Novartis AG (NVS) 2010 Q3 法說會逐字稿

Good morning or good afternoon depending where we are attending from.

I am Myra, the Chorus Call operator for this conference.

Welcome to the Novartis Q3 2010 sales and results conference call and live webcast.

(Operator Instructions).

This call must now be recorded for publication or broadcast.

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

Please go ahead, sir.

Good afternoon.

I would like to welcome you to the Novartis third-quarter conference call.

So joining me on the Novartis end are Jon Symonds, CFO; David Epstein, Head of the Pharma Group; 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.

Before we get started, I would like to ask Susanne Schaffert, Head of Investor Relations, to read the Safe Harbor statement.

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

This 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.

Thank you.

Okay.

Starting on slide number four, I would like to make a few comments about our performance in the third quarter, and then I will talk about our performance against our strategic priorities.

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

Net sales were up 16% in constant currencies, and this is driven by very strong performance across all divisions.

Our core operating income was up 25%, which is very good leverage with that sales growth, and it shows good cost control.

This drove our net income up 10% and EPS up 6% despite incurring almost $800 million in one-time charges.

So we also had some significant good pipeline news in the third quarter, most notably the approval of Gilenya in the US for relapsing forms of multiple sclerosis.

So, on slide six, you can see that every one of our businesses grew ahead of the market in the third quarter, and this was led by Sandoz and Vaccines and Diagnostics, which grew both over 20%.

On slide seven, Jon is going to go into more detail about the numbers, but I just wanted to describe the progress that we have made on our three strategic priorities.

And that is extending our lead in innovation, which is helping us to continue to build the best pipeline in the industry; accelerating growth, which is turning that pipeline innovation into sales and profit growth that hits the P&L; and then third, driving productivity to increase margins to ensure that we are able to continue that investment and the cycle of growth.

So starting on slide eight with extending our lead in innovation, you can see that we have made great progress.

Beyond Gilenya, we had a positive CHMP opinion in Europe on Tasigna as a first-line therapy for chronic mild leukemia.

We also reported some compelling data on Onbrez versus salmeterol in chronic obstructive pulmonary disease.

This is driving Onbrez up to a very good start, and you'll hear more about that a little bit later.

On slide nine all of the divisions made good progress on innovation.

So, for example, in Sandoz we launched enoxaparin, which is the complex differentiated injectable, and enoxaparin had sales of close to $300 million in the third quarter.

So this is an excellent example of how a successful first to market launch can really drive the business.

On slide 10, in Vaccines and Diagnostics, we published a Phase III study that showed that our MenB vaccine generated strong immune response, and the results also demonstrated an acceptable tolerability profile when administered with other routine infant vaccines.

And this, we believe, supports the use of MenB during the first year of life when the medical need is the greatest.

This could be the first vaccine to provide a broad coverage against this deadly disease.

So, on slide 11, you can see that the highlighted areas show the progress that we have made against the pipeline in Q3 across the board.

On slide 12 this is really our second priority, which is to translate that innovation into sales and profit growth.

And you can see here on the right-hand side that newly launched products accounted for 20% of our total sales, which is up from 15% a year ago.

So it really demonstrates our ability to transform this portfolio ahead of the Diovan patent expiration in Europe, in 2011 and the US in 2012.

On slide 13 you can see that Sandoz achieved great growth over 20% in the quarter behind the launch of enoxaparin, good growth in biosimilars, strong growth in oncology injectables.

And, in the fourth quarter, we expect sales to slow due to the Losartan pricing decrease that we are going to see in the US and some other issues that we will go into a little bit later.

Now on slide 14, Vaccines and Diagnostics grew over 20% versus a year ago, and this was driven by a very strong start to the flu season with 35 million doses shipped to US customers in the third quarter.

Also, I have to say that the Menveo launch is off to a very good start, and we have begun shipments to 15 countries beyond the US.

On slide 15 Consumer Health grew 9% in the quarter, so it was also a very strong quarter.

CIBA Vision's share of contact lenses continues to grow.

So we are the fastest-growing lens business in the world, and the US share was up 3 points to 27% of the total market.

And this is behind our AirOptix brand.

On slide 16 our OTC business achieved a great milestone in Germany in the third quarter.

Our pain medication, Voltaren became the leading self-medication brand in Germany passing aspirin.

So Voltaren has about a 44 share of the topical analgesic market.

On slide 17 it shows we have completed our 77% ownership of Alcon.

We have established a project office to ensure that we are capturing growth and cost synergies, of course, at arm's length because Alcon is still a public company.

But I have to say that the interaction between management teams is positive, and both companies see opportunities to improve their results.

On slide 18 we saw double-digit growth in emerging markets.

Sandoz saw particularly good results in emerging markets and achieved strong double-digit growth in the emerging markets of Central and Eastern Europe, Asia Pacific and Turkey and Africa.

On slide 19 I want to stress that we are continuing to drive commercial innovation by operating with hospitals in new and different ways that will position Novartis as a customer of choice.

So an example of this is what we are doing in Germany with a large hospital group.

We have worked with them to develop an e-file for ophthalmology patients, which will improve efficiency and quality of care for patients.

So it's a new approach, but it is paying off.

And then finally, on slide 20 our third priority, which is to drive productivity to improve margins, is also paying off.

So we are making good progress.

One area of focus continues to be marketing and sales expense, and you can see that we have reduced this 200 basis points versus last year down to 25.2%, primarily through geographic reallocation of spend.

Slide 21 shows how we are translating this into margin improvement.

So, in the third quarter, Sandoz improved their core operating income margin by 180 basis points, and Pharma improved it by about 110 basis points.

On slide 22 you can see how much progress we are making in procurement.

When I went to the Pharma division about three years ago, we had pushed only about 4% to 5% of our spend through e-sourcing -- some kind of e-sourcing, and you can see we are now up to close to 40% this year, which is driving significant savings.

We still have a long way to go, but this is definitely helping us.

