Novartis AG (NVS) 2012 Q3 法說會逐字稿

Good morning and good afternoon.

And welcome to the Novartis Q3 nine-month 2012 results conference call and live webcast.

Please note that during the presentation all participants will be in listen-only mode.

And the conference is being recorded.

(Operator Instructions)

A recording of the conference call including the Q&A session, are available on our website, shortly after the call ends.

(Operator Instructions)

With that, I would now like to hand the call over to Mr. Joe Jimenez, CEO of Novartis.

Please go ahead, sir.

Thank you.

I would like to welcome everyone to our third-quarter conference call.

Joining us on the Novartis end are Jon Symonds, the CFO; David Epstein, Head of Pharma; Kevin Buehler, Head of the Alcon business; Jeff George, Head of Sandoz; and Andrin Oswald, Head of V&D; George Gunn, Head of Animal Health; Brian McNamara, Head of OTC; and we have Tim Wright with us also, Head of Development Pharma.

So before we begin, I would like Susanne Schaffert 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 result, performance, or achievements expressed or implied by such statements.

Please refer to the Company's Form 20-F on file with the Securities and Exchange Commission for a description of some of these factors.

Thank you.

Okay, starting on slide number 4, as in the first half of the year, our recently-launched products supported Novartis sales in the quarter.

Our core EPS was $1.34 and importantly, cash flow was $3.5 billion in the quarter.

We also achieved a number of regulatory milestones in the quarter, most notably Afinitor in advanced breast cancer and Jakavi in myelofibrosis.

The next slide shows the financials for the quarter.

Sales of $13.8 billion, and core operating income of $3.9 billion, and Jon is going to take you through some of the details in a minute.

We continue to execute against our strategic priorities of extending our lead in innovation, accelerating growth, and driving productivity.

And I want to just touch on each one of those, starting with innovation.

So in the third quarter, on slide number 7, we delivered nine regulatory milestones.

Besides the two that I mentioned, the Afinitor and Jakavi, we received approval to Seebri Breezhaler in Europe and Japan.

This is key to our respiratory pipeline and to QVA which we also have filed now in the EU.

On slide 8, importantly, we received first interpretable results of our Phase III trial on serelaxin in acute heart failure, so we're right now in the process of discussing results with the regulatory agencies and we're going to present our results on November 6 at the American Heart Association Congress in Los Angeles.

In terms of growth, Pharmaceuticals had a very good quarter with the launch brands offsetting the Diovan patent expiration.

And importantly we were able to show an increasing core operating margin during this period to 33.4%.

On the next slide, in emerging markets, China really led the growth, with 22% for the group.

Our businesses in China continue to perform well, behind not just the new launches but also very good base execution.

Alcon's growth rate was below the year-to-date average with sales growth of 3% in the quarter, and this is primarily driven by two factors.

First, they had a very strong year-ago base, specifically a very strong allergy season in Japan a year ago, and a shift in some order patterns in the Middle East.

But secondly, we did feel some price competition in monofocal intraocular lenses in Europe.

We expect this to be a temporary issue, as we respond competitively and we do expect a stronger fourth quarter, more in line with the year-to-date results.

Now, despite that quarter, slide 12 shows that Alcon is really positioned well.

And IOLs were the market share with over a 50 share and we're now focusing on execution excellence.

Glaucoma we gained share this year driven by global gains in DuoTrav and Travatan ex-US.

And in contact lenses we're gaining share in monthly silicon hydro gel lenses.

While Sandoz' results were impacted by the loss of exclusivity on enoxaparin and the slowdown of production due to the quality issues at some plants, there is some very positive news.

Sandoz delivered double-digit growth rates in Western Europe, in Asia, and also in Russia, and biosimilars were up 35% versus a year ago.

I think we've made some good progress on our remediation efforts in the few sites across our network that have quality issues.

We did have an FDA inspection in Broomfield, Colorado, which was one of the Sandoz warning letter sites, and that audit was -- or that inspection was satisfactory.

So across the divisions, we have had many good or satisfactory inspections in the third quarter, and that includes sites in Pharma, sites in Alcon, and sites in Vaccines.

I'm still not happy with the progress that we're making in Lincoln.

So we are ensuring our return to market through third-party manufacturers, which will reduce our dependence on the remediation efforts at Lincoln.

So remediation continues.

We're making progress.

But it is just not fast enough and we're returning to market with co packers.

Also, some of our Sandoz sterile sites are still under intense remediation.

But overall, we are making goods progress and have isolated this issue to a very few number of sites.

I'm happy to say that we've relaunched three very important over-the-counter drug brands back into the US and this includes Excedrin which is the lead brand.

We have very strong relaunch plans in place, and we're executing now to regain our market share.

We're also making good progress in productivity.

We delivered over $350 million in procurement savings this quarter.

We have divested or exited 15 manufacturing sites since the beginning of the manufacturing footprint project, and our marketing and sales spending continues to decline as a percent of sales, and this is despite the fact that we are executing a number of new product launches.

I would like to turn it over to Jon to go through the financials.

Thanks, Joe.

And good morning, or good afternoon to you.

As you have already concluded, there is a lot to talk about this quarter.

Both in terms of the performance for the year to date but perhaps more importantly some of the trends which lay over the next three or four quarters.

Before getting into the details, the summary results is shown here.

Sales decline 2% in constant currency for the current quarter and 1% last year for the nine months.

