of the Gleevec/Tasigna franchise is CML.

The other 25% is primarily GIST.

Within the CML franchise, we have about 92% market share, and that is a combination of Gleevec and Tasigna.

The introduction of Tasigna and actually Sprycel in the second-line setting has expanded the overall market as patients have stayed on therapy longer, and thus, you see the 15% year-to-date growth for the combined franchise.

The clinical trial that we ran, the head to head trial in de novo CML we are particularly pleased with.

The results are striking.

You will see more of the data at the American Society of Hematology meeting.

The data is more than just MMR data.

There are a series of secondary endpoints that I think will put into perspective for physicians and for patients why Tasigna is going to become the preferred therapy in that setting.

Alexandra Hauber, JPMorgan.

Just, firstly, on the vaccines, could you just give us an update on how many government orders you have actually received?

You talked about 100 million you are shipping by year end, earlier if everything works well.

We know you have 100 million doses ordered from the US alone.

So what are your orders from non-US governments?

Also, when are you going to ship the bulk adjuvant orders you have from the US?

Is that going to be a next year event?

Could you also comment on where the price pressure is coming from you are referring to for seasonal vaccine?

What we are hearing is that there is not enough seasonal flu vaccine around, because all manufacturers had yield problems.

Then I have a couple of questions -- two questions on the pipeline firstly.

Is the delay of the QVA combinations, the Phase 3 study, is that related to your complete response for QAB?

And, therefore, we don't know whether it is a first- or a second-half initiation?

And the other question is on Ilaris.

What type of Phase 3 studies will you do for this, and actually when can you start them?

Well, the easy question goes to Andrin.

With regards to the government orders, we have orders now for about 200 million doses.

But one has to take orders with a word of caution, of course.

Because it will depend mostly also on how the pandemic is going to evolve in next year and to what extent there will be a need for vaccination [one to 12].

And there are governments now that hope they can complete vaccination programs by December, and there are governments who clearly feel that they would vaccinate way into 2010.

And what is going to prevail will really depend on the evolution of the pandemic and the epidemiology that is underlying that.

And with regards to price pressure in seasonal flu, of course, the price pressure has changed once the pandemic fully materialized.

But, by that time in many major markets, the price has already been fixed.

Especially in the US, the majority of our volume is defined actually in the first quarter of the year.

So we saw a significant price decline there simply because of that.

Now during the pandemic where we had freedom, prices went up.

Clearly the US -- in Europe not so much.

There were still several suppliers that are not producing pandemic vaccines who are actually shipping quite significant volumes into the markets.

Did you start to ship already MF59?

Yes, MF59 we have started shipping to the US as well.

That is not included in your guidance then?

You have not given a guidance on that.

That could come in addition?

No, that is all included in the --

-- in the 400 to 700?

In the 400 million to 700 million, yes.

Because I think that is almost close to $500 million, that adjuvant order?

Oh, really?

The total volume would be around that range.

So the question is going to be how quickly will we have shipped all of these.

And then also when we recognize the revenues, because the contracts are such that maybe not all revenues are recognized at the time of shipment.

Understood.

Trevor?

Yes, in terms of QVA, the delay in QVA from 2011 to 2012 is actually not very long.

It is really a couple of months.

And the factors over there have been that we did want to understand the implications of the dosing for that program, the initiated program, with our desire to really have a global program where we had similarity of doses across all the regions.

The NVA component of that program, which is the antimuscarinic, the Spiriva component, is moving ahead on track as we planned.

As far as Ilaris goes, the 3 million difficult to treat gout patients that Joe had referred to are our target, and there are a couple of ways to segment that population.

The first focus is going to be the treatment of acute flares in these patients who have frequent recurrences of their gout.

And that Phase 3 program is now underway.

We would look at submissions very end of 2010 or 2011 across the different gout indications that we are looking at.

But that was the first one that we are doing.

Thank you.

And can I just follow up quickly?

When you said it is related to the dosing -- so if for some reason your dosing discussions with FDA extend for longer then, that would push out the QVA Phase 3 initiation also out, is that correct, that understanding?

No, not necessarily, because we just need to understand what the dosing situation is.

The negotiations around QAB and that package, that would be somewhat independent.

I just would not want to initiate a Phase 3 study and not have the right doses in it.

Okay.

Good.

Eric Le Berrigaud, Raymond James.

Two questions, please.

