Novartis AG (NVS) 2011 Q2 法說會逐字稿

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

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

Welcome to the Novartis Q2 half-year results 2011 conference call and live webcast.

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

(Operator Instructions).

This call must not be recorded for publication or broadcast.

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

Joe Jimenez.

Please go ahead, sir.

Thank you.

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

I would like to welcome everybody to the second-quarter 2011 conference call.

Now joining with me on the Novartis end are Jon Symonds, CFO; David Epstein, Head of Pharma; Kevin Buehler is here, Head of Alcon business; Jeff George, Head of Sandoz; Andrin Oswald, Head of Vaccines and Diagnostics; and we also have Trevor Mundel, Head of Pharmaceutical Development.

Before we start, I would like Susanne to read the Safe Harbor statement, please.

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.

Okay.

Starting on slide number 4, we had a strong quarter in the second quarter.

Our sales were up 19% versus year ago, but we're also able to drive strong operating leverage with our core operating income up 29% in US dollars and core EPS up 23% in US dollars.

We had a great cash flow quarter, and we also made great progress in our innovation this quarter with four major approvals, which we will talk about a little bit later.

On slide 5, you can see an overview of the financials, and Jon will speak to these, but core EPS of $1.48, which is up 23% versus a year ago.

Slide 6 shows the -- what I think is the benefit of the Novartis diversified portfolio.

We had very strong contribution this quarter from Sandoz, which was up 16% in constant currency and Alcon up 6%.

Pharma also had a good performance; it was up 2%, but this includes absorbing 4 points of generic erosion on Femara in the US and Diovan in Europe, particularly Spain where we have lost exclusivity.

Now, Vaccines & Diagnostics business was down excluding H1N1 due to the timing of some bulk product shipments, but as you know, Q2 is historically a low sales quarter for vaccines, so I look at vaccines more on the half-year, at the first half of the year.

And they were up 6% in constant currency behind the Menveo launch.

Now, on slide 7, we are continuing to execute well against our three priorities of innovation, growth, productivity, and let me just touch on each of those, starting with innovation on slide 8.

We made great progress with some key approvals.

The four key approvals in the quarter are listed here.

And if you add those to first quarter, we have had, in total, seven approvals in the first half of the year.

Also in the second quarter, we had two very important filings -- INC424, our new JAK2 inhibitor for myelofibrosis was filed in Europe, and Menveo in the US to expand the label for use in infants and toddlers between two and 12 months of age.

On slide 9, our focus on innovation has really been critical in terms of translating that innovation into sales and profit growth.

So on this slide, you can see that recently-launched products accounted for $3.8 billion in sales out of the roughly $15 billion for the quarter.

That's up 46% versus year ago.

And David is going to talk more about some of these launches and how we are driving them to move that portfolio.

On slide 10, we saw some strong performance in our top six emerging markets, led by Consumer Health and Alcon.

Both of those divisions grew 20%-plus this quarter in those markets.

I also want to point out China's performance.

We had great performance in the second quarter on China, bringing the half-year to plus 20% for the entire company.

We're also making good progress in Russia, particularly with establishing a manufacturing footprint.

So we recently broke ground on a new state-of-the-art manufacturing facility in St.

Petersburg.

We see Russia as a long-term play, and we'll have local manufacturing there shortly.

On slide 11, since the Alcon merger closed on April 8, our teams have been working very closely to integrate CIBA Vision into Alcon and Alcon into Novartis.

We have made great progress over the past few months, and the new Alcon division with those new businesses in it became operational July 1.

We've got synergy plans and tracking mechanisms in place, and we will provide you with an update on synergies and progress against those later in the year.

Slide 12 shows you an overview of the Alcon business, the new Alcon business, which is structured into three franchises; surgical was up 6% with strong growth in advanced intraocular lenses.

Pharmaceuticals was up 8% despite a weaker allergy season than a year ago; and vision care, including CIBA Vision, was up about 2%.

Now on slide 13, you can see the growth that we are seeing on Sandoz which is not just this year, but it's year over year over year.

And this is driven by strong performance in the US with enoxaparin sales, which were substantial in the quarter.

We also though had strong double-digit growth in Western Europe in emerging markets.

And also you can see biosimilars and oncology injectables were up both over 30%.

So this is broad-based growth that is across geographies and it is across product categories for Sandoz.

On slide 14, our Consumer Health division grew about 5%, as both OTC and Animal Health drove some of their key brands, and they also showed nice growth in emerging markets -- both of these divisions.

Now on slide 15, our next growth platform for vaccines is Bexsero, which is our vaccine for bacterial meningitis B.

We have focused the regulatory strategy on those areas with the highest incidence of the disease and higher unmet medical need in countries like the UK, Spain, Germany and France, but importantly, also, in the US, we received feedback from the FDA.

And a path for Phase III is clear, so we plan to initiate the Phase III trial in the US either late '11 or early 2012.

On slide 16, we're making good progress on our productivity efforts.

Back in November, we announced a cross-divisional program to optimize our manufacturing footprint.

And the overall objective was to increase plant utilization to 80% of capacity.

Since then, we have sold three plants.

We have five additional sites which are under either full or partial exit.

And completion of those programs will occur over the next 24 months.

We continue to evaluate our footprint and there will be more announcements to come in the area of manufacturing.

Additionally though, in procurement we are making good progress.

We've now pushed about 55% of our addressable spend through e-sourcing, and that's generating savings in packaging materials, in media, travel expenses and a number of areas.

So overall, a good quarter, but I think the thing that I am most pleased with is that we are executing well pretty much across the board.

So now I'd like to turn it over to Jon for further description of the financial performance.

Thank you, Joe.

Good morning or good afternoon, everyone.

I'll get straight to the numbers, but my view, like that of Joe's is that these are a very good set of numbers that build nicely on the first quarter.

Hopefully since the publication of the restated numbers in May, nobody's going to be surprised by the structure of the results as you can see on slide 18.

That said, I think the baseline performance for the quarter is very clear.

19% sales growth translates into 30% core operating income growth and a 25% growth in core earnings per share, the lower rates of core earnings per share being explained by the net increase in shares following the Alcon merger.

