Novartis AG (NVS) 2010 Q2 法說會逐字稿

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

Welcome to the Novartis Q2 half-year results 2010 conference call and live webcast.

Please note that for the duration of the presentation all participants will be in a 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.

Joseph Jimenez.

Please go ahead, sir.

Thank you.

I'd like to welcome everybody to our second-quarter conference call.

Joining me here today on the Novartis end are Jon Symon, CFO; David Epstein, head of Pharma; Jeff George, head of Sandoz, Andrin Oswald, head of Vaccines and Diagnostics; and Trevor Mundel, head of Pharma Development.

Before we start, I'd like to ask Susanne Schafer 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, Susanne, and starting with the presentation, I'm on slide number four.

What I'd like to do is make a few comments about our performance in the second quarter, then discuss how we are dealing with the current external environment and some progress on our strategic priorities.

So on slide number five, you can see that we had a very strong second quarter.

Our sales were up 12% in constant currencies, and this was driven by strong growth across all divisions.

Our core operating income was up 23% behind not just the strong sales, but also continued cost control that gave us good leverage.

And that drove EPS up 18%.

We saw some great progress in our pipeline in the second quarter, and I'll talk more about that in a minute.

Now Jon is going to go into more details about the numbers, but I want to talk about the external environment and the progress that we are making on our priorities.

So on slide number six, this is an industry that's undergoing quite a bit of change.

As you know, reform in the US will extend coverage to just over 30 million Americans.

This is going to come at a cost to the industry with additional fees and increased Medicaid rebates; but, if you look at our business, we believe that the impact of US healthcare reform is manageable, given our diversified portfolio and our global footprint.

And the financial impact of this reform has been factored into our 2010 guidance.

Now, in Europe, despite the significant level of price cuts, we were able to deliver 8% sales growth.

I think this demonstrates the power of the innovation of the Novartis pipeline and the fact that that insulates us somewhat from those cuts.

On slide number seven, just to refresh your memories, the three strategic priorities are extending our leading innovation, accelerating growth and driving productivity to improve margins.

So, just touching on each of those, on slide eight, starting with extending our lead in innovation, I was very pleased to hear the unanimous agreement of the FDA Advisory Committee to recommend FTY720 for approval in the US.

This safety and efficacy data for this compound is compelling, and we look forward to an FDA approval in September with a launch shortly after that.

Secondly, as you know, Tasigna was approved in the US for the treatment of newly diagnosed chronic myeloid leukemia, and David is going to talk more about what that means for his business.

You can see on slide number nine that we expect significant progress on our pipeline across the board.

So, all divisions have specific goals and will be delivering on the innovation front.

On slide 10, we are also on track to file our meningococcal B vaccine in the EU of this year, and when approved, this will address a significant unmet medical need for infants and for children.

As you can see on this chart, we wanted to show the disease incidence data.

The opportunity for men B is largely ex-US.

That doesn't mean that the US is not important, but this is going to be a significant vaccine for us both in the US but, even more importantly, outside the US.

Slide number 11 shows how we are translating our innovation to accelerate growth at Novartis.

The innovation across our businesses is resulting in significant transformation of not just the Pharma pipeline, but in all divisions.

So this bar chart shows that about 21% of our total group sales were driven by newly launched products across the divisions.

On slide 12, Vaccines and Diagnostics is getting the benefit of Menveo.

So Menveo is our new vaccine for meningococcal serotypes A, C, W and Y, and it is helping build momentum in the base vaccines business.

We already have broad access in the US, and we are looking to further strengthen the brand with label expansion in the future.

The next slide shows Sandoz.

Sandoz had a very strong second quarter, and this is due partly to a pretty dramatic turnaround in the US.

The US was up 43% versus a year ago, you can see by that chart.

In addition, biosimilars were up 72% over the first half of the year, and that also contributed to Sandoz's strong results.

On slide 14, we don't talk a lot about our consumer business, but it continues to be a significant growth driver for us.

Voltaren, which is a brand we don't talk about much -- this is a topical analgesic -- this brand in Germany is growing 20%, which is about twice the market rate, and achieving over a 40 share of the category in Germany.

Also, Prevacid 24-hour -- that launch in the US is going well, achieving about a 25% share in a market that's growing almost 40%.

And then CIBA Vision continues to perform very strongly with our AirOptix brand.

This is our line of silicon hydrogel contact lenses.

This has about a 26% share of the category in the US; and it's, again, driven by innovation and some of the new product launches.

And even in Animal Health, we've got two brands that are performing extremely well, Sentinel and Interceptor.

These are US heartworm brands, and together they comprise over 40% of that market.

On slide 15, as we've stated previously, we are going to create a new eye care platform for growth with Alcon.

And we are on track to acquire 77% of the company in late Q3 or Q4.

It will depend on regulatory approval, but I have to say that we're making excellent progress on the antitrust side, and so we expect that transaction shortly.

On slide number 16, our initiative called Customer First is where we've leveraged the entire portfolio on a market level.

So what we've done is we've created an integrated key account management model in many countries.

Some customers are not yet ready for cross-divisional selling, but there are many who are, and we're starting to see some good traction here.

I believe that in the current external environment, this is one of the approaches that differentiates Novartis from some of our peers.

And then, on slide 17, you can see that emerging markets accounted for 25% of our sales in the second quarter with the top six countries growing about 16% in constant currency.

Now, our third priority is shown on slide 18, and that is to drive productivity to improve our margin.

So you saw the margin improvement at the group level, which was substantial this quarter.

And, if you look at the individual divisions, Sandoz delivered a margin improvement of about 110 basis points due to good cost of goods, productivity improvements and other cost reduction.

Pharma delivered a 180-basis-point improvement in operating income margin.

So a lot of this was focused on marketing and sales efficiency.

And I think it's just a demonstration that we are creating a mentality where productivity is a way of life, and we're going to continue to squeeze cost because that will help us maintain margin growth even at a time when we are investing in innovation.

So overall, a very strong quarter, and now I'll turn it over to Jon to talk in more detail about the numbers.

