Novartis AG (NVS) 2010 Q1 法說會逐字稿

Good morning or good afternoon, depending where you are attending from.

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

Welcome to the Novartis Q1 results 2010 conference call and live webcast.

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

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

(Operator Instructions).

This call must not be recorded for publication or broadcast.

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

Joe Jimenez.

Please go ahead, sir.

Thank you.

Good morning and good afternoon to those of you on the line.

This is Joe Jimenez, from Novartis.

I'd like to welcome you to our first-quarter conference call.

Joining me on the Novartis end are Jon Symonds, CFO; David Epstein, Head of the Pharma Division; Jeff George, Head of Sandoz; Andrin Oswald, Head of Vaccines and Diagnostics; George Gunn, Head of Consumer Health; and Trevor Mundel, Head of Pharmaceutical Development.

Now before we start, I would like to ask John Gilardi to read the Safe Harbor statement.

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

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

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

Thanks, John.

Now, starting with the presentation, if you flip to slide 4, what I want to do is make a few comments about our performance in the first quarter, and then I will discuss our priorities as a company.

So slide 5 shows that we had a very strong first quarter.

Net sales were up 18% in constant currencies, and this was driven by strong performance across all the divisions, and then when you add the strong H1N1 vaccine shipments on top, we generated exceptional sales growth.

Core operating income grew 48% versus a year ago behind that strong growth and good cost control.

And that drove EPS up 48%.

I would say we also made very good progress on the pipeline in the first quarter, which we will talk about a little bit later.

So John is going to go into more detail about the numbers of the first quarter, but I would like to spend a few minutes describing the priorities that we have set for the Company.

So on slide 6, this industry is going to continue to be a growth industry well into the future.

So if you just look at the aging population, there's going to be a rising demand for healthcare well into I would say the mid-century.

We are all aware of the challenges that the industry faces, but I believe that we've got one of the best portfolios in the healthcare industry to deal with those challenges.

So not only innovative pharmaceuticals, but also low-cost generics, self-pay over-the-counter products, vaccines for prevention.

And with Alcon, we will create the leading eyecare company in the world.

So on slide 7, we are focusing the Company on three priorities to unlock value in the Company.

First is extending our lead in innovation.

And this is all about building our pipeline in Pharma and in the other businesses through both internal discovery and development, as well as in-licensing and acquisition.

The second priority is to accelerate growth.

And this is all about rejuvenating the Pharmaceutical portfolio ahead of the Diovan patent expiration, and it also means building our non-Pharma businesses into businesses of global scale.

As well, building that platform for growth with Alcon.

Then the third priority will be to drive productivity to improve our margins.

And this includes getting aggressive with procurement costs and streamlining our core processes.

So we've put the first-quarter results in the context of these three priorities.

You're going to see these three themes come out throughout the presentation.

On slide 8, this starts with our lead in innovation and extending that lead.

You can see that over the last 10 years, we've been the most productive pharmaceutical company in the US with 19 new molecules approved.

And on slide 9, in the first quarter, we made good progress on our pipeline and building our pipeline.

We achieved US and EU approval for Menveo, and also US approval for Metaxalone out of the Sandoz unit.

In Pharma, we expect significant progress for the remainder of the year.

In terms of growth, on slide 10, our effort to transform the portfolio is showing great progress.

This shows, from a group standpoint, in the first quarter, newly launched products accounted for about 16% of our total sales, so that's the middle bar.

And this is a very strong number.

This is group-wide.

When you add H1N1 sales on top of that, it's about 25% of our total portfolio.

Slide 11 shows that in the first quarter, emerging markets accounted for a quarter of our total sales with the top six countries accounting for 10% and up 22% versus a year ago.

In terms of growth in Sandoz, on slide 12, we are building our difficult to make portfolio.

As you can see, biosimilars was up nicely in the first quarter and injectables also grew nicely.

We were also able to maximize our exclusivity on tacrolimus, generating about 40% conversion from branded in four months.

On slide 13, our Vaccines and Diagnostics business had a very strong quarter.

We met challenging delivering schedules for about 21 pandemic customers.

And, we launched Menveo in the US and Europe, and we're building our business in China through the Tianyuan acquisition, which we expect to close in the second half of the year.

And then in Consumer Health on slide 14, we also demonstrated good growth.

We gained about a 30[%] share of the US over-the-counter PPI market with our launch of Prevacid 24-hour.

CIBA Vision is off to a strong start.

We're increasing share behind the launch of multifocal lenses.

And in our Animal Health business, we've accelerated growth with our parasiticides business for companion animals.

On slide 15, we have made some pretty significant changes to our commercial models in the US and China to anticipate changes in those countries and to be able to shape the future.

So last week, we announced a restructuring in the US to build upon the regionalization of the sales force that we announced about 18 months ago.

And we are creating three integrated specialty business units, which David Epstein will talk about in a minute.

In China, we created four new regional organizations to manage our business in China locally.

More and more of the spending is being pushed from the central government down into the provinces, and this will enable fast action in the regions.

On slide 16, our initiative called Customer First is also paying off.

This is our effort to leverage our entire portfolio with some of our key customers, including pharma, generics, vaccines, over-the-counter products.

So I believe this is a key differentiator for Novartis versus some of our peers.

We're able to go to some key customers and talk to them on more of a strategic level versus a transactional level.

We've rolled this program out in 45 countries.

And then finally, we will create a new eyecare platform for growth with the acquisition of Alcon.

We continue to be on track to acquire the 77% majority stake in the second half of the year, and then subsequently enter into an all-share merger with Alcon for the remaining 23% under Swiss law.

So I look forward to welcoming the Alcon group into Novartis and really believe that we are going to be able to take this business to the next level.

From a productivity standpoint, as shown on slide 18, we made great progress in the first quarter.

Some examples of that, we've spoken a lot historically about marketing and sales expense, and in the first quarter, David Epstein and his team did a great job.

