Novartis AG (NVS) 2011 Q1 法說會逐字稿

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

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

Welcome to Novartis' Q1 2011 results conference call and live webcast.

(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 would like to welcome everyone to our first-quarter 2011 conference call.

Joining me on the Novartis end are Jon Symonds, CFO; Kevin Buehler, head of the Alcon business; David Epstein, head of Pharma; Jeff George, head of Sandoz; and Andrin Oswald, head of our Vaccines and Diagnostics unit.

Before we start, I would like to ask Susanne Schaffert 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.

So starting on the agenda, given that we closed the Alcon transaction on April 8, we are going to spend some time talking about the integration and financial implications.

But before we do that, I want to comment on our performance in the first quarter.

So on slide four, we had a very strong start to the year with our sales up 14%, and this is despite the fact that we had over $1 billion of H1N1 in the year ago base.

So we were able to increase our core operating income of our underlying business.

Because there is a lot going on to strip out Alcon and H1N1, our core operating income grew 13% versus a year ago.

We also made very significant progress on the pipeline this quarter, which we will talk about a little bit later in the presentation.

So on slide five, you can see the summary of the financials.

Jon is going to go through them in a little bit more detail, but slide six shows that all divisions grew nicely in the first quarter.

Sandoz had really a great quarter with sales up 15%, but all of the divisions grew above market rates.

And we are continuing to focus on our three priorities of extending our lead in innovation, accelerating growth, and driving productivity.

And I want to just highlight some of these areas, starting with innovation on slide number eight.

We did have great progress.

Gilenya was approved, as you know, in Europe, and our launches are underway.

David is going to talk a little bit about how the launch is going in the US and also in Europe.

But I think one of our more overlooked pieces of news in the first quarter was the second positive Phase III for our JAK inhibitor, INC424.

The data from both of these positive Phase III studies in myelofibrosis is going to enable us to file worldwide this year.

Recently launched products on slide number nine accounted for now over a quarter of our total group sales, so $3.1 billion out of our $14 billion, and that was up about 45% versus a year ago.

On slide 10 we saw a nice uptick on our emerging markets growth, particularly in the BRIC countries.

So Russia up 20%, India up 19%, China midteen growth.

I think you're going to see this nicely throughout 2011.

Sandoz saw an impressive growth in the first quarter, despite a pretty significant decline in Germany, and this was driven by enoxaparin, which generated almost $250 million in sales.

Also, biosimilars were up nicely, and emerging markets saw us double-digit growth.

Our Consumer Health business saw double-digit increases in growth on slide number 12 with all three -- sorry, high single-digit growth.

Each of the three businesses contributed to that growth.

OTC had a particularly good quarter if you look at brands like Excedrin up 19% and TheraFlu, which was driven by a strong cough and cold season in the US, up 50% versus a year ago.

On slide 13, Vaccines, we closed the Tianyuan acquisition to form the joint venture with this vaccines manufacturer in China.

This is going to provide a great platform for us to grow our Vaccines business in China with really a two-tiered pricing structure; one for innovative Novartis vaccines and another for lower priced but very high quality local vaccines from Tianyuan.

We also submitted on April 13 the Menveo filing for US for children between two and 24 months of age, and we are now waiting for FDA feedback.

From a productivity standpoint, on slide 14, back in November, we announced our cross-divisional program that would optimize our manufacturing footprint, and since November we have had a lot of activity.

We sold two plants to third parties.

That is in Morocco and one in France.

We announced the exits or partial exits in four additional sites -- Liverpool and Marburg, Germany where we consolidated flu vaccine platforms, and Horsham, UK where we are exiting manufacturing completely and in Mexico also.

So the completion of these exits will occur over the next 24 months for the sites that I have talked about, and we will give you updates every quarter as to further progress that we are making on the manufacturing footprint.

Now I would like to spend a couple of minutes talking about the progress that we have made on the Alcon integration planning and the financial and implications.

So, on slide 16, this eye care sector, I believe, is poised for continued growth over the next 10 years.

Just look at the basic demographic trends with the aging population, this is going to be a growth engine for Novartis well into the future.

We have already started the integration planning right after the Novartis and the Alcon board signed the merger agreement.

So, on slide 17, you can see the moving pieces where we integrate CIBA Vision and Pharma Ophtha, ex-Lucentis into Alcon.

And then we will also move Alcon's generic business into Sandoz given Sandoz relationships with top generic customers around the world.

So Alcon in Novartis will create a $9 billion business totally focused on eye care.

Slide 18 shows that it will be the second biggest business in Novartis after pharmaceuticals at 16% and further improving the growth profile of the business.

There is going to be three businesses in Alcon -- surgical, which is ophthalmic surgical products for cataract and refractive surgeries, pharmaceuticals focused solely on the eye, and then Vision Care, which includes contact lenses and lens care.

Now we see tremendous growth synergies here and have always said that this acquisition is more about growth than about costs.

If you think about Novartis' research capability bolted onto Alcon, it should result in an increase in breakthrough innovation in pharmaceuticals for the eye.

Also, the Novartis market access capability, particularly outside the US, will bring new market access for Alcon's premium intraocular lenses.

And the synergies also will go this way because Alcon's expertise in formulation is also something that we can leverage on the Novartis side.

Our bottom-up cost synergy estimate now looks like it's more than we had previously talked about and should be nicely over $300 million.

So we have organized clear accountability and tracking for the synergies in the new organization.

Slide 21 shows the timetable, so the planning is nearly completed, and now we will be moving into the execution phase, and we are targeting getting most of the integration activity completed within the next six months.

So now Kevin is going to give you an update on the performance of Alcon and also where he sees the value creation opportunities.

Thanks, Joe.

Starting with slide 23, I'm pleased to say that in Q1 2011 we had a strong quarter with net sales rising 12% to $1.9 billion.

This represents 10% constant currency growth.

Alcon's double-digit sales growth was broad-based with balanced contributions across all geographies and strong performance in our pharmaceutical and surgical franchises.

Reported operating income rose 25% to $207 million.

However, for a better picture of Alcon's performance, we have adjusted both Q1 2011 and 2010 for certain exceptional and other items to arrive at a pro forma core operating income for each period.

The adjustments include $501 million of amortization of intangible assets related to the purchase price allocation of the consequence of Novartis obtaining majority ownership and other items totaling $14 million.

On this basis, core operating income increased by 11% to $722 million or 37.4% of sales.

Drilling deeper into the core operating income performance, the 11% growth reflects the achievement of operating leverage even while increasing our rate of spending in research and development and other growth activities.

This performance is the result of the success of Alcon's business model to focus on the eye with a diversified portfolio of high margin products across the major eye care categories.

Meanwhile, free cash flow improved to $523 million in Q1 2011 versus $267 million in Q1 2010.