Clearly, the growth rates won't stay at this level for the rest of the year, as from the beginning of September, we start to lap the full consolidation of Alcon.

The reported results are a bit more complicated, and I will take you through the moving parts in a moment.

Free cash flow grew at 39% to $3.3 billion, much better than the first quarter, although it's flatter a little by the disposal of proceeds we received on Elidel.

For the sake of completeness, slide 19 shows a summary of the results for the half year.

The numbers are not as strong as for the second quarter -- as they are not as strong as they were for the second quarter as a result of the size of the H1N1 revenues -- $1.3 billion for the six months, but only $200 million in the second quarter.

We have improved constant currency operating margins for the half year by 30 basis points to 30.2%, which is a really good outcome and means that the profit growth for the first six months has already fully made up for the loss of H1N1.

Before getting into the details, there's one aspect I want to address as is pervasive throughout the numbers, and that is currency.

I don't need to explain why the dollar has been so weak or indeed why the Swiss franc has been so strong.

But on slide 20, you can see the impact for the second quarter, 8% positive on sales and a negative 3% on operating income.

The difference between the plus 8% impact on sales and the minus 3% impact on profits is, as you know, created by the different currency mix between sales and profits, primarily created by our Swiss franc cost base being substantially larger than Swiss franc sales.

Therefore, when there's a differential movement between the dollar and the euro and the Swiss franc, you can see how the P&L mismatch arises.

In the second quarter, the dollar weakened by 13% against the euro, but by 27% against the Swiss franc.

And of course, that's what -- it's that that creates this differential.

I think given the scale of the movements, it's however striking that the profit effect is so modest.

This is because the broad geographic distribution of our business is a big asset.

Even when we model extreme scenarios, we always find that in profit terms, the business breadth has a big dampening effect, that is so long as the currency correlations stay intact.

While currency forecasting is something nobody can do with confidence, especially at the moment, if June average weight rates were to prevail for the rest of the year, we would expect the full-year impact to be of the order of plus 5% on sales and negative 3% on operating income.

Slide 21 shows the currency picture by division with some variation by division.

You can see from this the benefit of the broad geographic footprint of Pharma, as well as the impact of the European or Swiss franc cost basis in the other divisions.

Alcon, by contrast, has a higher proportion of its cost in US dollars and, therefore, achieves a more neutral position.

Obviously, with swings of this scale, reported margins are impacted, which is why we've given you more emphasis to the underlying constant currency margin movements.

Longer term, it's clear that we need to seek a better alignment of costs and revenues, but this is not something we can achieve in a single quarter or two.

As I said at the beginning of the year, the best measure of underlying sales performance would be volume growth.

You can see on slide 22 that when all the elements are stripped back, volume growth in the quarter was good at 7%.

Excluding divestments and the impacts of generics, the number is more like 8%, so we maintain our strong underlying momentum.

And on slide 23, you can see the reason why.

Our portfolio of recently launched products generated 25% of total sales, $3.8 billion in total, growing at 46%.

And for the six months, the impact was equally impressive at 24% of sales, $7.1 billion growing at 47%.

I think what is particularly noteworthy is the contributions being made by Sandoz and the other divisions.

This really demonstrates the value of our broad-based commitment to innovation and the drive for value-adding medicines in all of the divisions.

Joe has already mentioned some of the individual highlights, and David will update you on the Pharma performance in a moment.

Before coming to divisional operating performance, I briefly want to mention the adjustments between core and reported operating income on slide 24.

There are obviously some items on this list that are predictable.

The acquisition-related items, which including $500 million for Alcon, is now running at about $800 million a quarter, together with those that are not predictable.

Where significant, there will be individual press releases.

For example, the Elidel proposal, but for a group of our size, there's always going to be some catching up to do.

I won't go through this in any detail, as it's well covered in the press release, and therefore this is really more for reference.

The picture on operating leverage on slide 25 is striking not only for the number of green arrows, but also for the size of the underlying improvements.

Sandoz is well ahead of the pack.

Obviously, enoxaparin is a big part of the story, but don't simply attribute it to that alone.

The shift in German sales and profits has been a big one.

And not only have Jeff and the team driven top-line growth across all markets, but the focus on operating costs has been excellent too, creating a highly impressive growth in profits and margins.

But I also say that the focus on markets, products and customers together with good cost discipline was a hallmark across the group this quarter.

Pharma cost management in the quarter was excellent and Consumer Health has done a good job in making sure that strong sales performances in many markets has been retained at the profit level.

Alcon had a tough quarter with a particularly strong comparator in the second quarter of 2010 when the allergy season was very strong.

You can see that in the declining sales of the allergy segment.

That said, the second-quarter performance of ophthalmic pharmaceuticals was very good, especially in glaucoma.

And the growth in the international business in emerging markets were very strong.

The challenge remains growth in the US cataract procedures and the shift to higher-value Advanced Technology IOL's.

At the other extreme, V&D performance is a result of two expected effects, the absence of seasonal flu sales and the continued investment in our meningitis portfolio, together with an unplanned effect from the delay of shipments from one of our plants.

We hope the latter effect will be caught up in the second half, but as you know, vaccine production is not straightforward.

Slide 26 is another way of telling the same story on margin improvement and shows that after excluding Alcon and H1N1 we're making good progress in improving profitability with good operating leverage coming from many of the individual cost lines.

For the second quarter, we saw an improvement of 2.3 percentage points in constant currency core margins and 2.2 percentage points for the half year.

As I mentioned at the beginning, this performance has allowed us to increase constant currency core margins for the half year by 30 basis points.

Before leaving the divisional performance, I want to highlight a few of the trends expected in the second half so you don't think that the full year is simply a straight line from the first half.

Slide 27 shows some of the factors we expect to be present in the second half.

I won't go through them in detail, as I hope this presents a picture of the moving parts.

Some of them should be obvious, such as the strong trends in recently-launched products or the increasing impacts on -- generic impacts on Pharma, or indeed the uncertainty around enoxaparin sole generic status, which can go many -- both ways.

Whereas others are there to help with some of the cross trends that are less obvious, Sandoz, Pharma and Consumer Health always spending patterns in the second half that are different to the first.

