Novartis AG (NVS) 2013 Q1 法說會逐字稿

Good morning and good afternoon and welcome to the Novartis Q1 2013 results conference call and audio 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 like to hand over to Mr. Joe Jimenez, CEO of Novartis.

Go ahead, sir.

Thank you and I'd like to welcome everybody to our first quarter conference call.

Joining me on the Novartis end are Jon Symonds, CFO, David Epstein, Head of the Pharma Division, Kevin Buehler, Head of Alcon, Jeff George, Head of the Sandoz Unit, Andrin Oswald, Head of Vaccines and Diagnostics, George Gunn, Head of Animal Health, and Brian McNamara, Head of OTC.

Now before we start I'd like to ask Samir Shah to read the Safe Harbor statement.

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

These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements.

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

Thanks, Samir.

Okay, starting on slide number 4, before we start I want to comment on the announcement that we made today about Jon Symonds.

As you saw from our press release after 17 years as a CFO of which four of those years were at Novartis, Jon's decided to step back.

I want to say that I'm personally going to miss working with him.

He's done a great job at Novartis.

He brought a strong productivity agenda to the Company.

He improved our internal processes significantly.

And beyond that he's just a good guy to work with.

So I've relied on him heavily.

I'm in my fourth year as CEO and Jon's been there every step of the way.

He's agreed to stay on through the end of the year to be advisor to me and also to help with the transition for Harry Kirsch.

Many of you know Harry.

He's the CFO of the Pharma Division.

He's been in the division for over 10 years so he's got a very deep knowledge of the business.

And one of the reasons why Harry got this job is his focus on productivity and also his execution skills.

Jon's brought a focus on productivity that we are absolutely going to continue, and Harry will continue in that tradition.

He's been able to generate margin improvement in the Pharma Division even at a time when they faced generic competition, so he'll be able to bring that to the entire group.

Okay, so let's talk about the business.

We delivered a solid quarter.

In the first quarter our sales were up 4% and our core operating income was up 6% in constant currency.

But I think more importantly we had good innovation in the quarter.

We had eight key approvals in innovation which I'll talk about in a minute.

On the next slide you can see that our net income was $2.4 billion which was up 13% versus a year ago in constant currency.

Core EPS of $1.32 was ahead of consensus and up about 9% in constant currency.

So if you look at the three priorities of innovation growth and productivity beyond innovation, we saw net sales growth in all of our divisions and that was quite good for the first quarter.

It was driven by our growth products which were up 14% in constant currency and also driven by emerging markets where we continued to get some good traction.

We also continued our pretty intense productivity agenda, we generated $600 million of gross savings and nearly half of that coming from procurement.

Going a little deeper on innovation, in the first quarter, Pharma delivered six product approvals including Ilaris in acute gout in Europe.

In vaccines and diagnostics you know that Bexsero, our meningitis B vaccine was approved in Europe and this is the first broad coverage MenB vaccine offering protection for all age groups including infants.

And then in Alcon I want to call out Jetrea, which was approved for vitreomacular traction in Europe and that launch is now underway.

You can see on this slide the growth rates for all divisions ranging from about 3% in Pharma up to 10% in Vaccines and Diagnostics and in fact the OTC group within Consumer Health was up double digits also.

So let me just highlight each division.

In Pharma all products -- all of the growth products you can see here grew nicely in the first quarter.

I want to call out Gilenya and also Afinitor, we continued to see double and even triple digit sales growth.

Importantly though, if you look to the right, Onbrez and Jakavi now starting to contribute to that growth product momentum.

Growth of Lucentis at about 7% represents the fact that we have new competition from Eylea so even though the new launches of diabetic macular edema and retinal vein occlusion have been executed well, and those launches now account for about 20% of total Lucentis we saw a pretty big impact of Eylea in two markets in particular, Japan and Australia.

But we're defending the business quite well across Europe.

Slide 10 shows that Gilenya grew an impressive 71%, and I think what's important here also is if you look at the ex-US part of that bar you can see that it's becoming an increasingly important part of Gilenya.

Alcon grew 3% in the first quarter, this is a little bit below expectations so Ophthalmic Pharmaceuticals and Vision Care were about where we expected them to be.

Surgical was a little bit light, up just 2%, there were two reasons for that.

We cycled over some strong equipment sales a year ago and also there's essentially a slowdown of cataract procedures that impacted the quarter.

This is not uncommon.

We've seen cataract procedures growth change quarter-by-quarter and usually there's a catch up at some point.

If you look on the next slide you can see that Alcon has quite a launch agenda planned for the remainder of 2013.

So beyond even Jetrea, we just received approval for Simbrinza, which is a new glaucoma medicine that will be launched in the US.

And then down at the bottom you can see two new equipment, new products for Alcon, one is Centurion in which is the next generation phaco machine that we are launching in the back half of '13, and the other is a new development called Synchros.

This is actually a guidance system to facilitate cataract surgery, so it starts with pre operative ocular imaging then it digitizes that imaging into surgical plans for the surgeons.

So it's something that our physicians have really sparked to and we're going to be selling this in the back half of 2013.

Now, Sandoz grew a nice solid 7% in the quarter.

You can see by region, we're getting great growth in Western Europe and Central and Eastern Europe, well ahead of market.

So the growth was pretty broad based on Sandoz.

And then our Consumer Health Division returned to growth this quarter.

OTC in fact saw double-digit growth which was driven by not only the relaunch of the OTC brands into the US, but also outside the US the business is doing quite well.

Brands like Voltarin and Otravin are growing nicely and helping drive growth for the OTC business.

Now, Animal Health, the Animal Health brand Sentinel began reshipping from the Lincoln site in early April so that did not impact the first quarter but that relaunch is now underway.

Also in the first quarter our Emerging Markets business was strong, China was up over 20% and Russia was up over 30% in the first quarter.

We also made strong progress on productivity so our focus on procurement has continued.

We delivered about $250 million in savings.

And in manufacturing we continue to streamline our footprint so we now have 18 sites that are either completed or in progress in terms of exit, divestment or restructuring.

We added three to that total this quarter.

Our progress on quality also continues.