Free cash flow increased in large part from the Q1 2010 rights for Durasal, a higher level of accrued rebates and royalties and reduced capital expenditures.

Looking at slide 24, the global sales of pharmaceutical products increased 18% or 16% on a constant currency basis to $863 million.

Sales of allergy products rose 31% fueled by increased demand for Patanol and Pataday due to the early onset of the spring allergy season.

Glaucoma product sales increased 15% on strong sales performance for glaucoma combinations, which actually increased 48%, and continued solid performance of Travatan and Travatan Z ophthalmic solutions.

Global surgical sales were $845 million, which was an increase of 9% or 7% on a constant currency basis.

Fast-growing emerging markets led to faster sales outside the US, while US growth was negatively affected by Q1 by inclement weather across much of the country and the expiration of the new technology IOL reimbursement program.

Advanced Technology IOLs, including both ReSTOR and the Toric IOL brands grew 15%, and sales of vitreoretinal products rose 23% to contribute to the surgical performance.

Global sales of consumer eye care products rose 2% or flat on a constant currency basis to $223 million.

Strong sales of the Systane family of artificial tears, which increased 27%, offset declines in contact lens care and other consumer products.

The sales decline in contact lens disinfectants was the result of a continuing trend towards the use of hydrogen peroxide solutions and increased competitive activity in the multipurpose market.

As slide 25 shows, our sales results were balanced across each of the geographic regions.

In Q1 41% of Alcon sales were in the US, which showed sales growth of 8% over prior year.

Outside of the US, 39% of our total sales are in mature developed countries with demographics and healthcare delivery trends similar to the US, and these developed international markets showed 13% reported growth or 9% in constant currency growth.

Sales in emerging markets accounted for the remaining 20% of our total sales.

We have been achieving especially fast growth in these markets as we penetrate the unmet clinical needs of these countries.

Our Q1 sales in emerging markets rose 21% or 19% on a constant currency basis.

We are continuing to invest in market expansion activities in these markets, which represent a significant opportunity for eye care and our most attractive long-term geographic opportunities.

Consistent with past practices, we will not be providing quarterly guidance.

But for those of you who are not familiar with the Alcon business, there are a couple of comments I want to make about how our revenue expectations will unfold over the balance of the year.

In 2011 Alcon's annual revenue expectation is high single-digit growth based on the growth dynamics in the key ophthalmic categories, share expansion, planned product introductions, and growth in emerging markets.

It should be noted that the quarterly growth is not consistently applied to each quarter, especially in Q2, which is directly impacted by a number of factors.

For example, Q2 2010 was a relatively strong quarter in the pharmaceutical segment related to the severe allergy season, and we will need more time to evaluate the severity of the season in 2011.

It is reasonable to assume lower growth in the US in Q2 considering the relative uncertainty around both the Xalatan patent expiration and the expiration of the new technology IOL reimbursement program.

This reimbursement program is not applicable to sales outside of the US, and the growth rate in the second half of 2011 should compensate for this Q2 impact.

Now looking at slide 26 and turning to the integration with Novartis, we are building the Vision Care commercial capability with the strong CIBA Vision contact lens brands, as well as CIBA Vision's hydrogen peroxide solutions, plus the leading Opti-Free product line.

The new Alcon eye care division adds selected Novartis ophthalmic medications to the broad Alcon portfolio of eye care drugs.

Along with the surgical franchise, the new Alcon division has three solid product line growth engines.

As we carry out the integration, we will capitalize on the best attributes of each company to make a business that is simply stronger together.

We will also move aggressively to optimize our commercial platforms across the three eye care categories.

By doing this, we will deliver incremental and sustainable growth from the new Alcon while capturing operational efficiencies between Alcon and CIBA Vision.

We will also be able to capture savings from the integration of certain functions into the Novartis management structure.

As slide 27 shows, the division will operate with three dimensions -- geography, franchise and function.

By and large, global strategy for each product area will be developed and managed by the three franchises -- Surgical, Pharmaceutical and Vision Care.

Tactical execution and customer support will be delivered through the regional structure just as it is today in Alcon, though the regions will be defined slightly differently.

Finally, we will have functional areas that support the franchises and the regions in manufacturing, research and development, quality assurance and finance.

As shown on slide 28, the new Alcon has many of the world's leading brands in eye care holding the number one or two positions in most of the largest product categories.

The Surgical division contains leading positions in intraocular lenses with the AcrySof platform, cataract equipment with the Infiniti phacoemulsification system, and vitreoretinal equipment with the Constellation System.

The Pharmaceutical division is rapidly growing and is number one in allergy with the Patanol family, number one in anti-infectives led by Vigamox and number two in glaucoma with the Travatan, Azopt and combinations portfolio.

Vision Care has strong positions in weekly, monthly and disposable contact lenses, including Air Optix and Dailies and is number one in multipurpose, as well as peroxide solutions with Opti-Free RepleniSH and Clear Care respectively.

Slide 29 shows our global share of voice is unrivaled in eye care.

Our sales teams will bring the Alcon portfolio to our global audience of eye care practitioners across categories and customer channels.

This enhances our ability to execute a comprehensive commercial strategy across all three areas of eye care to capitalize on all growth opportunities.

The surgical team of over 1500 salespeople worked closely with the ophthalmic surgeons around the world to communicate the benefits of our total portfolio of cataract, vitreoretinal and refractive products.

Over 2000 pharmaceutical salespeople are driving growth for Alcon's glaucoma, allergy, anti-infective and dry eye offerings to eye care professionals and other specialists that treat ocular conditions.

Most of these salespeople are directed to ophthalmologists, but in some countries such as the US, we also promote eye care drugs to optometrists for allergies, glaucoma, dry eye and eye infections.

Our Vision Care salesforce of over 1400 promotes our contact lens and lens care products to those eye care professionals who fit contact lenses and recommend solutions.

As you can see on slide 30, we have already made a lot of progress since the announcement of the merger agreement.

In the last 90 days, we have already established a new operating model for the Alcon division, announced the global leadership team, and selected country management.

We have also made significant headway on our functional integration, and we have launched our value creation plan, which I will focus on in the next few slides.

It is expected that the integration implementation phase will continue in 2011, and commercial execution to the customer channels will start in Q3.

Slide 31 highlights that to maximize the value creation opportunity with this merger we are focusing on three main areas.

Number one, enhanced innovation to drive more growth from new products.

Number two, synergistic co-operation to capitalize on incremental revenue growth from our existing products.

And number three, increased productivity from our combined global infrastructure.

Now I will spend a few minutes in each of these areas of focus.

On the next slide, it notes Alcon will leverage our expertise in ophthalmic research and development to expand potential targets from the libraries of compounds at Novartis Institutes for BioMedical Research, and we will work together for solutions to many areas of unmet need in eye care.