And on slide 23 one area that will not be a source of margin improvement is R&D spending.

And I have said before that healthcare is fundamentally about innovation, and as long as our R&D machine continues to generate a strong pipeline, we will continue to invest.

And so this chart proudly shows that we spend 440 basis points more than the industry average in pharma research and development.

Now the key is not just spending.

Obviously you have to have the best scientists and physicians in the world, and we think that we have them at Novartis.

So, with that, I'm going to now turn it over to Jon Symonds.

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

So let's go straight to the numbers on slide 25.

Now the reported numbers include Alcon.

In some senses I hesitate to say including Alcon as Alcon is now part of the business, and it is here to stay.

In addition, given that we will not start lapping the Alcon numbers properly until quarter four next year, it's going to be a strong feature of our results for the next four quarters.

So, in summary, sales grew by 16% in constant currency.

The strength of the dollar reducing sales by 3% to 13% reported growth.

Core operating income grew by 29% in constant currency with currency depressing the reported result by 4%.

Reported operating income grew by 3% in constant currency, thus 26 percentage points below the growth in core operating income.

There are two principal reasons for this, which I will explain in more detail in a moment.

But they are the impairment charges we announced earlier in the month and Alcon where the core operating income was largely offset by acquisition-related provisions.

The bottom half of the P&L has also been affected by Alcon, particularly on the associated company line, but also in EPS, which is where the 23% minority interest in net income is deducted.

So, on this basis, core earnings per share grew 19% in constant currency to $1.36 and EPS by 12% to $0.99.

Meanwhile, cash continues to flow in, $2.9 billion for the quarter and $8.2 billion for the nine months.

I will go through the impact of Alcon on slides 26 and 27, and I will do this in some detail so that you fully understand how to model for it.

In the future I will just treat Alcon as another segment of the business and will not go into this level of detail.

The effect of incorporating Alcon in the quarter has to be separated into pre and post acquisition periods.

Firstly, pre-acquisition, the period where Alcon was an associated company.

They are two effects here.

Firstly, we were required to revalue our original 25% stake to its fair value.

This resulted in a gain of $204 million.

Secondly, the change of majority owner triggered some charges in Alcon's books immediately prior to closing, and we picked up our 25% share of these items.

These were highlighted in the Alcon press release this morning, although we did not take up our full share of these of their $133 million charge as part of it related to an adjustment that was made for US GAAP only.

The second period relates to the postacquisition period from 25 August, and I have tried to lay out here again a link to the numbers Alcon reported.

Obviously you will not see them exactly as this is only one month of their third quarter, but you can see that there is a clear link to their reported results.

They have $26 million of adjustments to get from their reported to core, and they are at $191 million of consolidation adjustments that we have taken to reflect our acquisition cost.

So we have $222 million of core operating income from Alcon and $5 million of operating income.

On slide 27 you can see the adjustments we made more clearly and how they compare to the estimates we gave you on 26 August.

I would comment that the employee stock vesting triggered before closing, therefore, was recorded in Alcon prior to completion.

In other words, we only took up our 25% share.

The inventory step-up is in line with the four-month estimate, and we have not incurred any costs -- direct costs relating to the realization of synergies.

I do need to give you a general health warning here.

The purchase price allocation process is a big exercise that will not be completed until the end of the year, and there could, therefore, be significant changes to these estimates.

The preliminary purchase price allocation is given on page 37 of the release.

So this gets you to the underlying business on slide 28, and the picture is pretty robust.

Sales in the quarter grew 10% in constant currency, and core operating income grew by 22%.

As Joe has already said, great operating leverage.

Slide 29 shows the buildup of sales.

The important point to note here is that the volume growth continues to be very strong at 11% with a relatively small impact to pricing.

In Pharma pricing is down overall by 1% with the impact of price acquisitions in Europe 6% for the quarter, 4% for the year to date, and the biannual price reductions in Japan being offset by mix and benefits in other markets.

We are clearly benefiting from the balanced geographic portfolio and product portfolio we have, although price reforms in the US will not be fully felt until next year.

You can also see that in the quarter currency turned negative as we predicted last time, and I will return to currency again at the end.

Slide 30 summarizes the topline performance by division.

What is striking is how strongly all the divisions have contributed to the result.

Vaccines and Diagnostics grew 21% on a strong start to the flu season.

We were able to ship our product to the market much earlier than last year and in larger quantities.

Consumer Health grew strongly with all the components -- CIBA Vision, Animal Health and OTC -- performing well.

Sandoz had an outstanding quarter with their launch of enoxaparin where sales were just short of $300 million.

We are still the only generic on the market, but, of course, we cannot assume that this will last forever.

But it would be wrong to put this quarter down just to enoxaparin.

Jeff and the team have delivered a strong performance across the board.

Emerging market growth was strong, and Western Europe recovered with a good double-digit performance.

Finally, Pharma delivered growth of 6%, which David will cover in a few moments.

Our sales continue to be driven by recently launched products as you can see on slide 30.

For the third quarter, recently launched products contributed $2.3 billion, 20% of sales and a growth rate of over 40%.

Pharma delivered $1.7 billion with the other divisions contributing over $600 million.

For the nine months, sales of recently launched products totaled $6.5 billion or $7.9 billion if you include the sales of H1N1.

Slide 32 gives a geographic perspective for quarter three and for the nine months.

You can see that the emerging markets growth continues to outpace growth in established markets.

While there is no doubt that we can do better in the emerging markets, I think our growth in the developed markets where the impact of recently launched products is most pronounced will be a match for any of our competitors.

Slide 33 shows the components of profit growth and how we move from a 2% decline in reported operating income to a 29% growth in core operating income in constant currency.

There are three components to this.

Firstly, Alcon, and I have already highlighted to you the moments which take you from $5 million in operating income to $222 million of core operating income.

Secondly, as we announced a few weeks ago, the termination of Albuferon and Mycograb programs resulted in an impairment charge of $584 million.

