Novartis AG (NVS) 2012 Q1 法說會逐字稿

Good day and welcome to the Novartis conference call.

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

Joe Jiminez, CEO of Novartis.

Please go ahead, sir.

Hello.

I'd like to welcome everybody to our first-quarter 2012 conference call.

We've got on the Novartis end Jon Symonds, CFO; David Epstein, Head of Pharma; Kevin Buehler, Head of the Alcon business; Jeff George, Head of Sandoz; Andrin Oswald, Head of V&D; George Gunn, Head of Animal Health; and Brian McNamara, Head of the Over-The-Counter Drug business.

Before we start, I'd like Susanne to read the Safe Harbor statement.

Susanne?

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.

Okay.

Starting on slide number 4.

We expected a challenging quarter in Q1 and we delivered in line with our expectations.

On the positive side, we had strong performances in the Pharmaceuticals division, and also in the Alcon division, offset by a weaker quarter on Sandoz and Consumer Health.

Free cash flow was strong at $2.1 billion, and I think we also demonstrated good leadership in terms of product innovation.

The most notable piece was last Friday when we announced that the safety review of Gilenya by the FDA and the EMA was concluded and that both agencies confirmed a positive risk benefit profile for the drug.

On slide 5 you can see an overview of the financials for the first quarter.

So Group sales declined by 1% in constant currency.

Core operating income was down 6% in constant currency, driven by the Sandoz and Consumer Health businesses.

So on Pharma and Alcon we delivered good operating leverage, improving core operating income margins.

Jon's going to talk more in detail about the financials, but on slide 6 I think we're continuing to execute well against our three priorities and let me just touch on each of those three, starting on slide number 7.

We had good progress in the first quarter in innovation, so two new molecules approved in Pharma, Signifor for Cushing's disease and Jakavi for myelofibrosis.

Also, very nice Phase III clinical trials on QVA149.

This is going to be an important drug for Novartis in COPD going forward.

On slide 8, our second priority is to turn that innovation into sales and profit growth that hits the P&L.

And we had good underlying performance in the first quarter with volume growth of about 5 percentage points, main growth drivers were the recently launched products as well as some of our emerging markets grew nicely.

China, which is a nice big business for us, grew at 30% versus year-ago at the Group level.

On slide 9 you can see that the underlying growth of new launches is fully offsetting the impact of the patent expirations.

I think it's particularly impressive that Pharma was up 3%, despite a 15% decline in Diovan in the quarter.

And on slide 10 you can see more detail around the Pharmaceutical business.

Good operating income leverage, and on the right-hand side you can see double-digit growth by some of these launch brands.

Galvus actually had the greatest growth rate, almost 60%, crossing $200 million in the first quarter.

But also Tasigna, up 40% and Lucentis which has crossed $2 billion annually was up an impressive 30%.

David's going to talk more about the portfolio and how that's driving growth.

Alcon also continues to deliver solid performance.

The growth in Alcon was driven this quarter by the Surgical and the Pharmaceutical business, Surgical was up 10%.

I think some important points here, that the advanced technology IOLs grew 19%, so that's driving that Surgical 10% growth.

Even within Vision Care, which was up just about 2%, if you look deeper into Vision Care, our lens business, particularly AirOptix grew very nicely.

AirOptix is our monthly silicon hydrogel lens and it was up 23%.

Slide 12 explains the dynamics on the Sandoz business.

You have to go back a year ago and see the very strong quarter that was driven by US enoxaparin exclusivity.

As well, Sandoz had authorized generics on two molecules, and this created a very high base for 2011 and consequently sales were down 8% in the first quarter of 2012.

But Sandoz had some very good performance geographically.

Western Europe was up double digits, as was Asia and Brazil.

And biosimilars was up 54%.

I want to talk more about this on the next slide.

Sandoz now has more than a 50% share of the biosimilars market.

And this is a market that is relatively small today but we expect that by 2020 this could be a $15 billion to $20 billion segment of the generics business.

We also believe that Novartis is uniquely positioned in biosimilars because we have the scientific and medical expertise of a pharma company but we have the commercial expertise of a generics company and that's more than either of our pure play pharma competitors or our pure play generics competitors have.

They have to partner to get both of those pieces of expertise.

We have it under one roof which gives us the ability to make decisions faster and move faster in the marketplace.

On slide 14 you can see that Vaccines & Diagnostics advanced the meningococcal franchise in the first quarter.

So Vaccines was down -- sales were down I think 18% in the quarter, driven largely by bulk pediatric shipments in the year-ago base, so the underlying performance in Vaccines is quite good.

Menveo shipments in the first quarter were double what they were a year ago and we also made progress on Bexsero.

Bexsero continues to receive some pretty high profile recognition and we continue to expect regulatory decision this year in the EU.

On slide 15, our Consumer Health business was significantly impacted by the supply shortages that resulted from the suspension of the Lincoln, Nebraska site.

So you can see first quarter sales were down 20% in OTC and 14% in Animal Health.

I think the thing to note on these businesses is that ex-Lincoln and ex-US, both businesses had good underlying performance, so they were up mid to high single digit.

And that means that once we get the Lincoln site back up, these businesses will return to growth.

On slide 16, we are in the middle of quality remediation activities at Lincoln and we're making good progress.

We had a meeting with the FDA recently and shared with them our start-up plan for the plant.

We will begin production in May and we will resume shipments mid-year.

We had previously said.

The ramp-up, however, will be slower than expected as we cycle through the new products.

This is a process that is going to take us some time.

We'll have a relatively limited portfolio in the back half of the year.

So we have signed up some third party manufacturers for some key products and I think the important point to note is that the financial impact of this is manageable within the group, given the relatively small size of the US OTC business.

We're also making progress on the three Sandoz sites under the FDA warning letter.

So we have invested in capital and in people, upgrading the infrastructure and processes at all three sites and strengthening organizational capabilities.

So we expect FDA inspections by most likely the end of the year, and we're preparing for these now.

That work is ongoing.

In terms of productivity, our cross-divisional efforts continued to deliver nice value, so productivity delivered about $500 million in the quarter, of which half of that came from procurement savings.

Also, the optimization of our manufacturing network is continuing.