Core operating income declined by 3%, while reported operating income grew by 5%.

In the interest of time, I won't go through this reconciliation but a simple explanation is that the net impact of amortization [and one on phitas] was lower this quarter than last year.

And there is a full reconciliation as a backup to these slides.

Core EPS for the quarter was 6% below last year where reported EPS was 2% higher.

Cash flow remains pretty strong at $3.5 billion, generated in the quarter, but almost $8 billion for the nine months.

Slide 19 shows that this aggregation of sales of both Q3 and the nine months, demonstrating as always that there is a lots of moving parts under the surface.

Importantly, however, the underlying growth of volume remains solid at 6%.

And the other parts are reasonably self explanatory.

The significant part of the price erosion comes from Sandoz, and the recent acceleration of price competition for enoxaparin.

Pharma business as a whole remains pretty resilient with a net price decline of 1%, even though in Europe, it is running at about 5% negative.

Generic impact is 4% in the quarter as we begin to face competition to Diovan in the US and this includes a significant reduction of Diovan inventory in the channel.

I will come back to this in more detail later, but in quarter four, the impact of generics is likely to be around 5% of sales.

Lincoln is obviously disappointing as we hoped to begin resupplying customers in the second half.

In fact we are from some OTC products but from third parties.

Q4 is likely to be tough for consumer health as it has been for the previous three.

Finally, currency is a negative 5% for the quarter and 3% for the nine months, and this gap should narrow in the fourth quarter for both sales and profits.

So that is a quick summary.

Slide 20 shows you an area where we continue to perform outstandingly well.

In growing our portfolio recently launched products, which now amounts to 29% of the portfolio and almost $12 billion for the nine months.

And this includes a decline in enoxaparin sales.

The Pharma is particularly impressive and David will take you through this story in a moment.

Slide 21 shows the summary of the overall performance.

Clearly, it is mixed.

With only Pharma and Alcon contributing operating leverage, and improving margins.

However, given the challenges facing some of the divisions, the 40 basis point decline for the group shows a overall high degree of resilience.

And I'll now look at some of the divisions in more detail.

Firstly Sandoz on slide 22, the magnitude of the movements for the quarter and the year to date are relatively large, the story is actually quite straight forward.

For sales, the biggest impact is the declining in enoxaparin from $259 million in quarter three 2011, to $34 million this quarter.

Recent price declines have been very severe.

And the quarter result includes the impact, the resulting inventory and revenue adjustments.

We now expect enoxaparin run rates to be at relatively low levels from now on.

This overshadows however some really excellent performances around the world, where we have double-digit growth in many markets, and the regions, as you can see here.

Our biosimilars business is performing particularly strongly, with growth of 35% in the quarter and 42% for the year to date.

In addition, Sandoz has benefited from partnering with Pharma on Diovan HCT.

Around $100 million of sales have been made so far and Sandoz has around 50% the generic market.

There will be more benefit in quarter four if and when we face competition to Diovan mono.

Of course these sales will evaporate on day 181 and you need to think about this in your models for next year.

On the profit side, the impact on sales is exacerbated by two factors.

Firstly, continued investment in biosimilars and respiratory portfolios which contrary to some commentary is making good progress, and remediation across our sites.

Some of them one-off in nature but there will be an ongoing profit impact this year and beyond.

Turning to Alcon on slide 23, Joe has already given you some of the factors behind the weak and unusual quarter.

As you can see from this slide, the biggest impact is in the surgical segment.

And there are two broad things for this.

Firstly, the lapping effect from last year.

Although many of these impacts effects themselves are not significant, the impact is worth around 2 points of growth overall.

And Joe has already covered the main items.

The second fact underlying Q3 surgical performance, however, are weaker procedure patents in the US and Europe.

The US is coming off a strong trend line from the last six months, while in Europe, some governments are restricting procedure volumes, adding to which there is more price competition on IOLs, especially monofocals.

In the latter case we've instituted plans to recover share and increase penetration of our advanced IOL platform.

I do think however that we have responded quickly with results adjustments and together with the deliver of synergies, we protected profitability and indeed as you can see from here, increased the Alcon margin over quarter three 2011.

Let me now turn to Pharma.

And obviously David will go into the products and pipeline performance, which I think represents another outstanding quarter.

As we head into the next three to four quarters of increased Diovan erosion, there are three points I would like to make on how the story will evolve over the next few slides.

On the first point, you can see on slide 24 how well the business has performed since the beginning of 2010.

In fact the business has had an uninterrupted record of 10 consecutive quarters, with quarter-on-quarter margin growth.

This is a combination of the rates of growth of profit contribution from new products, exceeding the incremental investment, together with the underlying productivity programs.

The best form of defense to patent erosion is to be as strong as possible when the event comes and we certainly improved the quality and profitability over this period, and without diminishing our ability to grow new products.

Turning to Diovan on slide 25, fortunately for us, the generic picture, some five weeks after Diovan patent expire in the US is still not clear.

At least not for the mono form of Diovan, which is about 50% of the business in the US.

Obviously, this means that we have some upside in quarter four, and we now estimate the 2012 generic impact, which includes Diovan from our and other smaller brands to be around $2 billion.

And that is down from $2.2 billion, as we laid out in quarter two.

This slide sets out how we see the situation today and you should note, however, that there is no free lunch here.

And any upside to this year's numbers is likely to be offset by other erosion next year.