Note that the disposal of Enablex to Warner Chilcott was completed earlier this week and will generate again $394 million, which we will record in quarter four.

And finally, currency had a negative impact of 4% on reported profits, slightly higher than the impact on sales.

Slide 34 shows how each division contributed to operating leverage, yielding an overall improvement in margin of 2.7 percentage points.

The strongest contributor is Consumer Health with a margin increase of 3.9 percentage points.

And, as you can see from the Consumer Health section of the press release, around 2.3 percentage points came from a disposal gain and the effective provisions made in quarter three 2009.

That said, the divisional performance was very strong, benefiting from a strong start to the cough and cold season and a very disciplined cost management where a strong topline drops through to operating income.

Sandoz was the second best contributor with a margin improvement of 1.8 percentage points driven by the strong topline, even though gross margin declined by 3.1 percentage points as a result of mix shifts and inventory write-offs.

Pharma margin improved by 1.1 percentage points.

Gross margin is back on an improving trend, and there are positive benefits from sales and marketing.

Although the overall result was flattered a little by the impact of provisions made in quarter three, 2009, we have benefited margins by around 50 basis points.

Slide 35 gives you another dimension of the margin improvement.

While the fundamentals come through strongly, you can see that the benefit of one-off credits in 2010 compared to largely debits in 2009.

Finally, on margin slide 35 brings together the story on productivity.

Joe has given you some very strong examples of sales and marketing productivity gains and the benefits that are coming from purchasing, which overall yielded 3 percentage points of margin improvement in the quarter, of which around half has been reinvested mostly behind new products in the emerging markets.

One other point to note in the nine months column is that H1N1 benefited margin by 2.1 percentage points.

Of course, it will not be as high as this for the year as we did not begin to record sales until the fourth quarter of last year, but it is something that you will need to factor into next year.

Now let's turn to the bottom half of the P&L on slide 37, which shows our 2% decline in reported operating income translates into 10% increase in net income and a 6% increase in reported earnings per share.

The right-hand side of this slide gives you the core reconciliation.

There are four points to make.

In associated companies I have highlighted the one-off revaluation of Alcon.

Putting quarter three last year, there was a one-off charge in both Roche and Alcon, which totaled $189 million giving us an overall swing this quarter of almost $400 million.

The interest charged now picks up the impact of the second stage Alcon acquisition.

The tax charge is 17% in the quarter compared to 15.2% in 2009, and, of course, between net income and earnings per share, you have to remove the 23% minority interest in Alcon's earnings.

On slide 38 cash flow.

Our cash flow performance continues to be very good as I have already mentioned -- $2.9 billion generated in quarter three and $8.2 billion for the nine months.

Slide 39 sets out where our indebtedness is after the Alcon acquisition in August.

Net indebtedness is $19 billion, of which $8 billion is in cash and marketable securities, $3.3 billion recorded in Alcon, which, of course, we cannot poll.

The strength of our cash flow is such that we have already repaid $700 million of the CP issued for the Alcon acquisition and the outstanding amount of 30 September of $7.5 billion, and it is lower today.

So before handing you over to David, let me summarize where we are.

Clearly this has been another strong quarter with all divisions contributing to 16% constant currency sales growth, which through good operating leverage generated core earnings per share growth of 19% in constant currency.

The outlook for the year is low to mid-teens sales growth, including Alcon, leading to improved operating and core operating margin.

But before finishing, there are two final comments.

Firstly, as you think about the final quarter, there are a number of moving parts to take into account.

H1N1 sales commenced in quarter four last year, and the program is now complete.

Sandoz last year included four months of EBEWE sales in the final quarter, and so we will begin -- start to begin lapping it now.

And, of course, in Pharma there were the legal provisions made in the final quarter.

Secondly, currency, as predicted, the third quarter was negative for both sales and operating income as a result of the dollar strengthening.

Since the end of the third quarter, the dollar has weakened a lot with the result that if rates stay where they are today, then the currency impact in quarter four will not be as severe as quarter three.

And for the year as a whole, the overall impact should be broadly neutral to both sales and operating income.

One conclusion you can draw from this is that even though the current situation where the euro is weak and the Swiss franc is strong, which is generally bad for profits, our broad geographic base and business base has meant that the overall impact is significantly muted by the appreciation of other currencies.

So, with that, I will hand you to David now for a review of the Pharma business.

Thank you, Jon.

It is my pleasure to update everyone on Novartis Pharma's robust Q3 where we were able to deliver 6% topline growth and core operating income, as well as our free cash flow roughly double that topline growth.

Turning to page 43, we see that just as importantly, recently launched brands, those brands that we have launched since 2007, now account for 22% of our portfolio as we continue to rejuvenate our sales base.

Compared to Q3 2010 to Q3 last year, that's a 34% growth on this basket of products.

Turning to page 44, this should be a familiar chart.

Due to the eight brands/franchises that we are increasingly focusing our investment on, because we believe this strong portfolio of recently launched products has blockbuster potential, and all will have patent protection beyond 2015.

What I would like to do for most of the rest of the presentation is focus on just three of these brands, those brands where we had the most interesting recent new data.

Starting on page 46, I would like to give you an overview of the $11 billion MS market.

As you know, this market has been led historically by just three classes of drugs -- the interferons, COPAXONE, as well as Tysabri.

The total market is approximately 430,000 treated patients worldwide and more than likely well over 1.5 billion patients in terms of worldwide prevalence, giving us some expectation that the market will continue to expand over time.

Looking now at page 47, we have had the opportunity to just recently introduce Gilenya, an oral therapy for relapsing multiple sclerosis patients.

That first launch has now occurred in the US on the back of very significant data, which showed that Gilenya reduces relapses by 52% versus beta interferon intramuscular and, importantly, reduces the risk of disability progression by 30% versus placebo, which broadly translated means that these patients can enjoy a better quality of life.

We were able to negotiate with the FDA, I believe, a very good risk evaluation and mitigation strategy so that patients would have the appropriate screening prior to their first dose.