Now, we had over 58 health authority inspections of which 10 were from the FDA and I can say all except one of those was either satisfactory or good.

And I want to talk about the one now, we had a mixed inspection at the Lincoln, Nebraska site.

This was a reinspection from about a year ago.

We received no negative observations on the manufacturing site of the business.

So all of our manufacturing startup -- and on that basis, we began shipping Sentinel out of the site and into the US, which was a definite positive sign, but we did receive a significant number of observations on consumer complaints.

The speed and the depth with which the site is handling consumer complaints.

So it's clear that as we said earlier we have separated the remediation from Lincoln, or the remediation at Lincoln from the relaunch and the return to the business and we've done this through third-party co-packers, but we do have to get Lincoln fully up and running.

So we've made the decision to focus this plant away from a pretty complex plant where we produce five different technologies to only two.

We're going to produce only solids and powders.

It radically simplifies the plant in terms of formulations and number of items that are produced there.

And yet it retains a majority of the volume, maybe 70% of the volume.

So the rest of this volume will go to either co-packers or other Novartis sites.

It does mean that we will reduce or down size the site by about 300 positions over the next 24 months, but this is the right thing to do.

It will ensure the sustainability of that site as part of the Novartis network.

So with that I'll turn it over to Jon for the financial review.

Thanks, Joe and good afternoon or good morning everybody.

As you can see from slide 20 Q1 was a sound quarter and it's good to see a page of almost positive numbers.

Exception is cash flow which I'll come to in a few moments.

Nevertheless the core constant currency performance of plus 4% sales, plus 6% core operating income, plus 9% core EPS sets a good foundation for the year.

I won't cover the reported numbers in any great detail as we include the usual reconciliation in the back up to this presentation but there are a couple of points I just briefly wanted to mention.

Firstly, as has already been said, we've taken charge of $51 million related to the restructuring of Lincoln.

The total charge when the restructuring is complete we'll be around $100 million.

We also established in Sandoz legal provisions amounting to $79 million.

And finally you'll notice as you go down the USD column, the widening gap of the impact of currency as you move down the P&L.

The 7 percentage point difference of reported EPS compared 4% of operating profit and this is primarily due to a $44 million charge related to the devaluation of Venezuelan currency which is recognized in net financial income.

On slide 21 you can see the disaggregation of sales into its component parts.

I'll start from the right-hand side and carry on to the left.

The FX impact for the quarter is predominantly the devaluation of the yen.

Moving by a massive 16% in the quarter.

And in fact the impact for the full year could even be slightly higher than this as the yen has devaluated further since the quarter end and currently is closer to 25%.

The generic impact is obviously more significant than you've seen in the past with US Diovan, and that's Diovan combo and not Diovan Mono as well as the late in the quarter generic competition to Zometa and Aclasta.

I'll show you what later what we expect in quarter 2 and quarter 3 and it will be at bigger impact and I'll come to that shortly.

Price impacts were relatively neutral.

The big impact was in Sandoz, particularly their decline in enoxaparin prices which were well down compared to last year.

This leaves on the left-hand side a robust underlying growth of 7% for the group and 9% from Pharma.

And this obviously represents the foundation of the business in the years to come.

On slide 22, Joe's already given you the main components and explained some of the underlying product dynamics.

As you think back to the last slide and what is driving the 7% underlying volume growth we just talked about, then these are the products.

Note also this quarter that the definition is not the same as recently launched products that we were using last year.

As we have a more enduring definition now which does not fix the start point in 2007.

In actual fact the difference between this definition and what we were using before is pretty minimal, but this one I think makes more sense going forward.

Nevertheless you will still recognize the picture, a strongly growing and brightening the portfolio which represents 30% of group sales and 36% of the Pharma sales.

On slide 23 you can see the divisional performance.

The performance of Pharma should be clear, underlying volume growth of 9% and a strong performance of 27% growth from the growth products that you've just seen.

Alcon sales growth was 3% as plus five from Pharma with the launch of Jetrea and Simbrinza still to come, plus 3% from Vision Care and 2% for Surgical.

As Joe has already mentioned the Surgical rate was a little softer than expected.

Especially when you're up against strong comparators from both the first quarter last year and from the last quarter.

Equipment sales finished very strongly in quarter 4, 2012.

And results of this together with the portfolio refresh later in the year we expected equipment sales to be soft this quarter.

In addition, procedure growth rates in many markets was soft.

We've seen this variability on the quarterly cataract procedure growth before.

And given that annual growth rates tend to be more predictable, we should expect some recovery in the remainder of the year.

Sandoz had a good quarter at 7%, the Fougera acquisition has bedded down really well and is making a good contribution to our business in the US.

However in reported terms, Fougera sales and profits almost exactly offset the decline in sales and profits of enoxaparin.

However the 7% that you see remains a contribution of the core business and as is described in the press release in more detail, most of the regions in the biosimilar business performed very strongly.

In two other divisions, V and D benefited from the strong late flu season although the main event for 2013, the first sales from Bexsero is hoped-for later in the year.

Consumer Health we see the impact of the OTC portfolio returning to the market together with a strong underlying performance of key OTC brands we've benefited particularly from a strong cough and cold season.

As you can see on slide 24 the sales performance translated into a good performance on profitability and overall we increased group core margin by 60 basis points to 26.5%.

Pharma did well to absorb almost $500 million of generic erosion and core Pharma margins remain firmly above 30% at 32.7%.

Alcon continues to see productivity savings dropping to the bottom line as it improved core margins by 180 basis points to 36.8%.

The Sandoz core margin has recovered nicely to 19.1%.

However I do think this is a bit above the expected trend for the year for the reasons I discussed with the year-end results.

Full annualization of the higher quality costs as well as increased investments in biologicals.

In addition the benefit of Fougera will start to be in the base from quarter 4.

So far as Consumer Health is concerned the core margin improvement of 3.2 percentage points is flattened somewhat by some disposal gains.

I should also add that the priority is to reestablish the brands on the market as they are relaunched.

And therefore AMP is and will remain high.

Slide 25 shows the continuing tracking above productivity benefits which contributes strongly to the overall performance.