M&S spending as a percent of sales was 27.9%, which is down 160 basis points versus a year ago.

So still able to generate 7% sales growth but more efficiently.

Sandoz led the way with production cost of goods improvements, which led to a nice margin improvement in Sandoz.

And Consumer Health showed great progress with their procurement savings, which led to a nice gross profit margin improvement also.

So with that, I will now turn it over to Jon Symonds to talk in more detail about the first-quarter numbers.

Jon?

Thank you, Joe.

Good morning or good afternoon.

Here's what I want to talk about.

And my comments will be built around those three things of innovation, growth and productivity.

And I'll also comment on earnings per share, free cash flow and liquidity.

So first, results on slide 21.

And I'll take you quickly through the key numbers.

Sales of $12.1 billion increased by 25% in US dollars and by 18% in constant currency.

Core operating income was $3.9 billion, growing by 48%, and with a constant currency growth rate of 41%.

Core EPS grew by 44% to $1.45, a 36% increase in constant currency.

Earnings per share grew by 48% to $1.29, and that's a 40% increase in constant currency.

And free cash flow grew by 93% to $2.9 billion.

I'm now going to turn to the structure of sales and profits.

And firstly, sales on slide 22.

You can see here that the result is driven by strong volume growth of 19%.

Not surprisingly, with the high sales of H1N1, Vaccines and Diagnostics grew an extraordinary fourfold in the quarter.

Volume growth in Pharma was 7%, including some destocking in the US and Japan.

It was double-digit growth in Sandoz.

And the volume growth in Consumer Health at 6% was well ahead of their market.

The negative price impact primarily comes from Sandoz and B&D.

And in Vaccines, the price effect was more to do with the loss of value of exports than it was with price reductions per se.

Pricing in pharma was broadly neutral.

US health care reform is now being enacted, and the price impact for 2010 should be manageable within our guidance, particularly as a doughnut hole impact doesn't come into play until 2011.

In quarter two, the Japanese biannual price cuts come into effect.

And given the state of many sovereign country finances, we remain cautious for the balance of the year on pharma pricing.

Slide 23 gives you the core reported operating income reconciliation.

And you can see that exceptional items impairments and the acquisition-related items actually had a bigger relative impact in the first quarter of 2009 than in 2010, with the result that IFRS profit growth was slightly higher by 2 percentage points [than call].

The main exceptional items in the quarter were the impairment of Protez in Pharma, offset by the Famvir litigation settlement with Teva and the related impairment reversal.

And in Sandoz, we had the AWP litigation settlement.

The details of these items are fully covered in the press release.

The final point to make on this slide is impact of currency, which was positive 7% on both sales and profits due to the weaker dollar compared to a year ago.

This positive position will not be sustained if exchange rates remained where they are currently.

But I would expect the overall impact on sales and profit to become broadly neutral, implying that the impact could turn negative in the second half of the year.

Turning now to the divisional sales on slide 24, you can see that all divisions contributed to the group sales growth of 18% in constant currency.

Without H1N1, group sales would have grown by 7% in constant currency.

The run rate of Pharma at 7% is lower than we've seen in previous quarters, and is explained by a variety of factors, including inventory drawdowns in the US and Japan.

Japan was affected by inventory reductions ahead of the April price cuts; as well as the impact of health reform in several countries.

Sandoz growth of 9% was particularly good, especially the US business, which grew by 19%.

And there was another strong performance in biosimilars, which recorded growth of 81%.

I won't go into any more divisional details as I hope you find that the new format of the press release gives you a more comprehensive review of divisional performance.

But before leaving sales, there are a few other points I want to make.

Firstly, H1N1, on slide 25.

I think it's clear that at the time we reported our 2009 results, there was a lot of uncertainty as to how a number of contracts would play out.

As it happened, compared to our estimates then, we recorded around $400 million of more sales than we targeted.

Some of this was due to the caution we had in January being excessive.

There were a lot of talk about contracts being canceled, and we've seen little of that.

But we've also have additional orders.

There have been shipments to the Southern Hemisphere, and we've been able to deliver components, such as adjuvants, that can be stockpiled in the event of future pandemics.

Could there be more to come?

The simple answer is yes.

The harder part is how much.

Andrin can give you more color, but it probably amounts to a couple hundred million dollars or so.

Going to slide 26, Joe has made it clear that our future lies in rejuvenating the portfolio through innovation and new markets.

We have an enviable position compared to many of our peers in relation to new products.

Including H1N1, 25% of quarter-one sales were from recently launched products.

Definitely, like many of our competitors, we need to broaden our global footprint and reduce the dependence on traditional markets.

We now have 24% of our sales outside the traditional or established markets.

Portfolio rejuvenation in developing new markets are the key to sustainable growth.

If you get these two things right, it should be possible to also improve profitability as well.

So let me now look at operating margins on slide 27.

There are many ways of presenting profitability, but for me, the most important measure is the one that is visible in the reported numbers.

And as you can see here, core ops improved by 5 percentage points in the quarter.

To be fair, without H1N1 sales, margin would have been broadly neutral to last year.

So that does not mean that there weren't any important productivity improvements, which I will return to in a moment.

Slide 27 sets out the divisional operating performance.

And a full description of divisional performance is given in the press release, so I won't repeat it again.

But the operating performance of Vaccines and Diagnostics in Sandoz, which had an excellent quarter, really stand out.

Slide 28 tells the story of how margins increased by 5 percentage points over 2009.

And the yellow bars represent the source of margin improvement, a concept we described as operating leverage.

What you can see is the contribution that SG&A efficiency is made to our overall performance.

They added 3.7 percentage points of margin by growing only 11% against revenue growth of 25%.

And the standout performance here is that of Pharmaceuticals, where SG&A grew by 8% against a 13% top line.

The continuation of the trends you've seen for some time, despite continuing investments being made in the emerging growth markets.