Turning now to page 48, I would like to focus now specifically on the US opportunity.

And, as you can see, approximately 55% of US diagnosed patients are treatment naive or on first-line therapy.

And while it is true that most initial patients for Gilenya will come from patients that are either currently on medications or those who have previously refused medication because of the fear of getting an injection, we believe that the market opportunity for Gilenya is quite good in the US.

In Europe it is likely that the label will be more restrictive than in the US, most likely a second-line label, but given the dynamics of the market, we would not expect that to have much impact on patient or physician demand.

Prior to the launch of the product, we did quite a lot of research talking to both physicians, payers and patients about their experience in getting access to MS drugs.

In addition, we knew that the onboarding of a patient onto Gilenya would be a little bit more involved given the pre-treatment screening, and we wanted to design a program that would address their needs.

I can now tell you after just a few weeks on the market that the feedback we are getting from patients and from physicians is quite strong, and what we have done is we have developed a process that allocates an MS move to each of the patients that signs up for the program, and starting with pre-treatment through their first dose evaluation and then along with ongoing therapy, we provide a range of benefits, including coordination of medical evaluations, co-pay support for pre-treatment tests, education material and streamline access to pharmacy.

Taking a look at page 50, you can get a better sense of the support that we have provided in the context of getting patients onto Gilenya.

Starting on the left-hand side of the pie, what you see is, as we do for many of our other drugs, we do have a Novartis Patient Assistance Program, a PAP, which provides Gilenya at no cost to patients up to 500% of the federal poverty level.

In addition for Gilenya, we have provided funding to a co-pay foundation for underinsured patients, and what is truly novel about this program is our Gilenya prescription and medical co-pay assistance where we provide medical co-pay coverage of up to $600 for those pre-screening tests and then up to $800 per prescription with an annual cap of just over $10,000 for patients who have large out-of-pocket co-pays.

Turning now to page 51, you see that we plan to and are continuing to invest in Gilenya, one to continue existing trials to get longer-term safety and efficacy data.

We now have individual patients who have been on drug for more than five years and doing well, but we would like to have a much larger database.

In addition, we have underway a trial in primary progressive multiple sclerosis, which we hope over time will further expand the potential of this exciting new medicine.

Page 52 lays out for you the timing of the expected reviews, approvals and launches worldwide.

The next decision expected is an approval in Switzerland during the fourth quarter with launches in Europe staggered over the course of 2011 as we gain approval and reimbursement.

The second franchise I would like to focus on starts on page 53, and this is our [desirable] franchise targeting the chronic myeloid leukemia market.

As you know, we recently introduced Tasigna initially as a second-line therapy for chronic myeloid leukemia and have launched in the US for the first-line indication.

On the back of that launch, we have seen significant growth in Tasigna with a growth of almost 100% from Q3 2009 to Q3 2010.

And you see the overall franchise is growing double-digit 11% in this particular period.

In addition, during the quarter we were able to receive a CHMP positive opinion for the first-line indication.

That occurred in September, so we would expect to be able to launch by early next year for this first-line indication.

Looking at page 54, we have our first snapshot of how this first-line launch is progressing in the US market.

And you see the nice bend in the curve and the uptick of Tasigna since that launch, and in the second generation TKI market, we are now catching up to our number-one competitor.

I have been asked a number of times what additional clinical data is being generated to help inform physicians about which patient should potentially be switched from Gleevec to Tasigna.

And what you see on page 55 or what I believe or we believe are the four most important clinical trials, looking at patients who have sub-optimal responses to Gleevec, and as you will note, we will have data both at this year's ASH, as well as next year's ASH, and I think this data will help provide the confidence physicians will need to help put their patients on the best therapy given specific patient type.

If you look now at page 56, you see another part of our strategy beginning to play out.

It is quite clear that the physician community has moved over time from relatively crude measures of patient success to more sensitive measures, basically moving from hematologic response to cytogenetic response and now to molecular response.

Unfortunately the technology that is in place around the world to measure molecular response is often fairly cumbersome and sometimes can give varying results from sample to sample or lab to lab.

We have now put in place an agreement with Cepheid to help standardize that process with a simple to use blood test, which will provide simplified standardized reports back to the physician, which will help them better understand which patients to keep on Gleevec or perhaps switch to a second generation agent.

I would say even more importantly we are working with Cepheid on a next-generation diagnostic which will be even more sensitive.

This new device will help us understand which of the Gleevec patients really have control and which would benefit potentially from being on a more effective agent like Tasigna.

I would now like to speak about one more franchise.

This is our newly emerging respiratory franchise.

I would like to start with Onbrez, which is our first launch for chronic obstructive pulmonary disease.

As you can see, we were able to present data showing the superiority of Onbrez versus salmeterol 50 micrograms twice a day, which is the standard of care.

Our first launch market was Germany where we are off to a very good start, as you can see, from the right-hand side of the chart.

Looking at page 58, you can see our strategy in a little bit more perspective.

Onbrez is just the entry into this market.

Onbrez is a combination of a very effective molecule, as well as a very well received device called the Breezhaler.

Our plan is to bring to market, in addition to this LABA, a LAMA, as well as a combination of Onbrez and NVA, the LAMA called QVA149, and over time we will then bring additional combinations into the marketplace, including a combination of Onbrez plus a once-a-day steroid.

All these different products will use the same device making it easier for physicians and patients to switch among the family of Novartis medications.

We believe in time that our respiratory franchise could become a very important third leg behind our cardiovascular and oncology business at Novartis.

I would like to now summarize on page 59.

It is very clear that we have quite a lot of news flow planned over the coming months.

Our development colleagues will be extremely busy, and I believe our customers will be quite happy with the innovation that we are bringing to market.

Just as a quick reminder, we expect imminently a decision by the CHMP for a new indication for Lucentis in diabetic macular edema.

We will present the first head-to-head data of Onbrez versus tiotropium from a Phase III trial in chronic obstructive pulmonary disease.