And we highlight three benefits here, the program to restructure and simplify manufacturing base, procurement savings which continue to be substantial.

And the benefit of the realignment of our sales force around our specialty portfolio which continues to see benefits on the sales and marketing ratio for sales.

For the group, percentage has improved by 70 basis points to 24.7% and for Pharma where most of the benefits arise, the constant currency improvement in M&S as a percentage of sales was 100 basis points.

As you can see from slide 26 free cash flow declined by 37% over the first quarter.

The principal explanation is given below the table.

Contributing the increase to working capital of $700 million and the saving of tax benefits amounting to $200 million.

The main increase in working capital relates to receivables.

Where some distortions arose from receivables being paid in early April as opposed to the expected March date, Pharma receivables were approximately one day above last year.

In addition, Consumer Health receivables decreased in the previous year following the shutdown of Lincoln and are now returning to more normal levels of sales.

Nothing particularly unusual although it may be slow to turn around.

In terms of tax the Swiss tax payments fell into March this year rather than early April.

The point made on the right-hand side of the slide however is that we are developing or have developed a bias in the cash flow to the second half.

This is partly driven by this working capital cycle and some seasonality, the flu and cough -- cold seasons for example.

But you should not be surprised by the picture therefore that you've seen in the fourth quarter where we are off to a slightly slower start than the annual effect would imply.

On slide 27 the movements in cash flow that I've just described in the payment of the dividend means that net debt increases from $11.6 billion at the beginning of the year to $14.9 billion at the end of March.

You will see in the middle of the chart that we received approximately $1.5 billion from the delivery of around 30 million shares following the exercise of employee options.

We have declared an intention to neutralize the dilution arising from employee share programs through share repurchases.

And we repurchased 4.1 million shares in the quarter although obviously it was not possible to repurchase all of the shares issued within a single quarter.

So let me now briefly summarize where we are in relation to the commitments that we made at the beginning of the year.

It's clear that we've made a solid start to the year and overall I'm pleased with our performance so far.

As you know we are continuing to benefit from the absence of generic competition to Diovan Mono in the US.

In our guidance at the beginning of the year we assumed some continuing benefit but it's now going on longer than was anticipated then.

Every month of delay is worth about $100 million of sales value and of course is still possible that we could face generic competition at any point in time from here.

While this is obviously a direct benefit to Pharma, don't forget that Sandoz was assuming that they would be benefiting from an authorized generic so the overall benefit to the group is somewhat lessened.

As the chart on the right shows, and this is the one I used with our year-end results, we do see an increasing impact from generics in quarter 2 and quarter 3. And it's worth reflecting that we've only seen $500 million in generic erosion so far out of the total expected for the year of over $3 billion.

Given all of these factors, and the fact that we're not significantly different to our original assumptions that we gave you at the beginning of the year, I think it's fair to say that it's too early to reassess the outlook for the year.

Now finally before I hand you back to Joe, let me make a few comments about myself.

For an organization the size of Novartis there is never a beginning or an end.

And so choosing the right moment to step down is never easy.

One thing that's clearly been on my mind is the fact that Novartis after this year begins its new growth story.

The growth story that should run for the next four or five years and longer.

And after 17 years as a public company CFO, and just reflect on that for a moment, is just how many quarterly results reports that comprises, it was clear that I was not going to be at the end of the journey.

And it's self-evidently true that if you're not going to be at the end of the journey it's probably better not to be at the beginning either.

I'm very proud of what I've achieved in my four years here.

And many of the financial policies and disciplines that are now in place will endure to the future.

Novartis is a wonderful company with an extraordinary commitment to science and biomedical research.

On stepping down I've agreed to give Joe and Harry my full support to ensure the transition is a smooth one and I hope that I'll be personally able to introduce Harry to many of you over the coming weeks.

My relationship with investors and analysts has always been of the highest importance to me and I want to thank all of you for the enormous support and often at times the challenges too that you've given me over many years.

I regard many of you now as personal friends who I respect very much.

And I'm sure and I hope that our paths will cross again in the future.

Thank you.

Thanks, Jon.

Okay, I want to close by reinforcing our strategic priorities for 2013.

I think in the first quarter we strengthened our pipeline in terms of innovation.

We accelerated our growth by driving those new products and also driving emerging markets and we also made progress in productivity which contributed to our margin improvement in the quarter.

So as Jon said our outlook remains unchanged.

We expect sales to be in line with 2012 and our group core operating income to decline in the mid-single digit on a constant currency basis while it's absorbing the patent expirations that we have for the year.

Okay.

So with that I'd like to open it up to questions.

(Operator Instructions)

Matthew Weston, Credit Suisse.

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

Three if I can.

Firstly, Jon, it's very fair to say that there are many people disappointed to see you move on.

And we wish you well in the future.

I wondered if you could comment on the key challenges that you think you're handing over to Harry coming forward over the next 12 to 18 months.

Secondly --

(multiple speakers) Sorry.

Secondly, on Lincoln, effectively you lost $1 billion of revenue when the plant was suspended.

And now clearly we have the restructuring to move a lot of brands either to third parties or to other sites.

Are you still confident that you can get $1 billion of revenue annualizing back?

And if so, when?

And then finally, on Lucentis, if you could just give us some idea as to how much Australia and Japan contributed as a percent of total sales and how much you've lost in those markets?

Okay, Jon, do you want to start?

Yes.

Harry will set his own agenda.

I think the challenge for Harry is managing growth.

And I think the performance that you've seen in the Pharma business while Harry's been at the helm has been extraordinary so I think I'll let Harry speak for himself in the months and years to come.

The only thing I would add to that is I think at the end of the day our shareholders are going to care about performance.

And that's what Harry's all about, so I would just say, watch and see what happens.

In terms of Lincoln, Brian's on the line but let me also start by saying that I think in the end of the fourth quarter we said that we would expect to be shipping out of Lincoln about 50%, or whether it was Lincoln or third-party, about 50% of the SKUs that were coming out of Lincoln before.

And so I think you can assume that we will get back what we lost and that it will happen over time, not all the way by the end of this fiscal year, but the vast majority of it by the end of '14, so assume a ramp up over that let's say 18 month time period.