In fact, this is an important point.

If you compare the next few slides of what I showed you in previous quarters, the estimated impact of generic erosion in 2012 has lessened.

And given that we don't expect to be in a bit different position at the end of next year, any benefit in '12 will be reversed in '13.

Slide 26 shows the expected profile of generic erosion over 2012 and 2013.

Generic erosion will peak in the first half of next year, before declining.

So as you can see from the next slide, why we believe the Pharma business can emerge strongly from Diovan in the second half of next year.

With all the positive news flow we've had over the last few months, I don't see the contribution from new products diminishing.

Of course, the sales trajectory is not the only factor.

And I know that many of you have focused on profitability.

And this is something we're still working on to balance short-term profitability with the needs of the portfolio.

As we told you last quarter, we're not afraid to continue to invest behind growth opportunities.

A list of opportunities is longer today than it was even three months ago.

Of course, productivity is a big piece, too.

And there is no let-up in the intensity of the productivity programs, which continue to release resources equating to around 4% of sales each year.

For the sake of completeness, on slide 28, I include the usual reconciliation of operating income to earnings per share.

There are really no new items to discuss here, although there is some erosion of the core operating performance from 3% at the operating level, and 6% to the earnings per share.

On slide 29, you can see the delivery of free cash flow, down last year, but still substantial at $3.5 billion for the quarter, and $7.9 billion for the nine months.

Finally, on net debt, on slide 30, it shows that despite this cash flow, the net debt at 30 of September, $15 billion, has really not changed from the beginning of the year.

As you can see, this is down to the payment of the dividend, and the recent acquisition of Fougera.

What you can't see from this slide is the recent refinancings where we pre-financed all of our 2013 maturities at very attractive rates, especially for 30-year money, recognizing that debt needs to be a permanent part of our balance sheet.

So in closing, I would prefer that as we enter the next four quarters of Diovan erosion, we have all divisions firing on all cylinders.

This however is at least true for the Pharma business which I believe is performing as well as any in the industry.

Not just in terms of current performance, but also in terms of pipeline development.

And I will let David update you on that now.

Thanks, John.

As you mentioned, the Pharmaceutical Division delivered solid profit growth in Q3 and that's despite being the first generics against Diovan HCT.

Top line was flat, actually up a very small amount.

But more importantly, the main story is the 6 point growth in core operating income driven both by productivity initiatives as well as beginning to see some of the initial benefits of having a portfolio that is weighted a little bit more towards specialty products.

Turning now to slide number 33, you see that the recently launched products are growing very strongly, contributing 8 points of growth.

Unfortunately, that is offset by pricing as well as generics for the overall net change of zero in constant currency.

On page 34, we see the group of recently launched products that we've been tracking each quarter for you.

They grew strongly at 24% in constant currency.

And very importantly, and it is good news going forward, now represents 36% of our total sales.

So it is essentially our sales base is being rejuvenated, replacing old legacy brands like Femara and Diovan.

Turning now to page 35, you see our track record of driving efficiency.

In this particular slide, looking particularly at M&S spend as a percent of sales.

Which we've been managing I believe quite well, despite funding a fairly broad set of new launches which will pay benefits well into the future.

On page 36, our growth platform continues to deliver and I would argue has been exceeding most expectations.

As you can see strong double-digit growth across each of these key franchises, particularly happy with the continued strong growth of Lucentis, which is growing 23% as we continue to expand into DME and RVO.

As well as the very strong performance of Tasigna, which is growing 49%.

I want to take you through a few of these other products in a little more detail starting with Gilenya on page 37.

What you see is that Gilenya has more than doubled sales since the same period last year.

And it is I would say very likely to become a blockbuster in 2012.

Part of the story here that is not well understood, we spoke about it briefly last time, is that our ex-US growth is extremely dynamic.

Ex-US, we have a market environment where many of the patients are started in hospitals or in other centers, and as a result, the fixed dose observation that was added to the label has had a much smaller impact.

In the US, first dose observation is a bit more challenging.

We now have a network in place to serve the physician who would want to have that done outside their office.

And we are starting to see in the weeklies, now the first beginnings of an uptick in new RX EBIT in the US.

I remain very bullish on Gilenya and will have certainly more to say next year as new competition is expected to enter.

I believe the opportunity for oral MS drugs is still largely untapped and there is a lot of growth ahead.

Taking a look at slide 38, you see the first uptick or uptake of Afinitor as the newly approved breast cancer indication in the US.

You can see that the growth is dynamic and we are very, very optimistic that the incremental sales will be well in excess of a $1 billion in this indication.

Although I don't have the data for you on the page, I can tell you that the German dynamic is actually quite similar, so we would anticipate that this product will do very, very well.

I want to just now spend a moment on QVA starting on page 39.

We believe that QVA is a very exciting opportunity in COPD.

I believe that most have under appreciated the opportunity of this new combination of LABAs and LAMAs to become eventually the standard of care in COPD, and the lead that we have at least ex-US with the development in this category, we have the most comprehensive development program to date, and you can see from this slide the data that was reported out and the data that we will be reporting out in the very near term.

And as Joe mentioned in his opening, we have now filed in Europe for QVA 149, once per day, in chronic obstructive pulmonary disorder.

Page 40, you get a quick snapshot update on the regulatory approval of an expected filing.

This is largely what we had promised you with our last update.