I won't repeat the currency story again, but of course this is going to have an effect.

And to achieve full-year results, the effect of plus 5% on sales and minus 3% on operating income, the impact in the second half could be a little different to the first.

Finally, on capital structure, on slide 29 -- slide 28, gives you the reconciliations of core and reported earnings per share, which highlights the structural changes in the P&L following the Alcon merger.

I don't think there's really much to say other than that on this.

Finally on capital structure, slide 29 shows the movements in net debt from $14.9 billion at the beginning of the year to $21.9 billion at the end of the first half.

At this level of debt, $27.5 billion in gross terms, our credit rating is more or less in the mid to lower half of the AA-backed.

The primary movements, apart from the operating cash flow of $4.9 billion, has been the payments of the dividend of $5.4 billion and the Alcon-related payments, including the share buyback, of $5.3 billion.

This includes $1.8 billion or 30 million shares of Novartis shares repurchased in the second quarter.

The program to mitigate Alcon dilution has now been completed.

The other point to note on capital structure is the board's decision to amend the dividend policy to remove the restrictions around dividend payments, which previously had been set at 35% to 60% of net income.

This is being done to give the board full flexibility in thinking about shareholder returns, particularly given recent currency volatility, although not at the expect of jeopardizing capital strength or the group's ability to invest in the business for the long term.

The board won't, however, be making a judgment on any of these variables before making a decision on the dividend until next January.

With that, and I hope you see that these are a positive set of results for the second quarter, I'll hand you over to David for the Pharma review.

Thanks, Jon.

Today I would like to give you an update on our numbers, which includes a strong management of costs, our launches, which are fueling growth, and a brief look at the pipeline to come.

So I recommend we start on slide 31, where we see that sales are up 2% with strong leverage on core operating income, which is up 6% and a very strong cash flow for the quarter.

Turning to page 32, we see that the launch brands drove 7 points of growth during the quarter.

And as Joe mentioned, this is despite the loss -- the overall number were despite -- this growth was despite the loss of Femara revenue in the US due to generics; the loss of revenue on high-dose Lotrel in the US; as well as the beginning of generic competition on Diovan in countries such as Spain.

Page 33, we see that launch brands actually grew the category -- grew 34% in constant currency and are now at 28% of sales, driven by the same eight products that we plan to update you on each quarter.

And what I would like to do now is just go through a couple of these to give you a little bit more perspective on how they are growing and why we are seeing the results that we are.

Starting on page 34, which is for our blockbuster product, Lucentis, which is being driven by the launch of new indications, in particular the DME launch, which is giving us a whole new growth opportunity on the back of continued growth of wet AMD.

If you would like, I would suggest you take a look at how our partner is doing in the US market with the DME launch to get a sense of the still yet untapped potential we have for this brand to continue to grow that indication as well as to find new opportunities in the RVO market later this year.

Turning now to the following page, we take a look at our Tasigna Glivec franchise in the treatment of chronic myeloid leukemia, and what we see is that the Tasigna's share of the CML franchise is now approximately 17%.

Tasigna grew during the first quarter at 100% rate over the previous year and during the second quarter at a 79% rate, reaching $170 million for the quarter.

So as you can see, the brand is doing quite well.

Among the second-generation products, it is now the leader in many different countries.

Now some have asked why the share is not even higher.

It's important to note that Glivec also did especially well during the quarter, driven by some tenders in a few emerging markets, and in addition, we have seen expansion of the use of Glivec because of the excellent data that we have generated showing that three years of adjuvant GIST use is better than one year of the use of Glivec in the adjuvant GIST setting.

Turning now to the next page, looking in more detail at the US market, we begin to get a feel for where this growth is coming from.

Just to remind you, the 200 milligram strength is used twice a day in the second-line setting, and the 150 milligram strength is used also twice a day, but in the newly diagnosed setting.

So these bars give you an approximation of where the revenue is coming from, although there can be some crossover from one strength to the other.

We now estimate that more than 30% of all new CML patients are started on Tasigna, which gives us a good expectation for our ability to move the market to this better brand over time.

On page 37, I wanted to take a moment to share an update on Galvus, a product that we don't talk about very often.

This is a DPP-IV for the treatment of diabetes.

As you see, sales grew 65% in constant currency, reaching $165 million in the quarter.

We recently enhanced the label in the EU by lifting a restriction in the very elderly, and we launched a partnership with Sanofi in Japan to increase our market presence in order to grow share in the Japanese market.

Recently, we were able also to share some data which shows that Galvus is the only DPP-IV with clinical data showing similar efficacy to Actos.

So as physicians begin to look for alternatives to that drug, they find that our product, Galvus, is a very good alternative.

Overall, Galvus is on track to become a blockbuster product, and I would say that's even faster than we had originally expected.

The next couple of pages are on our product, Gilenya which perhaps generates the most questions about our new launch portfolio.

As you can see, Gilenya is doing very well.

It is now among the best launches ever among specialty products in the pharmaceutical industry, with over 13,000 patients being treated in the EU -- in the US and EU.

Overall, more than 20,000 patients have been exposed to Gilenya.

Some of these patients have been on drug for as long as seven years.

The most striking thing about this chart, however, is the comparison using similar points in time to the launch of Gilenya versus two of the market leaders, Rebif and Copaxone.

And as you can see, we are well on track to generate a very strong future for this brand as we continue to take share from the other market participants.

What I would like to say before we move to the next chart is don't always believe what you may hear from some of our competitors, who will often tell you that our launch is somehow underwhelming, because, if anything, it is beating expectations.

The next page gives you a sense of what's driving the move from the older agents to Gilenya.

In particular, when we first launched, a lot of patients were moving to our brand because they were either afraid of injections or had side effects, particularly from the interferons.

What we are now seeing is that efficacy is increasingly driving the reason to move, and you see that a large number of the patients are coming from a switch of Copaxone to Gilenya.

On page 40, I'd like to give you just a snapshot of the design of the recently stopped Afinitor trial in ER+HER2- metastatic breast cancer.

As you recall, we were comparing the addition of Afinitor to an aromatase inhibitor called exemestane or placebo.