And then Lucentis?

Yes.

Lucentis we had I would say quite different impact market by market, so in Europe, things went actually quite well.

Germany, we've lost roughly I would say at this point in time about 10 share points.

Japan and Australia did not go well.

The negative contribution to growth, in other words we showed 7% in the first quarter, was actually about 8 points, so we would have done about 8 points better if we hadn't lost any business to Eylea just to give you a rough idea.

And the business in those two countries combined during the fourth quarter of last year was about $120 million.

Andrew Baum, Citi.

Good afternoon, three questions please.

First, in the press release you highlight Novartis is entering a new track obviously with the departure of Dan and now Jon.

I just want to make sure I understand, I think you're referring to the growth trajectory that Jon outlined, perhaps you could clarify if there's something else that you mean by new track that we may not be appreciating.

Second, I know you've initiated a new Phase III trial with LCZ696, in regards to the ongoing PARADIGM trial, how many interim endpoints have already taken place?

I understand there are three, I'm assuming that at least two have taken place by now in terms of interim analysis, both for efficacy and futility.

And then finally, could you give us some guidance regarding Bexsero, when you expect the decision from the UK government regarding tender, and should we assume that if the UK does not tender for the broad population it would trigger restructuring of that division?

Thank you.

Okay.

Thanks, Andrew.

Regarding the first question, in terms of Novartis entering a new track or a new phase, what I was referring to was the coming growth phase so as soon as we get through the patent expiration of Diovan we're entering into guidance that I've given as at least mid-single-digit sales growth, but importantly, margin improvement as we grow the business.

So this is not just invest for the long-term.

This is we enter a phase where we start growing and we grow -- the expectation is that we grow our margins also if we execute well.

So that's really is what we're talking about.

Now, you did mention the change of Chairman and changes in the Company.

And what I've said previously is that the strategy of the Company is sound, that we are a science-based company, we're focused on innovation.

And we are focused in high-growth segments of healthcare.

So while the strategy, I don't anticipate the strategy of the Company to move, the way that we execute that and the way that that looks could potentially change as we evaluate our portfolio, as we evaluate the market, as we evaluate a lot of things over the next 24 and 36 months.

So I think you have to think about this as a dynamic Company that is entering a growth phase, that, if you look at our history, constantly thinks about ways that we continue to -- that we can continue to position the Company for good and solid growth.

David, on the paradigm trial?

Yes.

Just, to help everybody understand, we're talking about LCZ and LCZ is a novel product which we're pretty excited about.

It's in Phase III for two indications, the first is hypertension, which could result in a submission later this year, particularly with a focus in Asia and Latin America.

I think your question's about the chronic heart failure indication and the PARADIGM trial, also to remind people that it's also in Phase III with a planned first submission in 2014, we usually don't talk much about our interims unless something surprising happens, but I'm going to ask Tim, is there anything that we can say or --

At this point we're not commenting further on any interim analyses.

Okay.

In other words if we get a surprise we will certainly tell you about it.

Okay.

Andrin, on Bexsero?

Andrew, we expect a decision from the vaccination policy committee in the UK this summer.

I think we should remember that in the UK alone, about 2,000 cases of meningitis type B every year, children, teenagers.

Many of them die, those who survive often are handicapped, lose limbs, some of them all four limbs, so we are quite confident that this vaccine is needed and will be used.

Our focus is not on restructuring but on making it happen.

Thank you.

Graham Parry, Merrill Lynch.

Thanks for taking my questions.

First, a broad one on guidance, 6% reported growth Q1, just pointing to, if I just read your guidance probably still mid single digit decline plus 4% FX would be a high single-digit decline in EBIT for the full year, just it does seem rather conservative.

I was just wondering if you could talk us through the bridges that you see as the key negatives that would take your guidance down that low given the good quarter you've had so far.

And secondly on Gilenya in the US, sales of $243 million is up from $192 million in fourth quarter '12.

There wasn't really a major change in the actual absolute number of prescriptions though, so can you just talk us through stocking or price impact between the two quarters there?

And then thirdly on Lucentis, is it fair to say that the European impact thus far of Eylea is probably being inhibited somewhat from reimbursement, and perhaps if you can talk as why it wouldn't look like Japan wants OTC broader reimbursement there?

And then one final one on consumer margins, if you can just talk us through the one-off divestment gains, quantify those so we can understand what the underlying margin is and then talk us through whether we should be expecting a sequential quarterly margin uplift from here or are there other things that would make that a little bit more lumpy through the year?

Thanks.

Okay.

Starting with guidance, Jon?

Graham, I wanted to try and give you all the factors in my comments earlier that affected the guidance.

Obviously, the big positive is Diovan Mono.

What we haven't done as of today is made an assumption about how long the benefit which we're currently enjoying now will continue into the future.

And so based on where we are after four months, yes, we do have a positive but we don't have a huge positive against what we were expecting in our original plan because we knew at the end of January that there was at least one or two months of Diovan Mono in the bag there.

You then take into account the fact that Sandoz are assuming an authorized generic, then as of today, the benefit is not perhaps quite as great as you might initially calculate.

I think our sense is that by the middle of the year it will be better to draw some conclusions and rather having multiple stabs at looking at guidance it would better to have a more considered view in the middle of the year.

Good.

Gilenya?

Graham, so you can see Gilenya is doing quite well with $420 million of sales in the quarter.

Let me just break down the pieces for you.

Ex-US, as we've been indicating there's a bigger opportunity than what I think many were predicting, it was about 125% growth quarter-over-quarter.

In the US, post the label change, we're currently seeing a return to growth, with a growth that was about 46% Q1 versus Q1 and 28% Q1 versus Q4.

That 28% is in fact overstated as you point out, you recall that we had a little bit of an inventory draw down in Q4.

And then we had a modest inventory build in Q1.

If you put that all together we would estimate that the real underlying growth in the US quarter 1 versus Q4 is probably mid-single digits.

Although it's hard to get an exact handle on it because IMS tells us they're going to restate the numbers in the category.

Overall we're quite pleased with how the product's going, and I think most importantly what we're seeing is the market is starting to reach a tipping point and you're starting to see this shift to oral therapies which will benefit all the oral products.