Novartis' size and expertise in clinical development will provide multiple opportunities to leverage the synergies in the ophthalmic development activities.

We have already identified opportunities for the integrated development of technology in the contact lens and solution arena, and we are exploring the collaboration of our intraocular lenses and contact lens research teams in order to share technologies.

On the next slide and with our expanded portfolio, we will simply have more to offer the eye care professional and expect to have increased share of voice in the eye care market against these products.

The Vision Care franchise can now bring two industry-leading offerings in the Air Optix contact lens and Opti-Free Multi-Purpose Solution directly to the contact lens bidders globally in order to be a more complete partner.

We will also be able to clearly position Clear Care and Opti-Free appropriately with each of the eye care professionals.

Expanded market access will increase reimbursement for value-added products outside of the US and accelerate penetration in emerging markets.

As a practical example, Novartis' expertise in European market access may help us to obtain a similar reimbursement approach to advanced technology IOLs to that we have received in the US.

The Alcon Generics business named Falcon can also greatly benefit from the size, product breadth, and global reach that Sandoz offers.

Now from a productivity perspective on slide 34, Novartis has several areas for value creation with the integration of Alcon such as in the areas of procurement and manufacturing functions.

Procurement savings will affect areas ranging from IT to research lab supplies and help the new organization's profitability.

We will gain efficiencies in lens care manufacturing and be in a position to optimize the manufacturing footprint.

We are planning to capture significant cost savings for the new organization as we realize these efficiencies and opportunities, allowing us to reinvest in research and other growth initiatives while still providing sustainable P&L performance.

In summary, I am very excited about the growth and investor value that the new Alcon can bring to Novartis.

I will now turn the call over to Jon.

Thank you, Kevin.

I will now look at the financial consequences of the Alcon merger before moving to the first-quarter results.

As you can see on slide 36, there are four components to the Alcon merger from a financial perspective.

I will not repeat what Kevin has said about the growth opportunities, even though improving the top-line growth is the single most important value driver to the whole deal.

So taking cost synergies first, slide 37 gives you a summary of where we expect the synergies to come from, delivering the baseline $300 million, which we hope to build on and exceed over time.

There is a lot of granularity behind these numbers now.

We have built a very detailed model that integrates costs line by line for all of the components of the new Alcon division together with the related headcount.

Synergy targets have been allocated down to the country level, and as we appoint the new country teams, general managers have already been appointed, and their management teams are in the process of being put together.

This will give us the ability to develop full bottom-up synergy targets that have clear accountability and can be tracked on a monthly basis.

This process has been only possible since December, and while it is now a very robust profile, as Kevin has already mentioned, there are opportunities that we can further assess in the supply chain in the commercial area.

In many meetings over the last 18 months, we have been asked why the announced synergies on the Alcon acquisitions appear to be so low.

The simple answer is that synergies come from the removal of overlaps, duplications and inefficiencies.

The most attractive part of this whole transaction has been that these are relatively low.

There are no surgical overlaps in CIBA Vision, and there are no contact lens overlaps in Alcon.

This is also why we have to focus on growth to drive longer-term improvements.

This slide tries to put the cost base into perspective to make the point, and it is perhaps easiest to read it from the right.

In aggregate, the announced synergies represent 5% of the total cost base, at the low end of what would normally be expected for the reasons I have just outlined.

As a combination of the combined G&A cost base, synergies amount to 25%, and of the combined cost base in the areas where we have most overlap, the reductions represent around 40% of combined costs.

So I think you can be satisfied that where we can we are applying the necessary rigor while making sure that the businesses as a whole are giving the necessary priority to growth.

Slide 39 shows the phasing of the cost savings.

We expect around one-third of the synergies to be achieved in the first 12 months.

That is by the second quarter of 2012.

Slide 40 sets out the one-time costs for delivery of the synergies.

For the activities that we are confident about, the cost is around $270 million.

The areas we are still working on is the integration of Alcon into our ERP systems.

But now we have a provisional cost estimate of $350 million, which we will be updating as our plans evolve.

Slide 41 summarizes what you have already seen in the information provided with the AGM, which takes a mitigation of dilution through three stages.

Firstly, our expectations on the 15 December, 2010, when we expected to issue 215 million shares.

Secondly, the position achieved on closing on 8 April when we actually issued 165 million shares following the purchase of $2.6 billion of Alcon shares.

And finally, the position which would be achieved with a share buyback to be increased to $5 billion.

Given that the mitigation of the dilutive effect of the Alcon share issue was a major objective in re-initiating the share repurchase, it should be clear from this that we have already significantly reduced the amount of dilution arising from the issue of shares.

And with a further $1.8 billion of share buyback to an aggregate of $5 billion, it will be neutral to core earnings-per-share and accretive when synergies are fully factored in.

It is clear from slide 42 that our ambition for Alcon is to progressively improve its CFROI and to demonstrate the enormous value contribution we expect to gain from Alcon.

This slide sets out how the three components of improving returns fits together.

Finally on Alcon, constructing the new division is not a simple task, and this slide shows you all the moving pieces.

Only the Vaccines and Diagnostics division is unaffected, although the impacts on Pharma and Sandoz are relatively small.

So I think you are well prepared for quarter two when we publish our results on the new basis.

We will in effect republish the entire Q1 press release on this new basis, including a restatement of the quarterly results for 2010.

As this is a significant exercise, we will be holding a teleconference on the 18th of May with Kevin, his CFO Robert Karsunky, and myself to answer questions.

So let me now turn to the first-quarter results, and I will cover three areas -- operating performance and margins, cash flow and net debt and capital structure following the Alcon merger.

You will have already recognized that while the underlying results for the first quarter are excellent, being able to reach this conclusion requires a little un-picking.

On the left-hand side of the page, you see the reported results in constant currency.

This already removes one layer of complexity in currency, which I will return to in a moment.

Structurally, however, the results reflect two things, the acquisition of Alcon and the loss of H1N1 revenues.

There is no surprise in either of these events, but it takes care to work through the effect.

The right-hand column, therefore, gives you a much better indication as to how we see the underlying business performing when both of these factors have been excluded -- 8% growth in sales, 16% growth in core earnings representing excellent operating leverage, and a 30% growth in operating income boosted by disposal gains and a legal settlement in CIBA Vision.

Slide 46 shows in its fullest extent all the moving pieces in the top-line.

There are three points I want to make off of this page.

At the far right, volume growth continues to be robust at 10%, a product of good growth in Pharma of 9%, 25% in Sandoz, and 9% in Consumer Health.

The performance in Pharma excludes the dampening effect of both generic competition and product and divestments.

The generic impact will increase as we go through the year.

We expect Femara to face generic competition in the US in quarter two, and Diovan is already facing generic competition in Spain, and other markets will follow in quarter four.