Efficacy was overwhelmingly positive, and this trial has now been opened, which will allow for an early submission in the second half.

On this chart, we try to give you -- share with you an estimate of how many women in the G7 countries would be eligible for treatment.

But clearly if you look beyond the US and the rest of the G7, you would see many more potential patients.

And we would see incremental sales potential in excess of $1 billion for this indication alone.

Page 41 shows you how our development team has done in the quarter with registrations and approvals.

And, as you can see, it's been a very solid quarter.

Now I promised you we would take a quick look at our pipeline, and on page 42, I would like to do that.

As you know, there's over 140 projects in development and we continue to reshape that pipeline and think very carefully about our R&D spend to get best effect.

What we've done here for you is pick out seven sample pipeline projects that we believe could be very significant contributors to future growth as a next wave of launches beyond the eight blockbuster products that we have been talking about, our new launches that we have been talking about repeatedly.

I won't go through this in detail.

Suffice to say I believe this is one of the best near-term pipelines in the pharmaceutical industry.

The one product I will mention, however, is on page 43 because the data is quite fresh.

We now have two positive pivotal Phase III studies supporting the use of INC424 in the treatment of myelofibrosis.

That indication have now been filed in the EU and in other countries beyond to support that approval.

And our oncology team is very excited about this upcoming launch, particularly because it fits very much in our sweet spot of the hematology segment.

For my last page on page 44, just give you a sense of the news flow for the second half of the year.

I won't take you through it.

Suffice to say I think the second half is shaping up to be at least as busy as the first half.

And with that, I would like to turn the presentation back to Joe.

Thanks, David.

Okay, so to close on slide 46, we are making solid progress on our strategic priorities for the year, and we will provide updates each quarter in this format so that you can track along.

And based on our good performance in the first half, we are reaffirming our outlook from a sales standpoint for 2011 with sales growth around the double-digit mark.

We're also, though, now expecting to improve our core operating income margin.

I think at the beginning of the year, we said that we aim to improve, but as we progress through the year, I feel good about the leverage that we are getting, the cost control that we are getting, so we expect to improve that margin this year.

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

(Operator Instructions).

Tim Race, Deutsche Bank.

Thank you for taking my question.

First question to Jon.

I suppose looking at the margin progress, you talked about the sort of change in the manufacturing footprint and the plants and also the procurement savings.

Could you just help us understand how far through those programs we are; as a proportion, how much is left to go over the next couple of years?

And maybe help us understand a little bit about in terms of marketing and sales spending in pharma, how far we are in terms of sort of realignment of the primary care sales force and how much is left to go there; and perhaps whether we could actually see some sort of margin improvement next year as well.

Second question, just on the pharmaceuticals in emerging markets, looking at the top six emerging markets, growth was only 5% in constant currencies.

If you could just talk me through what's going on there because it seems that China and India are growing pretty strong.

And then lastly, just another question for Jon just on the tax rate -- could you just help me understand where the core tax rate and the reported tax rate go and sort of the differential between the two for the next few years, that would be great.

Thank you.

Okay.

On the first one, Tim, around margin progress, I think all of the three projects that you highlighted are a work in progress to various degrees.

I mean I think, as Joe mentioned, we're now progressing through the streamlining of our manufacturing program, but that's really a three to five year program because there's quite a lot of internal product transfers that need to be made in order to optimize the footprint at the end of it.

Procurement is also something that I think we've done very well over the last three years and we really are now penetrating the amount of spend that we are managing on a cross-divisional basis, and are using e-procurement techniques.

I think we have continued to do pretty well at the sort of 5% to 6% procurement savings per annum.

And then on sales and marketing, I think it's pretty clear from the way we set up the press release that you can see the progress that we are continuing to make on pharma.

And as you saw, there's another 90 basis points of improvement this quarter over the previous year.

And so long as we are maintaining effectiveness on our sales targets, then we will continue to drive for efficiencies there.

Perhaps I can just pick up the tax rate point before the second point.

The way to look at tax fundamentally is on the reported line, because we manage the tax rate really on a consolidated basis, including things like amortization, one-off adjustments and so on.

So that is a more -- that is the most robust part of our tax planning and that's what gives you the around 16% tax rate.

Generally, the core tax rate is a little bit higher because of the tax shield on amortization that we get in the reported rate.

The only thing I would add to what Jon said on cost is I believe that in procurement, we are still at the beginning stages.

When you think about the organization that we put in place right now, here at Novartis, which is a global procurement organization, there are still many categories that we have not yet attacked, so I still think -- and I have seen this before -- that we have got many years of procurement savings to come.

With e-sourcing, you don't just push it through and that's it.

You push it through and then the next time you find a different way to optimize it, and then the next time you find a different way to optimize it, and so this is a multi-year benefit.

David, on the pharma --?

Yes, just to speak a little bit first about M&S, clearly, we're working to drive that down as the portfolio shifts from primary care brands to specialty brands.

And in terms of EGM, there's a mix of countries; China and India did particularly well this quarter.

I expect some of the other countries will contribute more in the back half of the year.

Thank you.

Graham Parry, Bank of America Merrill Lynch.

Okay, thanks for taking my questions.

This was just on the dividend and the restriction of the 35% to 60%; I think you alluded to it on the call, but can you just confirm that's intended to prevent a declining Swiss franc dividend if spot rates are maintained?

And on that basis, if you went to a 60% payout ratio, that would imply a 20% lift in US dollar dividend to keep a flat Swiss franc dividend.

And can you just confirm that would be a realistic possibility?

Second, some peers have indicated that they think a more geared structure is more appropriate for more diversified business.

I was just wondering what -- if you have view now on what you think the right level of net debt is for Novartis going forward.

And then, a couple of quick questions on products; Bexsero, can you just give us an update on how the studies to assess strain coverage are progressing in the different territories, using the MATS technology; and can we expect to see any data on that?

And your pipeline update is saying -- still saying QVA-149 filing 2012 for both US and EU, so could you just give us an exact breakdown of what you are intending to achieve in terms of running 55 microgram indacaterol studies for an FDA filing -- timing of first-patient dosing and expected readouts on those trials?

Thanks.