In Pharma, this performance was offset to some degree by an increase in COGS, which ironically is also due to the success of productivity improvements, which can reduce gross margin as inventories are revalued to lower standard costs; and to unabsorbed overhead, if capacity isn't adjusted at the same pace as the efficiencies are generated.

Clearly the process of rebalancing capacity doesn't happen automatically.

And capacity realignment tends to track -- tends to lag quite significantly.

This effect is not visible on group gross margin as a result of H1N1.

And as Joe has already mentioned, good manufacturing productivity performance is in both Consumer Health and Sandoz.

Finally, on performance, a couple of things in the bottom half of the P&L on slide 29, which shows you how 48% growth in core operating income, again, 44% earnings per share growth.

There were three factors.

Firstly, in associated companies, income increased by 24% in reported terms and by 30% on a core basis.

The major difference between these two numbers being the recognition of restructuring costs in Roche that they reported in their year-end accounts.

There will always be a catch-up here as we tend to report our results before they do.

The financial result in quarter one was better than last year, primarily due to higher cash balances and a positive currency result, offset by higher interest charges from last year's bond issue.

Note that there was very little impact in the quarter from the recent $5 billion bond issue.

You will need to factor these higher interest costs into your estimates for the balance of the year.

Finally, the tax rate for the quarter was 16.5%, which is broadly what we expect for the full year.

Our cash flow performance in the quarter on slide 30 demonstrates the full dimension of productivity that stretches from operational performance and into the balance sheet.

All of the operating cash flow -- incremental operating cash flow of $1.4 billion flowed through into free cash flow.

And this represents a total increase of free cash flow of $1.4 billion on the first quarter of last year.

Given our financial commitments this year, focus on cash flow has to become even sharper going forward.

On slide 31, you see overall net liquidity has improved by $5.6 billion since March 2009.

The payment of the dividend in March 2010 accounts for the decline from the end of last year.

The increased gross cash and debt positions at 31st of March reflects the recent $5 billion bond issue undertaken in anticipation of the Alcon transaction in the second half of the year.

These bonds were issued in three tranches -- three, five, and 10 years that represent what we deem to be necessary as the term debt to finance the second stage acquisition with [net flows] 52% interest in Alcon for $28 billion.

The all-in interest costs of these bonds was 2.8%.

Ongoing cash flow until completion, the $20 billion of cash on hand, and an extended commercial paper program will complete the financing we need for the acquisition to continue to plan for a second half of 2010 completion.

As previously disclosed, we are targeting the ability to return to a cash positive position within four years of completion.

This requires a continuation of the cash management measures established in recent years, as well as a tough discipline on the allocation of resources and their expected returns.

Acquisitions and in-licensing has been and will continue to be part of the group's overall philosophy, consistent with our conservative approach to the use of capital.

On slide 32, in summary, a strong start to the year.

Sales up 25% to $12.1 billion.

EPS up 48% to $1.29.

And free cash flow up 93% to $2.9 billion.

H1N1 has exceeded the target we had at the beginning of the year by around $400 million.

And in all other respects, our operating expectations for the year remain unchanged.

With respect to currency, if rates remain where they are today, we expect the positive impact on sales and profits we saw in the first quarter to begin to narrow.

And we're well prepared to complete the Alcon acquisition -- second-stage acquisition in the second half of 2010.

And I will now hand you over to David for the Pharma review.

Thanks, John.

During Q1 in Pharma, we had a very strong performance, showing 13% net sales growth in US dollars and 7% in constant currency.

Of note is that the recently launched products delivered $1.5 billion of those sales, representing now 20% of total sales.

During the quarter, we also continued to focus on achieving productivity gains to improve efficiency, as well as to fund future growth with the core operating income margin of 33.3% and investments in new products such as Gilenia.

The pipeline continued to progress well, with Gilenia and Tasigna granted FDA priority review.

Those reviews are on track.

Equa, Exforge and Afinitor were approved in Japan, and we gained rights to DEB 25, a new antiviral agent that's in Phase IIb development for hepatitis C.

As you know, we also discontinued PTZ 601, an anti-infective, due to some side effects.

And we stopped the ASA404, first-line non small cell lung cancer trial as it was deemed futile to continue.

Turning to page 35, you see the P&L.

I don't want to repeat the numbers to you other than to focus you on the free cash flow line, which grew roughly double the rate of net sales.

Turning to page 36, we had the opportunity to put that top-line growth into perspective when looking at the market and our competition.

And you see that Novartis Pharma is the fastest-growing pharmaceutical company according to IMS.

And we have widened the lead versus the number two player, now reaching 4% market share.

On page 37, you see how those sales were distributed by therapeutic area.

And you see that we had good sales growth in each of those therapeutic franchises.

And on page 38, you see the growth by geography.

What I would like to point out to you here is really what I consider outstanding growth of 10% in Europe, based upon the multiple new product launches that we have achieved there over the last two years.

The European number, in fact, would be even higher, except that we include Turkey in Europe; and in Turkey, there were various price cuts and other reforms that have slowed the growth in that market.

Asia, Africa, and Australia only grew 4%.

This is largely due, as Jon explained, to reductions in orders in advance of price reductions in the Japanese market.

And in fact, this 4% growth number would have been double-digit if we exclude the Japanese experience.

Turning now to page 39, I'd like to point out how those growth brands are doing in terms of rejuvenating the portfolio.

In particular, in addition to noting that it's 20% of the total volume, what I think is even more impressive is that this group of products has grown 56% Q1 2009 over Q1 2010, telling us that the rejuvenation of the portfolio is well on track.

Turning to slide 40, we've laid out for you eight products which we believe will be key to future growth of our business.

They will all be patent protected in 2015, which is well past the patent expirations for Diovan and zoledronic acid.

And we believe each of these products either currently is a blockbuster or has very good potential to become a blockbuster in time.