We've exited seven sites, exited or divested and seven more are currently in execution phase.

So now I will turn it over to Jon, who is going to talk about the financials in a little bit more detail.

Jon?

Thank you, Joe.

Good morning or good afternoon everyone.

Although these are not the best results we've delivered, the fact that there was very little difference to consensus indicates that most of the factors in the underlying numbers were either known or had been anticipated.

So the three things I want to spend my time on over the next few minutes that you can see from the summary here -- the component parts underlying the 1% decline in constant currency in sales; the factors which led to the 6% decline in core operating income; and why there was such a large gap between core and operating income.

I'll finish with a few comments on cash flow, net debt and capital allocation.

I'll quickly address the reconciliation between core and reported operating income that you can see here on slide 21.

I think it's self-explanatory and identifies a shift from net exceptional income last year if you exclude acquisition accounting to a net exceptional expense this year.

The major item in the quarter was the US field force restructuring which we announced at the end of last year.

On slide 22, you can see the impact of currency on the results, which compared to the volatility we saw last year is pretty modest.

Obviously now that the Swiss Franc and the Euro are more closely aligned, the currency impacts on the current year is more stable.

However, what we're still seeing is the volatility arising from comparing against the year ago.

This means that you will still see some volatility especially over the first quarters.

But mostly because of the year-ago base.

The second quarter for example could have a bigger negative impact, currency impact, than in the first quarter.

Having said this, the dollar has strengthened recently against some currencies, with the Euro being the most significant for us.

For the year as a whole, we currently see the impact using March average rates of around negative 2% to 3% on sales and on operating profits.

Of course, at this stage of the year, this is nothing more than an indicator of what it could be, but certainly not what it will be.

On slide 23, you can see the progression of sales in two dimensions.

Firstly, the contribution each division has made to the Group result, and secondly, the reported growth for the quarter for each division.

The overall picture is clear.

As Joe has already said, Pharma and Alcon continue to perform strongly, especially as both face headwinds.

In the case of Pharma absorbing around 6 percentage points of generic erosion, and for Alcon, the base in the first quarter of 2011 included sales of ophthalmic products that were divested right at the end of the first quarter last year.

And this represented around half a percentage point of growth.

The other divisions it's more of a mixed picture.

I think the reasons behind the declines in Consumer Health from the lost production from Lincoln and Vaccines & Diagnostics, the very strong base in 2011 which included the delayed bulk pediatric shipments from the final quarter of 2010, I think are clear factors.

For Sandoz there's rather more moving parts with the erosion in sales of enoxaparin and the strong contribution on the top line last year from authorized generics, which together combined to make a very strong quarter last year.

To which is added the hefty destocking in Germany, as a result of some changes in the pharmacy reimbursement at the beginning of the year.

All three of these factors will lessen in subsequent quarters.

Underlying this, however, is some really good performances in Sandoz.

Western Europe in particular, and as Joe has already mentioned, the biosimilars sales were really excellent.

Slide 24 gives a better picture of the Group performance when it's been stripped back to its core.

5% underlying volume growth is still pretty robust.

On the next slide you can see why.

Recently launched products, the foundation stone of our business, now and into the future, grew by 16% to $3.8 billion and now represents 28% of total Group Sales.

Included in this is another strong performance from Pharma, growing 33%, and I'll leave it to David to tell the story on that.

In addition, the new products in Alcon principally comprising LenSx and refractive equipment sales and contact lenses grew by 37%.

On the other divisions, I've already mentioned the impact of lower enoxaparin and the authorized generics in Sandoz and obviously the impact of Lincoln on Consumer Health was negative.

We've also included this quarter new definition of emerging markets, from the top six markets to a definition that's more widely used across the industry of total revenues less the revenues of established markets.

This broader definition should be less volatile, but also gives an indication of the total size of our activities outside of the developed markets; $3.3 billion of sales in the quarter representing almost a quarter of our total revenues.

On slide 26, we tried to give you a sense of the impact of generics at the year end when we estimated the total impacts in 2012 for Pharma would be around $2.6 billion in lower sales.

This slide tries to look at it in another way and shows the shape of what we expect to face for the balance of the year.

Obviously, it's illustrative but will give me a base that I can follow up each quarter.

It's clear from this that the third and fourth quarters of this year bears a bigger weight of generics than in the first half, obviously largely due to US Diovan.

Although the patent is lost at the end of the third quarter, there's a supply chain impact that occurs in quarter 3 as inventories start to run down.

The Diovan impact will peak in quarters 1 and 2 next year and then quickly decline so that by the time you get to the second half of next year, the impact of generics will lessen.

But as I've said for a long time now, this is only half the story for the next two years.

It's when you put this picture together with the growth in recently launched products that you can see on slide 27 that the underlying strength of the business becomes apparent.

This picture only uses Pharma recently launched products.

There's an additional layer coming from the rest of the Group that I could have added to this picture.

It's also why I believe the Pharma results this quarter to be very good.

3% sales growth after absorbing six percentage points is a good performance and shows both the strength of the portfolio we have, but also how well we're executing in the market.

Turning now to core operating income on slide 28.

The picture's not quite so good.

Pharma and Alcon performed well and both delivered further improvements in underlying margin.

As I've said, in the case of Pharma, it's the product of good execution, the contribution from productivity, and solid cost control, and in Alcon it's these same three factors, together with the added benefit of the merger synergies that are still coming through.

For the remaining divisions, the first quarter trends go the other way, although for reasons that should be not surprising.

The Vaccines and Development, it's a combination of the high margin bulk pediatric shipments in the first quarter of 2011, together with continuing investment behind the meningitis portfolio.

For Sandoz and Consumer Health, the impact of the top line declines have been exaggerated by the consequences of lower production volumes and remediation costs.

Overall, this yields a decline in core operating margin of 1.6 percentage points, which is more than we expect for the year as a whole.

We're aiming this year for a smoother margin profile, which means that we'll start to recover margin in the latter part of the year.

Below operating income, the story's a bit more familiar as you can see on slide 29.

Overall, the differences in growth rates between operating income and net income are relatively small this quarter, as the lower tax rate which is now benefiting from the full integration of Alcon, offset increases in net financial expenses and lower income from associates, the latter of which was mostly evident in the core column.