First, with full consideration and respect for the disclosure limitations for the ASH meeting, could you say a word on the safety profile of Tasigna in the head to head trial versus Gleevec?

And second question, on your last but one slide, Daniel, you said that you expect to mitigate 2012 patent expiries, but not offset it.

Is there any chance in your view to see any of the 2012 to 2013 years without an EPS decline at this stage?

Thank you very much.

Let's go first to David on Tasigna.

First, I just want to remind you about the study design.

There were three arms -- Gleevec 400; Tasigna at two different doses, the 400 milligram BID dose, which is the current dose for advanced patients; and there was also a lower dose of 300 milligram BID.

Well, I cannot distinguish on the phone call for you the full safety profile because it really needs to be presented at ASH.

Otherwise, we would jeopardize the late breaker presentation.

What I can tell you is we were very pleased with the safety profile.

The fact that there's two different doses could improve -- could lead to a range of safety depending upon the ultimate dose that is selected to be used.

But overall there were no negative surprising findings.

And then on the question, I should have a second Safe Harbor statement because what I'm going the say is, of course, highly speculative.

But I would say looking at Pharma sales, I would hope that the ambition of Pharma not to have a decline will succeed, and my hope is not based without figures.

So it is at least feasible.

The second question on EPS, I don't want really to answer.

But if Pharma succeeds to achieve that, then there is no reason that the other divisions would not be doing well and continue to grow and deliver their profits.

And then we have some unknown factors currently, which are the question will Nestle and Novartis close the deal or not?

And all of that are uncertainty factors which play a role and which make the answer a little bit tricky.

But all I can tell you the ambition is here, the means are here, and so I'm really personally optimistic.

Thank you.

Kevin Wilson, Citigroup.

A couple of questions if I may.

Dan, could you give us your sense of the net impact of what you believe healthcare reform will be in the US on your business over the course of, let's say, the next three or four years rather than just 2010?

We have some sense I think of what the legislation is likely to be.

It would be helpful for us to get a sense of how you think that Pharma business may move forward in the context of those proposals.

And secondly, on emerging markets, what proportion of your emerging markets Pharma business is tender based?

And so how often are we going to get these little surprises that make it hard to follow what has actually happened quarter on quarter?

I would ask Joe to comment really on the impact on the Pharma business.

I will just give you my view on the healthcare reform overall in the process.

First of all, I think what we have seen is that it has been a debate about access first, not about really cost containment.

Because, frankly, I think it is an illusion to believe that an increase of access will result in cost containment.

It will continue to grow and maybe even accelerate in the short-term.

And that, of course, will be helped by the concessions the Pharma industry made.

But that will not suffice to neutralize the effects.

The big question in my view is, will we stay where we are, or will government do what I think should be done, which is to understand much more deeply in a more granular way how patients are being treated, what prevention programs should look like if you think of obesity and diabetes as a consequence?

If the incentive system for physicians and hospitals are being changed, to pay more for outcome rather than just volumes, and there are a number of things I think which could be done to really slow the increase significantly of the overall bill.

On pharmaceuticals I believe it is recognized by most people that pharmaceuticals do improve the outcome, that they are cost effective, that they are a contributor, which is absolutely irreplaceable.

The fact, on the other side, is also that generics have their volumes to over 60% now.

And so the question is to what degree or what volume is innovation versus generic going to be.

And now the question is, in bottom line what does it mean sales and profit-wise in the Pharmaceuticals business?

So I don't know --

Yes, I think our take on what is happening in the US is that there will be a bill enacted, and that it will look a lot like the Senate Finance Committee bill.

So the agreement that the pharma industry has made will be delivered upon, and that is higher Medicaid rebates.

It is covering 50% of the doughnut hole, as well as the prescription manufacturer's fee that got it to that $80 billion.

So I think the implication for us is that we have to think about, number one, the US can continue to be a growth area, but we are going to have to think about our cost structure probably in a different way.

As you know, almost now a year ago we moved our sales force into a regional structure that allows much better and precise resource allocation on a market by market basis as individual markets in the US become more restrictive.

So still a large number of open markets, but as they become more restrictive, we are going to need to be able to react from a resource allocation standpoint in a way that allows us to show steady margin improvement despite the healthcare reform and what that will -- the pressure that that will put on prices.

And then in terms of emerging markets, we have in the past seen times like this in emerging markets in terms of lumpiness of sales due to tenders.