Yes, on the dividend, Graham, I mean, the one point I will stress is that the board has not taken any decisions at all on dividends and won't do so until January.

But as it does think about dividends in January, we will be -- we will not be constrained in its thinking about previously declared (technical difficulty).

And therefore, all of the scenarios and many others are feasible within what you describe.

On debt, I did highlight that we have $27 billion of gross debt.

And that is the debt number that we believe is a structured part of our balance sheet because we need the net $4 billion of cash just to run the business on a sort of ongoing basis.

It takes us into the lower half of the AA banding, and therefore, I think you should view us as being appropriately geared at the moment.

Andrin, Bexsero?

Yes, on Bexsero strain coverage, we actually have published a paper and (technical difficulty) of course provide you with a copy of that, and with figures of most of the major European countries and also selected countries outside of Europe.

And the coverage is depending on the country between 70% to 90%, and I think that's very good, given that if you look at the [Prednar 7], for example, when it was launched, it had the coverage of 70%.

It's important to note that of course if you look at infants than an average the coverage is a bit lower and in adolescence, it's a bit higher given the difference in the immune response.

And QVA?

Well on QVA, what we'd noted in the portfolio update was the first planned submission which is for the EU, was for 2012, and that is on track.

Now that we have locked down the dose in the US, we have that program starting right now.

We'll confirm some details with the FDA, but we believe we can deliver that in 2013.

If I can just follow up quickly on the Bexsero question, is that MATS technology and that level of strain coverage being accepted by regulators and payers, if you're having any discussions with them on that already?

Yes, absolutely.

I think we have exploratory discussions with countries who have shown a high interest in the vaccine.

I think it's a bit too early to give any specifics, but in principle, I think that the interest is quite high.

Great.

Thank you.

Alexandra Hauber, JPMorgan.

Good afternoon.

Firstly, just coming back to the dividend comment, which obviously caused some debate this morning, I just wanted to confirm that we shouldn't interpret this comment on dividends that going forward, the preference and the focus will be on dividends rather than share buyback.

I'm just wanting to make sure that this is not the right interpretation.

Or if it is, please correct me.

Secondly, on Alcon, IOL growth in the quarter was only 1%, and I think two reasons were quoted for that; one is reduced US procedure number, but also reimbursement changes.

I think on the reimbursement changes, you may be referring to the NTIOL status that ended in February for the Toric and aspheric lenses.

If so, I calculate about a $10 million to $12 million impact in the quarter.

Is that about right?

Or could -- was it less because you were managing to hang on to more of your pricing power than under such worst-case scenario calculations?

And also, can you comment on the reduced procedure rate -- why we saw that at the beginning of the year and why you expect it to pick up later in the year.

Also, a somewhat critical question on Ilaris -- why have you decided to use your primary -- your priority review voucher on this product in gout?

There's certainly no patent clock ticking.

And at least in hindsight that strategy looked very risky.

And I'm just wondering how we should interpret your view on the rest of the pipeline if you use this valuable asset of a priority voucher on something that looks like a very risky asset.

Okay, starting with the dividend, Jon.

Yes, you should interpret the -- what we've said about dividend as being solely in relation to the dividend itself, and we're not making any other comment about any other forms of shareholder return, which was why the policy was contexted in the desire for the board to optimize capital structure and continue to invest.

So just view it as a comment on the dividend.

Okay, thank you.

Alexandra, on the IOL performance, I think we have to look at the drivers behind the overall business.

And as you know, procedure volume is a primary driver.

And what we saw was really a tale of two scenarios.

One is the international procedure volume was actually quite good.

We're up 8% in units, which reflects share achievement at a faster rate than procedures.

Obviously in the US, we reported on the last call that we actually saw a volume decline in terms of procedures.

It's somewhat encouraging that we saw at least a return to growth in the US, albeit limited in terms of 1% or 2% growth, so we are still not seeing the procedure growth in the US, and that's the reason why we saw the impact in the quarter.

I think you also referenced NTIOL expiration; and clearly we've spent a lot of time considering our share position, where we have had to renegotiate in terms of our total procedure pricing, and that's obviously had some effect in terms of the quarter.

But the basic fundamentals behind the IOL's remain intact -- procedure volume; the ability for Alcon to hold share; and then the opportunity to convert that share into Advanced Technology IOL's, and it's encouraging to see the continued growth that we are seeing on Toric as the entry point into those Advanced Technology IOL's.

Okay, and Alexandra, on Ilaris, just to remind everybody on the phone, so we had an advisory panel.

The panel noted the very good efficacy of Ilaris in the treatment of gout, but they had questions about the overall safety profile.

The product, particularly given (technical difficulty) has a relatively small number of patients who have had retreatment.

That review process is not done yet.

And the use of the voucher was our expectation that this would accelerate the review process for this particular product, and obviously result in an approval.

The use of review vouchers in general is still somewhat experimental.

I don't know if we're the only case or we're one of very few.

And I think there's a lot to be worked through about how these things work and how the agency responds to them.

And yes, we can always second-guess whether this was the right product to use it on.

So basically -- but are you saying there is still a chance that things may work out better than what we should assume after the panel votes?

What's clear to us is the drug has a role in a narrower population, and the question is really what does the agency require in order to grant an approval.

And until we have our final discussions with them, I really can't comment on it.

Okay, understood.

Michael Leuchten, Barclays Capital.

Yes, thank you.

Two quick questions, please -- number one, I'm just trying to reconcile your Pharmaceuticals' top-line guidance with the underlying growth in the first half, which was 3%.

The range of low to mid single digits, how do you think you can get to the upper end of that?

That seems to imply an acceleration of the Pharmaceuticals' underlying growth in the second half.

And then the second question is on Diovan rest of the world, please -- just trying to understand the 11% decline given that there haven't been any additional patent expiries in international markets from Q1.

What's driving that double-digit decline in the second quarter?

Okay, starting with I think the Pharma guidance, the year to date obviously is well within the guidance of low to mid-single digit, and so, I don't think we would have anything further to comment on.

It's right in that range.

And so, David, do you have any additional thoughts?

Yes, it's probably best to comment on Diovan because I can be a little bit more specific there.