The second point is that price erosion is more or less as we expected, and so far we are not seeing anything major in the pipeline that will change this view.

Price erosion in Sandoz was higher than we had experienced in the past at 10%, predominantly a function of the German tenders from last year working through the system.

Finally, I will note for now that currency had a positive 2% effect on the top-line.

At the heart of our business lies our commitment to innovation and the rejuvenation of our portfolio.

Recently launched products generated $3.1 billion of sales in the quarter, representing 26% of the total, and that is up from 19% in the first quarter of 2010 for a 45% increase in dollar terms.

Slide 48.

And on this slide, you can see the reconciliation of core operating income and reported operating income, and there are two points to note.

Firstly, the FX impact on profits was a negative 2%, and the adjustment between reported and core income comprised various exceptional gains and restructuring costs, which are fully described in the press release together with the PPA adjustments relating to Alcon that Kevin has talked about.

As with sales, slide 49 shows the moving parts to exclude Alcon and H1N1, demonstrating the strong underlying core income growth of 16%.

Slide 50 gives you the delivery -- the divisional summary performance.

The last time you will see it on this basis is from quarter two we will implement the new divisional boundaries.

Generally it was a good performance from each division.

The numbers from Consumer Health speak for themselves, driven by an excellent OTC performance, and the Pharma performance was also very good with good cost management delivering operating leverage.

Sandoz had an excellent quarter, in fact setting new performance benchmarks.

The top-line grew by 15%, having absorbed 10 percentage points of price erosion and a decline in the German business of 27%.

Although Sandoz good cause management was very good overall, the level of price erosion dented gross margin.

Productivity should over the remainder of the year recover some of this, although the performance for the balance of the year does depend somewhat on the exclusivity of enoxaparin.

The only other point to note on this page is the impact on currency on margin.

At the bottom of this shaded column, you can see that margin improvement in constant currency was an excellent 2 percentage points, but only at 70 basis points was visible in reported terms.

From the line above, you can see that the group reported margins was squeezed by a currency effect of around 110 basis points.

This was mostly attributable to the fact that the Swiss franc strengthened proportionately more than the euro against the dollar.

Pharma with a high proportion of R&D in Switzerland and Consumer Health with its Swiss-based manufacturing were harder hit than Sandoz, for example, which has a very small Swiss franc denominated cost base.

This is a good point to look at currency more generally.

Slide 51 shows that currency trends over the last few quarters of currency impact on sales and core operating income.

You can see that for sales our steady weakening of the dollar since the middle of 2010 has not produced an improving trend, which yields a positive 2% impact on the top-line.

If rates stay where they were for quarter one for the remainder of the year, we expect around a 3% positive outcome for the year.

For profits the impact has remained stubbornly negative since the third quarter of 2010.

This is essentially because the natural hedge between euro-denominated profits and Swiss franc costs has broken down as the Swiss franc has taken on a safe haven attribute in addition to its natural role as a trading currency.

For the full year, Q1 rates would produce a similar negative effect on profits as we saw for the first quarter at around 2%.

So turning to margins on slide 52, you see the movement in core margins.

At the top and bottom of the reconciliation, you see the impact of H1N1, Alcon and currency.

In the middle you see the outcome of good management to the cost base and which produces the underlying margin improvement of 2 percentage points.

Our target for the year is to aim to increase constant currency core margin, and by this measure we are off to a good start for the impact from H1N1 will reduce significantly in subsequent quarters.

Remember, however, what I said at the beginning of the year, that in order to simply deliver the same margin as last year, we had to increase our core margin by 70 basis points.

70 basis points for a business of this size is already a big achievement.

Slide 53 gives you the core EPS reconciliation between 2010 and 2011.

There is really nothing new to say here as it is largely related to Alcon -- higher financing costs, the loss of associated company income, and minorities offset by an improved tax rate.

Turning now to free cash flow on slide 54, after H1N1 and Alcon, cash flow is down on the equivalent quarter of last year.

This year we have paid almost $600 million out of provisions in Pharma, and we have seen the normal increase in working capital from the end of the year.

The year-end working capital was slightly below normal, and as the first quarter tends to be higher, taken together it looks a bit more dramatic than it really is.

There is no shift in our focus on cash flow, and it will recover in the balance of the year.

Finally, on slide 55, you see the movements in net debt from $14.9 billion at the end of 2010 to $22.3 billion at the end of the quarter.

The first quarter is generally the toughest for the year on cash flow, particularly with the payments of the dividend and with the negative working capital trends, but in this quarter, you will also see the effects of the share repurchases to reduce the Alcon dilution, which I have already spoken about.

And with that, I will hand you over to David for the Pharma highlights.

Thanks.

I want to share with everyone a very good start to the year.

Our sales grew 5% in constant currency, despite a negative pricing of about 2% of the divestment of Enablex in the US and generic impact on Lotrel high dose in the US, as well as first generic on Diovan in countries such as Spain.

Core operating income grew well ahead of sales.

We saw a nice increase in core operating income margin despite the negative FX effects.

What I would like to do now is just give you an update on four of our key franchises starting on page 58 with Lucentis.

You see that Lucentis grew 22% quarter over -- I'm sorry, quarter one 2011 over quarter one 2010.

We had just started to launch diabetic macular edema in Europe with a particular focus on Germany, and we received a positive CHMP opinion for retinal vein inclusion earlier than expected with that launch expected to commence during the second quarter of this year.

On the very next page, we tried to put into perspective the CAT data that is the head-to-head study of Avastin versus Lucentis that most expect will be available during the month of May.

We continue to believe that this study is unlikely to share any new insights as that trial is quite small in size.

As you know, there have been retrospective analyses done of very large safety databases.

In those large clinical trials, we do see what appears to be increasing rates of stroke and worse mortality on patients treated with Avastin.

Turning now to page 60, I'm happy to see that Tasigna continues to grow strongly, outstripping our expectations.

We showed 100% sales growth during the quarter, reaching sales of $153 million, showing us this product is well on track to become a blockbuster, and the conversion of the CML market from Gleevec to the better product, Tasigna, is continuing as expected.

On page 61, I'm happy to share the latest data on Gilenya, our oral MS drug.

As you know, we launched Gilenya in the US late last year.

We achieved during the first quarter $54 million in US sales, as well as an additional $5 million for a total of $59 million in sales outside the US.

Currently we have made good progress in converting patients who are on free drug to paying patients with now approximately 80% of the 6500 patients that are on drug actually paying for their medications.

As you know, we received European Commission approval in March, and we launched in Germany at the very end of the month.

Now this chart, which is the first time we show it, is a comparison adjusted for time weeks after launch of Gilenya versus two of the market leaders, Copaxone and Rebif.

And, as you can see, this launch is performing in line with the very best launches in the MS space.