I would just add that we have recently received approval in addition to what is on this chart, for Seebri once a day in the Canadian market as well.

So the story is good.

The additional clinical trials that are required in the US as we mentioned are pre-agreed with FDA and they are about to start to grow imminently and we feel very good about these time lines.

On page 41, you see our regulatory and development teams have been very, very busy.

The pipeline has delivered eight regulatory milestones in Q3, 2012, and we could have up to seven more during Q4.

I think this would paint us as one of the most attractive companies in the industry in terms of taking our R&D dollars and turning them into true innovation that can be commercialized.

These products will continue to help us fuel growth post the patent expirations of Diovan and other brands.

If I could sum it up, on page 42, the short message is the division is on track to realize its plan for 2012 and also our growing ambitions for the future.

The growth platform itself is delivering above market expectations.

We expect at least nine blockbusters by year end, up from seven last year.

In addition, we believe our pipeline is best in class, delivering those eight significant regulatory milestones, including five approvals.

The productivity improvements have delivered margin improvement for each quarter this year so far.

And I am very excited to have the opportunity along with Tim Wright to update you on serelaxin at our R&D day on November 8. That's just two days after the data is shared at the American Heart Association.

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

Thanks, David.

So to close, we've made solid progress on our three strategic priorities in the third quarter.

And our full-year performance is on track.

So our outlook for 2012 remains unchanged.

And that is group sales expected to be in line with 2011 in constant currency.

And we expect core group operating income margins to be slightly below 2011 on a constant currency basis.

The final slide I just want to look forward to welcoming everyone to our R&D investor day on November 8 in Boston.

You will have the opportunity to hear our key people from research and development, as well as the commercial side of the business.

So you can see the agenda here, it is going to take you through our approach to innovation, our key programs, how we measure success, and I hope that you will leave with a better understanding of how this innovation machine is different from some of our peers.

So thank you.

And now I would like to open the session to questions.

(Operator Instructions)

Gbola Amusa, UBS.

-- the mortality result on serelaxin was driven by cardiovascular causes.

And assuming you can't comment on that, can you at least say the process that drives your decision to include or not include the CV results in your headline press release?

And then lastly, I know it is early days, and you have an R&D day upcoming, but can you comment on what benefits, if any, come from potentially commercializing serelaxin with LTZ696, your other heart failure drug?

Regarding serelaxin, I really don't want to try to address any questions that might end up having me say more than I should be saying before the data is presented at AHA or before our discussions are completed with regulatory authorities around the way.

Just say that we are excited about the data.

We think this is a great additional opportunity for our portfolio and we will share as much as possible at the R&D day.

For LTZ, as you know that the product for chronic heart failure, while serelaxin is for acute heart failure, should both of them end up with good data and approval, the ability to market both together would certainly drive an even better opportunity for our Company.

Thanks.

Michael Leuchten, Barclays.

Two, please.

One, for Jon.

In terms of the comment you made about the ongoing work on short-term productivity improvement, can you talk a little bit about cost savings versus phasing this year.

Clearly some things have gone according to plan, others haven't.

How do I look at the margins in terms in Alcon and Pharma in terms of efficiency gains and cost savings.

And the second question for David, on Galvus, I think in the past you've been saying you've been thinking that the product could make $1 billion.

This year it looks like it is not going to make that sort of level and the Q3 result seems to be off-trend.

Is there anything going on in that line or is it just taking a breather?

Thank you.

On the first one, I mean I think we are not dependent in productivity for any one initiative.

If you think about the total portfolio, which includes maybe hundreds or several hundreds of projects in procurement, which are phased over, in some cases, two or three years, all the work we've been doing in manufacturing, all the work that is being done on adjusting sale sources in the Pharma business, I mean these are not -- these are not programs that really impact any one quarter.

Which is why we can say with a reasonable degree of confidence that they continue at a 3.5% to 4% rate, and in fact we've probably done a little bit better than that this quarter.

So these are pretty sound and well-established programs.

In Alcon, however, you've got the added benefit of I guess a shorter cycle synergy program.

Some of which come with the integration of the business.

And if you notice on page 6 of the press release, that the Alcon sorry, it is on -- sorry, it is on the top of page 7, you see that Alcon has generated already $200 million of synergy benefits this quarter, some of which from the obvious things but also joining our procurement programs.

It has really given Alcon quite a considerable boost.

So there is no one item that you should be looking out for, thinking about it, it is a very broad program.

David?

Yes, Galvus continues to perform very strongly, sales up about 40% for the quarter.

We're particularly pleased with both Europe and Japan.

We have not yet seen sales really out of China yet but we will after we get reimbursement in the future.

You're right.

We were hoping that it would be a blockbluster but it seems like FX have gotten in the way.

For this product, it was going to be a close call.

And it looks like with FX, it is probably going to have to wait until next year before it becomes a blockbluster.

Okay.

Thank you.

Naresh Chouhan, Liberum Capital.

And firstly, on Diovan, we've now lost a third of US Diovan sales, and the earnings have held up particularly well this quarter, and that to me should provide some sort of floor in earnings.

Now, in the second half of next year, we should annualize most of Diovan, and so should we expect EPS growth to resume in the second half of next year?

If that is not a given, can you talk about some of the investment decisions that could lead to costs being higher than expenses?

I know you've talked about not wanting to be hamstrung, and needing to invest in the business.

Some of the things that you could be investing would be helpful.