Basically, the negative aspects of the growth geographically for the quarter, we saw roughly -- just give you rough ideas, minus 6% in Europe, and this is largely driven by the introduction of generics in Spain.

And then in Japan, we also had a negative quarter because we had an unusually big quarter -- second quarter of last year.

And that obviously -- that should not continue, so Japan will come back to growth in the second half.

The rest of the world, when you exclude US, Europe, and Japan, actually grew roughly 4 points, so we feel pretty comfortable about the long-range outlook we have given you for the [Belsarin] family.

Thank you.

Michael Leacock, Royal Bank of Scotland.

So I have two if I may.

Firstly, in terms of your business and your Alcon -- your Pharma business, your Sandoz business, you're clearly leaders there in the marketplace.

But your position in the Consumer Health and Animal Health is some way behind.

Listening carefully to what you're saying, Jon, about your rating now in the lower half of the AA standing, and given all the comments from other companies about assets up for sale at the moment, do you feel that you will be constrained, and what you might want to do to move yourself into leadership positions in consumer and Animal Health?

And secondly, if I may ask, for the vaccines, just for clarity, you mentioned an issue of timing of product shipments and that was the reason for the Q2 shortfall.

Is that a matter of production being slower than you anticipated?

Or is that customer demand being a bit later than you thought?

And which products might this delay apply to please?

Thank you.

Okay, regarding the consumer businesses, you are right in that we do consider the over-the-counter drug business and the Animal Health business good business; they're both investment-grade.

They're growing nicely.

They're not as big as some of the other divisions, so it would be nice to build scale in those two divisions.

When you look at our current debt position and you look at the fact that we are generating about $1 billion in cash a month, it doesn't take long to be able to create a position where we could go after assets that would increase our scale in some of those divisions that are smaller than the others.

So I don't think the fact that we, today, are at the lower end of -- are mid to lower end of AA would constrain us, given the speed with which we will be paying down debt.

Regarding the timing of shipments?

Yes, so this has nothing to do with the demand from the customer per se, and these are out shipments of basic antigens for pediatric vaccines.

The annual volumes are fixed with the customer, so the schedule of the shipment is depending on when exactly the customer wants the shipment and of course, also our production.

Gentlemen, thank you very much for your time.

Florent Cespedes, Exane BNP Paribas.

Good afternoon, gentlemen.

Thank you for taking my question.

First, for Andrin, could we have more color on the Phase III For the US for Bexsero?

Second question for Jeff, how sustainable is the performance of the division at the margin level?

Could we assume that with Falcon and biosimilars, both the 20% mark is something which is sustainable?

And my third question for David and Trevor, could you give us more color on the reasons why you've selected the seven potential blockbusters on page 42?

Some are quite far from the market, and I don't see elinogrel on this list, so could we have an update on this one as well?

Thank you.

Yes, I think on Bexsero Phase III, first -- and I would say we were very encouraged now by the feedback from the advisory board to the FDA; would clearly state that that men B vaccine in infants, in children, would be valuable and needed in (technical difficulty).

And that really helped I think here to deblock some of the discussions we had in the past.

With regards to the trial, it's clear that the trial will be large and complex, so we really want to take the time to make sure that we get a complete alignment with the FDA.

We will probably submit the protocol for a form of review just to make sure that before we start we really have absolute clarity on the design of it, and that will just take some time.

Jeff?

So, in terms of Sandoz, the growth outlook, it's important to note that the enoxaparin launch boost annualizes from this quarter from Q3 onward as we launched in July of last year.

As we said, we expect to deliver mid to high single-digit sales growth.

And that broadly covers the scenarios that we can foresee regarding enoxaparin competition.

The growth in the second half of the year will slow due to a couple if factors.

One is the annualization of enox, as I mentioned.

The second is a loss of exclusivity or co-exclusivity that we have on several key products.

Gemcitabine -- where we lose the 180-day exclusivity this month; lansoprazole ODT; and then the third factor is just the continuing decline of the German market, which we estimate was down about 20% year to date.

Having said that, as Joe mentioned, I think it's important to note that we see great growth in a number of areas.

If you look at Western Europe in Q2, we grew over 85% in Spain, over 25% in both France and the UK and 15% or 16% in Italy.

Emerging markets are also performing well with double-digit growth year to date in Central and Eastern Europe, Latin America, and Asia when you exclude Australia.

So I think -- as we look at the outlook, we do see sales growth slowing, but we continue to be enthusiastic about the fundamentals of the business and the broad geographic footprint.

Maybe just a follow-up.

You were anticipating a slowdown of the growth of the top line, but in terms of margin, do you believe that the 20% -- being above the 20% mark is something which is sustainable?

Or the slowdown of the top line could impact significantly the margin?

Well what I would say, Florent, is a couple of factors.

One, as new competition or if new competition comes in on enoxaparin, you will see price erosion, which will have ultimately an impact on the dollars on the bottom line.

I think, secondly, on the positive front, we continue to drive really good productivity savings, about $1 billion of cost taken out in the last 2.5 years, so that will continue to be strong.

But clearly the mix effect that Jon alluded to in Germany has a dampening effect on margins.

But as we continue to work to gain scale in other regions around the world outside North America and Germany, we continue to be enthusiastic about what we can do with this business.

David?

Thank you, Jeff.

So the last question was about why did we put these seven particular projects on the list?

And as I said, this is a sample.

We could put a lot more on the list.

We tried to do a couple things as we chose these particular projects.

One is, we gave you projects where we believe our understanding of the biology and the data overall were becoming increasingly clear.

We thought these were projects that could in a big way change medical practice.

And we also chose projects, as you pointed out, that had submissions in different years.

That was really to give you a flavor.

And it would take a much more complete R&D day to really go through the pipeline in detail.

Florent, one other quick comment that I forgot to mention.

We obviously have a number of compounds in biosimilars and respiratory moving into the clinic, so as we move into clinical trials, the development spend increases, and we will see that affect in the second half of this year as well, so we are reinvesting a lot of the productivity savings into our strategy around differentiated products for the future.

Thank you very much, Jeff.

You just had one final question on Elinogrel.

So one of the reasons we didn't put projects on the list was if we could see any events which might change a strategy.