And Lucentis?

The question about Europe and is it a reimbursement impact as opposed to why wouldn't you see what you're seeing --

I think you would expect new competition to come in slower in Europe because of reimbursement.

Having said that, we believe we are executing better in Europe.

And we're seeing much less interest in Eylea on the part of the physicians.

Japan is not a success story on our part.

We're learning a lot of lessons from that Japanese launch and those lessons are now being applied in the countries where Eylea has not yet launched.

David, do you want to just mention also the frequency of dosing difference may be that would occur between Europe and Australia?

Yes.

Australia is a unique market.

Australia has the heaviest usage of Lucentis on a per patient basis in the world.

The Australian doctors are fairly aggressive in injecting every month.

So there the Eylea story resonates fairly well.

But even there, Joe, we're starting to see some now stabilization after their penetration as some of the reality about the lack of differences between the products really starts to come to the forefront.

Okay.

And on the consumer margin, one of the things that impacts the consumer margin this quarter is the pretty heavy investment on the relaunch back into the US so it's not just the divestment gain but I'll let Brian McNamara who is on the line also address this.

Yes.

So we did make some small tail brand investments in a couple of our European countries, so that had an impact on the core operating income in Q1.

If you look at the balance of the year, the run rate's a little bit high for the balance of the year.

Again, our focus is to invest in the relaunches and in the brands and regain our share.

So what about margin, the way that margins develop, Brian, just in terms of the back half?

Should we expect to see improvement as we go?

Or is it going to be relatively flat to what we saw in the first quarter?

Yes.

I think you're going to see relatively flat throughout the year and the first quarter a little high, higher than the balance of the year.

Thank you.

Alexandra Hauber, JPMorgan.

Good afternoon, thank you very much.

Four questions please.

Firstly, European growth in Pharma was 9%, this is probably the sweet spot this year as you, through Diovan but not quite suffering from Zometa, Aclasta yet.

Can that stay in view of the Zometa and Aclasta generics and appreciate as given that we don't have the visibility on the actual sales in Europe of these products, can that stay in positive territory for all the remaining quarters?

Particularly also thinking of some of the new product opportunities such as Ilaris in gout, is that going to be potentially making significant contributions this year?

Second question on Sandoz, gross margins, I do understand that Fougera makes a huge positive impact, but why was there no such positive impact on the gross margin in the fourth quarter?

And when I make that comment is I mean on the quarter-on-quarter comparisons, so fourth quarter compared to either the third quarter last year, or the first quarter this year.

I do understand the year-on-year comparison in the fourth quarter due to the enoxaparin situation, but just looking at the last three quarters Fougera didn't seem to have a positive impact on margin.

Thirdly on Alcon, can you give us a little bit more color on what's happening in cataract?

How come that there -- is there a procedure slowdown across the globe?

Is this simultaneously or is it one geography where that's particularly pronounced?

Can you also comment on pricing, which I recall was an issue in the third quarter?

And just more bigger picture, that's acceleration towards the double-digit level, which you promised in September 2011, is that still a realistic prospect to get there let's say within the two to three year horizon or is that something for the longer-term?

Finally, just a small question on the Consumer Division.

You mentioned for Lincoln, on the inspection the one thing which is still there is the issues on consumer complaints, which I actually find a bit surprising given that was part of the original findings of the FDA over 15 months ago.

And given that you haven't shipped from that plant, can you just tell us what's happening there, why that hasn't been fixed?

Is that just a huge backlog in addressing those or is it still not happening with the procedure you're suggesting?

Or has it simply just been so many new complaints that the guys don't -- cannot catch up?

Okay.

Let's start with the European growth in Pharma.

David?

You're correct.

We had 9% growth.

The actual volume growth is a strong double-digit.

I would venture to say we're probably one of the best performing companies in the European market, largely because of the breadth of the new product launches which are going quite well.

Very strong contribution this year will be coming from the oncology business, particularly the launch of Jakavi, growth of Afinitor and Tasigna, the Seebri launch is off to a good start and Galvus continues to grow.

Having said that, as you pointed out, we're facing generic competition later this year Zometa, Aclasta, and the like.

Ilaris will be, in gout, will not be a big contributor this year.

So you would expect the outlook to be less than the first quarter in Europe but I won't go further and tell you quarter-by-quarter what we would anticipate.

Jeff, gross margin?

Yes.

Alexandra, as Jon highlighted earlier the Fougera impact almost exactly offset enoxaparin impact on the bottom line, didn't quite offset it in Q1.

The reason that you saw a higher gross margin in Q1 of this year versus Q4 of last year was due to a couple factors.

First, really a favorable sales mix that we saw with very strong 16% growth as Joe mentioned in Central and Eastern Europe where we tend to have strong margins as well as good performance across Europe including Germany and Western Europe.

Secondly, we saw a rebound in our injectables business particularly on oncology injectables with improving performance and better gross margins in that business.

And third, costs were well-controlled and a number of areas within cost of goods sold so we saw good productivity performance in Q1 overall.

So how much of that is sustainable into the coming quarters?

Is this -- how much of that is one off?

Yes.

I think the seasonality impact, we had a stronger flu season than we've had in a number of years this year and so clearly that doesn't repeat itself in Q2 and Q3.

We'll see how things evolve in Q4.

I think the rebound in oncology injectables and the improved performance is sustainable given the improvements that we're seeing there both top and bottom line.

So I think it's a mix on that front.

Thank you.

Okay, Kevin, on Alcon and cataract surgery procedures?

Sure.

Alexandra, as you know, we have relatively large equipment installed base around the world.

And when we look at the disposables used on that equipment, we can get a pretty good sense for directionally which way procedures are going.

And I would put them in a couple of different groups.

First of all, we continue to see procedure weakness in the southern part of Europe.

Secondly, we did see weaker procedure growth in Japan in the first quarter.

And also against the US, while the US procedure volume looks to be up, it's going against a very, very strong period a year ago.

When I look at our intraocular lenses which obviously are absolutely reflective of procedures, I'm pleased with the growth that would look like we are holding share against these procedure trends.