Between net income and earnings per share, you will see for the last time in a quarter the effect of the Alcon related share issue and minority interest movements, as from next quarter we lap the Alcon merger which took place on the 7th of April, 2011.

Turning to cash flow on slide 30.

You can see here the moving parts of both free cash flow and net debt.

Cash flow at $2.1 billion for the quarter was 27% above the first quarter of last year.

Operating cash flow was $400 million below last year, broadly in line with operating performance, offset by improved working capital of a similar amount.

The biggest positive movement came from lower exceptional tax payments of around $800 million.

CapEx was about the same as last year, although as I told you in January, for the full year we expect CapEx to be higher than last year, at something closer to 5% of sales.

In terms of net debt, you can see an increase of $4 billion, which largely follows the payment of the dividend in the quarter.

Our credit ratings remain unchanged.

The topic we're most frequently challenged on is capital allocation, often accompanying it with a comment that our policy is not clear.

Actually, I can't counter whether any of our peers have laid it out quite as clearly as you see here on slide 31.

Consistent with this, the scope of capital reduction through buybacks is limited given our credit rating remains at the low end of our target rating.

There remains, however, potential to acquire shares to offset the dilutive impact of the employee share schemes.

As you can see here on slide 32, when you look at the overall distribution record of the industry since 2009, we're pretty well in line with our peers.

So with that as a review of the quarter, and its many moving parts, let me now hand you over to David to explain the Pharma performance, which I'm sure you will agree with, was pretty solid.

Thank you, Jon.

Indeed, we had a solid quarter with 3% sales growth and good leverage in constant currency as we continue to drive productivity within the Pharma Division.

If you turn now to page 35, I think it's even more important the quality of those sales.

And it's now clear that our strategy to reallocate our resources to launches is paying off as we offset a loss of more than $460 million in sales from Femara and Diovan generics during the quarter.

In fact, our recently launched products now represent 33% of the business and they grew 35% in constant currency over the quarter.

Looking at page 36, it really should be no surprise, at this point, why we're driving that kind of new product launch growth.

I believe we have at Novartis an unparalleled platform for growth across multiple brands and franchises.

Just to point out one particular product in this chart, it's Afinitor which is approved as you know in renal cancer, TSC, and pNET.

We grew 60% during the quarter, reaching $143 million in sales.

And some of the big indications are still yet to come.

Turning to page 37.

We can take another view of our portfolio.

You'll recall that we ended 2011 with six blockbuster products, those are products with more than $1 billion in sales.

And when we look at consensus we see that analysts are projecting that we will end 2012 with seven such blockbusters when we actually believe we can deliver nine or more.

What I'd like to do on the next couple pages is to discuss just a few of them.

Starting with Gilenya, which was the focus of an investor conference call that we held just a few days ago, and as Joe mentioned, the label review with both the FDA and the EU was completed favorably.

Physicians have been telling us that they were waiting for those new labels before they would accelerate the use of the product in new patients because they wanted more direction on how to manage the first dose observation period.

Turning to page 39.

What you see is, despite the fact that we did have some slowdown in growth in some of our big markets, such as US and Germany, while we're waiting for the new label, we were continuing to launch into new markets during this period and, in fact, Gilenya reached $247 million in sales in Q1, which puts it already on a blockbuster run rate for 2012.

And I focus your attention on the fact that ex-US now represents more than 37% of the business and we are just now starting to launch in France, Spain, the UK, Italy, Belgium and other markets and I believe that some have under called this ex-US opportunity.

Turning now to page 40, we see that Lucentis also recorded very strong growth for the quarter, up 30%.

In the markets where we have reimbursement DME and RVO, are growing the brand very nicely and now exceed 20% of sales in those key reimbursed markets.

We now have more than one million treatment years of exposure for this product and we believe that the number of patients who could still benefit from a therapy in the eye is still rather large pool of patients in this category and this product will continue to grow.

Turning now to page 41.

We take a quick look at our Galvus franchise.

I believe this is a story that's still not well-heard.

While some are taking up their estimates, we believe this product has a lot more potential and it's already on track to become a blockbuster in the not too distant future, reaching $201 million in sales during Q1 which is up 57% from the same period last year.

Galvus is now the number one DPP-IV inhibitor in seven markets, beating competition despite, in most cases, having launched second.

Of note here is we have now launched in China, and although China's contribution to the growth is pretty much nil for now, once we do get reimbursement, this will become another large growth driver for the Galvus franchise.

Now, on page 42, I'd like to bring you up-to-date on our respiratory business.

Starting with Onbrez Breezhaler, which grew 50% over the quarter, reaching $29 million in sales.

Just as importantly, during the quarter we reached agreement in the US on the way forward to bring NVA and QVA to market.

Starting with NVA, to remind you, the EU filing was back in August 2001.

And we expect a decision mid this year.

In the US, we have a Phase III agree with FDA which allow filing at the beginning of 2014.

For QVA, the first four Phase III trials are positive.

I'm going to show you a little bit of top line data on the next page and to remind you there, EU and Japan filing is expected at the end of this year and with the new plan agreed with FDA we would expect to file at the end of 2014.

The most common question we get about these products is what's the likely dosing schedule to be and I can tell you that our Phase III program will contain both a once and a twice a day dose.

It's pretty clear from our conversations with the FDA that the agency believes in general that products in this category are often better if dosed twice a day and a recent approval in this category, or recent recommendation for approval in this category confirms that twice a day bias in the US market.

There will be no impact on the rest of the world from the FDA's preferences.

Turning now to page 43.

We take a look at two of the successful -- the four successful trials from our IGNITE program.

This is a very comprehensive program for QVA in COPD.

The first trial was versus placebo, Onbrez, NVA as well as Spiriva.

And in that trial we showed superior improvement in bronchodilation against each of the competitors.

Perhaps even more excitingly, we just completed a head to head trial of Seretide where QVA showed significant improvement in lung function.

I believe this data is quite impressive and I think you will too when you see it at a major medical congress.

There is a very good chance in our opinion that (inaudible) will become a standard therapy in the treatment of COPD in the not too distant future.