And we are very acutely watching the upcoming advisory for one of the competitive products, Ticagrelor, before we make decisions about Elinogrel, although we are currently planning for the ACS program next year.

It is dependent on a couple of factors.

Thank you very much, Trevor.

Jo Walton, Credit Suisse.

Three quick ones.

Can you just tell us or make it clear, the Alcon sales guidance, which is being trimmed slightly, is that just relating to the IOL issue or is it somewhat broader?

Looking at the positive data you've got for Afinitor in breast, does that mean that you are going to carry the oncology sales force that has been dealing with Femara for a year or so, and then you will have it in place for Afinitor, so that would be a bit of additional cost to be carried over the year?

And also in Pharma, I wonder if you could tell us a little bit more about your pricing discussions for DME.

We can all see the tremendous growth and opportunity of new patients, but how are government and payers thinking about this in terms of asking you to cut back on costs?

Kevin on Alcon?

Yes, thanks for the question.

Actually, the guidance for Alcon is unchanged.

I think maybe what you are referencing is looking at the legacy Alcon as compared to the mix that we have in an integrated state, which has two primary impacts.

One is that we have taken Falcon out in terms of the generic business and moved it into Sandoz.

And secondly, we have moved in CIBA Vision, which has somewhat of a lower future growth rate against the legacy Alcon component.

So really you should continue to focus on mid- to high-single digit revenue growth for Alcon, new Alcon.

David?

Regarding the field force in the US in particular for -- the potential field force for the sale of Afinitor in breast cancer, right now, we have two parallel lines selling both -- well they were selling both Femara and Zometa.

We believe basically one line will be appropriate to sell those Afinitor and Zometa in the future.

You will recall Zometa will face generic competition in 2013.

Those adjustments are underway now.

It is really good that we have a very excellent team of sales representatives who understand the breast cancer market very well, which means the launch of Afinitor in breast cancer will be relatively straightforward.

Regarding DME, we are in discussions with some health authorities regarding the price where it's required to have that discussion with the introduction of a new indication.

The discussions have generally gone towards very modest price reductions, which is in line with what we told you we expected.

Thank you.

Tim Anderson, Sanford Bernstein.

Thank you.

I have a few questions.

On Sandoz, going back to some comments made earlier about the margin structure, you know, when I think about biosimilars and when they might really start to kick in in terms of their revenue and profit generation, that seems like it's a few years away.

And to get there, it seems like you will have to invest a fair amount both from things clinical development as well as manufacturing.

And I'm trying to square that with the margin outlook for Sandoz.

So it seems that Sandoz margins could actually kind of go down before they come up because of the need to invest biosimilars.

I'm hoping you can address that.

Second question is on emerging markets.

You talked about the six biggest regions being 10% of sales -- hoping to get that figure for all emerging market regions.

What would be the percent contribution to total sales?

And then last question on Gilenya, you showed a couple of slides with some market research data.

Looking at switch business, I'm hoping you can tell us what percent of business currently is coming from treatment-naive patients, if any.

Okay, Jeff, Sandoz?

So Tim, on the margin structure, your comment is essentially right that the revenue associated with a lot of the pipeline, particularly in monoclonal antibodies, kicks in after the patents expire, and many of those are looking at 2014, '15, '16, '17, and beyond patent expiry.

So there is significant investment that we are making up front, which we believe is right, spot on, with our strategy to maintain strong leadership in the biosimilars field.

We -- though, however, though, I think it's important to note that we continue to see really strong performance of our products that are in market.

So within the emerging biosimilars market today, we have almost 50% market share according to IMS of the regulated biosimilars markets.

And if you take the biosimilar for Amgen's NEUPOGEN, which is our Zarzio product, we already are at volume share above 50% in Sweden; above 15% in Germany and the UK; around 10%, a little less than 10% in France; and around 25% in CEE.

So what we are doing is really expanding geographically with our footprint in those, but you are right, it's not going to compensate fully for the development investments that we have.

What I would say will help offset the margin pressure from the investments that we are making is, again, back to productivity where we continue to drive productivity savings through M&S, G&A, as well as more productive development spending, and then the geographic expansion which gives us more scale outside of our big regions in Europe and North America, so we'll continue to look for margin expansion on our core business.

Also, we've mentioned Florent was correct in pointing out Falcon is a nice business with good, healthy margins.

And that, coupled with the sustainable businesses that we are building in differentiated products, which are now about 45% of our sales, is going to really help offset the investments that we are making into biosimilars, which again, are dovetailing exactly with our strategy.

So for Gilenya, the question was how many patients are new patients.

What we can tell you is about 50% of the patients currently being treated are either treatment naive or not treated within the last 12 months.

And then just regarding the EGM, your question was about if you had a broader definition of EGM; is that correct?

Yes, that's right.

You kind of defined it as six markets, but obviously, there's more than that.

I'm wondering what percent of total sales come from all emerging markets when you widen out that definition to include what's commonly described as like 30 markets.

Yes, yes, yes.

No, we haven't disclosed that or cut it out.

Do you have a thought on this?

I mean we may have to get back to you, Tim, because I know we look at -- we have another classification which is emerging less-developed, which is everything else.

And I don't have that statistic to hand at the moment, so perhaps if you need it you can give Suzanne and the team a call.

Okay, thank you.

Mark Dainty, Citigroup.

Just on productivity, it's hard for us to know because we don't see the numbers, but would you expect the benefit from productivity savings to be greater in the second half of this year than it has been in the first half of this year?

Obviously I understand there's further investment to come in the second half, but I'm just talking specifically about productivity.

And then second question, there were some comments on the wires about expectations for pricing pressure -- more pricing pressure in Europe later this year.

And I just wondered whether you are expecting that in main markets or in peripheral markets and whether that's likely to be more focused on Sandoz or on the Pharma division?

Thanks.

Yes, on the productivity question, I mean clearly we have showed you in the past that the sort of gross productivity across the group is running something like 4 margin points per annum.

And against that are going investments into new product launches, going into -- because we look at this -- on a group level, we include the investments that are going to biosimilars, respiratory products and so on.

So the underlying source of productivity improvements that we see is pretty consistent through the year because there are multiple programs.