Thank you, Joe, and good morning or good afternoon.

Slide 20 sets out the agenda, which I want to follow the theme of innovation, growth and productivity and also comment on cash flow and liquidity.

I'll also spend some time looking at currencies.

Given the volatility we've experienced in this quarter, I want to give you a little more insight into where we are exposed and where the natural hedges lie.

Generally, I'll also focus on the second quarter.

And most of the slides that I'll go through have a half-year companion in the backup section, so you can choose how you want to look at performance.

On slide 21, Joe has already given you the headlines, but I think what's striking here is how strong the numbers are in every line.

We had some distortions in quarter one with the H1N1 revenues, but they are relatively small in this quarter.

So what you see is predominantly the underlying performance showing through.

Sales in the quarter were $11.7 billion, an increase of 11% in US dollars and 12% in constant currency.

Note that the impact of currency in the quarter was negative.

Core operating income at $3.3 billion grew 23% in both US dollars and constant currency.

Operating income growth at a reported level was a little higher than that, and I'll run through the exceptional items in a moment.

Core EPS grew by 14% to $1.20, again in both US dollars and constant currency.

Finally, but by no means least, free cash flow grew in the quarter by 24% to $2.4 billion.

On the right-hand side of the slide, you can see the six-month figures, which I won't go through, other than to point out to you the free cash flow figure of $5.3 billion, which, amongst all the strong numbers, really stands out.

On slide 22, you can see the components of sales growth.

Overall volume growth of 12% represents a really good performance.

And as you can see, all the divisions contributed strongly.

It cannot be clearer that, given the current pressures on government finances, an innovative and vibrant product portfolio is going to be the key to sustained performance going forward.

I also believe that our diversified portfolio will increasingly offer our customers, many of whom buy from all divisions, greater optionality that will enable us to build win-win outcomes.

Price impacts for the group was a negative 1%, again demonstrating the robustness of the portfolio.

David will give some more insight into what Pharma is experiencing.

Obviously, these numbers include US healthcare reform, the Japanese biannual price reductions, as well as price cuts in Europe.

And, as the full effect of these actions take hold, we would expect that the Pharma price impact in the second half to increase.

Exchange rate movements reduced sales by 1%.

On slide 23 you can see the reconciliation of operating profit growth from reported US dollars to core constant currency.

Although the movement between the two looks relatively small, you can see from the right-hand side of the slide that there have been a lot of moving parts this quarter.

The principal items, which are well covered in the press release, the litigation and legal settlements, the main component being the Velez settlement which was agreed to yesterday, an impairment of a financial asset in V&D, offset by an accounting gain following changes to the Swiss pension [screen].

During the quarter we agreed with the pension trustees a change in the structure of benefits, which now includes part of the defined benefit liability becoming a defined contribution liability.

Even though there are substantial transition payments, a net accounting gain arose.

Finally, on currency, you can see that the impact on profits was zero, slightly less than the impact on sales.

As I mentioned in my introduction, currency volatility has had a big impact in the quarter.

From a position in quarter one where currency had a positive impact of 7% on both the top line and operating profits, the general strengthening of the dollar has turned this into a position where, for the second quarter, as you have just seen, it became negative 1% on sales and zero on operating income, and most of this volatility occurred in May and June.

Slide 24 looks at the relative distribution of sales and costs.

From this, two things emerge.

Firstly, the euro is a big concentration of sales and costs.

Don't confuse this with profits, as that depends on individual transfer of prices and that's a level of complexity too far.

But when the euro is up alongside the Swiss franc, you see a strong offset.

In normal situations where the euro and Swiss franc move in tandem, there's a very strong hedging effect between the euro revenues and Swiss franc costs.

The euro/Swiss franc is therefore an important cross-currency correlation that has a big impact on profits and this is why the impact of currency movements on profits should generally be less than the impact on sales.

The second thing to emerge is the scale of others, and in this group of currencies you have Asia, China, Latin America and Eastern Europe.

These currencies are generally tough to hedge; but, given the wide mix of currencies here, there tend to be currencies both strengthening and weakening at any point in time.

This is the benefit of a broad global footprint.

But, as we saw in 2009 when the dollar appreciated against all currencies, the impact can be substantial.

Slide 24 shows how these currency blocks have moved.

For quarter one, you can see how the weaker dollar was against all currencies, resulting in a 7% impact on sales and profit.

For the second quarter the dollar strengthened against the euro but remained weak against the other countries, including the Swiss franc, resulting in a 1% negative impact on sales and, as I've said, zero on operating income.

It's obviously dangerous to make forecasts, but the final portion of this slide shows directionally the impact in the second half, based on June rates.

What you see is the dollar having appreciated significantly against the euro but less against the Swiss franc, and it's mixed against the other currencies.

If this situation continues, we would anticipate for the whole year that the impact on sales would be a small negative but broadly neutral on operating income.

Slide 26 gives you the picture of sales by division; and, as you can see, it's a strong performance across the board.

In absolute growth rates, V&D stands out, which is, again, partially driven by revenue recognized on H1N1 contracts, which for the quarter amounted to $200 million.

This brings the total recognized for the year to $1.3 billion and now more or less completes the program.

Obviously, when we get into the final quarter of the year, the size of this program will distort the reported growth rates.

But nonetheless, this has been an outstanding we executed program by the division, and you should not miss that, excluding H1N1, the division grew by 46% in the quarter.

All components of Consumer Health performed well and the press release gives color on many of the individual elements.

Prevacid's share is down slightly to 25%, following the launch of a competitor product, but Joe has already mentioned category growth has now increased to nearly 40%.

Sandoz continues its strong run of performance with 13% constant currency growth driven by 15% volume growth.

US performance is once again a major component of this at 43%, but the growth of biosimilars at 66% is also excellent, and there are many other individual strong market performances.

In addition, the acquisition of EBEWE contributed 5 points of growth, and we'll start to lap this acquisition from full quarter four.

I'll leave David to go into Pharma in more detail.

On slide 27, Joe has already described portfolio rejuvenation, and I won't repeat what he said, only to re-emphasize how important this is to our future.