Turning now to page 62, I just want to give you some additional insights into our evolving respiratory business.

Our Onbrez Breezhaler launch for COPD continues to gain momentum.

As you can see from the chart on the left-hand side of the page, with each successive launch, our market share gains have been greater as we have gained experience in the respiratory market.

Onbrez achieved sales of $20 million for the quarter, which is a very nice acceleration versus the $33 million that we have for the full year of 2010.

We also announced that the US FDA Advisory Committee recommended approval of the 75 mcg dose on March the 8th, and we expect to see final approval in the next couple of months.

And we also expect a Japanese regulatory decision by midyear, which will allow us to continue to build the Onbrez brand.

If we turn now to the next page, I want to remind you that our respiratory strategy does not just focus on Onbrez, but rather a portfolio of products, the next launch to be NVA237, a long-acting muscarinic agent where during the quarter we saw the first positive Phase 3 results.

That data will be released in a major medical meeting during the third quarter.

We saw positive efficacy, as well as a very nice profile in terms of dry mouth, which is one of the side effects of drugs in this class.

The development program for QVA, which is the combination of Onbrez and NVA, is continuing as planned.

We are continuing to accrue patients outside the US with a planned launch outside the US in 2013.

And we are now in progress of getting ready to meet with the FDA to discuss how this program would need to be amended for a US launch given that the dose of Onbrez in the US will be lower than it is in the rest of the world.

Overall we remain very bullish and positive about our respiratory portfolio.

It will take time to evolve, but I believe this will become a major leg for our organization.

If we turn to my final slide, which is page 64, I will not go through this in any detail.

Suffice it to say that our development organization is very busy with a lot of expected news flow during the second and third quarter, and our commercial organization continues to demonstrate that it is very capable of launching new products, and we are very excited about the products yet to come as we continue to rejuvenate our portfolio.

With that, I would like to hand it back to Joe to wrap up.

Thanks, David.

So we are off to a good start in the first quarter, and our priorities for the rest of the year are clear.

If you look at slide 67, we are reaffirming our outlook for 2011 with sales growth around the double-digit mark, and we aim to improve our core operating income margin, which will more than compensate for the lack of H1N1 this year.

So, with that, I would like to now open the call for questions.

(Operator Instructions).

Alexandra Hauber, JPMorgan.

I have a couple of questions.

Firstly, on the buyback program, I think you emphasized that the key strategy really is to mitigate the dilution.

But today you mentioned $5 billion versus in December you mentioned a range of $5 billion to $6 billion if I recall correctly.

So I'm wondering whether you really should focus on the $5 billion given that it has turned out to be cheaper to buy back enough shares to mitigate the impact to get it to zero.

So whether the cheaper share price is the key reason why it is know $5 billion rather than $5 billion to $6 billion.

The second question is on the integration costs that you have highlighted, is there -- can you roughly tell us what the cash component will be?

And also, outside Alcon on your ongoing restructuring of the manufacturing footprint that you understand that you cannot announce today what you're going to do, but what sort of annual restructuring cash requirement should we put into our cash flow model?

I have a question for Kevin, which is very uneducated because I still don't know Alcon as well enough as I should know.

But once I saw your strong constant currency sales growth, which I understand is partly because of an early seasonal -- an early onset of the allergy season, I was actually surprised that you did not get more operating leverage out of the business.

So could you just -- and you briefly mentioned that there is a drive to accelerate R&D spend.

So could you just briefly talk a little bit more about your growth initiatives, which are ongoing basically on the standalone business before we get all these revenue synergies coming on top?

And then the fourth question is on is for David.

We have seen on Friday the FDA announced the post-marketing commitments for the LABAs and the LABA/ICSs.

Given that you -- in the (inaudible) you are not going to go for asthma, do you -- are you confident that you can escape a similar post-marketing commitment?

Okay.

Let's start maybe Jon the first two.

Yes, coming back to the buyback, we have always put as a priority of the share repurchase program the minimization or the elimination of the dilution.

From the shares that we issued with Alcon, which is why we felt that repurchasing Alcon shares during the quarter made most sense because it eliminated dilution at source and, therefore, not only reduced dilution, but also I think mitigated the amount of shares that would have come back in flow back.

When we talked about $5 billion to $6 billion in December, we talked about up to $6 billion of cash, and we gave a scenario of a $5 billion share buyback.

The $1 billion difference was the CVA, which at the time we announced it in December had a value -- a cash value of about $1 billion or an anticipated cash value of around $1 billion and actually came out at about at a bit less than that.

So, as you saw from the slide I presented, we have actually dealt a lot already with dilution, and we will continue to buy back shares until we are satisfied that we have mitigated it.

The Alcon integration costs are predominantly cash because there is a relatively limited asset overlap between the two.

And then on the manufacturing footprint and the restructuring, I think we will -- in the future we will separate out what the cash costs and what the assets are on the write-downs.

But, in the initial phases of the restructuring, most of it relates to asset effects because these programs will stretch over a number of years, and the cash costs will come towards the latter part of the program.

But we will separate out cash and non-cash in future quarters.

And Kevin, the question of operating leverage?

Sure.

As I mentioned in my comments, we were actually quite pleased with the operating leverage that we had on a core reported basis, which actually showed leverage at a 11%, 1 point faster than what we achieved in terms of top-line revenue on a constant currency basis that at the same time that we increased research and development expenses by 11%.

And this is something that we have been doing over the last couple of years as we reinvigorate our R&D pipeline.

Also, our SG&A expenses were slightly higher than what we would normally plan to run for the year, and part of that relates to timing.

One of the major surgical events, the American Cataract and Refractive Surgery meeting, was in March this year when, in fact, it was April last year.

So overall positive operating leverage on the Alcon business.

And David?

Trevor, why don't you answer the question?

So, on the post-marketing requirements around the LABAs, we have been working with the FDA for some months on that now, and it does impact our product, Foradil.

It has not involved indacaterol, and we think it is unlikely because we are applying for an indication in COPD, although it may well impact products which are going for an asthma label in the US in the future.

Tim Race, Deutsche Bank.

On NVA237 could you just comment on how it broadly compares to what we have seen in the Phase 2 data in terms of the FEV1 benefits and just comment on perhaps when we should see the [LAB 2] data going through?

And then perhaps just talking about relationships with the FDA and what we have seen recently with QVA149, Afinitor, perhaps a slight delay to Menveo and also LVH?

What are you learning from how quickly you're trying to get products through to the FDA?

Is there a time to step back, and do you need to learn some lessons from this, and what do you think going forward in terms of your development plans?

And then probably lastly on Lucentis, just on the CATT study obviously.

We will get in the database soon.

Could you just comment in terms of market shares that we see between Avastin and Lucentis in the key European markets, and then just maybe give us an idea of what we see in terms of sales split between Europe and the rest of the world?