It tends to really be the large government tenders, which generally would be Russia.

You know, there are very few large government tenders in China, almost none in Turkey, in Korea.

But when we do get, let's say, a large government purchase of Gleevec in one or two of the countries, you are going to see some level of a lack of smoothness in terms of shipments.

Okay.

Thank you, Joe.

We go to the next question, please.

Graham Perry, Bank of America/Merrill Lynch.

Just firstly, a quick follow-up on the gross margin question from earlier.

You talked about the Betaseron revenues, but also the account ratio looks a little worse in the quarter.

So I am just wondering if you could talk us through any moving parts on that as well?

The second one for David on Tasigna.

I will try and tempt you a bit further into commenting on safety.

The key challenge for this drug in the first line setting is going to be whether it is actually better from a safety point of view than Gleevec or not.

I just wondered if you could give us kind of a generic comment whether you view the safety as better, the same or worse than Gleevec in the front line setting?

And then for Trevor on Ilaris in gout, I am just wondering if you expect this to be dosed on a frequent basis or only on occurrence of flares ultimately?

And on pricing it is a very expensive product currently at about $16,000 per dose.

Just how you are thinking about pricing on these longer-term indications?

And then finally, one on Sandoz.

I just wondered if your recent settlements on Adderall XR and Solodyn suggest that your philosophy on settling patent litigation has shifted at all, or was there something unique about this situation?

So does it change your thoughts on the first to follow-up changes like Skelaxin?

Okay.

Starting with gross margin, if you look at our gross margin this third quarter versus a year ago, the entire difference, it is about 100 basis point of reduction, is due to Betaseron royalties coming out.

So Betaseron royalties used to show up in other revenue, so below the revenue line.

And so it directly impacted the gross margin versus year ago when it came out.

Now versus Q2, if you look at our gross margin, there was a similar 100 basis point reduction in gross margin.

But that was solely due to volume, meaning the summer shutdown that occurs, and that occurs every year.

So if you go back to previous years and look Q2 versus Q3, you will see an erosion of the gross margins because of the timing of that volume production.

Now David.

Yes, just quickly, one of the reasons we studied two different doses of Tasigna was our speculation that the lower dose may have efficacy that is similar but that the side effect profile would be better.

So I think this is one of the key things that we will have to look at it when the data is unblinded.

But just to remind you, in the advanced setting, Tasigna had a very different side effect profile than Gleevec.

In particular, Tasigna is not associated with edema.

It does not have the same severity of hematologic toxicity, and, in fact, the GI safety was slightly better.

So there is no reason to believe that in the front line setting Tasigna will do worse.

In fact, we would expect it actually to do better and represent a different kind of benefit to risk profile.

The one concern that we had had originally with Tasigna, which had been largely mitigated now with taking the drug without meals, was the potential for QT effects in the advanced setting and that there had been a certain small number of sudden deaths recorded in the clinical trial.

I can tell you that there are no sudden deaths in the de novo head-to-head study.

I cannot comment any further than that, though.

As far as Ilaris goes, we are talking here about the moderate to severe population.

And because of the different circumstances whether you are working the context of your lowering therapy or acute flares, there might be some different dosing strategies.

The studies I was talking about around acute flares would be treating the flares, though the precise regimen would emerge out of the Phase 3 program.

It has to be said in the Phase 2 study in the moderate to severe patients, these patients were experiencing upwards of seven flares a year.

In pricing obviously Pharma will look into the volume and the pricing flexibility we have so that it is an attractive treatment for the patients overall.

Then we have, Jeff, if you would not mind.

So with respect to the minocycline launch at risk, we did settle with Medisys as you alluded to.

We felt that that made sense given the risk return profile.

Our basic patent settlement strategy has not changed.

I would say that perhaps we are taking a slightly more aggressive stance in terms of launches at risk, particularly where we feel that patents are not infringed.

So we will continue to look for unique first to follow opportunities where we can take a more aggressive stance.

Dani Saurymper, Goldman Sachs.

Two questions if I may and maybe a third on generics.

But just firstly, on Fanapt, perhaps you could just talk us through what you think the commercial potential of such a product might be, and how you are going to position it against the incumbents?

And then secondly, in terms of Animal Health, I'm just trying to understand in the context of consumer healthcare, given M&A activity in the area so far to date whether that changes your view in terms of needing to bulk that up or perhaps no longer consider it a core part of consumer healthcare and your strategy there.