Finally, in terms of products, I'd like to just turn your attention to a new product.

AIN 457 which is an anti-IL 17 monoclonal antibody.

Some of our competitors' drugs have gotten some press recently and I think our product maybe has not gotten as much attention.

I want to remind you that in Phase II we showed that up to 81% of patients had at least a 75% improvement in their psoriasis symptoms.

And also to remind you that we have the most advanced anti-IL 17 that is in the clinic.

The program is very comprehensive and we would expect to file in psoriasis with one year data in the second half of 2013.

In addition, AIN is in the clinic, in Phase III for rheumatoid arthritis, ankylosing spondylitis, as well as psoriatic arthritis.

This new modality could become a very important therapy in the treatment of a variety of different immune disorders.

Last but not least, I think it's good to end on our news flow, which is on page 45.

As you can see from this chart, we're very busy.

Perhaps our news flow is I would say more robust than it's been in some time with a combination of new filings, as well as approvals.

We're on a good track for this year.

I'm not going to take you through all of them except to come back to Afinitor where we expect in the second half a CHMP opinion as well as FDA action for advanced breast cancer.

You recall that we have said in the past we believe the benefit this drug provides should make Afinitor a blockbuster just for this indication alone.

With that, I'd like to turn the meeting back over to Joe.

Thanks, David.

Okay.

So to close, I think we made solid progress on our three strategic priorities and we'll be continuing to provide updates each quarter as we go through the year.

So our outlook for 2012 remains unchanged with Group sales in line with 2011 in constant currency and we expect Group core operating income margin to be slightly below that of 2011 on a constant currency basis.

So now I'd like to open the session for questions.

Thank you.

(Operator Instructions)

Matthew Weston, Credit Suisse.

Good afternoon, gentlemen, and thank you for taking my questions.

There's a number, if I can.

Firstly, Jon, with respect to the message on free cash flow and buybacks, I'm a little bit confused.

The picture shows that buyback historically represented about 50% of the dividend at Novartis but if I look annually there was historically a sustainable commitment.

Then you acquired Alcon and understandably you needed the cash flow to fund the acquisition.

And I think what the market's looking for is a sustainable commitment to return within Novartis.

Now, your comments suggested that you felt that you didn't think that was going to be possible.

Can you clarify whether that is the case and more not about this year but about the longer term use of cash flow as it accumulates and you very rapidly break out of that double A debt band.

Some more specific technical questions.

On Bexsero, I see that you're now indicating the catalyst is end 2012.

Does that suggest that you've had some detailed discussions with EMA that's led to stopping of the clock and is there anything that you can tell us about your confidence and what those discussions have been about.

And also, with respect to QVA, the doses that have been agreed with the FDA, can you actually be specific in the studies?

You've clearly highlighted the impressive data relative to Advair.

But clearly if the doses that you're going to have to use in the US aren't likely to deliver that impressive efficacy, should we only consider it as a drug which really has utility ex-US, where the higher dose is available?

I'll stop there.

Okay.

Thanks.

Starting with Jon.

Yes, Matthew, you laid out the history well.

Quite clearly, our balance sheet changed dramatically from any previous looking balance sheet after the acquisition of Alcon, where it increased or added a substantial amount of debt.

And so in the past when we talked about capital allocation, it was completely unconstrained in terms of the influence of the balance sheet.

Now, the balance sheet does add a constraint and we've been clear that the constraining line that we put in is around the low end of double A.

We don't desire to go below that and we don't desire to go into triple A.

So I do think that slide 31 is clear, that in the sense that as we start to accumulate cash, we start to move away from the desired balance sheet position, in which case there are only two ways in which you can manage that.

One, you either invest in the business and we've set some constraints around return on capital on that, or you return that excess capital through share buybacks.

We are not in a position at the moment where we do have surplus capital.

We haven't invested in the business since the Alcon acquisition.

So in the short term there isn't a structured return program but over the longer term share buybacks are an intrinsic part of how we manage both the balance sheet and surplus capital.

Andrin, you want to give some details on the Bexsero situation?

I think the Bexsero review process in Europe is going quite well.

It's of course a lengthy one, given the complexity of the vaccine.

We had initially received about 100 questions from the regulators in Europe and we have been able to answer all of them with the exception of one item which is remaining and that has to do with a mouse-based immunoassay that we want to use to release the batches to production, batches once the product is approved.

The regulators have asked us to make adjustments to that text and we're in the process of doing that and plan to submit this answer in the second half of the year and we are quite confident that we can satisfy that request and then would expect an opinion still during this year.

David, QVA dose, specifically in the US?

The actual dose and the whole trial design will be out in the next couple months as the trials get under way.

I don't for competitive reasons want to disclose that at the moment.

But if I understood your concern, you're worried about efficacy.

Let me reassure you that we have a pretty good idea of the dose response of the individual components, as well as the combination.

And as a result, the doses we use are very -- still very, very likely to show superiority.

Okay.

Thanks.

Can I just follow up very quickly, Jon, on the buyback issue?

It may be too difficult for you to answer.

I'll give you the get out before I even ask it.

When do you see the tipping point with cash generation such that you can make a commitment?

When we start seeing upgrades in the rating or potential upgrades in the rating.

Understood.

Thank you.

Okay.

Next question.

Gbola Amusa, UBS.

Hi.

Thanks.

Two questions, please.

One on Consumer and one on Sandoz.

On Consumer and the Lincoln plant, I understand there's about 20 drugs that are perhaps 80% of the sales from that plant.

Is it the case that the 20 -- 80% of your capacity as well or because of pricing that they take up considerably less?

And then on Sandoz and biosimilars, on slide 13 and the sort of incredible 50% biosimilars CAGR through 2020 for $15 billion to $20 billion market, that's obviously largely based on your own internal estimates that must take your own capabilities into account.

If so, do you see your share of this market as greater than 25% in 2015 or 2020 or can you comment more broadly on where Sandoz might be?

Okay.

Starting with consumer, let me just start and then we'll turn it over to Brian.

The Lincoln plant did produce both OTC and Animal Health products.