Trevor?

Yes, I will pick up the NVA question.

As we indicated earlier, we have the first of the Phase 3 studies, which we will be disclosing more information on at the ESR in the second half of this year.

We did say that the study was clearly positive on its primary endpoint, which was the trough FEV1 at 24 hours, and the data looks quite similar to what we have seen in previous studies.

As to the next Phase 3 study, that will come out in the second half of this year, and that will emerge with the totality of the data as we file end of this year.

In terms of just general commentary on working with the FDA, I would not say that any significant change in direction or approach.

We have seen over the last couple of years an increased emphasis on benefit risk overall for products with a particular focus on safety.

I expect that will continue.

And I think our strategy of increasingly identifying patient subsets who are likely to respond so we can submit drugs with higher benefit risk will differentiate our Company and allow us to continue to get drugs approved.

Regarding -- I guess your question is regarding the use of Avastin in Europe, the simplest way to describe it is it is highly variable.

And it is not even a country by country answer; it is a region by region answer.

There are some places where Avastin use is zero, and there are other places it is nearly 100%.

It has, however, in terms of Avastin encroachment in the business that has actually stabilized, and I guess depending upon how people interpret these larger retrospective databases where we see the increased safety risk with Avastin, that may ultimately have some impact on Avastin use going forward.

Can I just ask do you expect to see Avastin -- I mean not Avastin -- Lucentis growing over the next three years following the CATT study?

I think Lucentis will certainly grow.

Lucentis will benefit from the DME indication, from the RVO indication, and other development work we are doing.

In addition, Kevin and I have been discussing a synergy between our businesses where he can help us perhaps penetrate certain customer segments where we have not had the same depth of experience and reputation and outcome.

So I'm optimistic.

Yes, and I also think if you just look at the number of patients outside the US with DME or treatable DME, it is as large as wet AMD at about 600,000 patients.

So I think we fully expect to drive Lucentis growth.

Graham Parry, Bank of America/Merrill Lynch.

Just starting with enoxaparin annualizing at nearly $1 billion in sales now, I'm just wondering if there is any stocking or one-off impacts in the quarter, or if that is a good run rate that we should think about in the absence of any further competition from Teva?

And the second question for Jon, just on your comment about mitigation of dilution through the share buyback, are you talking just here about EPS dilution or about share dilution?

You have included in your $5 billion the $2.6 billion in Alcon purchases.

I was just wondering does that mean we should not expect any more than a further $1.8 billion share buyback this year, or is it feasible you could actually go over that level depending on opportunity to buy back stock?

And then the final question just on Trevor's comment on LABA post-marketing requirements following up there, I was just wondering if that would also apply to any generic Advair there that you are developing in Sandoz, or do you think you can use a pathway that would mitigate that?

Okay.

So, Jeff, maybe you would take one --

I will start with one.

Thanks for the question on the enoxaparin run-rate.

Look, we had a strong performance in Q1 for our largest launch ever.

But having said that, it is important to keep in mind that we are still operating in a supply-constrained environment.

We have worked hard to get our supply and share up to between 45% and 50%.

And yes, there is some normal stock-in built in around two new accounts that we picked up in Q1.

On mitigation of dilution, you are right that you should think of the $2.6 billion that we have already spent or really the $3.2 billion.

Because we did buy $600 million of Novartis shares back before we had to stock the program as being part of the dilution program that we talked about in December.

In December when we talked about share buyback of $5 billion illuminating or mitigating dilution, we had not fully taken into account at that time the opportunity to continue buying Alcon shares.

And, as I said to the earlier question, that seemed to us to be the more efficient way in which to reduce dilution.

We are thinking about dilution in terms of impact on P&L, and so the conclusion that you can draw is that we have not yet fully eliminated dilution, and therefore, you can expect that there will be some further share repurchases.

Yes, Graham, in terms of whether Advair would be or generic Advair would be impacted by this ruling around the LABA, so I think that if that were the case, that certainly would mean there would be no path to a generic product in this category in the US that would not be a generic path.

And, as we have said before, we believe that there is, in fact, such a path.

So I think that you can draw your conclusions from that.

Okay.

And just then going back onto enoxaparin, can you quantify that stocking impact at all?

Yes, I would prefer not to give any guidance on that.

Andrew Baum, Morgan Stanley.

Three questions, please.

First, Dr.

Vasella previously indicated your expectation is to be able to grow through the entry of Diovan generics.

Would you like to reaffirm that commitment today?

Second, you obviously have one of the highest R&D spends within your Pharma business, particularly with regard to research and your ongoing series of acquisitions and organic investments in the business.

Perhaps you could say something about capital discipline and how you think about capital allocations?

You are building out the research part of the R&D Pharma business.

And finally, on the same theme, you recently amended your Elinogrel program for a shorter and lower-cost clinical trial in acute coronary syndrome.

I note that you have started a program with Alaris in cardiovascular disease, which at the moment is in a long-term trial which is probably going to have a similar cost to or maybe slightly lower but still substantial costs similar to the original Elinogrel program.

Is there any sense that that could be amended, or are there specific scientific rationale why you're doing a secondary prevention trial with Alaris in the cardiovascular indication?

This is [Bill Sterling] with the first question around patent expiration.

You know, we have had many years to plan for the Diovan patent expiration.

We continue to stand by our previous comments about the fact that when you look at the diversified nature of our portfolio, you look at the growing markets, you look at the balance between reimbursed and non-reimbursed products that we do, in fact, expect to grow through this period of Diovan patent expiration.

If you just look at the first quarter, Diovan was down 5% globally.

We lost Diovan in Spain, in Brazil and in Canada in the first quarter.

And the organic growth of our business, ex-Alcon, ex-H1N1 was 8% with that built in.

So I think that we are at the very beginning stages of losing Diovan, but we are going according to plan with the addition of Alcon.

And what that does is the second largest business with a growth trajectory of high single digits.

That is going to further enable us to accomplish that.

In terms of R&D, we are one of the highest in the industry, but when you look at what we are getting for that, we believe that it's a good spend obviously.

Just look at the previous data that we have shown around pre-clinical Phase 1, Phase 2, Phase 3 and the number of new compounds that it takes to get us from those stages to an approved new compound, it is significantly better than the rest of the industry.

So, as we look at capital allocation decisions, this is a good spend for Novartis.

It is probably not a good spend for some companies, but at this point given the productivity that we are seeing now, it is a good spend, and you are going to see us continue to spend research and development at around 20%, anywhere from 19% to 21% of the Pharmaceutical division.

David, do you want to add anything to that or --?

No, I think the other question was about Elinogrel.

As you saw, we have decided to focus the program on ACS, acute indication.

As you know, Elinogrel is likely to be available in both an injectable and an oral form, and we felt that was the best place to start when you look at the overall risk of the program, which, Andy, you have certainly pointed out to us in the past.