And then just lastly, can you update us if there is any news to be added around generic Lovenox?

Okay.

Starting with Fanapt actually, Trevor, why don't you talk about the profile of the compound.

Then I will jump in on this commercial opportunity.

So I think in terms of the atypical antipsychotics, except maybe with the exception of Clozaril, ballpark the efficacy is somewhat similar and Fanapt falls into that category.

So a lot of the differentiation is around safety profile, particularly in the area of metabolism and abnormal movements.

In that area I think that Fanapt compares very favorably with some of the market leaders like -- (technical difficulty).

That is the key profile.

Also, it has an interesting avenue to a depot formulation, which we are taking aboard on this.

I mean intrinsic technical reasons why we think we would have a very favorable depot formulation.

Okay.

And so just in terms of how we would position this, obviously similar efficacy, but a better tolerability profile on certain elements.

And, you know, if you look at the US, schizophrenia is a $5 billion market, total antipsychotics $14 billion.

There is -- within schizophrenia there is a lot of switching that goes on across a number of brands.

So it would be premature to really give a sales forecast because we are right now building the field force that will sell Fanapt, and we are getting ready for an early 2010 launch.

But framing it in about $5 billion market where we expect to get a small piece of that would be appropriate.

Please, George.

Well, the consolidation in the industry is clearly significant, and we have shown in the last five years that we can compete very readily against the other guys, and we feel that we can do that in the next -- in the oncoming years.

We have an excellent pipeline with some specialized products that will be relatively launched, and we are very confident we can continue to grow this, frankly.

And then finally on Lovenox?

So on enoxaparin our aspiration, of course, is to launch as soon as we can, but we are waiting on a ruling from the FDA on two outstanding citizens' petitions and hope that will be resolved shortly.

With respect to the USP monographs, the new heparin USP monograph came into effect on October 1.

We have confirmed they meet the expectations there.

The new enoxaparin USP monograph will be effective, as I understand it December 1, and we don't see that as -- (technical difficulty) to launch.

Lastly, I would just say that all four of our Chinese heparin suppliers have been inspected in China by the FDA and have been cleared for use in our enoxaparin filing.

Thank you, Jeff.

Next question, please.

Karl Heinz Koch, Helvea.

I have one relating to generics.

Now I understand that when it comes to the complex follow-on biologics, pharmaceuticals will be strongly involved in at least the marketing if not the development.

Now I was wondering whether you could talk a little bit about how you -- how we should think about this from a divisional P&L point of view?

Who books sales?

Who absorbs which charges, etc.?

And then a second question, if I may, this voucher you have for the priority review, have you made a decision where you would use that?

I know in the past you have said that you would not use that on FTY720, but considering the competitive landscape, has that view changed?

Thank you.

I would like maybe, Joe, do you want to say something about who books sales and who books profit?

Obviously when you think about follow-on biologics and you look at the compounds and the potential, we want to make sure that we maximize the opportunity.

So if there is a follow-on biologic that within the Pharma system would demand the kind of attention and get that kind of attention from the country commercial organization, obviously it would make sense to have a pharma organization commercialized and potentially help with the development.

But if you look at the vast majority of follow-on biologics, they are going to fall probably within a range that may not get the same kind of attention that we need to make them successful.

And in that sense, it would be a big opportunity for the Sandoz organization to build out an operation that could handle those compounds.

Jeff, do you want to comment on that?

Yes, I would just agree with that, Joe.

I think in 80%, 90% of the cases, biosimilars and FOBs make sense within Sandoz.

Certainly if there is a 505(j) AB substituted product, right, it makes sense that Sandoz would commercialize that with the key account team that we have.

In cases where there be (inaudible) where Pharma has expertise in a particular therapeutic area, it makes sense for us to discuss how we commercialize that, and we are certainly not looking to rebuild capabilities that we may already have.

In other areas, for example, in Omnitrope in pediatric endocrinology, the Pharma capabilities were not huge in that area, and this was not a sufficiently large opportunity.

So we made this decision at the time to build out under Sandoz a team of key account folks and people calling also detailing pediatric endocrinologists.

They are both managed care, as well as GP detailing, and that business is really picking up.

So we are seeing Q3 76% growth of biosimilars, which for year-to-date puts us at about 68% growth.

So we continue to see nice progress, but as Joe mentioned in certain cases, perhaps in multiple sclerosis and other areas, we will partner with Pharma on the development and commercialization.