We will see the initial Phase III data for ACZ or Ilaris in gouty arthritis.

We have regulatory decisions coming for Tasigna, new data for Tasigna coming at the American Society of Hematology.

And finally, we expect a US FDA decision on SEGA associated with tubular sclerosis.

And, as you can see into 2011, we expect continued news flow.

So, with that, I would like to wrap up and hand the meeting back over to Joe.

Thanks, David.

Okay.

Just to wrap up, I feel good about the progress that we're making against our three strategic priorities, particularly I think in the area of innovation.

Now we still have a lot of work to do in all three areas, but I believe we will continue to execute well against these.

So the final slide just restates our guidance for the year.

So, with that, I would like to close the presentation and now open it up for questions.

(Operator Instructions).

Andrew Baum, Morgan Stanley.

Three questions, please.

Firstly on Zometa, can you confirm the year dates that will be presented at San Antonio?

And then following on from that, is there any possibility of maintaining your market exclusivity or your patent protection beyond --

Andrew?

Yes?

Sorry, you were breaking up.

We cannot hear the question.

Maybe if you could get closer to the phone.

So the first question is on Zometa.

Just to confirm that Azor data will be at San Antonio.

And then second, is there any possibility that you could use additional patents or user codes to try and extend your period of patent protection beyond 2013?

Second, on elinogrel, given the wealth of riches at your disposal, I'm somewhat puzzled by your commitment to a very large and presumably very expensive clinical trial for an agent which has some hair on it already.

Perhaps you could just outline your rationale there.

And then finally and quickly, on your anticipated filing or rather Sandoz's anticipated filing for a generic Advair in Europe, perhaps you could update us on the timelines for that and whether, indeed, you may have actually filed already.

Andrew, I will take the Zometa questions, and then I'm going to hand it over to Trevor for elinogrel.

So there is an interim analysis planned on the Azor study.

This is done by a third-party organization.

We believe that interim will occur before the end of the year.

Whether or not they decide to submit that data to San Antonio, I cannot speak for them.

Regarding the patent extension, I do not see any clear road to a patent extension for this brand.

Trevor?

Elinogrel actually remains I think an important part of our cardiovascular franchise in the sense that in this I think very good opportunity which is around treating chronic coronary blockage patients with high risk over a chronic period, there really are only two players in the game.

One is ticagrelor and the other one is elinogrel right now maybe with some low-level usage of clopidogrel.

So I think that, if you look at the INNOVATE-PCI Study, we had very good efficacy, and our safety and bleeding risk looks very manageable.

So it is up to us now to get the dose exactly right.

But we are certainly intent on starting that early next year, and we have certainly staged it in terms of interim datas and futilities so that I don't think the outlay in resource is unacceptable for the potential return.

And Jeff?

For competitive reasons I have got to refrain from commenting on the future potential for generic Advair.

Sorry I cannot say more at this point.

Graham Parry, Bank of America/Merrill Lynch.

Firstly, on Gilenya co-pays, I was just wondering what percentage of commercial patients do you think would actually reach the co-pay limit of up to $10,400 for Gilenya?

Is that around half of patients, 20% of patients?

Can you just give us a feel for that proportion?

I just wondered if you could secondly give us an update on MenB Phase III starts in the US, any timelines there, and when we might see some data in the catch-up populations in Europe?

And then thirdly, on the sustainability -- the consumer margins seen in Q3, can you just give us a bit of a comment about how you see that margin progressing going forward?

And then a similar question on the Sandoz Q3 margins, in particular on the margin you were generating on generic Lovenox sales.

I was just wondering if you could give us a little bit more of a breakout of that and a comment as to how sustainable you see your Q3 margin for Sandoz?

So I would expect most patients over time will be covered under their pharmacy benefit, and this will typically be a Tier 2 or Tier 3 drug.

Out-of-pockets for patients like this are often in the range of $40 to $100 per month.

Of course, there is a lot of variability around that.

So I would think very few people would get to the upper limit of our cap.

As for MenB, first in the US, we have now requested the official end of Phase II meeting with the FDA.

Initially we planned that for Phase III, but we decided to include the study results of the good Phase III study that we saw from outside of the US in that package, and it surely has a positive impact on the discussion with the FDA.

And based on that feedback, then we will decide on our Phase III program in the US.

And additional catchup data, in Europe you will see data coming in over the next 12 months from toddlers, from adolescents, but also from adults.

And we will give you a comprehensive update at Investor Day of Novartis in November about the exact status and what to expect when.

George, on margin?

Sorry, when is the end of Phase II meeting scheduled to take place?

Of course, it is up to the FDA to give us the exact date, but it should happen by year-end.

Well, as John said, the operating margin increases 3.9%, and 2.3% of the percentage points of that is due to one-offs.

The underlying trend for the year is relatively good, and that is sustainable.

And Sandoz?

Graham, I will comment both on the sustainability question that you asked around margins and growth, as well as on enoxaparin, but I will break those two out.

In terms of sustainability of performance for Sandoz, we expect the improved Sandoz performance to continue, but at more modest top and bottom line growth rates.

Clearly Q3 was a strong quarter, but I think it's important to note that one can not simply extrapolate the good Q3 into Q4 and beyond for a few reasons.

First of all, enoxaparin sales included a significant stock in as is common with big first to market launches.

And as competition could come at any given time, it is in our interest to maintain significant stock in the channel.

Secondly, we had four months of EBEWE sales last year, as Jon mentioned.

Third, as Joe mentioned earlier, we have increased competition on our key products globally, particularly our US products, tacrolimus, and the end of 180-day exclusivity on Losartan.

And then, of course, we have the ongoing margin impact of Western European price cuts in the German market decline because of the tender situation.

Enoxaparin specifically the results exceeded our expectations since July 23 when we launched.

Our marketshare is currently tracking slightly over 45%, putting it at the most successful generic injectable launch ever in the US.