We've taken the opportunity, since the plant has been down, to do quite an aggressive SKU rationalization program where we maintain the strength of the most potent SKUs but we also eliminate some of the complexity and also some of the SKUs that were potentially weakening other SKUs in the line.

So when we come back with let's say the Excedrin line, we'll come back with fewer SKUs but they will be stronger SKUs and we'll make sure that we have a very powerful lineup, all based on consumer preference and ensuring that we're not going to reduce volumes.

Brian, what about the 20 products that account for -- or that were suggested to account for 80% of the sales?

Yes, so I think overall in the portfolio it's not quite that clear.

It's the 20/80 rule doesn't work.

Our main focus as Joe said earlier is we're restarting the plant, starting up the plant in May, line by line, product by product and we expect to be launching, shipping a limited portfolio in the mid-year.

What we will do is when we come back to market and start shipping, we will have a broad enough line within each of the particular brands but it will be on a brand by brand basis.

We want to ensure that we have a broad enough line to promote at the trade level.

Jeff, on biosimilars?

Yes, so to answer, to address your question on market size, the left-hand side of slide 13 is built using both internal and external data and that's built on what we see coming off patent between now and 2020.

So as Joe mentioned we see this as a very attractive, big market in the future despite being a nascent market today.

I can't really give you market share estimates at this point as to where we'll be in 5 to 10 years.

What I can say is that we believe we are uniquely positioned as Joe mentioned based on both the Sandoz and Novartis capabilities.

We have biosimilars today in over 50 countries.

We have a total of about 50 million patient exposure days of experience.

We have the number one position in each of the three marketed -- in each of the three marketed products that we have across EPO, GCSF and human growth hormone and we're investing substantially in our pipeline.

And so while we expect increasing competition in the future, we've seen some of those partnerships unravel recently and we feel very well positioned that we can do this all in-house.

Thank you.

Graham Parry, Merrill Lynch.

Thanks for taking my questions.

Starting with a question for David, just your comments on two times daily dosing being preferred in the setting of the LAMAs, just wondered how could see Spiriva fitting into that analysis which has a very strong daily profile.

When you say that you felt confident this drug would be superior at the new doses, could you just clarify, superior to what?

Was that reference to other LAMA/LABA combos in development or to Advair?

Secondly, a question on Pharma COGS, 19% of sales.

Relatively high drew to royalty pay-aways on Gilenya, Lucentis, just wondering if that's the sort of level we should expect to continue or if there's anything else in there that made that particularly high this quarter.

Thirdly, wanted to clarify what's prompted the use of the third party supplies at Consumer.

Is that just because you feel you can't get back up-to-speed as quickly as you originally expected, and therefore, what the impact of consumer margins would be on using third party suppliers even if you were able to get to the same sales levels you were expecting at the beginning of the year.

Thanks.

David, QVA?

So QVA, so I obviously don't know how it will compare to other LAMA/LABA combinations, but we have a pretty good sense of how this drug will compare to single agents.

That's where we would expect to see superiority and also I would have no -- given what I've seen so far from the ILLUMINATE trial, I have no reason to believe we wouldn't also see superiority for Seretide, so that's the first.

In terms of your question about why is Spiriva QD.

I can't speculate.

I wouldn't be surprised if that drug had to be submitted today with today's guidelines, that would be a QD drug.

I think I would just leave it at that.

Regarding COGS, you're right, cost of goods have gone up despite the productivity efforts and it is largely driven by royalties, in particular on Lucentis as well as Gilenya.

And then in terms of the third party supplier out of Lincoln, we made the decision to look at and sign up some third parties when it became apparent that the product by product start-up that would lead to a limited assortment in the back half of the year could be supplemented.

So in that case we were valuing getting back to market quicker as opposed to margin because we would take a margin reduction on those third party shipments.

But I think what you need to think about in terms of Consumer Health this year as a rebuilding year, obviously, as we get through the back half of the year.

We're going to return to market.

We're going to have marketing programs on those brands that are promoted in the back half of the year.

But I wouldn't be counting on growth in that OTC business until the beginning of next year.

Can I just follow up on the COGS Pharma, just wondering is that the kind of level that we should expect going forward or is there anything else in that which means that's particularly high this quarter?

No, I don't think it's particularly high this quarter.

And I think given the increasing contribution of Lucentis and Gilenya to the mix, it would be hard to bring it down.

Okay.

Thank you.

Florent Cespedes, BNP Paribas.

Good afternoon, gentlemen.

Thank you for taking my questions.

First, on Vaccines, as we see some delay with Bexsero, I have a general question on this division for Joe.

When should we see the profitability of this division coming close to the (inaudible) and what are the growth drivers here?

And second one on Alcon for Kevin.

On the contact lenses business, could we have some color on the ramp-up of the new products?

And marginally speaking on the division, on Alcon division, last September you suggested that Alcon division should reach high to low double-digit growth.

Are you confident with this target?

And what are the growth drivers behind it?

Thank you.

Starting with vaccines, we've been pretty consistent in saying that the meningococcal portfolio of Bexsero and Menveo would be the trigger take takes the Vaccines division to profitability and to substantial profitability.

So obviously we have a strategic plan that shows that if we're able to execute against that, that will be the key to make this a thriving, profitable part of Novartis.

So when you talk about the delay on Bexsero, to have it approved in 2012 is going to be a good success for us which means we'll start selling in '13 and based on the ramp-up, we would expect the division to benefit from that relatively quickly, given the relatively small size of the division today.

So I would leave it at the Bexsero and the Menveo ramp-up and then behind that we have quite a strong pipeline in Vaccines, which will be developed for future '15, '16 and '17.

Obviously it is going to be critical that Bexsero and Menveo take the division to profitability.

Kevin, on new products?

Sure.

First, on Dailies Total 1 which is our daily silicon hydrogel product that we've launched in limited markets in Europe.

We continue to be very pleased with what we're seeing in terms of product performance, as well as the fact that we're seeing optometry and optician acceptance of the product and we're seeing very positive trial by the consumer with the start of repurchase.

Now, albeit a relatively small segment of the Dailies Today in silicon hydrogel, we believe this is the future and we are demonstrating with initial results that we can grow share in this segment at a premium price.