Incremental revenues of $1 billion have been generated compared to the second quarter of 2009, and for the half-year new products generated revenues of $5.5 billion, and that's an increase of $2.9 billion over the first half of 2009.

And, as this slide also points out, new product regeneration is not just a focus of Pharma, but all divisions are generating new revenue streams.

For those of you understandably focused on patent expiries, the other side of the story lies here, and it's a story as good as you'll find in the industry, especially if we take into account the recent pipeline use flow.

Slide 28 gives you the other dimension of portfolio rejuvenation, which looks how we are addressing the faster-growing emerging markets.

As you can see, the top six emerging markets grew 16% in the quarter, ahead of the established markets at 12%, which in itself represents a good performance.

Turning to operating margins on slide 29, this slide shows a concept we are using to drive performance.

The concept of operating leverage looks at the relationship between sales and profit growth.

And, as you can see, all divisions generated profit growth in excess of sales growth, and by definition improved their margin.

It's not going to happen like this every quarter, as there will be times when we decide to reinvest more.

But over time it's why we believe that sustained innovation should generate revenue growth which, with a continuous focus on productivity, should lead to margin expansion.

And it's worth pointing out at this stage, now that the H1N1 program is complete, and it will be relevant for the second half and as you start to think about 2011; but H1N1 revenues added around 1.5 percentage points of margin in 2009, and over the full year of 2010 will add about the same.

Obviously, we don't expect these sales to reoccur in 2009, and therefore this is something that you need to factor into your forward thinking.

Slide 30 looks at where we have operating leverage, generating 2.7 points of additional margin.

The picture is very similar to the first quarter with strong gains being made in SG&A, especially in Pharma, offset to an extent by an erosion of COGS, and part of this erosion is also attributable to higher royalty payments.

Both of these two trends will play out for a bit longer.

On SG&A, the portfolio transition to a more differentiated specialty care portfolio will improve the sales and marketing mix, while for COGS, improving efficiency in the short term creates more unabsorbed overhead.

It's also true that it's tough to adjust manufacturing costs quickly enough to unforeseen price cuts, and that will add to the pressure.

But we recognize that we have to deal with the imbalances that are created.

Sandoz has operated in this environment for many years and is very skilled now at being able to absorb 7% to 9% price decreases through manufacturing efficiencies.

This has to be a skill that is perfected across the group, as I suspect price pressure could be with us for a while.

The margin improvement that comes from a lower rate of R&D spend is predominantly due to the facing of trials, and much of this benefit will reverse in the second half.

Slide 31 explains why core operating income growth of 23% reduces the 14% earnings per-share growth and is broadly the same factors as the first quarter.

Underlying 13% growth in associated Company income to a total of $299 million was below the rate of profit growth at 23%, and therefore, has diluted growth slightly.

Net financial income reflects both lower financial income and the incremental cost of Alcon-related borrowings that we took out at the end of the first quarter.

The effective tax rate for the quarter was 17.6%, representing a slight increase in the estimated tax rate for the year, which we now expect to be around 17% based on how we see the geographic mix of profits evolving.

Be careful how you interpret the derived core tax rate, as we manage the tax on a total legal entity basis.

Finally, cash flow and liquidity, on slide 32 -- as I mentioned in my introduction, the performance on cash flow generation continued strongly with $2.4 billion generated in the quarter, and for the six months, free cash flow was $5.3 billion.

Obviously, when you boil down the strategy of innovation, growth and productivity to its most basic element, it's cash flow, which ultimately gives us the ability to invest for the future and to pay dividends to shareholders.

Our liquidity management is focused on completing the Alcon acquisition.

In the quarter we've increased our gross liquidity to $23 billion and have put in place an expanded CP program to enable us to complete the acquisition of Alcon from the third quarter, or whenever we have final regulatory approval.

So, turning to slide 33 and the summary, it's clear that this was another strong quarter with sales up 11% and reported EPS increased 18% to $1.06.

Free cash flow before dividends continues to be strong, up 24% to $2.4 billion.

So far as the outlook is concerned, we now expect sales to grow mid- to high-single digits as compared to our mid-single digit expectation at the beginning of the year.

This is excluding Alcon, of course.

The other element to factor in is currency.

I've gone through this in quite some detail, so I won't repeat the discussion.

But based on our current currency assumptions, that is, using June average rates, we expect for the year the impact on sales to be slightly negative and for profits broadly neutral.

Finally, the financing preparations for Alcon have been completed, and we've prepared for completion whenever we receive regulatory approval.

I'll now hand you to David.

Great, Jon, I'm pleased to share our performance for Pharma for the second quarter.

We can start on page 35.

In short, I'm going to focus the presentation on our strong net sales growth versus last year and versus the market, our margin improvement through our productivity push and continued very good pipeline progress.

If we go to the next page, you will note that top line grew 8% with a corresponding increase in core operating income above net sales growth of 14%.

Going to page 37, you see that Novartis Pharma continues to outperform the market by a margin of more than two to one, and we remain the fastest growing of the large pharmaceutical companies, being one of only two that are gaining incremental market share.

On page 38, you see that the growth is broad-based.

We have a strategy in Pharma to try to win bulk in the primary care and specialty segments, with the business increasingly shifting over to specialty, and what you'll note is strong growth across each of our therapeutic areas.

In particular, oncology grew 11%, fueled by growth of Tasigna, which was up 73% to $89 million in the quarter.

Our CV portfolio had many strong contributors, in particular Galvus, Tekturna and Exforge.

Our Neuroscience and Ophthalmics portfolio grew 17%, powered by a 29% increase in Lucentis; and our Immunology and Infectious Disease portfolio grew 12%.

That portfolio includes Reclast, which was up a strong 23%.

So overall, a very good picture across each of these franchises.

If we turn now to page 39, you see that we are perhaps the most geographically spread of all the big pharma companies, with a very broad footprint.

This helps us in many regards, leveraging new launches, but also it helps us continue to deal with the pricing actions as they occur all around the world.