To your point on the longer-term strategy, obviously, the growth priority continues at Alcon.

That growth is going to be driven primarily by new products.

As Joe highlighted, that flow of new products is obviously starting this year with the approval of the new glaucoma product as well as Jetrea and a next generation phaco unit.

When we introduce equipment, you go through a normal cycle period where you're increasing units to take out against your existing install base plus against competitive equipment, but when you get on the backside of that curve, obviously the volume slows down.

What we're signaling is that with a new phaco unit coming at the second half of this year, that cycle is going to ramp up.

Also I would tell you that a large part of that growth plan that we talked about involves contact lenses.

The DT One launch continues to go well.

We are making steady improvements in terms of our manufacturing output and we'll be launching in the US where we already have approval.

Thank you.

And then, Brian, on the consumer complaint handling?

Yes.

So a couple points on your question.

So we did have a backlog of complaints when we shut down our plant a year ago and we worked through that backlog of complaints.

And we continue to work through new complaints that do come in as products are still out there on the market.

So as Joe mentioned, the comments were about the completeness and timeliness of the complaints, but we're aggressively working to remediate, we brought in experts into the plant to handle this as we go forward.

And I don't want to lose sight of the fact that we also did make progress in a lot of other areas in the plant, which is why we were happy to begin shipping Sentinel in early April.

Yes.

And I would just add that the group did make progress on complaint handling.

They completely reworked the system.

They have upgraded people and processes.

It was a very large backlog that they are now through.

We believe that we've got the right things in place to get it done but it just wasn't enough.

It was a tough audit, obviously.

And it was written up as areas that need to improve in the coming months.

Understood.

Thank you.

Florent Cespedes, Exane.

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

Three quick ones.

First, a question on Alcon for Kevin.

Could you give us some color on the launch of Jevtana, and if you could share with us the potential of these drugs and some feedback from prescribers?

Second question, is for Jeff on Sandoz, following all the setbacks from your competitors on biosimilar projects, could you give us an update on your view on your projects in this front in terms of timing and different projects there?

And last, for David, on Emerging Markets, could you give more color on the dynamic there?

And on if you believe that the performance delivered in Q1 is sustainable?

Thank you very much.

Okay, Kevin?

Jetrea launch?

Sure.

The Jetrea approval obviously was planned for this time period.

And the label was everything that we had wished for as it relates to macular traction and macular holes within a certain size tolerance.

You have to keep in mind, though, that the sizing of this category's a little bit difficult because the patient today is really not being treated.

The current course is to simply watch the patient until you either see resolution of the traction or you proceed to surgery.

So what we've said is roughly the 250,000 patients in Europe, but I think what I'd like to do is to let this roll out with obviously reimbursement that we're pursuing.

Our first two markets are Germany and the UK.

And then obviously what we need to do is to engage with the retinal specialist in order to discussing the benefits of early treatment so that you can avoid surgery in the cases where we think we can have impact.

Jeff?

So Florent, we continue to see good progress in our biosimilars pipeline.

We have six Phase III clinical trials across four molecules right now as well as several monoclonal antibody projects on route to the clinic.

We have as you alluded to seen a shakeout in biosimilars.

I think the most notable example is in rituximab where we've seen two of our competitors terminating their Phase III follicular lymphoma trials and two others putting their trials on hold.

And while for competitive reasons we don't provide specific timelines for our biosimilar development programs, because we've never given a timeline for example on rituximab, I can say that we continue to track according to our plan in terms of patient recruitment both for that Phase III follicular lymphoma trial as well as our Phase II rheumatoid arthritis trial.

I think a key advantage that Novartis has over the competition is our strong cross divisional collaboration between Sandoz and Novartis oncology where we're able to leverage our clinical experience and network for biosimilar patient recruitment in the clinics.

And as we expected, clinical trials with life-saving oncology medicines take longer to complete than trials for supportive care products.

But I think in summary, we believe we are very well-positioned versus the competition both in rituximab, [and more broadly], and that frankly, the shakeout that we're seeing shows both that development in this area is harder than some of the aspiring entrants had anticipated, and it's more rewarding for those who are successful in the end.

David, EGM?

We had a good first quarter a good first quarter, we are up 9% in Emerging Growth Markets.

As you recall one of our strategies is to invest to grow those markets, so it's clearly paying off.

You asked me about an outlook, one thing I'd caution you about Emerging Markets, these often are tender driven which means they bounce around quarter-by-quarter so I wouldn't look at any one number in any given quarter.

Having said that, there was nothing unusual in the first quarter so you can take that as you do your extrapolations.

Okay.

Thank you very much.

Tim Anderson, Sanford Bernstein.

Thank you, a couple of questions.

Afinitor had a good quarter, you've consistently described the growth prospects in very bullish terms but the landscape in breast cancer seems to be changing.

In the HER2 space we've got new and improved Herceptin available, we also have Perjeta, that seems like it could render BOLERO-1 and 3 a little bit obsolete because Herceptin is one of the drugs being used in that trial and then we have pipeline products like Pfizer's 991 that would be direct competitors.

How confident are you in the outlook for Afinitor in terms of hitting multi-billion dollar sales potential now relative to where you might've been a year ago because it seems like some things are in fact changing?

And if I can just ask you about the Roche stake.

In the past you've said before there was strategic value in owning the stake in Roche that you do.

I have not understood what that strategic value is.

Can you describe that?

And that's it.

Thank you.

Sure.

David?

So Afinitor is going very well.

I'm very pleased with the launch and the uptick.

As you recall, this is an estrogen positive breast cancer that is HER2 negative.

One of the things you should consider is that we will be having also more data coming in breast cancer in the not-too-distant future in the HER2 positive patients which would expand the opportunity even more.

It is true that new products are launching in breast cancer, in fact, breast cancer, if you were to look at all the clinical developments going on in the industry, is a very crowded area, as people try to match the right drug to the right patient using different biomarkers.

All these drugs are designed to do is to delay the eventual use of chemotherapy, it's a matter of sequencing and combinations and I think people are just underestimating the breast cancer opportunity in general for the market.

And our forecasts for Afinitor remain unchanged, both in breast cancer and other indications yet to come.