And then on the manufacturing issues, obviously, there have been issues that pretty much all of the businesses that could be considered noncore, presumably there is been some sort of investigation at the group level.

Could you tell us what those issues might be down to?

And have the cost savings essentially gone too far?

Just some help as to whether or not there is some sort of systemic problem there or is it just being bad luck.

And then on Alcon, and sales have grown 5% in the nine months todate and one of the key drivers for it being slightly lower than we'd expected were EU pressures which show no real sign of abating.

So can you help us understand why you think Alcon will grow at mid- to high-single digits in the coming years and I'm assuming obviously the guidance still holds.

Thank you.

Okay.

Starting with Diovan, you're right that Diovan has gone in the US, and as we've said, 2013 is really going to be a year of two halves, where the first half is impacted significantly by Diovan and in the back half of 2013, we would expect to come out with a growth trajectory that is nice.

We're not going to give guidance today in terms of how '13 will look.

We will do that at the end of the year.

But one of the things that we're also thinking about is you look at this launch machine, and you look at new medicines like Afinitor, like Jakavi, continued growth on Gilenya, Tasigna and how important that is to the future, and we want to make sure that we are funding those launches in a way that will ensure that as Diovan gets in our base in the back half of 2013, we come out with a nice growth trajectory.

So those are the things that we're thinking about and we're going through the budget process right now.

And we will be prepared to talk about 2013 at the close of the year.

In terms of manufacturing issues, we have since January, we have had 50 FDA inspections across all of our divisions.

And the vast majority of those inspections have gone, what I would describe as well, or at least satisfactory.

There are one or two where we've still got some significant amount of remediation, and while we're not out of the woods on those sites, it really is isolated to a very few number of sites.

Now, regardless of that, though, back in January we started on a group-wide effort to elevate quality on the agenda, and to ensure that we have highest quality standards across all of our divisions.

And we've executed well against that.

You just look at those 50 FDA inspections that have occurred, and I can say confidently that we do not have a systemic issue.

It is isolated to a very few number of sites.

I don't believe that cost savings has gone too far.

For example, when you reduce your costs you should be able to improve quality.

And that is really what we're focused on, because then you have fewer variations, you have fewer deviations, your costs are reduced, and your quality goes up at the same time.

And that's what we will continue to execute against.

Kevin, on Alcon?

I want to remind you of the two factors that Joe highlighted at the beginning of the call regarding the Alcon growth.

One is that there were a number of comp issues specific to last year in Q3, as well as one-time events in Q3 of 2012.

Obviously, we don't expect those to continue to go forward.

The second issue, which you raised, is the European market environment for procedures.

I think based on the work that we've done, we do see weakness in procedures across a few of the obvious markets like Spain, Italy, Greece, but when you look at procedure volume across the other markets, they seem relatively stable.

At the same time, we have seen price sensitivity increase, and some impact on market share, so our focus is going to be around how do we capture that market share back, which actually delivers an opportunity for us to grow.

So that's the mechanism for how we feel we can grow at an accelerated rate going forward.

Great.

Thank you very much.

Graham Parry, Bank of America Merrill Lynch.

I'm just wondering in Diovan how much inventory write down there was in the quarter and how much of that was against the monotherapy for which you hadn't actually seen in generic at the time of taking the write down.

And secondly is on consumer manufacturing, you said no Lincoln restart this year.

And just any thoughts on levels of capacity from the plant in 2013.

And if not, how fast can you restore full production by third parties?

And what is the margin implication of third parties?

And then fourth, I'm sorry, third, a question on FX impact, you've got 90 basis point benefit on the operating margin in the quarter and that was offset by hedging losses in financial expenses.

And so fairly neutral at the net line on FX, but if FX rates stayed the same, how far out do you hedge, and how long would you actually see that hedging loss head wind?

Thanks.

David, Diovan?

As the US patent for Diovan expired September 21 we did increase the product provision in line with what you would consider normal practices.

I got to tell you though the increase was relatively small because wholesaler destocking had already become apparent during the quarter.

They had destocked in anticipation of their product going generic, and as you know, things didn't work out exactly as anticipated.

Brian, consumer?

Sure.

The Lincoln plant, as we look at the startup, it is a sequential process that we talk line by line, product by product, so I don't want to speculate on when we will be back, but that continues to be the focus at the plant.

As far as third parties, we've announced the launch of Excedrin Migraine, Triaminic, and Lamisil, and Excedrin Extra Strength in January, and we're continuing to focus on bringing up our biggest brands at third parties as we speak to relaunch for next year.

The margin impact is short-term growth margin impact, really ranges product by product.

It ranges from mid-single digits to low-double digits.

But again, that is a short-term impact that we will address over time.

And I think the only thing I would add to that is that those products that we launched account for about 25% of those brands, 25% of what comes out of Lincoln, so the ones that we just started shipping in October.

And by the end of the year, we will be able to give you a better feel for, for 2013, what percent of sales that were coming out of Lincoln will be up and running in the co packers and a little bit of more guidance in terms of costs to expect.

But we do -- we do say that what is important here is to get back into the market, get our market share back, and really separate the Lincoln remediation from getting this market share back.

And that's really what we're focused on right now.

FX?

And FX, Graham, your analysis is pretty good.

Although the piece that occurs after underoperating profit and net financial income, I mean that is a very difficult piece to predict and it really is the net item of two very large movements for our balance sheet, which is we do hedge -- we do hedge the balance sheet, but we don't hedge the P&L.