As you can see from this chart, also broad growth, good growth by each geography.

In particular, I'd like to point out our very strong result in Europe, plus 8% despite the price cuts that we have experienced there this year -- 2.4% in Q1 and minus 3.7% during Q2.

This is because, in Europe, we have been quite successful in gaining approval for new launches, and our commercial organization is very strong at launching those products.

In fact, 27% of our sales in Europe now come from products that were launched over the last five years, so this portfolio is rapidly being rejuvenated and allows us to grow despite the price cuts.

In Asia, Africa and Australia we see a nice rebound in the growth rates.

This is because largely during Q1 we saw the impact of a Japanese wholesaler de-stocking prior to the biannual price cuts.

So overall, a very good picture.

Clearly, as we look forward, particularly in Europe, we would expect to see more pricing pressure in the second half of the year, and it's our goal to continue to drive volume to try to offset as much as possible those price cuts.

I'd like to now look at our portfolio in a little bit more detail, turning to page 40, in particular, our biggest franchise, which is our Valsartan business.

As you can see from this chart, in both Germany and the US, two of our biggest businesses, when comparing first half 2010 to first half 2009, we were able to experience continued growth of this particular franchise, both in terms of net sales but also in terms of market share gains.

This is largely because we've been able to grow our tier 2 presence and access in the US.

But in particular, worldwide, when you look at this particular franchise, physicians believe in the very strong and proven efficacy of Diovan and its combinations.

We have broad labels based upon outcomes, and we have a very broad portfolio of single-pill combinations which allows us to continue to grow despite the introduction of a generic for Cozaar.

So I think, in most regards, these results are better than what many had anticipated for this franchise.

Turning now to page 41, and I think this is even more important than how we are doing with Valsartan, it's our new product portfolio and our recent launches.

In particular, between Q2 2010 compared to Q2 2009, we had a 43% growth in these relatively new brands, now with 21% of our total portfolio coming from new products.

This will be increasingly important as we work to rejuvenate that portfolio as we experience the patent expirations from Diovan from our -- and zoledronic acid.

On page 42 I'd like to spend a moment on eight particular product/franchises I think are really key to the near- and mid-term future of our Pharma business.

Seven of these eight products, we believe, have blockbuster potential.

All of these products will be patent protected in 2015 and beyond.

And with the exception of FTY720, which I'll discuss in more detail in a moment, all of these products have at least their first approval, and they're currently in the market generating revenue today.

So what I'm not showing you here is a Phase I or a Phase II portfolio or products that we hope will be approved in the future, but products that we have in hand now that the market needs and that will provide, I believe, extraordinary growth for our Company over the coming years.

Turning to page 43, we'll spend just a moment on FTY720.

I believe the FDA advisory panel review of FTY for the treatment of relapsing/remitting MS went particularly well.

The panel went as far as to recommend first-line approval for this medicine, and we expect an FDA decision in late September with a potential US launch in October, followed by a likely CHMP approval in Europe before the end of the year.

As you can see from the data presented on this chart, the profile for this product is very strong with a 52% reduction in annualized relapse rate compared to standard of care and, very importantly, a significant improvement in disability, which means these patients will feel better on a day-to-day basis as they continue to deal with their disease.

Just to remind you, the market for MS drugs is expected to reach approximately $11 billion worldwide in 2010.

Turning now to page 44, I'd like to update you on our second most important franchise.

This is the Glivec/Tasigna franchise.

As you know, we went and did a head-to-head trial of Glivec versus two different doses of Tasigna in the newly diagnosed setting for chronic myeloid leukemia.

And what we were able to present at ASCO this year -- and it form the basis of our recent FDA approval -- was really striking data, was showing that Tasigna was able to achieve complete molecular responses in 21% of patients as early as 18 months.

And, perhaps even more important, this particular marker translated into improved outcomes for these patients with fewer patients progressing to advanced stages of the disease.

We launched this product several days after the US FDA approval, and our people in the US tell us that the initial reception to the launch is going quite well.

Turning now to page 45, I'd like to just update you on two other products.

At ASCO a little bit earlier this year, we presented data from a very large outcomes trial showing that Zometa has a direct anti-tumor activity.

In this case, in the setting of multiple myeloma, we were able to show improvements in both progression-free survival and overall survival.

We will be talking to the agencies about including this data in the clinical section of the label.

The product is already approved for myeloma, but this should certainly help its adoption.

Another very important product for our company is Afinitor.

As you know, we have eight different programs underway for Afinitor.

Afinitor is currently approved for renal cell carcinoma.

We've already presented data during the quarter on a Phase II study which shows Afinitor shrinks brain tumors in tuberous sclerosis patients.

That has now been filed in the US, where we have received a fast-track designation.

We also just presented data, Phase III data, which shows progression-free survival is extended for patients with advanced pancreatic neuroendocrine tumors, and this will be the basis for a filing in combination with new data from a recent Phase III carcinoid tumor trial which I would like to explain to you in just a moment.

The two of those together will form the basis for that particular submission.

The surprise in this study was that, although we saw quite impressive, clinically meaningful results from the trial, we just missed the statistical significance with a p-value of 0.026 versus a needed p-value of 0.0246.

As we begin to look at the data, and I must remind you this data is very fresh and will require additional analyses, we noticed an imbalance between the two arms.

So we will do those additional analyses, and we hope to talk to regulators during the month of August and, based upon those discussions, we will finalize our submission strategy and share that information with you.

Turning to page 46, I'd like to now spend a moment on productivity.

It's very clear that, due to the pricing pressure as well as our need to find the funds to launch this impressive portfolio of new products and our desire to drive margin growth, the productivity needs to become and is becoming a way of life within the Pharma division.

We spent energy during the first two quarters of this year reallocating commercial spend in marketing and sales against the priority brands, in particular those eight products which I've already described to you.

We continue to implement, under Trevor Mundel's leadership, lean processes for clinical trials, including shifting our clinical trial footprint to more of the emerging markets, where our business is growing and where the cost of doing clinical trials is often less.