The second part of your question related to the aspiration for accelerated growth, and clearly that is a focus for Alcon across each of our three businesses.

And when you look at the results that we put in in Q1 on Surgical, again, you start to see the strength of the cataract franchise and the ability to drive growth with advanced technology IOLs.

We're also launching new equipment in both our retinal equipment line as well as our refractive product line which contributed to the growth.

Obviously, the growth rate for Alcon has been somewhat reduced by the fact that we combined it with a slower growing business from CIBA Vision.

But when you look at what the opportunities are in that portfolio, which relate to not only the Dailies Total 1 product line but our ability to upgrade to specialty lenses in the hema segment as well as the ability to add future benefits as it relates to our core Air Optix business, which is growing quite nicely as Joe highlighted.

We believe that contact lenses will be a driver for that double-digit growth.

And then looking at Pharmaceutical, obviously we're executing today with the products that we have, primarily around glaucoma and allergy.

We've seen very nice growth as it relates to the steroid Durezol product and the NSAID Nevanac product.

And with the most recent announcement that we made on licensing ocriplasmin outside of the US, that also will be a growth driver.

So these are going to be small incremental steps across all three of our businesses that will contribute to accelerated growth.

Thanks, Kevin.

Thank you very much.

Jeff Holford, Jefferies.

Thanks for taking my question.

Just back to Consumer again.

I wonder if you could just give us a bit more information about how much the margin gets impacted when you use a third party manufacturer and just help us think a little bit more into the midterm here.

Is it still going to be 2013, 2014 issue, in terms of when do you get back near, somewhat near the level of sales that we had in 2011?

Can you give us some sort of idea around there?

And which products within the portfolio do you think might be most at risk of permanent market share losses during the period of their outage?

Thank you.

Okay.

Brian, you want to start by talking about the potential margin difference between let's say a co-pack product and our products.

Yes.

If you look at the margins that we had in the Lincoln plant before the shutdown and the co-pack margins, you're talking low double-digit impact on margins and that's a short term issue, obviously.

Yes.

And what about midterm, so for example return to let's say substantial sales out of the plant?

Yes, I see that happening in 2013.

And I think the ramp-up as we do product by product and we go, that will be happening throughout 2013.

What about products -- obviously in terms of your question about products that would have permanent share loss, these are quite strong brands from a consumer standpoint.

You can imagine that our marketing people in the US have been working very hard on developing relaunch plans for each of the brands which will include a return to market from a consumer standpoint that will get their loyalty and their trust back.

So I personally am not accepting a share loss out of any of the brands that we have lost.

I've seen it happen where we can get the share back, and we will.

Thanks very much.

Alexandra Hauber, JPMorgan.

Thank you and good afternoon.

Three questions, please.

Firstly, a follow-up question on Vaccines & Diagnostics.

Joe, you have indicated a prior occasion that Bexsero needs to turn into a success for Vaccines & Diagnostics to earn its place in the group.

Could you just indicate -- given the slip in time lines, what time frame Bexsero really needs to prove itself.

Are we talking about by 2014, '15, a decision to be made on this, and in the meantime is that division allowed to spend north of $0.5 billion each year on R&D given aside from Bexsero, there is no meaningful Phase III asset.

So at some point that money should be spent and forgive me if I can't see that very big vaccine pipeline.

Second question is what is Plan B for Hep C now given the clinical hold on DEB025?

Is there a Plan B, looking at the low, early stage in your portfolio or do you just give up at this stage?

The third question is for David on -- quick question on slide 35.

You show zero impact from healthcare reform on pricing in this quarter for Pharma, which is quite remarkable, so I guess that's probably a combination of big price increases in the US and price erosion everywhere else.

It could be a very exceptional first quarter phenomenon, could you just give us an indication what you expect this figure to be in the next couple quarters?

Okay, I'll start with the Vaccines question.

Yes, I have been focal about the fact that Bexsero really is going to be what carries the Vaccines division.

I don't want to put time parameters around it.

Let's say we get approval at the end of this year and next year is the launch year.

Obviously, you know that there's time that it takes to get pricing and reimbursement.

But we would expect that there would be contribution obviously by Bexsero in 2013 and by 2014 we're going to see a nice ramp and a good trajectory that would give us confirmation that this vaccine will bring that division to substantial profitability.

Now, I would also take issue though on the pipeline.

I want Andrin to talk a little about the early stage pipeline that we've got.

You said Phase III.

Andrin, talk about the pipeline.

Yes, I think overall I would say I have little doubt that our pipeline is highly competitive compared to some of our leading competitors in Vaccines.

That has also been recognized externally more than once.

It is obvious that if you want to create the leader in vaccines you have to make the investments in R&D to make sure that you can catch up with these competitors.

I think we still spend of course less than they do but I think we spend it well.

So first of all, meningitis as we have said is our priority.

We're not going to stop with the MenB program we have now under licensure.

We continue to expand that franchise.

I would just highlight one element which I think is critical is a combination of our ABCWI program, end of Phase II and we're definitely going to drive that forward.

We also are not neglecting our flu franchise.

It is a franchise that is volatile.

There's going to be good years and bad years but we think we have a way there really to differentiate with our adjuvant which we're planning to bring into the US and we have large scale programs running in infants as well as in the elderly to get the vaccine licensed in the US.

We also have a very large sales base, manufacturing program which has a very high interest from the US government and received the appropriate attention therefore.

For the early pipeline, the next one to follow would be our group B streptococcus program that has also had completed Phase II trials just recently.

Group B streptococcus is the leading cause of infant sepsis is the in the US and other developed markets and the incidents of mortality despite antibiotic prophylaxis is still higher than for example, meningococcal disease.

Beyond that, we have as Joe has mentioned promising earlier compounds such as our RSV program that is planned to enter the clinic soon.

We have a staphylococcus aurelius program that of course is a little bit more risky but nevertheless is an interesting asset in Phase I.

So we're not expecting all of them to eventually make it.

We will of course see some attrition but I think there is a lot to work on and a lot of promising innovation I think that we can and will bring forward.

David, Hepatitis C.

So for -- just to remind everybody on the phone, DEB025 is a drug for Hepatitis C that works by a very different mechanism than the other agents that are currently in the clinic.