So you will see more and more focus on this group of products, both in terms of where we are investing our money, but also as we talk to you about our business going forward.

On page 41, you see that our development teams and regulatory teams will have once again a very busy year at Novartis, with multiple new approvals expected, some already achieved, and five very important submissions.

I would like to now take you through just a few of the products, starting on page 42.

We recently issued a press release based upon new data that was shown at AAN this past week, which continues to reaffirm our belief that Gilenia will fill unmet medical needs for patients with multiple sclerosis.

The data that was presented showed a 44% reduction in annualized relapse rates on patients who had been previously treated with an anti-MS therapy, and a 62% reduction in relapse rates on patients who were treatment naive.

We were also able to show in another study that patients who switched from intramuscular interferon beta-1a did very, very well when they were switched to Gilenia.

So in sum, we believe Gilenia has the potential to fill a significant unmet need.

And those regulatory reviews are on track with a US approval and a European approval expected before the end of 2010.

If you now turn to slide 43, I want to give you just a brief update on how we are doing with Tasigna.

This product is continuing to grow share in second line CML, and we are anticipating a first-line approval mid 2010.

In addition, the trials, looking at sub-optimal Glivec patients, are accruing well.

And we expect updated 16-month data of the head-to-head Tasigna versus Glivec newly diagnosed trial, which was the pivotal trial for our submission to be presented at ASCO.

And I suggest you stay tuned for that particular study.

Now I will take a look at productivity starting on page 44.

During the quarter, we have further stepped up our focus on productivity, and we are doing that in several ways.

Of course, we are continuing to focus on sourcing, off-shoring, and streamlining various process, but we also took the opportunity during this quarter to restructure our US business to be successful in both primary care and specialty markets.

And while we did that, we were able to take our costs in the process.

We brought all our key primary care functions under one leadership, building upon our customer-centric model that was launched in 2009.

And I believe this new approach puts strong people in place, but will also accelerate decision-making, taking us closer to the customer.

We built three specialty business units, which will once again integrate the necessary commercial functions to be successful.

And we reduced our headcount in headquarters by just over 20%.

While doing this, we also took the opportunity to make sure we had the right level of investment against Gilenia.

And we are in the process of expanding both the medical department and the field force to ensure that the Gilenia launch goes well.

On page 45, we put the productivity savings into perspective since Q1 2009.

And what you see is SG&A growth continues to shrink, and it continues to be also smaller than top-line growth, which is overall then helping us drive improved margin for the business.

We turn now to page 46, which is the last page of the presentation.

I would like to reaffirm the top-line growth of mid to high single-digit sales growth on the back of strong underlying volume growth, which is obviously higher than the recorded sales growth due to the pricing pressures that the Pharma industry is facing.

And our expectation that launch brands will continue to drive this sales growth and as launch brands become a bigger percentage of total sales over time.

Core operating income should grow ahead of sales.

And on the innovation side, we expect to continue to report to you continued strong pipeline news flow and up to five submissions in the US, Europe and Japan.

And with that, I would like to turn it back to Joe for a summary.

Thanks, David.

So just to summarize on slide 48, I think we are making very good progress on our three priorities of extending our lead in innovation, accelerating growth and driving productivity to improve margins.

So we are maintaining our guidance of mid single-digit sales growth in 2010 with operating income growing ahead of sales.

So this concludes the presentation, and now I would like to open it up to questions.

(Operator Instructions).

Fabian Wenner, UBS.

Good afternoon.

Thank you for taking my question.

A couple of questions on your hypertension franchise and the launch of Cozaar last week.

Obviously, [Sando] had the strongest market share in the first week.

Can you just comment on the pricing for generic Cozaar, please?

And also, it seemed that Valturna had a nice pickup.

Can you just confirm that?

And also talk a little bit more about the trends that you see in your hypertension franchise?

And also remind us, please, when the ASTRONAUT study for Tekturna reads out, when you can expect data here.

And secondly, can you give us an update on the free cash flow measures that you are putting in place with regards to inventory and receivable management, just where are we there?

And lastly, just QAB, the situation with the FDA, can you update us on the timeline?

And also when we can expect data on NBA 237 and QVA 149.

Thank you very much.

Jeff?

On the Losartan question, Merck had decided to do an authorized generic, and we therefore sought to partner with them.

We did launch as a first to market, along with Teva and the 180-day exclusivity that they enjoy on April 6, and delivered a very strong launch.

Presuming that Teva's 180-day exclusivity holds up to the Apotex and Roxane and FDA challenge, we would expect this to be an important top-line driver for the year.

As to pricing, I can't really comment except to say that the only thing that influenced pricing in [this ardence] as far as Losartan is concerned is the fact that Teva has 180-day exclusivity.

David, maybe Valturna and QAB?

Yes, so I just -- you asked also about the hypertensive franchise I think more generally.

In general, we've seen a return to volume growth for the valsartan franchise.

We've seen our overall hypertensive franchise, which is our main focus, to grow considerably during the first period, and it improved actually during the course of the quarter.

And the launch of Valturna is going quite well, in fact, beating initial expectations in the US, where the launch is currently focused; although we to anticipate gaining other approvals for that product.

There was a question about one of the Tekturna studies.

Did you hear that, Trevor?

It was the ASTRONAUT study.

We expect data from that -- that's the first of the big M&M studies in the ASPIRE program for Tekturna.

Expect data at the end of 2011.

And Trevor, can you give perspective on where we stand with supplying the FDA with additional data for QAB?

Yes, indeed.

So, our resubmission package for the FDA remains on track.

We said we would resubmit that in the second half of this year, and we will do that.

And I believe there was a request for some update on NVA, which is our antimuscarinic; and QVA, which is the beta agonist, the QAB antimuscarinic combination.

So QVA will start its Phase III program as we had indicated in the second quarter of this year.

And NVA is in Phase III right now with a plan to file toward the end of 2011.