The program for Alaris is really different.

As we have explained before, patients that have had a myocardial infarction, a significant portion of them have a very high inflammatory burden, and there seems to be the opportunity to significantly improve upon the use of statins in those patients.

The program, of course, will not be cheap.

On the other hand, we think the potential benefit to patients could be really quite large.

Mark Dainty, Citigroup.

Just three questions.

Firstly, I understand that you have recruited a manager of AstraZeneca in China to your organization.

I was wondering if you could give me some comments around how that might change your trajectory there?

Secondly, on Alcon when the Travatan patent expires in 2013, do you still expect to maintain a high single digit growth trajectory?

And lastly, a question for Jon.

Just generally when you have implemented procurements saving programs, approximately what proportion of procurement spend have you saved?

Thank you.

Yes, we have recruited Hong Pan to run our Chinese business.

We do believe that his experience in China in terms of being able to build sales force excellence, as well as build out a commercial operation in China, is directly relevant to our business.

We have also hired him because we believe that there is substantial opportunity for the other divisions to gain scale and to leverage the Pharma strength.

So many of our businesses like over-the-counter drugs, the Sandoz generics business, and animal health are not as big obviously as the Pharmaceutical business and with Hong's experience, he is able to ensure that we're making the right decisions around China.

So we do expect to see accelerating growth in China.

I was there with him reviewing the plans just a couple of weeks ago, and they are very exciting.

We are doing something very different in Novartis in China than we have done in the past, and so we are looking forward to seeing the results of that.

Kevin?

Mark, thanks for the question.

The Travatan patent I think I have it listed as 14 -- I think you said 13.

But you have to keep in mind that for the most part we are talking about the US market.

Alcon obviously participates with our Pharmaceutical business on a global basis where the conversion on generics is not the same as in the US.

I think you also have to understand that the fact that the market is moving from a single entity prostaglandin to a combination, and obviously that allows us to participate at a different level.

And, at the same time, part of our approach in terms of the glaucoma segment is looking at ways that we can continue to differentiate.

So, for example, we have been launching Travatan without the benefit of a BAK preservative.

We just got approval for DuoTrav, which is the combination prostaglandin with the same preservative difference.

So we are going to continue to differentiate so that we have some difference that is clinically relevant.

And then you also have to think about the three legs to the Alcon business because you were relating it back to our overall growth rate, and we have got three growth engines -- Pharmaceutical, Surgical and then the enhanced Vision Care when we combine eventually contact lenses and solutions.

So we feel very optimistic about our growth prospects going forward.

And on purchasing, there has been a well-established program here for some time.

It covers about $17 billion of cost-based spend, so that is pretty well everything, excluding headcount costs.

It will be increased going forward with Alcon by about another $3 billion.

So that is about $20 billion of cost that is coordinated through the global and divisional purchasing teams.

If we go back to what we talked about in November, we felt that if we really pushed this, we could be generating somewhere between 6% to 8% of annual savings.

It is a big and important part of our overall productivity program.

Matthew Weston, Credit Suisse.

A number of product-specific questions, if I could, largely in Pharma.

Firstly, with respect to Diovan in the US, can you just give us an update as to how formulary relationships are progressing given the new formulary year and obviously multi-source Cozaar?

Secondly, can you also give us an update on how government negotiations are progressing on price for Lucentis in DME and RVO?

Basically what price assumption should we be using for 2011?

And then just a couple of quick ones.

Exjade looked particularly weak from a positive trend in recent years.

Has something happened?

Was that stocking-related?

And then just a follow-on on the FDA requirements with Foradil, I mean, quite frankly, is it worth it for a product of that size in terms of the very substantial investment for the clinical trial which is needed?

And then finally, the $59 million for Gilenya in the quarter, was that all fundamental sales, or is there also stocking and pipeline filling involved with that revenue number, too?

Okay.

I will try to hit each of them quickly.

In the case of Diovan, actually our formulary position improved slightly this year.

It did require us to give slightly higher discounting, but overall it has allowed us, as you saw, to maintain a substantial portion of the volume.

And you asked for an explanation why I believe that most managed care plans are looking at the switching costs and to switch from Diovan to Cozaar generic and then potentially back to Diovan when Diovan goes off-patent.

It is just not a worthwhile financial equation for them.

So, as a result, they will keep most of their patients on Diovan until the Diovan patent expires.

In terms of our ongoing discussions with some select governments on the Lucentis pricing in Europe, as you know, when a Company gets a new indication, some of those governments will at some point ask the company to come back to negotiate pricing.

Those discussions are underway.

As I have indicated before, I expect to see some pricing pressure for the brand, but overall it is probably somewhere in the single-digit range in terms of change in pricing.

And we think that will easily be absorbed by the increases in volume that we will see.

You are right about Exjade sales during the first quarter.

In fact, it is predominantly focused on Exjade in the US market.

Outside the US, their growth continues to be quite nice.

What we found is that there was one particular specialty wholesaler that had de-stocked Exjade during the quarter.

That represents probably about half of the missing sales, and the rest is some slowdown, particularly in the MDS indication.

As you know, over time there have been required your doctor letters about MDS, which it has some softening impact on demand for the product.

Regarding Foradil, we did about $72 million sales worldwide in Q1.

So while certainly not one of our biggest products, it is a decent-sized product, and obviously we would like to find a way to do any kind of post-commitment trials in a way that make economic sense, and Trevor is charged with helping us figure out how to do that.

And then your final question was about the $59 million in Gilenya sales during Q1, roughly $54 million which was in the US.

You want to know if there is any stocking in there, and the answer is yes, of course.

Anytime a new brand launches, there is a stocking effect that is in line with the growth of the product.

And when a product outdoes expectations for the wholesalers, there is a bit of a catchup period, and we did see some catchup there in the month of March.

And I think I have covered all of it.

Florent Cespedes, Exane BNP Paribas.

First, a question for Andrin.

Could we have an update on the MenB program in the US, notably following their recent outcome meeting?

Secondly, a question for Jeff.

Could you have an update on the Copaxone situation in the US?

The trial will start in September.

Do you have any news on potential clinical trials requirement?

And Jeff, also could we have a quick update on the German market environment?

A quick question for David.

Could we have some color on the discussions you have with payers in Europe about the pricing of Gilenya?

And the last one for Kevin.

As we are not very familiar with your business, could we have some more color on how do you see the dynamics of the three divisions going forward as you have to face some patent expiries, but also I guess you launch new products?

Thank you.

Andrin?

Yes, you have probably seen the recommendation of the advisory panel and from the FDA who was positive on our approach on how we would show a surrogate for efficacy in a Phase 3 program.