Okay.

Just in terms of the Roche stake when you -- to define strategic value, first, to have a 33% voting stake in one of the great companies in terms of healthcare or pharma, would mean that for that company to issue shares to do something, they would have to have the agreement of Novartis, so there's an element of strategy when you think about the let's say, freedom to operate that is valuable.

I've also said that you can't re-create that stake in the market today, so to me, it has value that is beyond the market price.

And so that doesn't mean we would never exit it.

What it does mean is that the value created, whether it's dollars or whether it's something else would have to compensate Novartis shareholders for that value and the fact that it's not just the market price.

Thank you.

Naresh Chouhan, Liberum Capital.

Hi, thanks for taking my questions.

Just a couple on, one on Pharma.

Firstly, on the -- Pharma margin continues to surprise on the upside versus consensus.

Clearly, obviously Diovan is very profitable and there was -- that would be part of it this quarter but in addition to that you've also got Afinitor, Gilenya and the rest of the specialty care portfolio growing really quite quickly, so you have a positive mix effect, which is something you've talked about in the past.

But it looks like it's finally coming through so can you give us some sense as to how you expect that mix effect to evolve over the next year or two?

And of the $600 million of cost savings you delivered in the quarter, could you give us some sense as to how much of that will actually flow-through to the bottom line?

Thanks.

David, on Pharma?

On Pharma, Harry and I have worked extensively in making this business more productive.

We think there are still opportunities to do so, by off-shoring, outsourcing, working with our suppliers, streamlining processes in drug development.

In the near-term the real key on the margin is going to be when does Diovan go away, which will have a negative impact as we told you at the beginning of the year.

If you take a midterm view, then you're correct, as the portfolio shifts more to specialty products, we would then eventually start to see that come through in terms of margin improvement.

Jon, in terms of productivity?

On the productivity, we don't quite look at it in terms of how much productivity did we generate?

And how much are we willing to invest?

If you take the business as a whole, we have a number of big blocks, firstly, there is the contribution margin from the new products, there's the margin loss on generics as productivity, and then there's the investment package and we try not to link the two together.

In fact, we try and optimize all of them, we try and optimize the amount of productivity which we generate, as David has said, and we try and look at what the investment requirements are to maximize the revenue from the products.

And then we subsequently optimize in terms of what do we think is an appropriate overall margin to go for?

So we don't really look at productivity in the sense of how much do we generate?

And how much are we willing to invest?

Because it's part of an overall operating philosophy which has productivity pretty close to the center of it.

Okay.

Thank you.

Alistair Campbell, Berenberg.

Thanks very much for the questions.

I've only got a couple left.

Just on Consumer Health, just so I have this right in my head, obviously quite significant restructuring at the Lincoln facility.

Should I think of those cost savings as essentially being defensive so that ultimately the Consumer Health business can come back to margins enjoyed prior to the closure of Lincoln?

Or actually could there be a chance that you actually get back to profitability level better than we've seen in the past?

And then just one more in Alcon, I think back over the year one of the bull stories in Alcon was increased penetration of advanced technology IOLs.

And the mix effect that would drive.

And just looking at the numbers it looks like ATIOL is growing around the same rate as the market and normal IOLs, so can you maybe give a bit more color on how that switch is going and then how you see penetration of ATIOLs?

Thanks.

Okay, Brian, on Consumer Health restructuring?

Yes, so the restructuring of the plant obviously to focus to get our plant back and remediated and shipping product, our intent is to get our business over the long-term back to the margins we had before the Lincoln issues.

Okay.

And if you think about it, you retain 70%, but you do it with 300 fewer people, so coming out of that site long-term, we should be in a pretty good position.

Kevin, on Alcon?

Sure.

I think when you look at advanced technology IOLs, we probably need to have two conversations, one is about management of astigmatism and toric lenses.

And they actually are continuing to grow at a very nice rate at least on a unit basis, twice the rate of what our overall IOLs are.

And we've got unique capability to address management of astigmatism with both LenSx as well as the toric IOLs.

The second side of that story is around multifocal IOLs, which continue to still be an opportunity for market evolution, but we are seeing some level of resistance, the market looks generally to be flat in terms of penetration change on multifocality, but clearly we continue to work on addressing options for the patient and we're very early in that penetration process.

So I think both of them continue to be opportunities, but toric seems to be the leading opportunity today.

Okay.

Thank you.

Jeff Holford, Jefferies.

Hi there, just got three questions for you.

First off, can you just give us any updates around your strategy to lengthen the exclusivity of Glivec and if there is any differentials between say the European markets or US markets, how that might potentially shape out?

Secondly, just within Sandoz can you maybe give us an update on your expectation for timelines on launch of generic LABA steroid, the VR315 product in particular?

And then just last off, we're seeing Pfizer push towards establishing an established products business.

Glaxo has announced the creation of one going forward from today.

Is this something that you'd consider at Novartis?

Is there a potential older products business now that you're less engaged in primary care going forward that you might consider making a separate entity at least within the group structure?

Thank you.

David, on Glivec?

So, for Glivec, it's really going to be hard to give you any updates on the patent until we get very close to the base patent expirations because in fact, describing the strategy probably wouldn't be a great idea for us.

One thing that did happen during the quarter is we did get pediatric exclusivity in the US, which we had anticipated but that added six months.

And there's really nothing else to tell at this point in time.

Okay, Jeff?

Not much more, Jeff, to add on our respiratory strategy.

We try to keep our cards pretty close to the vest for competitive reasons.

So nothing more that I can elucidate with respect to timelines on our respiratory projects.

And in terms of established products we do not have an intention to establish an established products unit.

We've looked at it obviously, but you look at some of the fastest growing markets and the blur between what's an established product and what's an innovative product becomes much less clear.

These are high-growth markets, they are scale, so we don't see it at this time.

Thank you.

Mark Purcell, Barclays.

Yes, thanks very much.

A couple of questions.

On the MS franchise, could you help us understand how you're looking to differentiate the BAF312 relative to Gilenya?

And then a broader question, I guess Gilenya has already got a proportion of sales ex-US that is enjoyed by the ATCR drugs, so in your opinion how much further can this go, obviously a question of affordability and differential pricing across the globe.