Yes, I, of course, understand the question that you would like to separate that.

In our case we have said we don't want to start a new accounting annual for sorting that out, but rather taking really a simplistic approach, and we are in the same group with the same shareholders.

And also, keep in mind that we have a number of countries which are operating under these group merging countries where we put all the businesses really under one head, and we optimize the CEOs.

So we need to have a pragmatic approach.

And luckily we are working well together as a team, and we have not brought up any issues or disputes.

I would like to give you a clear kind of factor, but we don't buy it.

And regarding the priority review voucher, we have not needed it yet.

Marcel Brand, Cheuvreaux.

I have a question on Lucentis.

Could you please go through the major markets and tell us what the market shares are for Lucentis versus off-label Avastin?

You mentioned that UK, France and Japan were doing well, but I just would like to get a little bit more color on that.

Also, what is your view on the timing and the potential impact of the CAT trial, Avastin versus Lucentis?

And then a question on other operating expense in Pharma.

It is a fairly high number, $201 million compared to Q3 '09 when it was $226 million, but that was a very high number.

We know that there were restructuring charges and Tekturna inventory provisions in the baseline.

So certainly still a much higher number than a normalized quarter.

Now is that kind of a restructuring going on which you don't want to publish while we see a continuation of marketing productivity going up?

And yes, that is it.

Okay.

Starting with Lucentis, obviously I don't want to comment on -- hello -- okay.

Just keep going.

There is an echo.

Okay.

Sorry about that.

Starting with the Lucentis question, I don't think it would be appropriate from a competitive standpoint to talk about specific market shares and what is happening.

I will tell you that we do have good disease awareness campaigns going on in France and in the UK that is helping us.

And we are just getting started now with Lucentis in Japan.

Trevor, maybe you could comment on the trial we have gone against (technical difficulty) head-to-head in the US.

We know the [CAT] trial is delayed somewhat.

We will probably get some data out in 2011.

I think the impact is well some (technical difficulty)-- largely dependent on what the actual outcome of that study is.

We do have a number of other studies underway in indications which do not impact the age-related macular degeneration such as the diabetic studies and the retinal venous occlusion studies, which will be indications where Lucentis might have some considerable advantages over Avastin.

And then regarding the other -- (technical difficulty) expense, you know, if you look in there, there is not really anything -- nothing that stands out.

It is quite similar to where it was a year ago, and it is a variety of things.

To answer your question, there is not one or two major things that are driving that total.

So it is restructuring?

No, it is a series of other elements.

There are some litigation and settlement costs.

There is a series of -- (technical difficulty).

Raymund, maybe you --

It is a total optional preparation for restructuring or restructuring expense.

It is a series of other small expense items.

Next question, please.

And this is the last question I will take, and then we will close the call.

Fabian Wenner, UBS.

I just wanted to find out what your intention of Tasigna once it is established in first line and you have data to support, convincing patients and physicians that it should be used.

Will you go for a quick switch from Gleevec to Tasigna, first question?

And secondly, given that in last year you gave us an indication that outcome synergies will amount -- or will give you visibility on 1% to 3% accretion in adjusted EPS, and the market is now fully consolidating Alcon into the numbers.

Is there anything on potential synergies that you want to add following what you said last year?

David, do you want to say something about --

What I would rather do is we are planning an analyst meeting for early December right after ASH.

And I think at that time we can commit to you to talk about our strategy for how the market will evolve over the next five years.

But I think to do it now just on the back of the data, which you have not even seen yet, is a little bit premature.

Okay.

I think that is very reasonable.

And from the point of view of the synergies, Raymund, do you want to add numbers?

No, on the outcome synergies at this point, it is premature to talk about potential synergies.

First, we have to see if and when this second step will materialize, and then once that decision is clear, then we can start to talk about potential integration and synergies.

At this point it is -- (technical difficulty).

Yes, and I would add that even if the second step takes place, there are no synergies.

Because they are still the minority shareholders, and we cannot integrate it.

Any business we would be doing would be at arm's length.

So it would imply that we would buy the entire company, and that is written in a totally different chapter.

Daniel, the synergies would have to be shared with the shareholders -- (multiple speakers)

Yes, but that is then a joint venture or whatever you do that -- (technical difficulty).

With that, I would like to thank you for your questions and your interest and close the call.

Bye-bye.

Thank you.

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