There's no one program -- probably the one program that is phased over time is the manufacturing program.

Purchasing programs are ongoing.

M&S reallocations are ongoing.

So the underlying productivity programs are pretty consistent, but each quarter, the investment decisions we make out of that are judgments on what we need to sustain the business each quarter.

And regarding pricing pressure, in the second quarter, we had 3 points of negative price.

Pharma had only 1 point of negative price.

I think my comment was that while we had seen European price cuts, so for example, we just quoted that in Pharma we had a minus 5 hit in terms of pricing; we don't expect that to worsen.

So -- but we also expect it to continue, so we're planning on really kind of a continuation of what we have seen because what we have seen is quite in line with what our expectations were.

Okay, thanks.

Mark Beards Goldman Sachs.

Thanks for taking my questions.

Firstly, I just wanted to know if you have any further information on the percentage of AMD used with Avastin versus Lucentis.

Obviously that will impact the growth potentially of Lucentis in the future.

Secondly, I see you have a 5% constant currency growth in emerging markets this quarter in the Pharma business.

Is that the sustainable level of growth we can expect in pharma per se?

And then thirdly, you touched on how you're reallocating resources in the US given Femara -- the genericization.

Can you provide more detail about how you will be reallocating resources over the next year in preparation for Femara and Diovan loss of sales?

David?

Yes, so in terms of the use of Avastin versus Lucentis, it's roughly -- and I'd say these are very rough numbers -- in the territories of which we're responsible, about 30 -- we estimate about 35% of the market is Avastin.

And about 65% -- and these are in terms of patients -- and about 65% is Lucentis.

For the top six emerging markets, we would expect growth in the second half to be stronger than in the first half, but once again, by country, you might see quite a lot of variability.

And just to give you some color on Diovan, we have already been reducing expenses on Diovan.

You will recall that we have shifted our field forces in Europe to focus on new opportunities like Galvus [on growth] and the like.

In the US, we had a 1400 FTE reduction in the back half of last year.

And in the US, we will be launching Onbrez as we continue to sell Tekturna, Exforge and the like.

There will be continued adjustments, but I can't really say much more than that at this point.

Thank you.

Andrew Weiss, Bank Vontobel.

Thank you for taking my questions.

I've got two.

For Jon, you indicated that you are wanting to seek to realign the natural hedge as your [swissering] cost block is almost 13%.

Can you illustrate on that a bit?

Is that just by using financial instruments?

Or how do you want to shift around the cost blocks?

And then one for David, Tasigna versus Glivec, switch data -- do you still expect that for ASH?

Yes, Andrew, on the first, there's a variety of measures, and also given the scale of the footprint, it's not something that changes overnight either, but you can look -- in periods when you believe that currency dislocations will last for a while, there are a number of things you can do.

Firstly, you can take out financial hedges.

Secondly, you can look at whether you've got a mismatch in any of the contracting that's going on.

You know, is -- are we setting contract prices in the natural -- in the right currencies?

You can divert cost to places where you know you've got high profitability or you can put liabilities against assets to achieve a better hedging.

So I think we will undertake, over the coming years, a whole variety of measures that try to seek a better balancing of revenues and cost assets and liabilities, so that we naturally insulate ourselves from things.

David?

So we will have a number of updates on previous studies of Tasigna or Tasigna versus Glivec at ASH.

In addition, we are anticipating we will see the primary analysis of ENEST CMR.

CMR stands for complete molecular response.

This was a trial of patients who had persistent evidence of molecular disease after two years on Glivec therapy.

They were then randomized, and the primary end point at CMR at twelve months.

Thank you.

Gbola Amusa, UBS.

Thanks for taking my call.

David, I have a couple of product questions on some of your growth drivers.

On Gilenya, could you tell us what the compliance rates are so far relative to that of other MS products?

Obviously, the data would be very short term, but any insights would be appreciated.

And then on Lucentis, you are saying age-related macular degeneration was responsible for the quarter's growth performance.

How close to 100% is age-related macular degeneration?

Or is there, in fact, some early effect coming from DME and RVO indications?

So on Gilenya, I actually don't have specific compliance data, but I can tell you the persistency is very high.

So in other words, patients are starting and they are staying on therapy.

What I can't tell you -- I don't have any good data now -- is do people miss doses and the like?

You would expect with any oral drug some of that happens.

And in terms of the other agents, I don't know, but we can go look into it to see if we have any market research.

I may -- it's possible I misspoke based on your question about Lucentis, but just -- so just to clarify, we think the reason that growth has accelerated is the launch of the DME indication.

Having said that, we still see continued growth in the wet AMD indication.

And clearly, although I don't have specific breakouts for you, the bulk of the revenue as of today are still in wet AMD, so I hope that helps you.

Okay.

Maybe time for one more question.

Naresh Chouhan, Liberum Capital.

Thanks for taking my questions.

A couple of questions on 2013 earnings please.

Firstly, when you talk about earnings growth in 2013, can you give us a feel as to whether or not you need to buybacks (technical difficulty) or it can be done from the underlying business alone?

And then, secondly, consensus it seems hardly any earnings growth in 2013.

So what, if anything, do you think the market is missing?

Thank you.

Well I don't think this is the occasion for talking about long-terms earnings guidance, but I would refer you actually to the scenarios that we talked about last autumn, which are fundamentally unchanged.

But the future growth trajectory of the business, A, lies in its diversification.

And you've seen with the inclusion of Alcon that we have a much broader footprint now so that the group as a whole -- any generic impact in pharma is diluted.

Secondly, I think it should be even clearer today than it was in November, the momentum and the pace of rejuvenation that is coming from new products.

And I think the growth rates that we're looking at today at 46% for the group and 34% in Pharma is every bit as strong as it was seven months ago.

So, I would end up repeating much of last autumn's presentation to answer this question because there's never been (technical difficulty) as strong today as they were then.

I would just add to that that as we think about generating earnings growth off of our solid sales growth, we don't take necessarily into account what a share buyback would do to get us to a particular number.

So that would be on top, and would not be part of the consideration in terms of what we are targeting the divisions to deliver and how Novartis will think about earnings growth through that period.

Okay.

Thank you very much.

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