But, as I mentioned before, that does include a significant stock-in.

So I think that I would leave it at that.

Is it possible to quantify the exact dollar amount of the stock-in?

Yes, I would prefer at this point not to do that.

Alexandra Hauber, JPMorgan.

Several questions, please.

Firstly, on Gleevec what happened this quarter outside the US when you went from plus 6% in the first half to minus 1%?

Is that all Tasigna taking huge share, and would you have maybe then a local currency growth rate for ex-US for the franchise combined?

Also on Tasigna, if I look at these three studies which you showed on slide 25, can you really elaborate a bit on those how those studies really are supposed to drive the switch?

Which of the three studies do you expect to be most impactful?

They are all quite small studies.

I mean what kind of endpoints can you even look at that?

So if you could elaborate a bit on that, that would be helpful.

Moving on to emerging markets, you did flag your good performance in India and South Korea, but, of course, that begs the question, what happened really in Brazil and China where you probably grew below 13%, or is it all Turkey, which is pulling you down for the overall growth rate?

And then the final question is on biosimilars.

In the past you have declined to give absolute numbers, and I think the reason you pointed to us because it was not yet reaching a significant level.

I had assumed we will reach that level of significance pretty soon.

Have you changed your attitude on that, and it's just you will never disclose an absolute figure for the biosimilars sales?

A couple of things.

If you look at Gleevec and Tasigna each quarter this year and compared to the similar quarter last year, we have been growing the combined franchise about 11% per quarter.

So it is fairly steady.

Outside the US?

When you go -- yes, I don't have the numbers right in front of me.

We can check.

But when you look at smaller parts of the world and you start seeing the impacts of tenders in any given quarter, so I would not read anything into that.

Now what is clearly happening is like with all medications we are feeling increasingly the impact of negative European pricing during Q3.

We are getting more of a full effect, which is hurting us.

And, in addition, in Japan we had a fairly significant price cut on Gleevec and Tasigna this year.

So you're starting to see that be rolled in a bit more.

But overall the franchise is doing quite well, and there is no untoward trends or nothing has really changed.

In terms of the Tasigna trial that we had on page 55, of the presentation, you can see that they are basically lined up against different subsets of what we would call sub-optimal patience, those that have sub-optimal cytogenetic response, no complete molecular response, which is a 4.5 log reduction after two and a half years or sub-optimal molecular control.

I think these studies are reasonable size.

We believe they are powered sufficiently to give us a clear answer as to whether or not there would be benefit from moving these patients from Gleevec to Tasigna.

We have modeled the statistics based upon what we have seen with the drug so far.

But is the endpoint ultimately just going to be you are bringing more patients to molecular response or to whatever you're starting recruiting criteria is -- or?

The typical study design is to bring more patients either into molecular our complete molecular response.

And then, of course, you know there are correlations between that better response and better outcome.

Okay.

And on Gleevec, is there any way how you could quantify how much of your business is actually subject to tender?

And if you cannot do that, we know there is tender business in Russia and Brazil.

Any other geographies we should be aware of?

There are tenders throughout the world.

So it would actually be a fairly long list.

I do not have a number in front of me to actually quantify how much is tender.

And, of course, the whole definition of what really is a tender and what is not is kind of fuzzy as well.

So, on the emerging markets for the group, we took a big hit in Turkey.

The big price decline that is forced in Turkey is suppressing our emerging market growth.

China, while it grew double digits, is not where we want it to be.

I think we have said in the past that we had some disruption in terms of the regionalization of that business.

And so we do believe, though, that the underlying performance of our emerging markets portfolio is strong.

And, as we get through the pricing issue that we have had in Turkey and China begins to climb, you are going to see that number go up.

So Jeff, on biosimilars?

Sure.

We gave an annual US dollar figure at the end of 2009, which was $118 million globally, which was up 73% versus prior year.

We are not giving quarterly breakouts, but we plan to give an annual figure at the end of the year.

What I can say is that we grew 72% in constant currency in the first half of this year and 41% in Q3.

So our year-to-date growth is 59%.

The drivers of that have been threefold.

One, Omnitrope in the US has overtaken Teva's human growth hormone to become the largest US biosimilar, and we have made significant share gains versus other competitors as well.

Secondly, we have rolled out the Binocrit -- that is the epoetin product -- high strength oncology indications in Europe.

And third, we have seen very nice growth of our G-CSF Zarzio product, particularly across Europe this year in 2010.

Florent Cespedes, Exane BNP Paribas.

Let's start with the European healthcare reforms.

Could you give us an idea of which products are the most affected by the price cuts in Europe, or is it all across the portfolio?

Secondly, on Sandoz could you give us an idea of the magnitude of the sales that will lose exclusivity in Q4 in the US?

And one pipeline question.

Could you have an update on BF-312, and do you still confirm that the rationale of being more specific is still better for the tolerance of the product?

Maybe a last one on Tasigna.

Could you tell us if you're working or not on the once-a-day formulation of the product?

Because obviously your competitor is very aggressive with this at this point.

So let me do the first and fourth question and then we will hand it over to Trevor for the BF drug and then Jeff.

In terms of price cuts across Europe, I think the easiest way to think about it is that price cuts have been typically rolled out and let's just call that in a widespread equal kind of manner, with the exception that in some markets drugs that are more innovative or drugs that are orphan drugs end up with lower price cuts.

So our portfolio is heavily weighted towards orphan medicine, so sometimes we are in a little bit better competitive position.

Regarding Tasigna once-a-day, it is interesting because, as we entered the market, we thought the fact that we were at twice a day would be a potential disadvantage, and what we're finding out actually it is not holding back the share gains for Tasigna.

Having said that, we have asked our development people to try to come up with a once-a-day formulation, and we are doing that work.

Trevor?

Maybe you could give us an idea of the timeline for this development, please?

I'm not prepared to do that yet because it takes a while to find an optimal form.

On the BAS study, so we will have the Phase II results in multiple sclerosis in a fairly substantial dose ranging study coming out in the first quarter of next year.