In addition, we continue to push on off-shoring and outsourcing with the result of improving ROS by 1.8 points between Q2 '09 and Q2 2010.

I'd like to know share with you the outlook on page 47.

Most importantly, I would like to reaffirm the mid-to high-single digit net sales growth.

This is despite the pricing pressures that we are seeing around the world.

The underlying volume growth will be even stronger, and I believe that the launch brands will continue to drive sales growth overall.

In the area of productivity, core operating income should continue to grow ahead of sales, and our focus on innovation is undiminished with strong pipeline news flow expected in the second half of the year and up to a total of five submissions in the US, Europe and Japan.

And with that, I'd like to hand it back to Joe.

Thanks, David.

Okay, just to summarize on slide 49, we are making solid progress on our three priorities.

I think this has helped us really focus on our efforts.

And, based on that, on slide 50, we are increasing our guidance on the sales side from mid- to mid- to high-single-digit sales growth, with the expectation that our operating income margin will improve for the year.

So that's the end of the presentation, and now I'd like to open it up to questions.

(Operator instructions) Kevin Wilson, Citi.

Could I ask first about price pressure?

Can you give us a sense of where you think that price pressure will go from the levels you've experienced so far?

Clearly, you talk about heavier pressure in the second half.

Perhaps you could give us some sense of where you think it may go in 2011, and whether or not we need to take a rather more bearish view of that on the outturn.

Secondly, could you just remind us where you are in Sandoz with Toprol-XL?

And, lastly, could Jon give us some sense of the longer-term tax charge direction?

So I think I'll start on the Pharma price pressure.

If I had to give you some rough idea directionally, what we would expect this to see -- and I'll try to do this by region for you.

I expect to see in Japan, we see basically the full-year impact.

As you know, the Japanese price cuts essentially start during March.

So in the second half, we'll see somewhat more pricing impact.

Probably the area that people are most focused on is Europe.

Year to date, on average across the first two quarters, it was minus 3.1%.

And, while I can't give you an exact number for the second half, I can tell you we'll see the full-on effects of the cuts in Greece and in Spain.

In addition, we will see the introduction of the rebates in Germany and some downward pricing pressure in France.

It would not be unreasonable to estimate that the impact could be as much as twice what we saw in the first half in Europe.

In the rest of the world, I don't think you will see that much difference from what we saw in the first half.

And I think, the only thing I would add to that is that, in Europe, obviously the second quarter, almost 4 points of hit.

So third and fourth quarter are not too much worse than that, and that would still get you to what David said.

So really, the double is not off of the second quarter; it's probably marginally more than in the second quarter.

Jeff, Sandoz?

Kevin, with respect to Metoprolol Succinate, or generic Metoprolol, as I communicated in the Q1 Q&A, we do not expect to relaunch Metoprolol this year, in 2010.

We continued to work with the FDA to bring the product back to market following the submission of the required supplement that we did late last year.

But for competitive reasons, there's not much more I can say at this point.

And, Jon?

Yes, tax charge, I think we've given you the range of 15% to 17% as being the range, and we are obviously right up at the top of that at the moment with an expectation of a group tax rate of about 17%.

And, I think we'll probably stay around that level for a while.

Obviously, long-term, long-term tax planning is something that we work hard at, and you can't guarantee it every year, but I think 17% is a reasonable target.

The second thing I would say is, just be careful if you try and over-interpret what an underlying core tax rate would be.

I said this in my comments because we do manage the tax charge on a legal entity basis.

And obviously, we do know that there are ongoing amortization, or there are acquisition accounting items in there that we take out of core, but we do manage it on a legal entity basis.

So just be careful in interpreting a residual tax rate after the core adjustments have been taken out.

Thanks; could I just ask you for clarification on that French comment regarding pricing?

Could you give us some [quantitation] of what you think the impact would be in France?

I don't think, at this point, we can quantify by individual country exactly.

I would say that the French impact would be rather small.

Matthew Weston, Credit Suisse.

Firstly regarding Gilenia, the release mentions that the clock has stopped at day 120 in Europe, I presume for some questions.

Can you give us a time line as to when you are likely to reply to the EMEA?

Can you give us some indication as to what questions they have been asking and how those refer back to the questions you faced from FDA?

Secondly, I also see from this statement that you have settled with Teva on the Zometa patent trial.

It seems that that has been fully settled without any financial transfer or transfer of other assets.

Can you confirm that that's the case?

And then, thirdly, just on Afinitor, can you give us a little bit more color on what you are referring to regarding the imbalance between the arms and what that may mean for treatment in the larger carcinoid tumor population?

Okay, Trevor?

[Zometa], on Gilenia, the questions we've received from the CHMP have been very similar to the questions which you saw in the advisory with the FDA, so a strong focus on safety and a good agreement around the efficacy of the drug.

We will resubmit and answer those questions in August.

I think we did indicate that in the release.

That was because we had some very specific data which directly addressed those questions which we wanted to include.

And of course, as you know, the timing of that is usually negotiated, as we did with the reviewers, so that we remain with our guidance that we should have a positive CHMP opinion in the fourth quarter of this year.

The second question was regarding the Zometa patent challenge by Teva.

The short version of it is that they decided after looking at our very strong patent to convert their Paragraph IV into a Paragraph III, which protects our product to March 2013.

There were no considerations exchanged for them basically withdrawing their action.

Regarding Afinitor, there were imbalances in a number of areas.

I don't have all the details in front of me, but they included typical things such as age, extent of illness, etc., and we need to really discusses with the agency in quite some detail before going into more detail with you.

Graham Parry, Merrill Lynch.

I was just wondering if the management have any opinion on the recent releases from the independent directors committee at Alcon and their third-party legal opinion, which seems to suggest that Novartis-appointed board members might have to abstain from voting in any merger proposal, contrary to what the management has previously indicated.

Any statement you have on that would be great.

Secondly, a question on Onbrez -- it doesn't seem to be making huge gains in Europe so far.

I was just wondering if you could talk us through the launch dynamics and any issues you are experiencing there.

And then, the third question just relates to the margin guidance.