It was particularly encouraging to us because this is an attracted approach we had used in our large Phase 3 programs that are the basis for our filing in Europe where we had filed Bexsero at the end of 2010, and secondly, we are now in the process of filing that product in other countries around the world.

On top of that in the US, you also had the end of Phase 2 meeting with the FDA where we had received additional feedback on the program, and we are currently digesting that feedback.

It will take us a few months to evaluate all our options, and then we will give an update on what is going to be our path forward in the US.

But is it a bit too early to give any timeframe now?

Yes, I would not want to speculate that.

I think it is a complex program.

We had quite some feedback from the FDA that we are now digesting in detail, and I think then we will be in a better position to give guidance.

Great.

So on your question first on Germany, we estimate that the German generics market declined 23% in net terms as tenders now comprise over half the market and in light of the AMNOG legislation, which limits substitution at the pharmacy level unlike in 2010 and most of last year.

Sandoz as a group was hit a bit harder on a relative basis as we have had historically higher share of the statutory health insurance portfolio contracts with our Hexal brand, which have now converted to single molecule tenders.

I think it is important to note that we continue to hold the number one position in the German generic market, and our market share in value terms per IMS is more than 6 points higher than that of Teva and Ratiopharm combined.

As we announced at the end of 2010, we have restructured our business into three segments to simplify our go-to-market approach.

First, the discount generic or tender segment, which is led by 1A Pharma, which has been growing double digits for the last several years and is now the number three brand in the market.

Secondly, our core genetic business, which is Hexal, which has detailing capabilities.

And then third, our specialty segment, which is really where a lot of the growth is in biosimilars, oncology, injectables, hospital and other specialty.

Before I go to Copaxone as a final note, I think what is more significant about Q1 is that despite the performance in Germany, offsetting the performance in Germany was really an excellent performance we had in Western Europe and Central and Eastern Europe where we had 19% and 22% growth respectively with over 40% growth in France, Russia and the UK and over 70% growth in Spain.

Quickly, on your Copaxone question, you are correct that the date for the full trial is now set for September 7, and we remain confident in our prospects in court.

The FDA continues to actively review our application based on the accepted 505J pathway filing, and we believe we are first to file and look forward to bringing this essential medicine to patients once we are cleared in the future for marketing.

Just any idea about potential clinical trial requirements?

Yeah, I don't comment on our development strategy.

I think that is probably best for me to not comment on that.

So I think the one price to point out in Europe for Gilenya now would be our German price where we are selling the product for EUR1850 for a 28-day pack.

The discussions with the other markets are ongoing.

There will be additional announcements in the coming weeks, and some obviously will take a few months.

And Kevin?

The growth dynamics behind eye care obviously are linked to aging demographics and, also, when you look at the level of unmet medical need in a lot of cases in the pharmaceutical area, for example, in glaucoma where we are simply treating the symptom of elevated pressure.

So when you think about our business dynamics across these three businesses, we have really got to look at each one of them individually starting with surgical.

Obviously, as the population gets older, the opportunity for increased number of cataract procedures increases, but, more importantly, we have got the opportunity to add technology.

And we are in a wonderful position with a multifocal IOL and a toric IOL, and we are just launching outside of the US the combination of both of those technologies that allows us to put a between 2X and 4X price on a monofocal IOL.

So obviously as we continue to introduce technology, we are going to drive both procedures as well as value growth.

The pharmaceutical segment is going to be based around the new products and driving out market share in glaucoma.

And then when you think about the other side of the aid spectrum in contact lenses, we are in a much better position to address the underindexed penetration of contact lenses, but, at the same time, to grow share across both lenses and solutions.

So we really do have different growth dynamics in all three of the businesses.

Okay.

I think we have time for two more questions.

Tim Anderson, Sanford Bernstein.

Bank to the topic of R&D spend, just a simple question, which is whether your internal rate of return has been above your cost of capital over the last few years.

The second question is on the tax treatment of Diovan.

Often big brands are set up in favorable tax structures.

I'm wondering if losing patent protection in certain markets over the next year is going to put upward pressure on your tax rate?

And then last question is on the margin structure of Sandoz.

Over time should we be expecting margins to go down before they go up between now and something like 2015 due to the need to invest in various things like biosimilars and clinical trials?

So, on the R&D question, when Jon got here, he introduced us to cash flow return on investment metrics.

I can tell you we have looked at our R&D spend every such possible way, and the return is much higher than any cost of capital that we use.

Yeah, he is right.

On the tax treatment, I think without going into -- obviously we will not go into the specifics of the Diovan tax structure, but I think the fact that we are and will experience Diovan patent expiries and are talking about a tax rate in the region of 15.5% to 16.5% sort of would indicate that we are not expecting to see any major impact on our tax rate as a result of patent expiries.

And Jeff on margin?

So on margin structure, Tim, we are investing heavily in biosimilars and respiratory, and as those products move to the clinic in Phase 3 and particularly in the back of this year and 2012 and beyond, that obviously has an impact on margins.

Having said that, we are offsetting that through a lot of great productivity work that our teams are doing.

So in Q1 this year alone we saved over $135 million of savings through productivity through sourcing and procurement.

And over the last two years in 2009 and 2010, the number is well over $850 million of productivity savings.

So I think we are balancing the productivity -- excuse me, we are balancing the significant investments that we are making with productivity.

We did get hit in Q1 on the gross margin side, as Jon mentioned, due to the declining German business, but there was also a good part of that was currency fluctuations, as well as lower sales to other divisions.

So I continue to be optimistic that we can continue to show margin expansion over the course of the next couple of years.

Okay.

Final question, please.

Michael Leacock, RBS.

I wanted two brief questions.

Firstly, on Germany and the Sandoz business, I just wondered if you could make any more comment on the pricing of the biosimilars in that marketplace?

And secondly, Jon, presumably now that the Alcon deal is complete, the $4 billion of cash which was on the Alcon balance sheet is now clearly available for Novartis purposes.

I just wondered how much of that money would need to be left for working capital purposes within Alcon?

First, on Sandoz in Germany and biosimilars, it has been hit by some of the legislative changes in terms of the pricing environment.

It is also a more competitive biosimilar market.

I think it is notable if you look globally at our biosimilars business, we actually were growing north of 80% outside of Germany, but it was a tougher quarter for biosimilars in Germany.

But, as we continue to expand elsewhere, the relative share of Germany to not only the total biosimilars business, but more importantly to the total Sandoz business, continues to diminish in importance.

And on cash, Michael, we completed the Alcon deal on April 8.

On April 11 the entirety of the Alcon cash transferred into the group treasury, and Alcon is part of the group working capital and CP program.

So it is all one cash pool now.

Okay.

So with that, I would like to thank everybody for their time and their questions, and we will now close the call.

Ladies and gentlemen, the conference is now over.

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

You may now disconnect your lines.

Goodbye.