There are some differences between the doses, but I think we fundamentally have to wait and see what the efficacy is before we can say whether there is a difference due to the selectivity of that compound.

And Jeff?

As to the magnitude of sales that are losing exclusivity in the US, I would prefer not to break out the specific number.

What I will do is give you a sense of the competitive dynamics on a couple of the key products.

On Losartan, which was for six months that we had exclusivity shared with Teva over $130 million in sales of the generic Cozaar and Hyzaar, that has now lost exclusivity.

The price has come down to a couple of cents on the dollar.

So that product effectively to some degree disappears.

We still have volume, but at a much lower price.

Secondly, on tacrolimus, which after enoxaparin is one of our most important products in the US, readies did come a few months ago -- Mylan entered the market in September, and Watson over the summer entered with one strength on the high strength side.

And then finally on lansoprazole, on the capsules, we have seen increased competition.

I believe Watson just launched.

Having said that, we just launched last Friday and then over the weekend the oral dispersible tablets where we have a new 180-day exclusivity shared with Teva for the next six months.

Obviously a much smaller segment of the market than the capsules, but it's a nice product.

I should say that is an authorized generic with Takeda, so you have to factor that into your margin assumptions that that is not a high margin product.

Okay.

We do have quite a few people in the queue.

So if you could maybe limit your question to maybe two questions, we would appreciate that as the next question is asked.

Jo Walton, Credit Suisse.

I will limit to one question, which is some help please on the longer-term margins that we should be able to achieve in vaccines.

There have been so many moving parts with pandemic flu and now with increased investments and with the emergence of Menveo and then more R&D on MenB.

Can you give us some help as to whether any of the margins that we are seeing at the moment is going to be illustrative of the margins that you can sustain in the future?

I will take that.

I think there are -- there is going to be a number of moving parts for a while.

One piece of moving part that will disappear is H1N1, and we have tried to indicate what is happening there.

But, of course, the preparation of the filing and the launch of MenB is going to be a big opportunity for the business.

Menveo is still establishing itself, and we've got a very good-looking early pipeline.

So with a volatile unpredictable flu business on top of it, I think you're going to have to -- it's going to take a while before you see the true quality of the business that will emerge, but it will come through.

And can I also ask for some help on the core corporate line.

Each quarter so far that has gone down.

Is the third quarter again representative of the quarterly charges going forward?

That is a very good question.

I wish I knew what a representative corporate charge was.

I mean it is to some extent by its nature somewhat of a volatile entity.

I mean I would hope it would -- I would hope it will come down over time.

But I would not look at Q3 as being particularly representative of where it is going, and I would expect Q4 to be higher than Q3.

Not only have you got the corporate operations in there, you have got pensions which in itself is volatile.

You have got environmental provisions as you have seen and so on.

So there is a natural degree of unpredictability in there.

Jeff Holford, Jefferies.

I have two questions.

I will ask the first one and then the second one after.

On QAB149 I wonder if you can just give us a bit more color on this product in the US approval process and the trials that you are doing.

Really particularly as you're exploring lower doses of this product, do you think that you're going to get a true once daily product on the market with what you are seeing or that potentially you might have to back up with twice daily dosing in some patients?

So, as we indicated in our release, we have re-submitted two doses -- 75 micrograms and 150 micrograms -- once a day in the US.

And I think that comes out of a fairly substantial patient group we looked at, about 2000 patients.

The one thing that is very clear in that data, which is that this drug is really a once-a-day drug.

So I think that aspect is certainly going to be supported.

And the process now going forward is the usual review in this case, and we should see what happens sometime early next year.

And the second question is just really regarding the stocks on Alcon because since August it has been fairly clear that you have now got a much cheaper access to cash if you want it.

You have got a stronger share price.

So you basically have a much stronger acquisition currency than you had, say, three or four months ago.

There was no real restatement of your previous starts on valuation in your release.

I'm just wondering has the environment in regards to your financing and your share price at all changed your starts or how you think about valuation or in terms of what you might offer in terms of cash and share mix for Alcon?

Obviously as the offer that was made in January was 2.8 shares of Novartis for every share of Alcon, with two things happening, the Novartis share price going up and the Swiss franc appreciation that -- without changing the offer, the value of that offer has obviously increased pretty significantly.

So I think obviously I cannot say what the IDC is thinking or the Alcon board.

We will see how it plays out, but in terms of cash versus stock mix, it would also be premature to talk.

We said this is an all-stock deal.

We will again see what conditions look like at the time of the deal.

Tim Anderson, Sanford Bernstein.

Questions on Gilenya and then on the Sandoz side.

On Gilenya I have seen a fair number of health plans in the US that seem to have prior authorization put in place, kind of a fail first policy failing other therapies first.

My question is, how often are you likely to face prior authorization policies?

What are the therapies that patients have to fail?

Is it usually just standard interference?

On the Sandoz side, two questions.

I would be curious to get to your thoughts on the generic insulin opportunities.

Is that an attractive area or not?

What should we expect Sandoz may be doing in that area if anything over time?

And then the last generic question, your expectations that other generic versions of enoxaparin will be approved in the US at some point over the next six to 12 months?

It is not that unusual that with a new specialty medicine which is perceived to be pricey to have basically default to prior authorizations until the discussions with the health plan have occurred.

We would expect that to be reduced over time.

I don't think it is worth speculating on the definitions of the few plans that will put this in place, what those definitions would be.

We don't expect access to be an issue in the US market.

So we have prioritized investment in monoclonal antibodies over insulin where we see significantly higher potential for returns.

Insulin is a more challenging market given lower pricing, given higher manufacturing costs and entrenched competitors in the space and high CapEx.

So we felt it would be a better use of our investment dollars to really go after the monoclonal antibodies.

On the second question, with respect to generic enoxaparin from competition in the next six to 12 months, I think your guess is as good as mine.

It is hard for me to speculate at this point as to what will happen looking forward.