It works on the host.

It could well be complementary to a whole number of other therapies.

It is true that we did see surprising, although a small number but more cases of pancreatitis than we would have expected in the ongoing Phase III program.

That's why it is on clinical hold.

I want to remind you that in Phase II B when we put in DEB, and combined it with ribavirin in an interferon free regimen, we did not see the pancreatitis And we had SBRs that were in the range of 80% plus.

So the drug could well have a role either in genotype 2, 3 patients or perhaps in genotype 1 failure patients.

It will have to be combined with something.

We have to do some additional homework now to understand the mechanism of action behind the pancreatitis and what we can do around dosing and combinations in order to design the right program going forward.

So that's basically where we are.

It does create a delay.

But we're hopeful that we can find a way forward for the program.

Regarding pricing and healthcare reform, you are correct that during the quarter we were able to take price increases in the US market, which largely offset price decreases that we saw mostly in Europe.

And in Japan there was no price change during the quarter or at least a very tiny one because the real pricing effect starts now, this time of the year.

So we continue to face pricing headwinds and it will become more apparent as the year goes on.

Thank you.

Tim Anderson, Sanford Bernstein.

Thank you.

When I look at your slides and the bar chart figures on slides 26 and 27, look at generic headwinds and new product launches, it makes me wonder what 2013 is going to look like and I'm wondering if you can give us some direction here.

Is 2013 likely to be down, flat or higher compared to 2012?

Second question is on emerging market growth rate of 5%.

We don't have Q1 growth rates for most of your peer companies but that seems like a fairly low figure and I'm wondering what might be keeping that growth rate in check.

And then the last question is on Sandoz's efforts in the generic respiratory space, is there anything you can tell us that's new in terms of when we might see the first respiratory generics launch in developed markets.

In the US in the past you've said you expect to have one day fully substitutable generics, and I think a lot of investors hear that and are skeptical and I'm wondering what more you could tell us that would give us some confidence in those claims?

Okay, let's start with 2013.

And I think we do need to get closer to 2013 before we want to give guidance.

One piece of evidence is that just as 2012 is somewhat suppressed by the issues that we are seeing in our Consumer Health unit, we expect to return that site to growth and to be able to create growth in '13.

So that will be one piece that was not expected in the original plan.

Jon, do you want to talk about anything else about the shape of the generics?

No, the intention was not to slide into a 2013 forecast with these slides but really to force you to think about the relative weights of each of them.

Obviously, the back end of this year we do see more generic competition with US Diovan coming in but that's a four quarter effect.

By the middle of next year we will have seen that through.

The point I really want to make is that the performance that David has and is continuing to deliver on the new products is not a four quarter phenomenon.

That will continue beyond the time when we see generic Diovan fading away and, therefore, that's why we believe the business is in robust health.

So if you think -- Tim, if you think about the back end of this year with Diovan going and then impacting the first and second quarter and starting to drop off towards the end of the second quarter as we start to lap, I think you need to think about '13 as two halves and that's what we will lay out when we start to give guidance on '13.

EGM growth rate of 5%?

Yes, there's a lot of things in there.

I think the Pharma -- the Pharma growth rate of 7 was actually pretty good.

Obviously, our performance in China at around 30% growth was pretty good and has been good for some time.

There are a number of factors that have brought it down from that.

Number one, some of the markets do have an impact of some pretty heavy cost containment, so Poland and Turkey were included in that.

Also, I think with the more narrow definition of emerging markets there has been actually a lot of volatility in the past, simply because a tender in one market, in one quarter either comes or doesn't come and it can make a dramatic effect on the growth rates.

The other things I would say in the other divisions, particularly in Sandoz and in Consumer Health, the east European business was pretty heavily hit by an almost entire absence of a flu season.

Flu for both of those divisions in that part of the world is pretty important.

So despite the broader definition, we still can't quite get away from all the individual pieces.

But I think the fact that we are talking about a part of the business that is nearly a quarter of the business I think is a better measure of the impact of emerging markets on our business than the narrow definition of six.

Jeff, respiratory?

We continue to invest significantly in both our US and European respiratory pipeline projects and we're making good progress.

I have no interest in giving our competitors any time line visibility as to what we're bringing and when we're bringing it.

What I can say is that I continue to stand behind my previous comments regarding the potential for fully substitutable combination asthma and COPD products in the US.

Look, people didn't think that we could use the 505J pathway without clinical trials on enoxaparin and we got it done and turned it into $1 billion product.

So I continue to believe that there is the potential and we'll see what comes going forward.

Thanks.

Thank you.

Michael Leuchten, Barclays.

Thank you.

Two questions for Joe and two for Jon.

Joe, I'm afraid I want to go back to the manufacturing aspects.

Firstly, on Sandoz, you were saying that the FDA's going to come and look at your plants towards the end of 2012.

Do you think that's the end of the slowdown for those plants then or is there going to potential that this is going to drag further?

And then secondly, how does that not turn into a Johnson Johnson like situation where it's a constant back and forth with the agency?

How do you handicap that risk?

Thirdly on that, has the agency looked at any of your Pharma plants or is this purely contained in Sandoz and consumer?

And for Jon, the other income and expense line in the Pharmaceuticals division was pretty low in the first quarter because of low legal expenses.

Is that something I can use going forward in the modeling?

And secondly, do you -- you said in the first quarter that you think the erosion of the margin in the group level will be no more than 100 basis points, do you stick to that guidance?

Thank you.

Okay.

Starting with the Sandoz, the three Sandoz sites.

I projected that the FDA will inspect towards the end of the year, only because they typically will inspect within one year of the previous investigation.

So -- or inspection.

So since they inspected last year, I expect them to come back and that's really what the team is working against.

Jeff, do you want to talk about the products, the return -- not return, but the service levels at those sites?

Yes, sure, Joe.

We continue to make progress, Michael, at all of our three North American sites.

As Joe and Jon had mentioned previously, production continues at all three of these sites.

Service levels are improving.

We're also on track with all of our commitments to FDA, with 50 of them completed, on time and zero overdue.

As expected, and as previously mentioned, our margins were hit by the remediation costs and the related adverse manufacturing variances but we are making good, steady progress.