You have now added in margin guidance for the group to grow this year.

Obviously, you've indicated you are getting help there from the H1N1 contracts, so I was just wondering, would you be able to guide to margin growth in the absence of H1N1?

That just would help us to know what to expect for next year.

Thanks very much.

Okay, starting with the Alcon question and the independent directors, as we have said and as we said on January 4, our intention is to first acquire the 77% majority ownership and then proceed with a merger through Swiss law for the remaining total for 100%.

And I think, if you look at the arguments that are made by the IDC over the past few weeks, nothing is really surprising.

I think, in fact, their actions validate our position in that a proposed merger under Swiss law will take place.

So I think the -- I will say, though, that I was disappointed by the IDC's attempt to set up a litigation trust because I think, as members of the board, the independent directors have the same fiduciary duty as the other board members of Alcon to act in the interest of the company as a whole.

So we continue to be focused primarily on closing the 77% and then proceeding with the 100% under Swiss merger law.

Just to clarify on that, so it's still your expectation that Novartis-appointed directors will be voting on the merger proposal?

Yes.

We continue to maintain that a director is not considered conflicted solely as the result of being nominated by a majority shareholder, and there are several legal opinions that will support that.

Regarding Onbrez, actually, the brand is doing quite well.

The feedback has been excellent.

What you have to remember is, so far we have essentially launched in just one market, and that's Germany.

We are in price discussions across Europe, and we will have a -- starting largely in September, we will have a significant number of launches, and I think this will be an important growth driver for the Company next year.

And on the margin question, the reason for really pointing out that something on the order of 1.5% group margin improvement in 2009 and 2010 came from H1N1 was to really say that, year on year, that the effect is neutral.

So that the desire or the expectation that we will increase group margin this year comes irrespective of the contribution from H1N1.

Florent Cespedes, Exane BNP Paribas.

First of all, on the emerging market, despite the less dynamic Chinese market, you delivered a strong growth in (inaudible).

Could you elaborate a bit on this?

Is it due to a specific country or due to the remaining five countries?

And also, if you would come back on the situation in China?

Second question, on Lucentis, could you give us some color on why we see a less dynamic growth?

Is it due to pricing pressure, market is saturated, or anything else?

And last question is, for Andrin, regarding men B, could we have a more detailed update on the discussions with the FDA regarding the process in the US?

Let me start with Lucentis.

I think Lucentis is growing quite nicely.

What you see for Lucentis, we are heavily concentrated with this product in the EU.

So this product is impacted by the pricing pressures that we see across the European Union.

Having said that, we believe there is still significantly more market to penetrate in wet AMD.

In addition, we already have two new indications we're working on, as you know -- diabetic macular edema, which we should hear some news, we think, by the end of this year.

And then we also anticipate filing for retinal vein occlusion.

These two indications, in terms of patients, are, order of magnitude, the same size as wet AMD.

The second question was around emerging growth markets.

We are growing double-digit in the top six emerging growth markets.

Our Chinese growth was a little bit lower than one would have anticipated.

We learned that we had had a little bit additional too much stock in the market from late last year.

That has now been worked down to more normal levels.

In addition, you may recall that we restructured into four regional businesses in China to reflect how the Chinese government is structuring their health care policy in the country, so that we could be prepared for more rapid growth in the future.

And it's taking us a little bit of time to work through making that work in a precise way.

But as we looked at the quarter, actually sales have improved month over month during the quarter.

So I'm optimistic China will grow robustly in the second half.

Okay, Andrin, on men B?

On men B, in the US I think we're making good progress with the FDA on our discussion towards an end of Phase II meeting.

As you know, the men B vaccine is a highly innovative vaccine, protein-based vaccine based on reverse vaccinology, and it's not a surprise to me that the FDA takes some time here to really think that through carefully on how they would want to establish guidelines for how to show efficacy in Phase III, because this new approach to develop a vaccine is also adopted now by other companies, and we expect other similar products to come into Phase III.

And hence, they want to be really careful in how they deal with this.

Just recently they accepted our way, our methodology by which we want to prove efficacy in Phase III.

I think that was very good news.

Now there are only a few minor issues left that we are confident that we can resolve within the next few months.

And I wanted to highlight, however, again, as Joe has said in his presentation that men B clearly is a much bigger promise for us than just the US.

Our Phase III trials are mostly completed, and we expect publish the results in the fall.

And then, based on that, we would be right before filing in Europe and actually also in other countries around the world by the end of the year.

Maybe could you detail a little bit -- is it fundamentally different the way the FDA look at the efficacy compared to the EMEA?

It's not fundamentally different, but I think they had much more technical questions and they were going into more details about how exactly this methodology that we developed would be applied.

And the difference into Europe and why we are further ahead is because EMEA said, you can go into Phase III and you can show us at the end of Phase III how exactly you are going to show coverage with your vaccine, while in the US they wanted to know that before we started Phase III.

Alexandra Hauber, JP Morgan.

Firstly, just on Afinitor, can you just tell us why the required p-value was this 0.0246?

Do you take any penalties for interim looks, because you never talked about interim looks; or, were there any co-primaries?

And then also, just in general, I know this is early days, but is there a case to be made on huge unmet need in this indication, given that you do use -- it's an add-on therapy?

Secondly, coming back to pricing, for Sandoz it was minus 7%.

Is that also -- I think we should also probably assume that that's going to get deeper in the second half.

And I was just wondering whether you could also give us a similar idea about the geographies this has mostly affected.

Of course, we all know about the tenders in Germany.

Is that where the key thing of the pricing comes from?

And did I hear correctly that you said a 5% to 7% is a good figure to use for Sandoz as an average?

Finally, on the vaccines, 46% growth in second quarter, excluding H1N1.

You were pointing to emerging markets and Menveo, and I'm trying to figure out, to strip out the one-time the effect here from either some tender or some Menveo stocking.

Could you just tell us how much -- can you maybe just quantify just the one-time elements among those about $120 million incremental sales year on year?