And we don't hedge the P&L because predominantly we rely on the total business mix that we have.

Which has a number of natural hedging elements in it.

In terms of the 5% on the top line, I would say about two-thirds of that came from the weakness of the dollar.

And therefore, a substantial part of that also flowed into the P&L.

But obviously, in the P&L, we have the offsetting benefit of the Swiss franc cost base.

So that's why we saw in the quarter 5% on sales and 2% on profits because of the big impact of the euro and the hedging effect of the Swiss francs.

I think, and I hate to make a prediction on this, I think it should start to lessen in the fourth quarter, because the third quarter, up until the third quarter of last year is when we saw the really big movement in the early Autumn of last year.

So I'm hoping that in the fourth quarter, the impact will be a bit less than we've seen in the previous quarters.

But the piece below operating income, there is really no pattern of prediction for that.

Okay.

Thank you.

Matt Weston, Credit Suisse.

Three, if I could.

Firstly, with respect to Diovan mono in the US, your guidance that you will see $200 million less generic impact this year suggests about eight weeks of Diovan beyond patent expiry.

I think my back of the envelope calculation.

Is there any reason why you've gone for eight weeks, you already seem to have four in the back or you're just guessing what we may see generic entry?

Secondly, with respect to Vaccines, it has been a tough division for a number of years, but now, Q3, which is traditionally when you make your money, also seems to be extraordinarily disappointing and we have the ongoing problems in Italy.

It doesn't look to me like the division will even break even this year.

Can you confirm that that is true?

And can you also give us an update on interactions with the EMA on MenB?

Are we on track for a decision before year end?

And then finally, on generic Rituxan, as you suggested in your opening comments, very many players in biosimilars have highlighted that they are rethinking their strategy in light of regulatory commentary recently.

What gives Sandoz the confidence that you've interpreted the regulations such that you are confident in moving forward in the near-term time frame?

David, on the reduction of generic volume impacting this year.

First the numbers are rough, right?

And it is not just Diovan.

There are other moving parts.

But Diovan mono not being in the market is worth about $25 million a week, about five weeks have elapsed so far.

There is not much more to say than that.

We simply do not know when a decision could be made for that product to enter the market, it's going to be up to the FDA or maybe even the courts as we understand it.

Okay.

In terms of Vaccines Matt, obviously third quarter was a tough quarter for the Vaccines business.

But if you step back for a minute, we continue to believe the Vaccines is a good business, if you look at the pipeline of our business, with Bexsero coming, and with some of the other vaccines that are in the pipeline, we still believe that this can be a profitable and important part of the Company.

Now, we -- also maybe I will leave it to Andrin to talk about Bexsero and what we expect.

Yes, on Bexsero, we still expect to get the regulatory action in Europe before year end.

Everything is on track for that.

We have to think that all of our answers to the outstanding questions, and I think based on that we are quite positive that we will get a decision quite soon.

Of course, once the decision would be made from a decision for a launch and from the man to sales, it will take a bit of time.

We have seen a difference from a pharmaceutical product, basically in every country we have to go through a very specific policy process before the country will adopt that health policy decision, to really start the initiation program.

We probably would see some sales next year but I think the majority will really ramp up in 2014.

Jeff on rituximab.

Sure Matthew.

On rituximab we have seen a resurgence of what I would call a potential shakeout in biosimilars, looking for it as we've seen several of our competitors putting their Phase III trials on hold for rituximab.

What I can say is that we have designed our clinical programs and we have several Phase III programs in addition to rituximab in close consultation with regulatory authorities and we continue to enroll patients and make progress on both our follicular lymphoma clinical trial as well as our Phase II rheumatoid arthritis trial.

I think two advantages that Sandoz and Novartis have versus competition, one is a learning curve factor.

We've started our development work on human growth hormone in 1996 and on EPO in 1997, and that gives us a bit of a first mover advantage.

I think secondly we have a strong cross functional -- excuse me, cross divisional team that is working on rituximab along with Novartis oncology that is really working diligently to drive enrollment in these clinical trials and we are firmly committed to our biosimilar rituximab program as well as all our overall portfolio of biosimilars.

Thank you very much.

Alexandra Hauber, JPMorgan.

Several questions, please.

Firstly, at the second quarter results call, you said you would spend up to $300 million in the second half of this year on growth initiative, and yet you have delivered a very, very strong Pharma margin, so did you spend any of that money in the third quarter?

And if not, is that due to phasing issues, and a lot of it will come in the fourth quarter, or is it more like your hurdles to actually spend this money for the marketing team is quite high and you will end up spending up very much.

Second question, can you just tell us what your European growth would have been if you strip out Diovan.

Because European growth is impacted by both generics and the price.

I'm just wondering excluding Diovan, whether you are already growing?

Thirdly, I was quite surprised to see when I looked at your new Phase III studies for NVA QVA that are required for the US approval that these seem to be predominantly safety studies with safety to key end points with a particular focus on cardiac safety.

Could you actually comment whether there have been any specific ECG observations with NDA237 or whether this a general FDA concern related to the class in view of what has been observed with [seriva estimate]?

And of course the LABAs?

And the fourth question is on Vaccines, all of your competitors seem to have either an approved or a filed version of quadrivalent flu vaccine, so I would expect 2013 flu season to pretty much quadrivalent.