Kevin Wilson, Citi.

Two questions on Sandoz.

Could you give us a sense of whether the level of price decrease you saw in the third quarter is likely to be repeated in the fourth quarter?

And secondly, could you talk a little bit about your respiratory portfolio and particularly why you have put a two-year plus delay into the QMF development by moving from the Clickhaler to the Concept-1?

I think you were very sold on the Clickhaler earlier on, and could you talk about why going to a single dose device is a good idea given that it will put you some way behind most likely to GSK's new once daily combination?

So Kevin, as you have seen for the first three quarters of this year, we saw 7% price erosion.

Historically it has been 8% or 9%.

I think a couple of factors would likely make it higher in Q4.

One is the increased competition on exclusive and semi-exclusive products in the US that I mentioned earlier.

Two is the rollout of the Q3 tenders in Germany where we expect the market to be negative double-digit in net terms both in Q4 and in 2011.

And the third factor is the continued price cuts and pricing pressure that we are seeing in Western Europe, particularly in the generic segment.

In terms of the QMF and the Concept-1 device, one strong factor over there was that we have seen the reception of the Concept-1 device increase and be very well taken up by both patients and physicians, particularly when you consider that it is an extremely simple device and the drug is given once a day.

So it mitigates any issues around the multi-dosing.

The other thing being that the first part of this Q family is really in COPD, chronic obstructive pulmonary disease, where this device really plays extremely well.

So the first QMF indications we are looking at would be in COPD.

And I think there is a tremendous utility as well to have a single device across the entire family really simplifies dosing for patients.

Amit Roy, Nomura.

Just a couple of questions.

Firstly, on QAB will you be releasing the lower dose data end point at a meeting before we get the approval?

I thought I might ask the question.

And secondly, just on enoxaparin, if my understanding is correct, the heparin market is only one third penetrated by Lovenox.

Is that true or not?

And if so, do you see any price sensitivity of this market with your generic entry and a possible expansion of the Lovenox market?

This is David.

Could you repeat the QAB question?

I'm not quite sure we heard it correctly.

Sorry, on QAB the lower dose data that you have re-submitted to the FDA, will we be seeing any medical meeting coming up shortly?

So we are looking at releasing that data next year around the ATS.

So, on the heparin market, I think what I will do is follow up with you after the call.

There is not a whole lot more that I can say.

I don't have data of the top of my head on the substitution of low molecular weight heparins like enoxaparin for the other portion of the heparin market.

I do see your conceptual logic of saying with lower pricing could this drive more of the overall market in heparin.

We can come back on that.

Okay.

Maybe two more questions.

Eric Le Berrigaud, Raymond James.

Two questions, please.

First, on Menveo, I guess probably the figures are still insignificant, but could you elaborate on the marketshare in the US perhaps versus Menactra and kind of ramp up feeling outside of the US?

And secondly, mostly for 2011, could you disclose a little bit more on the Mylan agreement on Femara, just to figure out whether it will be a full-year impact or only partial on the next year, please?

So on Menveo the majority of the sales to date come from the US.

I mean we are six months into lunch, and we have achieved the market access to the large majority now of public and private accounts.

It is in the double-digit million range already, and we are very satisfied with that progress.

It is as expected.

And obviously to really expand the brand aggressively, we will have and we are focusing on our indication expansions, and we expect the toddler indication to be approved earlier in 2011.

And then, of course, the infant indication, which we plan to file by year-end, is what would really make this the complete brand and probably the leading ACWY brand.

I believe the second question was when we would anticipate generic letrozole to launch in 2011 in the US market.

I think specifically you asked about Mylan.

Our best guess would be sometime in the second quarter of next year.

Marietta Miemietz, Societe Generale.

My first question relates to Alcon-related flow back.

Do you know at all what proportion of the Alcon minorities would effectively be forced to sell their Novartis shares either because Novartis is not on their benchmark or universe or because of the special [sits] people?

And are there any measures at all that you can take to alleviate the pressure from the flow back in particular?

Is it theoretically feasible to do a buyback of these shares?

And my second question is on Gilenya reimbursement in Europe if you do get a restricted label given that off-label use is not normally reimbursed.

So would it actually be possible for the payers to ascertain whether a patient had failed other treatments and has high disease activity and so forth and, therefore, refuse reimbursement in those patients that strictly speaking are not covered by the label, or is it not really an issue because the lines are too blurred between the lines of setting?

On the first question, I mean in terms of the detailed makeup of the Alcon register, you would probably get a better indication from Alcon because they get the exact data.

But if you take out the largest shareholders that have been relatively stable, there has been quite a lot of hedge fund movement coming in recently as you would expect.

So, out of the 23, I would judge not much more than five would be in indexed funds.

It could be a bit more than that, but not significantly would have to sell.

In terms of the actions of the other people, it is actually quite difficult to work it through, because if you follow actually the short interest in the Novartis ADRs, quite a lot of people have already taken their positions on it.

So you can work flow back through, but in my experience actually a large part of flow back actually occurs before the date of completion.

Because no sensible investor, nobody wants to sell into a market that is going one way.

So it generally gets sorted out in the weeks before hand.

So it's a factor but not one that worries us greatly.

Let me just try to provide some color on Gilenya in Europe, pricing lines of therapy, etc.

The first thing that is important thing to understand is that MS drugs across the board cost less than they cost in the US.

So you have to take that into your model.

And within acceptable pricing ranges, to the extent that the label is more restrictive -- for example, second line versus first line -- is the ability to negotiate a higher price goes up.

So getting actually a second-line label in Europe may be beneficial from a reimbursement perspective.

Now your specific question is, if there is a second-line label and a physician chooses to use a first line, will it be paid for it?

And the answer is, it varies country by country, hospital by hospital, and there is no one answer.

Okay.

With that, I would like to close the call.

Thank you for your attention, and we will talk to you soon.

Thank you.

Ladies and gentlemen, the conference is now over.

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