And then also, on vaccines, just coming back to your comment about the men B market opportunity being smaller in the US, I would have thought its size of birth cohort which determines the commercial opportunity rather than the incidence rate, or are you alluding to something that, because of the higher incidence, it's a bigger unmet need and, therefore, there is a greater interest in Europe than in the US, in this vaccine?

I'll start with Afinitor.

So I'm not a statistician, but I'm going to do my best here.

We used a one-sided test which would have put us at 0.025 as the target p-value.

There were two interim looks, and as a result the target then became 0.026, I believe, is the number.

So that is why we are shooting for that particular p-value.

Regarding unmet need, having worked in the area of neuroendocrine tumors for more than 20 years personally, I can tell you the unmet need is very, very high for these patients, and that will be certainly included in the case we'll be making to the agencies.

On pricing for Sandoz, I think that we may see price erosion increase in the back half of the year, given the wave of price cuts in Western Europe, in particular, which were generally double-digit negative generic price cuts ranging from 25% in Spain to 12% in Italy, those being the two most significant.

And then, of course, you know the situation with Germany, where we estimate that the net market is down low double digits, and Sandoz has actually remained flat in our sales year-to-date.

So we've gained ground vis-a-vis Teva, Ratiopharm and other competitors.

Alexandra, I think what's important to note is that we do have more stable pricing in our higher growth emerging markets, which are branded generic markets.

So if you look at Q2 performance in Asia, we were up 25%, 32% in Japan.

If you look at Central and Eastern Europe, we were up 17%, driven by Russia, which was up 38%.

And then secondly, differentiated products in particular -- Joe and Jon mentioned biosimilars, but also injectables and other categories tend to have less price erosion.

On the margin, though, given the price cuts in Western Europe, I would expect to see price erosion increase.

In terms of the range, Jon was correct that, historically, it's been about 7% to 9% price erosion.

I think it can be at the high end for the back half of the year, maybe even a little bit higher than 9%.

So, with regards to your two questions on vaccines, on the growth rate, 46% and related $120 million that you were referring to is largely non-Menveo.

And, as you know, Menveo, we have received approvals fairly late in Q1, and in Q2 we've worked our way through all the other approval steps, such as listing and pricing.

And we have seen first sales, of course, but it's a smaller part, a really smaller part of the $120 million.

The majority really comes from the emerging markets, and also from some other products in the US.

And is that tender business, as in a big one-time lump something in the second quarter, or is that more regular recurring business?

It's a mix of different things, but there is no one big-ticket item.

It's really a large number of smaller things.

Some of them are tender, some are just increased private sales.

Okay.

Men B -- what I'm referring to is, I think, the disease burden.

And I think I did not mean to say that the opportunity in the US is smaller, but I do think that outside of the US there is also a big opportunity.

And of course, if you have five to 10 times higher incidence rate, then the interest from public health authorities but also from physicians is much higher; that is clear.

And as far as pricing is concerned, of course, it also has a positive impact on any health economic assessment that you do.

Fabian Wenner, UBS.

Two product questions for David, and one question for Jon on the tax rate -- David, you made some comments on Valsartan.

What is your expectation on PBMs?

And you have probably some -- a lot of discussions with PBMs.

Do you expect a significant switch to Cozaar next-gen, given that Diovan goes off patents a year later?

And then, secondly, on Gilenia, there's a large part of patients still untreated, probably over 50%, looking at the scripts in the US, as they point to only about 200,000 patients being treated, whereas [Prevalin] is about 400,000.

I wondered if you have feedback from neurologists, to what extent you can actually expand the MS market with that first oral?

And then for Jon, just quickly, you mentioned 15% to 17% as a rough guidance.

Is that including Alcon?

Because obviously, you have -- with Alcon consolidated, the tax rate should come down.

Thank you.

I'm going to answer the FTY question, then I'm going to ask you to repeat the Valsartan question, because I don't think I fully understood it.

But regarding FTY, you are correct -- there is a large portion of patients who have multiple sclerosis that refuse injectable therapy, or they've attempted to use injectable therapy and they've discontinued because the side effects made their lives largely intolerable.

We would think a substantial number of those patients would become applicable patients for FTY720, but I don't have an exact number for you, but it's part of the reason that we are excited about the product.

Can you give me again the -- you broke up a little bit -- the Valsartan CVM question again?

Well, it's more the pharmacy benefit managers and what they might do, beginning of 2011, because they might actually then start to already switch formularies and switch to maybe Cozaar rather than having done so in April already.

I wondered what your thought was or your discussions was with those PBMs and whether that is a threat.

Yes, so the pricing of generic Cozaar is already substantially lower than the branded product.

I think, if we were going to see major PBM actions, they would have largely occurred already.

I can't tell you there won't be a few PBMs that might take some additional action in the second half of the year, but in principle I think the trend lines we are seeing in Diovan give us a reasonable guide for the future, with some minor further negative impacts, but no substantial step change.

And then on the tax rate, all of our estimates today exclude Alcon.

So that's on a standalone basis.

Michael Leuchten, Barclays Capital.

In the Pharmaceuticals division, the non-disclosed products seemed to do quite well.

I was just wondering whether that's already a reflection of the reorganization of the non-US business that you've gone through, or whether this just happens to be a good quarter and there's still more to come on that end.

And then a question on the margin performance -- I understand you're saying it's 200 basis points in margin improvement via efficiency programs, of which 50% has been reinvested.

That still leaves quite a bit year-over-year.

Part of it seems to be phasing off the R&D expenditure.

Could you just take into consideration there the upcoming launch costs for Gilenia?

How much of that margin increase do you think is sustainable, and how much do you think is going to go back into the business in the second half?

I'll start on the non-disclosed products.

If you look at the product table on the back chart, you can see that there are some of the new product launches that don't show up in the product table because they are not in the top 10 or whatever number that we are showing, so they end up in non-disclosed, and that tends to make the non-disclosed increase.

So it's more a function of just exclusion or inclusion of those products that makes that a wacky number.

So you wouldn't draw that conclusion by looking at that number.

Let me start with the first part of the margin question, then David can talk about the preparations for Gilenia.