What are you going to do to protect your flu sales next year given that you don't seem to have one of those in the pipeline unless I have missed it.

Okay.

Starting with the first question on $300 million spend, yes in the second quarter we said we would spend up to $300 million in the back half of the year.

I can tell you that we have prioritized and started to spend against some additional incremental marketing on Afinitor, on Jakavi, and Gilenya, to boost those growth rates and to continue to keep them strong.

But the majority of what the incremental piece will probably hit the fourth quarter, because again, this was third quarter is when we basically made the decision to do it.

And so spread a little bit, third quarter, more fourth quarter, and the margin on Pharma would have been slightly higher.

Because there's some incremental spend there.

In terms of European growth ex-Diovan, David?

It is very good.

It would be high-single digits.

Okay.

Tim, maybe Tim Wright could talk about the Phase IIIs on QVA NVA in the US.

Sure.

Well, I think perhaps there is a little bit of a misconception.

The end points, the key end points here really, and primary end points are on efficacy.

There are key secondary and key end points for safety throughout our program.

And that is not unusual.

That is important for determining the benefit risk.

And this is really no emphasis, no particular emphasis other than what is known for the class, in terms of making sure that we have established cardiac safety as one of the key elements of this program.

Okay.

And then Andrin, on the quadrivalent?

I think Alexandra, in flu we are having clear long-term strategy to upgrade a fairly old manufacturing network.

And for the US, our key priority is to be able -- a new cell culture, modern vaccine, for that reason we have invested and built a large facility and we expect that cell culture vaccine to be licensed later in the year.

And then of course, we will develop the vaccine into the right -- into the right indications, so it really is a strong and very competitive vaccine.

So we are having a QID program but of course it is not going to be launched next year, but that is in our pipeline.

Next question?

Andrew Baum, Citi.

Two questions.

One for Joe and the second for David.

Regarding portfolio management, Novartis has never been one to follow strategic trends, but nonetheless a number of your competitors are looking at the shakes of that portfolio.

You have previously addressed Vaccines and Diagnostics and the importance of MenB to what actually happens in that division.

Just focusing on consumer, to us at least, you look subcritical mass, and underinvested, I appreciate you fixing the GNP issues, but it would be helpful if you talk as to what it would take to actually exit from these areas, the group potential for JV, what are the gates and factors that we should be thinking about, is this a possibility with Novartis in terms that you went to that division.

And secondly to David, perhaps you could give us the breakout of Pharma sales in China.

I couldn't find it in the press release.

And also, just some sense of what is driving those revenues, I'm assuming it is older rather than newer drugs.

And the final point was it is terrific that you've got 20% plus growth rates following the restructuring you've put in place there.

One trend would notice with some of you peers is where there is a sudden acceleration in the growth in China, it is often closely followed by scrutiny under the Foreign Corrupt Practices Act.

Could you just give us an update on what you're doing to ensure compliance in Novartis in China, is held in check, so that doesn't become a risk?

Thank you.

Okay.

Starting with your first question, around portfolio management, I have said before that when you look at our five platforms for growth, they all play a role in the portfolio.

And that really hasn't changed.

So I wouldn't say that we're wed.

You said are you wed to all of the businesses.

I don't think we're wed to any of the businesses.

But we believe today that the platforms that we have are very strong in terms of playing a role in the overall portfolio.

For example, at Novartis, less than 55% of our total sales are reimbursed by some kind of a public agency.

Which means we are less impacted by some of the cost containment that is going on in some of the pure play pharma companies.

Consumer health plays a very important role.

While it is not a huge division, it is still a division that prelink and generated over $3 billion in sales, and will be a good grower, 100% self pay, strong brands, so strong consumer loyalty, as evidenced by all of those consumers in the US who were writing us and asking us to bring back Excedrin because nothing else works in their mind.

So these are very, very strong brands and consumer health plays a very important role.

In terms of gating factors, obviously we need to see, when I step back and I look at the divisions, the divisions have to accomplish a couple of things.

The first is that they have to have best-in-class pipelines because that's what we're all about, which is innovation.

The next thing that they have to do is they have to grow ahead of market, trend line.

Meaning if their market is growing at 3%, they have to grow at 5%.

If their market is growing at 5%, they have to grow at 7%.

And then the third is that they have to demonstrate that they can create leverage.

That means the bottom line has to grow faster than the top line.

And if we decide that we're in a business that is not going to be able to accomplish that trend line, then that would be a gating factor to rethink.

But right now I feel like we've got a very strong portfolio, as we exit the Diovan patent expiration in 2013, you will see the kind of growth that I think we're capable of delivering.

David?

We're very happy that China is performing well.

You will recall that some time ago my predecessor Joe, restructured our Chinese business into a regional set-up, which we now have operating quite well.

The growth is about 20% for the quarter.

You asked what the main products are.

They're mostly Diovan, Glivec, [cervivo], Exforge, and Aclasta.

We have not yet seen an impact of a very good set of recent approvals in China which will start to come through in the future.

In particular we now have approval for Lucentis which is off to a good start.

We have approval for Onbrez.

And we have approval for Galvus which will provide us I think even better quality sales that are more price protected in the future.

You asked about compliance.

And just -- I would just say rest assured our Company does everything that is in the power to be done, on a worldwide basis, to teach our people to be compliant.

Both in terms of training and coming from the top and everything else.

So I'm quite pleased with where our Chinese business is going.