And Jon, cash flow?

Yes, cash flow, there are three things that we look at, and they sort of get triangulated between one another.

One is the percentage of sales that is generated as operating cash flow.

Two, the cash conversion cycle, which measures how quickly raw materials enter and exit through sales.

And then thirdly, we look at the absolute levels of inventory, CapEx, and other forms of expenditure.

And those three things really capture operating performance, the convergence cycle, and cash flow into the balance sheet.

Next question?

Graham Parry, Bank of America-Merrill Lynch.

Great, thanks for taking my questions.

First one is just based on the higher H1N1 sales in the quarter; there is no increase in our guidance for the full year.

Just wondering if there was any scope for that, or are you just being conservative at this point in the year?

Secondly, you also haven't really addressed healthcare reform in your release.

And we have of course seen some of your peers reporting some fairly significant impact and certainly greater than I think the Street was expecting.

So is it fair to say you have now fully assessed the new legislation and you can confirm that there is no impact on your guidance at all?

And then thirdly, a question on the meningitis B vaccine, the end of Phase II meeting in third quarter looks perhaps a little further away than you had originally indicated.

I was just wondering what was taking the timing in getting the meeting there with the FDA?

If you had to file any additional data or other requirements to them?

Thanks.

Okay, Graham, if I start with H1N1 guidance, I think what we tried to explain in the outlook section was that we were anticipating H1N1 sales in the numbers that we talked about in January, which is why we've talked about the incremental sales that we have seen as being the only impact on guidance for the quarter, which was about another $400 million.

And I suggested in my comments there may be a few hundred million to come.

So that is really the only change in the operating assumptions that we have seen compared to what we were anticipating for the quarter.

David may comment on healthcare reform.

But we also anticipated some of that in our guidance too, which is why we're not making any adjustments for that either.

Yes, I'll just give you some perspective on healthcare reform.

First of all, it's spread, as you know, over this year and next in terms of the financial aspects.

Overall, we see the impact this year to be modest and anticipated and allowed us to reaffirm our guidance.

Two pieces of healthcare reform in terms of costs will not kick in till next year, and that's the healthcare reform fee, as well as the industry contribution to the doughnut hole.

So the impact next year will be greater than it is this year.

But as I said, this was all built in to our plans.

And Andrin, MenB?

As for MenB, the discussions with the FDA remain focused around the scientific question on what type of surrogate market would we use in our Phase III trials to show efficacy?

And given that this protein-based vaccination concept is completely new, such a concept is simply not established within the FDA.

So we keep on having many informal interactions, and I think the FDA is learning while we present new scientific data to them.

Also, adapting their thinking, their guidance on what they would want to see; and it just took a couple of interactions more than we had hoped for.

But it is purely related to scientific questions.

There is no additional request from the FDA on the clinical side.

Florent Cespedes, Exane BNP Paribas.

Good afternoon, gentlemen.

A few quick questions.

First of all, on Tasigna, on CML, your competitor BMS with Sprycel is supposedly very aggressive on the marketing message on the convenience, the once a day versus a twice a day for Tasigna.

Do you have under development your own once a day version?

And when do you expect to be on the market with the product?

Now a quick question on Sandoz.

Do you believe that the 22% adjusted operating margin is sustainable going forward?

And the last one, on the respiratory within Sandoz, can you share with us some elements of your strategy to develop respiratory products in Sandoz, especially following the Oriel deal and the Vectura adjustment.

Thank you.

Yes, this is David.

I'll start with some perspective on the CML market.

In short, in most oncology markets, and CML is no different, these are efficacy driven markets.

So, if someone is focusing on convenience of once a day versus twice a day, I think it may speak to their profile.

Currently, Glivec plus Tasigna together represent about 92% of the CML market.

To answer your question more specifically about new dosage forms, we're looking at alternatives, but it's not our main focus.

So on your question on the 22% margin that we saw in Q1, look, we had a good quarter.

However, I don't think one can extrapolate this to the full year.

Our core margin run rate is ahead of where we expect for the full year.

And this is due to the fact that Q1 is typically stronger than Q2 through Q4 on a seasonality basis.

We also had very strong performance in the US, where we continue to enjoy exclusivity on [Taklavenous] and where we had significant high-margin oxaliplatin sales, but where we like other generic companies, have settled.

I think it's also worth noting that we also launched metoprolol this year as we had hoped.

That should also be taken out of the forecast.

Okay, thank you.

And then on the respiratory question that you asked, you asked both about Vectura and Oriel.

First, with respect to Vectura, while we exited the 2006 US Vectura contract, we continued to work with Vectura in Europe, where we are confident in our prospects on the joint program that we are working on.

With respect to Oriel and the acquisition there, we're very bullish on this opportunity.

It's a strong, strategic fit with Sandoz's differentiated strategy from biosimilars to complex injectables and now really ramping up inhalables.

The deal augments our respiratory pipeline by giving us the rights to three promising respiratory development projects.

And I would say as a note of context, this is a $32 billion respiratory market that is patented, where we expect roughly half of those sales to go off patent between now and 2016.

So, in addition to the significant manufacturing upscale investments that we made in 2009, this really develops our development pipeline for the future.

Thank you very much.

Tim Anderson, Sanford Bernstein.

Yes, if I could just follow up on that respiratory question.

With Oriel Therapeutics being a US-based company with dry powder technologies, I'm wondering if you can just further clarify what the US strategy is for Sandoz in respiratory; what types of products you think you can go after; and what some of these promising candidates you just mentioned are.

Second question is on the core tax rate in Q1, wondering why the core rate rose versus a year ago; and how that core rate will trend if you move into future periods where you will start to lose some patent-protected products.

And then on the meningitis B vaccine, any update on the fever issue?

I know you've been studying new formulations, and I'm wondering if you can explain again why this might just only be a US issue and why it might not expand to international markets as well?