And with regards to your question about a J & J situation where we're back and forth with the agency, we've been very clear with our customers and also with the FDA that we want Lincoln to come back up right, when it's ready, so we have been in communication with the FDA.

We've shown them our plans.

We've shown them the progress that we've made at the site and that's one of the reasons why we'll have a limited portfolio in the back half of the year and that is to make sure that we don't come up too fast and get into a back and forth situation.

So when we come up, we'll come up right.

And in terms of the FDA looking at the Pharma plants, obviously they continue to inspect all of our plants across all divisions.

So since January, since the beginning of the year, we have had a number of inspections by the FDA in Pharma and in all of the divisions and those inspections went without incident and were all in substantial compliance.

So we feel good about the fact that we know where our issues are and that we are remediating those issues in those affected sites.

On Pharma, other income and expense, the Q1 is below the trend rate and we expect to see maybe not as high as last year for the remaining three quarters but certainly more than we saw in the first quarter.

On the overall margin picture, the fact that we have confirmed no change in guidance means that the margin assumptions we put forward at the end of last year are unchanged, notwithstanding the fact that margin was down in the first quarter more than we would expect to see over the year.

The simple answer to that is that the margin profile should be a bit smoother this year, which means that there will be a pick-up in the second half.

At the divisional level, it's a lot more complex with Pharma having a stronger first half than second half because of Diovan.

Alcon performs pretty steadily.

Whereas the other divisions by and large tend to have a better second half than first half.

So overall, the mix effect sort of brings you into a more of a steadier path this year.

Thank you.

(inaudible), Goldman Sachs.

Thank you.

And I actually have three questions as well, please.

First, starting with your 5% emerging market growth, can you help us understand what that number might have been ex-China?

And secondly, given your wide definition of emerging markets, can you help us put that in the context of what our Q3, Q4 2011 growth might have been on similar definitions?

Secondly, as relates to your investment behind the manufacturing facilities, can you please let us know how much you've spent on it in dollars since this year-to-date and how much do you think it's going to cost you in total?

Lastly, perhaps a little bit cheekily for David.

Can I just understand your confidence around the QVA approval process in Europe given your comments that you think the lower dose is still going to be superior to Advair.

Why should the EMA approve the higher dose and not just wait for the lower dose to come through?

Thank you.

Jon, EGM growth.

The second part of the question is easier than the first.

The profile using this method against the old method for three quarters of last year would have been about a point or so higher in one quarter, it was a little more than a point lower.

So I think overall you can take it that the growth rates are broadly comparable.

Obviously, if you take out China, one of the faster growing markets in that segment, you reduce the average, but probably not by very much because you're talking about $3 billion, $3.5 billion of total sales and China's important but it's not the majority of that.

And actually, it wasn't the fastest growing market.

There were two Latin American markets that grew faster than China.

Manufacturing.

On the manufacturing spend, it would be very -- I was going to say it would be easy.

It's not easy to sort of explain it into a single number, because obviously you've got a lot of factors in there.

There are some increased direct costs in relation to remediation.

There's the lost gross margin of sales and then you've also got the overhead wash-out from low capacity.

So I don't think you would be aided very much if I gave you a single number and I'm certainly not willing to break it into those individual pieces.

So just work it out from the various triangulation points that we've given you over the last hour.

David, confidence in QVA?

I think just look back at -- take a look at all the approvals in respiratory medicine over the last few years.

What you see is a very different philosophy between EU and the FDA.

The EU sees COPD as a deadly disease and they look to maximize efficacy.

The FDA is much more concerned about safety, given events they believe they've seen in single agent LABAs in the asthma category.

As a result, just a different philosophy around how products should be administered and dosed and it has played out over the years that there are different doses in both continents and we expect it to be the same.

Okay.

Maybe one last question.

Andrew Baum, Citi.

Couple questions.

Firstly, could you indicate the average realized reimbursement price you attained for Bexsero getting through the European schedule.

Second, for David perhaps, could you make some comments about the BEZ235 developments being delayed by a couple years.

One of your trials in second line breast cancer setting.

Could you outline what's underpinning the change of strategy.

Finally, on the finished what percentage of existing breast cancer patients second line, again, are getting drug already in the label setting in the US market.

Okay.

Andrew, you were fading out.

Can you restate the Bexsero question and we'll have Andrin answer it.

It was about average reimbursement?

What price do you think -- where would you need to price it in order to ensure inclusion in pediatric vaccination schedules across Europe given the fact that the prevalence of the disease has fallen significantly over the last 10 years.

Got it.

Thanks.

Andrew, I think it's of course too early to discuss the pricing strategy in detail but we did have first discussions with some of the countries who are most interested in the product and I think it's fairly clear that with regards to the guiding principle that we use, it's similar to other recently launched vaccines who were innovative and have helped to significantly reduce infant mortality.

I think we have a good case and at least the first discussion make us believe we find the ground here that gives us a good return on innovation and still makes it manageable from a public health point of view.

David, on Debio?

Debio, I think you were implying we have a different strategy and new time lines for development.

I'm not prepared to talk about that.

We have to do more investigation of the findings and I'll get back to you.

Just the BEZ235, not the Debio compound.

Oh, BEZ and BKN, so the two PI3K kinase inhibitors.

Suffice to say, the data we now have is very exciting across a number of indications and we have decide to do the first large Phase III program in breast cancer and that will start in the second half of the year and I think that's what we should focus on.

And then you had a question about Afinitor and the percentage of the business that is from breast cancer if I understood correctly.

I would say ex-US there's virtually no use in breast cancer and in the US is probably the beginning of prescribing now.

You see a little bit in the growth rate.

But having said that, since we did $143 million in the quarter, and given that the opportunity in breast cancer is over $1 billion, it's a relatively small contribution.

Okay.

Thank you very much.

I'd like to thank everybody for the call.

As you can see, not the best numbers we've ever put up in terms of the financials.

But if you look under the quarter, look at the strength in Pharmaceuticals, look at the strength in Alcon as we get our Consumer Health engine back going, we are feeling pretty good about the progress that we're making in each of the areas.

So thank you very much.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.