And leave it at that.

Thank you.

Odile Rundquist, Helvea.

Just three small remaining.

On Sandoz, you saw a decline of 6% in local currency.

Could you just concern us, if your guidance of say declining slightly versus last year, is still holding?

And then two quick ones.

Could you also give us the status of Menveo in the babies, less than two years old?

And finally, I notice you haven't a breakdown of Lucentis sales in EME and RVO.

Okay, Jeff, on Sandoz?

So our US sales have been a little softer than expected.

But with the US co-Diovan launch, where as Jon mentioned or David mentioned we have about 50% of the market, and the integration of Fougera in Q4, we should still see a slight decline in sales for the full year.

And as Joe noted on a positive note we have very strong double-digit growth in Q3 across Western Europe, Asia, Latin America, and Russia.

Andrew on Menveo infant.

On Menveo infant we have received a complete response letter early in the year.

We're making good progress in answering the questions the FDA have raised in there.

And we are on track then to resubmit the file by year end.

David?

For Lucentis, about 20% of the volume is EME and RVO, the majority of it is DMV and that's where we got the approval and reimbursement first RVO though is starting to contribute nicely.

Tim Anderson, Sanford Bernstein.

If I could go back to relaxin, I think investors have been kind of unclear how to think about this program, because your level of enthusiasm in the past has been low.

And you've often described this in very cautious terms.

So now having the data that you have, are you essentially saying that the program has substantially derisked, or is there still a meaningful development and regulatory risk going forward?

Second question, on the generic front, can you tell us what you think will be the first similar monoclonal to launch is, and when this might occur?

Could it be Merck's Remicade?

As soon as something like 2014?

And last question is on Glivec, and the potential to extend the market exclusivity in the US because of the polymorph patent that you have on the product?

David, relaxin?

For relaxin, we were purposefully cautious in the past, because although the Phase II B data was very good, there had been no other agents for this in the disease in the past that had ever shown a mortality benefit.

It was there.

But we didn't want to get too excited based upon a Phase II trial.

Now we see it again in a Phase III trial and we are extremely excited about the product, and so yes it is substantially derisked and we will tell you a lot more on R&D day.

Jeff?

Jim, I would be purely speculating at this point if I was to say which mab and from whom I think would get approved first.

So I think I will leave it at that and lets see how the market plays out.

But as I said earlier, I think this is going to be more difficult than some players realize when they first got into it.

Okay.

The last question?

The question on Glivec and exclusivity.

The base patents for Glivec in the US expired near the end of -- with the extensions at the end of 2015 and you know that similar date is 2016 for Europe.

But that of course only is the base patents.

And there are a series of other patents, which may or may not provide additional opportunity, and we will try to lay it out in maybe one slide for you at the R&D day.

I will ask Irving to try to do that.

It is hard to predict with any certainty exactly how that is going to play out, but I think most people have modeled the worst case scenario.

Okay.

Last question.

Florent Cespedes, BNP Paribas.

A few quick ones.

One for Jeff.

One for Andrin.

And one for David.

Starting with Jeff.

What could be the magnitude of the impact on the core operating margin of the division of the softer Diovan erosion in the US?

Is the 18% guidance -- the core operating margin for Sandoz, being a little bit too cautious now?

And Jeff, could you give us a quick update on your respiratory projects in Europe and in the US?

Second question is for Andrin.

Could you give us the total amount of sales generated from the Italian plant, and also where are you, your plans for Bexsero in the US.

And the last one for David.

What is your main objective for the 8 of November meeting as we see a lot of speakers from the oncology side?

Are you also planning to give us some more color on your ambitions on the recently launched products and the growth drivers of the Pharma division outside oncology?

Thank you.

So Florent, on your first question on the magnitude of the core operating margin impact of co-Diovan, clearly the authorized generic has a positive impact as David spoke to earlier, but as Jon mentioned at day 181, these things vaporize because they have hyper competition, when additional generic competition comes in.

So in that sense it is [efemoral].

There is a positive short-term impact.

We don't give margin guidance.

So looking forward, there is nothing more that I can say.

And I'm going to take the fifth on respiratory as I have historically the last two or three years.

We continue to make progress on our programs both in Europe and the US.

Andrin?

So on the Italian side, we do not breakdown sides for sales, but in Italy we do have two sides.

One is [for C] of every producer of bacterial vaccines, and then we have [insena], the second side which produces mainly flu vaccines and that site is one of four flu vaccines sites that we have.

On Bexsero, in the US, we are making progress in discussing with the FDA on really how to develop a better surrogate for efficacy.

It is difficult and time consuming scientific negotiation, but it is making progress.

We are evaluating now what type of Phase III trial to start.

And actually, we have a tendency to maybe go directly into an ABC-WI combination routine which of course would then have a much better public health value.

So that's right now where we stand.

David?

Okay, R&D, the main objective, one is to -- I think maybe the most important one is to give you a sense of how we take our innovation money, our R&D money, and turn it into commercial excellent products which provides a very, very good return on our investment.

In terms of the agenda, it is true that Tim and I will focus on, mostly on gen med and the others will focus on oncology, which is an important part of our portfolio, we will cover the entire gamut of opportunities and I hope that you leave feeling as excited as we do about the opportunities that we have.

I'd like to thank everyone for attending and we look forward to seeing you on November 8 in Boston at R&D day.

Thanks a lot.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.