Tim, with respect to your questions on our US strategy, for competitive reasons, I think it's better that I don't comment on what those assets that we have acquired are.

We do believe that there is potential in the future for fully substitutable generic versions of key branded medicines that are on the market today.

Yes, Tim, on the tax rate, I really would urge you not to look too closely at the core tax rate because we manage tax on a consolidated basis.

And how some of these exceptional restructuring items get dealt with as a residual, they can either have a full tax impact or they can have a zero tax impact, and that will swing the tax rate around.

So I would urge everybody really to focus on the group tax rate rather than the components to it.

I think we typically said the tax rate in the 15% to 17% range, I think where we are this year at around 16.5% is probably more representative of our thinking going forward.

So it's sort of in the upper end of the range that we've talked about rather than I think what you saw last year or the year before.

And Andrin?

As for MenB, we believe that despite the fever rates that we saw, that the risk-benefit profile, based on the clinical results we have to date, is clearly a positive.

And of course, we discussed the fever rates with leading experts, pediatricians, and they clearly are not worried about it, given the devastating disease that MenB is.

We have not seen the consequences of the fevers.

And these fevers, they disappear within 24 hours, are easily predictable and do disappear.

We also have seen in our Phase III trials that that fever was not [very] to the mothers and fathers who brought their children in.

We had more patients who wanted to participate than we could enroll.

Based on that also from the customer perspective or from a patient perspective, we remain quite positive.

That being said, the Phase III trials are not completed yet.

The enrollment has been completed.

We have several thousand patients enrolled, and we expect the final study results in the second and part of this year and then they will, of course, also be published.

And then, I think we will have more clarity on how the Phase III program will really look.

But based on everything we know today, clearly, the fever is still giving us a positive risk-benefit profile.

Thank you very much.

Matthew Weston, Credit Suisse.

Many thanks.

Three questions, if I may.

Firstly, a financial one regarding Protez, if I remember right that you bought the company for $400 million; and obviously with the failure of their lead compound, there was the write-down today.

Can you set out what the other $250 million of value is?

What else is there behind it that we should look forward to in the future?

Secondly, obviously the strong performance from H5N1 leads to significantly greater cash flow in Q1 than anticipated, and certainly relative to many people's expectations for the full year given your caution in 4Q.

The question is, what's the priority for the use of that excess cash flow?

Is it going to be to pay down debt for Alcon?

Or should we anticipate that some of that will come back to shareholders in increased dividends?

And just in general, some commentary about how we should think about your aggressive debt pay-down in the basis of a dividend policy.

And then finally, Fabian asked the question earlier about the implications of generic Cozaar on Sandoz.

Can you explain how managed care discussions are going at the moment with US Diovan?

Are you coming under pricing pressure in the face of the Cozaar launch?

And how would you anticipate Diovan to pan out in the future?

Are you pursuing a strategy of maintaining volume?

Or are you pursuing a strategy of maintaining value?

Okay, Matthew, you are going to regret asking the question about accounting on Protez.

Never.

We paid $100 million.

And I think as was disclosed at the time, there were further stage payments, depending on where the milestones were met.

Under the accounting rules, you have to anticipate what you think the most likely payments are or where there were higher probabilities of those future payments, you accrue for them on a discounted basis.

So even though we paid $100 million, we actually recorded $250 million in our books with $150 million of anticipated future payments, offset by a deferred liability.

That deferred liability was about $100 million when we came to unravel it.

So it was $250 million minus about $100 million, which gives us the pretax $150 million, $152 million.

And then there was a deferred tax asset against that future liability that was offset in the tax line as well.

So it does get quite convoluted.

And I think increasingly, that accounting is going to be taking into this territory where cash outlays and what goes onto the balance sheets are going to be quite two separate discussions.

But fundamentally it's now 100% written down.

Yes; correct.

And then, on cash flow, I think anybody who's sitting on the short end of a $28 billion payment is going to be thinking about short-term cash management and minimizing debt.

And I think that that will be our priority for a while to come because it clearly changes the shape of the balance sheet quite dramatically.

Shareholder returns, the dividends will continue to be paid out of operating performance.

Share buybacks and the like in my view are a decision about the use of whether or not you have surplus capital.

At this point, we don't have surplus capital.

And therefore, cash will continue to prioritize towards the repayment of debt.

Yes, so the question was our managed-care strategy with Diovan and the rest of the franchise, given that the generic to Cozaar has been launched.

You know, it's interesting because I think many people had assumed that because of Cozaar, we would have direct pricing pressure on Diovan.

And in fact, what's really happened is it opened an opportunity for Diovan.

Many large managed-care accounts will be looking at the number of ARBs they have on formulary.

And as a result, we've reopened discussions to become often one of two ARBs on that formulary.

And given Diovan's broader label, we are often the player that's able to achieve that positioning.

It is true that for some of these accounts, we have given some price, but in return, we have seen both volume and market share go up markedly in the last couple of weeks of the quarter.

So we think we're on the right track here.

Okay, thank you.

Alexandra Hauber, JPMorgan.

Good afternoon.

Several questions, please.

First of all, can you give us a little bit more color on what has happened in COGS and to get an idea how this will evolve?

I understand there's two components.

One is the lower valuation of the inventories.

Can you just confirm that they are now valued at a lower level, and that's been a one-time effect, only affecting the first quarter?

And the second component was this excess capacity which is now in the system.

Can you just tell us where this comes from and over which time that excess capacity will be worked down?

Second question on the vaccines, there seems -- based on the appendix data, there seemed to be a 7% price decline in Vaccines and Diagnostics.

Can you just tell us where that is from?

And just also a follow-up on an answer Andrin gave earlier.

Could you just tell us why the surrogate for a protein-based vaccine would be different -- for the efficacy for a protein-based vaccine would be different from that from a polysaccharide vaccine?

Third question, to David, on the MS data at ASCO, my impression was that there's going to be annual updates every year at ASH.