What we're trying to disclose this time, which is in request to a lot of discussions that we've had, is the related into relationship between productivity generation and reinvestment.

I think in the past we've talked more about productivity, which I think, as all three of us have said, is a fundamental part of the whole fabric of the organization and something that we continue to develop.

Obviously, productivity doesn't explain all of the things that goes on in margin because the absolute increase in the value of profits is also there.

So if you look at the second quarter, we increased our margin by more than 200 basis points, and that was because of the volume increases in the business, where -- that comes from sales.

But as we develop this analysis, we will indicate what we are generating from productivity and what we are reinvesting because I don't want you to think of the margin as just a one-way street.

We have to invest in the future of the business because that's the right thing to do long-term.

And clearly, Gilenia is a very important new product that we will invest behind, and it's all taken into account in our guidance.

I don't know there's a lot more I can add.

We've already started to make investments in FTY.

We are in the process of hiring the second field force line for FTY in the US, as we discussed last time.

Clearly, as we move into next year and we start rolling out in Europe, we will put more money.

But as I spoke about when I talked about productivity in Pharma, we are talking largely about a reallocation into those eight top brands, of which one, FTY720, is.

And wherever possible, we are driving other productivity initiatives to fund these new launches so that we can still end up with margin improvement.

Timothy Anderson, Sanford Bernstein.

I have a few pipeline questions.

Meningitis B, going back to that -- the FDA not letting you go into Phase III suggests they are not sold about the risk/benefit profile of the product, and I'm wondering how much of that has to do with the fever issue, which also seems to me like it ties into your hunt for additional formulations of that product.

But maybe I'm not understanding it right.

And can you give us your thoughts on the competitive profile of Wyeth's competing vaccine that I think is also nearing Phase III?

Second question is on Tasigna and Sprycel.

Novartis hasn't seemed to shy away from doing head-to-head studies.

I'm wondering if you might do the same here with these two products.

They seem to have fairly similar efficacy and safety profiles.

Sprycel has differentiation because of its mechanism, and I'm wondering if you feel like you need to do something more aggressive here.

Last question is on Exjade, something that doesn't seem to get a lot of questions.

But that is quietly tracking towards $1 billion in sales.

I have to imagine that's one of your most profitable products.

Are there any next drivers of growth that we should anticipate that continue to take sales higher and higher over the years?

Andrin, men B?

Yes, so I have no doubt that any type of assessment the FDA would do before moving into a Phase III would be on a benefit/risk profile of a vaccine or a drug; that's absolutely correct.

And, I do not believe, however, that there is an over-concern on the risk side.

But, yes, it's true that they wanted to know what exactly would be the coverage of the -- the vaccine or the expected coverage.

How can you really show that your vaccine has a high chance of covering most of the strains that circulate in the US?

And that's what we're doing now with the methodology that we have developed.

For the fever, we have seen higher fever rates than with some of the other routine vaccines; that is correct.

We have said that in the past.

And, we have also seen, however, if the vaccine is given separately from other vaccines, that the fever rate is significantly longer.

And we have, up to now, several thousand patients here in our Phase III trials, mostly in Europe and in some other countries, and we have not seen any side effects linked to these fevers.

This makes us confident that we clearly have a positive benefit/risk profile, a high chance to have good results at the end of Phase III.

That being said, we will publish the Phase III results in September, and if they turn out well I have no doubt that that would be an additional factor that will lead to a good Phase II meeting with the FDA.

From a competitive point of view, to the best of my knowledge, Wyeth's program is in adolescents and adults, and our program is in infants.

I think that's an important differentiation to make.

And with regards to, otherwise, a competitive profile, I think it's too early to judge.

I think, once we have our Phase III data, we will publish that.

Of course, we are convinced that we have a very strong vaccine and underlying good science.

And based on that, we are on the right track.

And where exactly Wyeth stands, I cannot comment on that.

The next question was whether or not Novartis would consider a head-to-head trial, Tasigna versus Sprycel.

What I would say is our focus is on demonstrating the potential survival benefits for Tasigna, and based upon that, we would not do such a head-to-head trial.

Regarding Exjade, we are very proud of this product's growth.

I think there were a lot of people that we were skeptical when we said initially it would be a blockbuster in time, and it's certainly moving in that direction.

We are hoping to expand the label to include thal intermedia, and we are also doing some work in some non-transfusion-dependent iron overload states.

So there is still more opportunity for this brand to grow.

I think we'll have time for one more question.

Marcel Brand, CA Cheuvreux.

Could you let us know, please, from ENESTnd trial, is there any indication that patients are starting to cross over, which might make it more difficult to show survival benefit?

Then the second question is also on the impact of Cozaar.

Can you talk a bit about the performance-based contracts that you have in place?

Do you have maybe any contracts in place that could even extend into the next year that would obviously prevent therapeutic substitution?

And then the last question is on FTY720.

The industry reputation in the US has suffered significantly because of the massive price increases of MS drugs.

We see that increases were 300% for most drugs since the end of 2004 only.

And I wondered what your thinking is.

I know that you're not going to tell us what the price for FTY is going to be, but I would like to hear your thoughts on that issue.

Regarding ENESTnd CMR, your question was whether or not we would be able to report future data, particularly around survival, because of potential crossover.

My understanding is that the trial is intact, and if there are some patients crossing over it is certainly not a problem at this point.

I think you are aware that we already presented at ASCO a survival benefit in one of the cohorts.

So it looks like we're on track, and we look forward to seeing the 24-month data, which will be presented at ASH later this year.

I don't want to go into our contracting strategy for Diovan in any detail, other than to say we have a very good second-tier position in the US market, and we think that should be sustainable over time.

And you are correct; I don't really want to comment on FTY720 pricing at this point in time, so we'll have to take that up in the future.

So with that, I'd like to thank everybody for your time and attention, and we look forward to talking to you again shortly.

Ladies and gentlemen, the conference is now over.

Thank you for choosing the Corus Call facility, and thanks for participating in the conference.

You may now disconnect your lines.

Goodbye.