So, now we're going to get a 16-month update at ASCO.

Will there be two updates every year now?

Or is there anything specifically noteworthy you are going to present this year?

And the final question is on elinogrel, on the study for coronary heart disease.

Is that -- is that anything that is going to resemble the TRA -- the TIMI 50 studies, size wise?

And also, why are you actually doing this?

I can't imagine that the reversibility in the IV formulation are of some benefit -- a certain benefit in the acute setting, but why would it be of a benefit also in a less acute setting?

Cost of goods.

So, productivity improvements throughout the P&L will continue, and that includes in tech ops and manufacturing.

So, we will continue to face the need to re-value inventory I think over time as we continue to become more productive.

It does raise the question of what's the ideal manufacturing footprint for us as a company.

And all I can tell you at this point is we will look at that with the goal of trying to improve that part of the P&L as well.

I really don't want to say much more at this point in time.

Regarding Tasigna, just to give you some insight, Alexandra, so, as you know, we're in the midst of an FDA review for the first-line approval.

And they asked us as part of that review for the 16-month update.

And that's why you will see it at ASCO.

You will also see a two-year data set at ASH, and then probably I would expect once a year afterwards.

I think this data will be fairly meaningful.

As you know, we saw less progression to advanced stages of disease at the 12-month point.

And it will be interesting to see how that continues to play out.

The next question was about elinogrel, I believe.

Trevor?

So, we've been looking at the Phase II data from elinogrel in Q2.

And a lot of work coming out of that analysis, coming out of that, will drive the acute coronary syndrome design, which will start later this year.

We are of course working with the TIMI Group on aspects of their design, but I think there are a couple of innovative features to that, that you'll be interested to see.

That's the use in acute setting.

And I think your other question was around why is there any utility to this class of drugs in the more chronic setting, which we've indicated?

As you know [pidogrel] had a positive study, a one-year study, post MI in a chronic setting.

And there are concerns about the usage of an irreversible agent in that setting.

But I think to have a safe reversible agent in a chronic setting would be a very useful addition to the armamentarium.

And -- oh, go ahead.

Yes; up to me, Joe?

Yes.

Okay.

So the first question on the price decline, I'm not entirely sure I understand where you derived the 7% price reduction from.

What I can say is that we saw price reduction of the underlying base business in vaccines last year, which was mostly the result of decreasing prices in flu.

Because most large contracts, especially in the US, had been signed before the pandemic hit, and we saw a price reduction of 20% to 30% due to an oversupply.

Clearly, a trend that we expect to change in this season.

And we would think that the prices, based on what we see up to now, would increase.

So for the overall outlook for this year, I would not expect the price decline in vaccines.

Andrin, just before we go onto the second part, let me just add one other thing, Alexandra, and that is partly the way that it's computed.

But when you have Swiss franc exports, we have recalculated those under constant currency rates.

And because we haven't adjusted the prices for those exports, they've been regarded as a price reduction.

It's actually akin to a currency effect, and it could just as easily have been included in the currency column.

But because that's how we've always calculate it, we left it in the price column.

So it's not what I would call voluntary price reductions.

It's a currency translation effect.

Thank you.

And on the protein-based MenB vaccine, the challenge lies in the fact that there are about, if you take the US 500 circulating relevant MenB strains.

Now, if you look at the polysaccharide vaccine, I think the most complicated one out there right now is Prevnar 13.

So, what you do there is you make a Phase III trial, and you vaccinate children.

Then you take the [sero] of these children, and you test whether, at the end, their blood sero would kill each of the 13 different bacteria that are circulating.

Now, if you have 500 different strains circulating, this is simply impossible already from a logistical point of view.

You wouldn't have enough sero, and of course you could also not run that huge amount number of tests.

So, what we have to do is to come up with a surrogate by which you could deduct from a few tests, whether this vaccine would protect against the whole 500.

And I think that is the challenge.

On top of it, we have different proteins in our vaccine.

And each of these protein contents.

of the circulating bacteria, is slightly different.

So this makes it quite sophisticated to come up with a methodological concept by which you could derive from a certain protein content in an existing bacteria whether the vaccine would give protection or not.

So how do you deal with that in your European study?

Because (multiple speakers)

Well, I think that Europeans are more (multiple speakers).

The Europeans were more pragmatic.

They said well, assuming you can show protection for a few of the strains, based on your proteins, we trust that the vaccine would also protect against the others.

And at the end, once the vaccine is used, real outcome will tell an exact effectiveness.

It's any way just assumptions that we can make.

So though it's more pragmatism.

While the FDA, given that this is a precedence for future protein-based vaccines, want to have a more logical, scientific concept that would really prove coverage in a more theoretical way.

Okay, thank you.

Andrew Baum, Morgan Stanley.

Good afternoon.

Three quick questions.

First one, John, on the subject of fixed costs and rationalizing your manufacture, how quickly, realistically, do you think you're going to be able to accomplish this?

And how persuasive can you and Joe be in discussions with the canton to minimize any negative impact on your tax rate given potential shifting of manufacture away from, and therefore, employment away from Basel?

Secondly, on healthcare reform, you spoke around the subject in saying that it will not impact your guidance for this year.

Perhaps I could encourage you to give your estimate for what the impact will be, taking out the offsets, both for this year and next year in order we can perhaps benchmark against some of your competitors?

And then finally, I have to ask, is there any update on the passage of Lovenox through the FDA?

Many thanks.

Yes, Andrew, on fixed costs, I think David has already explained where this excess capacity comes from.

Although, of course, before you close a plant, you have to think very carefully about whether future demand or whether future growth in the business will utilize it again because it's not a very good thing to do to sort of close a plant in the short term and then find you need it three years down the line.

So there is actually quite a lot of logistical analysis that needs to be taken account of, both within Pharma, but also across the group as a whole.

Because many of the technologies used in pharma are common to Sandoz, for example.

So it's not by any means a short-term fix.

I think the tax consequences of it, I know this is an issue for you, and maybe we should take it off-line a little at some point, but it's not quite as threatening as you suggest because of the way the manufacturing setup is, and the location of intellectual property.

And you have to assess which part of the value chain ascribes the reward.

And it's not necessarily the manufacturing that has all of the reward in the system.

Andrew, regarding healthcare reform, as we've said, the impact from a Company standpoint for US healthcare reform is in the current guidance.

Next year, it steps up due to the timing of some of the elements of healthcare reform, as you are aware.

I would hesitate to get into it in terms of the specific numbers, but we have said before that we don't want to use healthcare reform as an excuse for performance.

And we're looking at ways to mitigate that healthcare reform either through increased productivity, lower cost because it's largely coming in the form of rebates.

And I would say that relative to our peers, if you just look at the fact that we are underweight US, generally a third of our business versus up to 50% of the business of some of our peers in the US, I think that could give you a good feel for it.

And Jeff, Lovenox?

Andrew, Enoxaparin, really not much new to update you on.

We are awaiting FDA's ruling on the two remaining citizens' positions.

And we believe that we have satisfactorily resolved each of the specific technical and regulatory issues that are outstanding.

So we aspire to launch as soon as we get approval.

And just final question, and the expectation is it will be as an aNDA rather than as a 5 or [5(b)2]?

Yes, correct.

Thank you.

Brett Kaplan, Cowen.

Thanks very much.

Just a couple of questions.

First, on FDY, whether you have received the briefing documents from FDA, any surprises in there that you would think that we would be surprised by?

And, second, on FDY, how is Novartis doing relative to the REMS going forward on this program, and whether that will be a barrier to launch should you get approval near term?

Just, you had mentioned during the call healthcare reform in other countries as an impact.

Can you just give us more clarity around that?

And then, lastly, on just a mention around ARB in the market increasing slightly in the US, that's the -- can you give us a reason why that market has increased?

Thanks very much.

Trevor, FDY?

So Brett, on FDY, we've not received the briefing documents from the FDA.

And usually that would only occur in much closer proximity to the advisory committee.

But I can say that we've had very close dialogue with them almost on a weekly basis and in Europe around aspects answering questions on the submission.

So that has been progressing well.

We have submitted both to the FDA and in Europe a comprehensive REMS program, and that is also a matter for discussion and analysis with the agencies.

So I think that we are in good shape at this moment with regards to the review and we look forward to the advisory in June.

I think, Trevor, just one clarification; this is David.

When I was speaking, I may have said that we expected Gilenia approval in both the US and Europe this year.

Just US this year; Europe is more likely for early next year.

Is that correct?

That's right.

So I think we've said that we have the advisory on June 10, and then we have our action date is June 21.

As indicated, that is very tight timing to lock down issues around the label and the REMS program, although we have already discussion certainly around the REMS program.

So, quite possibly that could be extended by a few months.

But that would be this year in the US.

And we know that in Europe, the cycle time would put us at the end of the year, early next year.

Early next year, okay.

And then, in terms of other countries with healthcare reform, some of the -- in addition to the Japan biannual price decreases, which is not reform per se; it's part of their standard process, that some of the other markets where we've seen some significant changes are in the Turkish market, the Greek market.

There are some things happening in the Russian market as well.

So all of these are contributing, and there are ongoing discussions in Germany.

And we are still waiting to see exactly how that will play out.

And then our market growth?

ARB market growth?

Oh, you asked why the ARB market is returning to growth.

This is a harder question to answer.

I can certainly speak a little bit better about why our product is returning to growth, and I think I have done that with some of the -- through some of the managed-care discussions we've had as well as a refinement of the approach we're taking with our sales force and targeting and training of the sales organization.

The overall market does bounce around a little bit.

I personally would not be completely surprised if it's driven by two factors -- the fixed dose combinations, which are pulling in some new physicians and some new patients.

But also, there may be some increase just in prescribing and patients going back to doctors as the economy is improving.

But that's really hard to prove to you.

It's just a hypothesis that we have.

Thanks very much.

Okay, I think we have time for one last question.

Michael Leacock, RBS.

Three very brief questions if I may.

Firstly, in terms of the increase in the operating free cash flow, Jon, I just wonder if you might be able to strip out for us what the H1N1 accounts receivables change would have been.

I think there would have been a higher number at the end of 2009.

And I guess that would have come into benefit in the Q1.

Secondly, I read that you had 35% of the US jobs that you're planning to cut I think just under 400 will be through not [turning] vacancies.

Could you put into context?

That seems quite a high vacancy rate, some 35%.

Could you put that into context in the US?

And thirdly, I wondered whether you would had made an appointment replacing your head of Pharma in the US?

Michael, I don't have to hand the number on H1 cash collections.

I've got in mind a number that was -- why don't you call through to the IR team afterwards and they will help you with that one because I don't have it at hand.

Thank you.

The second question was regarding the restructuring that we've done in the US, which was largely to align the organization with the new product portfolio, but also to take out some cost.

And I think the main focus was why, although we reduced 383 FTEs, why there's only 250 actual individuals.

Clearly, as we've worked on this project, we knew that we were going to restructure.

And as a result, we were carefully managing, rehiring or filling vacancies so that we could minimize having to let people go and also the costs associated with letting those people go.

It's a proactive strategy.

We also had the opportunity, last week, to appoint a new head for North America.

His name is Andy Weiss.

Andy was previously running AMAC for us, has significant experience running other countries, other parts of the world.

Also has a background in finance as well as marketing and sales.

And we think he's the right man for the job.

Gentlemen, thank you very much indeed.

Okay.

With that, I would like to conclude the call.

I'd like to thank everyone for their interest and their questions, and we look forward to talking with you again next quarter.

Ladies and gentlemen, the conference is now over.

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