Secondly, just going back to biosimilars, obviously with rituximab the competitive landscape is changing but so is the regulatory landscape, so I just wondered if you could help us understand whether you're looking to do or start any US specific focused trials?

And also, an update on what are you expecting midyear on the Copaxone and a potential, tentative ANDA.

Next up, on Lucentis, obviously in the past you've talked about how DME and RVO could at some point be almost comparable in size to AMD.

Clearly, you've now had reimbursement in a number of countries for a number of years so wondered if you could help us understand where you think those indications can now go and offset the potential pressures coming through from Eylea and potential future competition?

And lastly, thanks for the update on guidance, on currency guidance, on both top line and operating profit.

Wondered if you could give us some guidance as to what could happen below the line on FX, obviously focus on the hedging gains that were booked in Q1.

Okay, David, on the MS and why don't you also cover Lucentis?

Okay, so for MS, you asked about the BAF312.

This is our follow-on to Gilenya being studied in secondary progressive MS which would be a whole new opportunity for us.

In addition, we are doing work to show that with an appropriate titration study that you can avoid a first dose observation period which we think would make this an attractive alternative to Gilenya.

I think you also asked me about how much more growth there can be ex-US for the brand.

And the answer is a lot.

We think ex-US will be a key driver of the expansion of this product.

There is still a lot of interferons and Copaxone to replace.

And I truly believe that an oral product will become a very, very attractive way to go.

We think the overall MS market worldwide could reach as much as $16 billion in a few years' time and as much as half of that, maybe even a bit more, could be oral medicines.

The next question was about --

It was about Lucentis and the DME RVO that is --

So we said that if you add up the DME and RVO patients and you make some assumptions about somewhat less utilization in the patient segment the market could approximate that as it will with AMD.

That will take time.

We stand by that.

We have just now gotten through a number of reimbursements for those indications.

So although uptake is good, we're still fairly early in the launches.

And currency guidance, Jon?

Yes.

I obviously can't give you guidance as to what's going to happen in the future but I think as you know, the currency structures that we have two big long positions, sorry, two big short positions which is the US dollar, which is obviously represented by all the non-US profits and the Swiss franc because of our cost base.

The Swiss franc is fairly well covered by euro, and so long as the Swiss franc continues to be pegged there, it's not a problem, we then have a long yen position and we have a massive tail.

Because we have such a long tail, the euro and the Swiss franc are hedged.

We actually don't have a dynamic hedging program.

Where we do see currency gains from hedging is what I would call occasional taking positions where we think there is a structural overall undervaluation and we did get some benefit because we thought that the yen was overvalued for some considerable time.

But going forward, I would assume that you just see the straightforward currency group, currency exposure coming through and make no allowance for the future hedging gains because I think they will be pretty limited from here.

Okay.

Maybe one final question.

The biosimilar question that Mark.

Sorry.

I missed biosimilar.

So, Mark, with respect to your question on the regulatory landscape and the US specific focused trials as well as Copaxone, let me take those in turn.

First, on the regulatory landscape, we're pleased with both the EMA's final guidelines for the approval of biosimilar mAbs as well as the draft guidelines that FDA has put out which call for a stepwise approach and a totality of evidence approach where we can use analytical tools to minimize the size of clinical trials and it also allows for extrapolation across indications.

I think the key for us is how the FDA will interpret and implement the guidelines, especially around the extent of clinical trial requirements.

For us, it's important that the agency recognize that the goal of a biosimilar trial is to prove similarity to the originator and not to confirm safety and efficacy all over again.

But we're optimistic based on what we're seeing from them.

I don't want to comment on what specific trials we're doing in the US or outside of the US for confidentiality and competitiveness reasons.

With respect to Copaxone, we have the first to file for Copaxone.

As you know last June the District Court of -- in southern New York had issued a decision in favor of Teva on those patents.

We've appealed that decision to the US Federal Circuit Court of Appeals and that is the oral hearing is scheduled for May.

So we'll look forward to those hearings and to seeing how that progresses.

Thanks.

Thank you, final question.

Peter Verdult, Morgan Stanley.

Good afternoon, Peter Verdult here from Morgan Stanley.

Jeff, just a couple of follow-ups on biosimilars.

We've talked about biosimilars for a number of years, we look at the Q1 over for Q4 number, not much growth there.

Just broadly, from an advantage point of view, how has the opportunity changed over the last 9 to 12 months when we're thinking about biosimilar competitors stepping back the way that Roche is discounting Herceptin when used in combination with progesterone in markets outside the US, and some ongoing regulation uncertainty in the US as well.

So want to get a sense from you in terms of how you're thinking about the biosimilar opportunity and how quickly you can commercialize that.

And then just a quick follow-up on that, in terms of future filings, I realize you won't comment on individual products, but can you give us a sense as to whether you're planning on using the biosimilar pathway as laid out or still is the BLA pathway an option that you're considering?

Thanks.

Yes, so we actually have seen quite good performance of the biosimilar business.

If I just look at end market products those were about $75 million in 2008.

And we have roughly the same portfolio a few years later but expanded now to over 55 countries.

The business was just under $350 million in sales last year.

Up to about 22% to just under $100 million in Q1.

And we're seeing really strong performance with each of our three end market brands which are number one respectively in EPO, both for nephrology and oncology.

Secondly for GCSF, which now is up to about a 24%, 25% share of the short acting GCSF market in Europe, which is on par with Amgen's Neupogen, and in human growth hormone which is the largest biosimilar globally should be well over $200 million brand for us this year.

And notably up to 18%, 19% share in the US with six originator's including Pfizer, Merck, Serono, Eli Lilly, Novo Nordisk, and Roche Genentech.

So I think the commercial performance has been quite good.

The issue is of course that there's a gap of patent expiries in between 2009 and 2014, there's very little in terms of what's coming off patent.

I think as you get into more patent expiries looking out a few years, it starts to become a more exciting business building from just under $500 million or so and in the course of as we look forward into next year or two to a multi-billion-dollar business.

We feel good about the position we have.

We have about a 53% market share in products that have been approved in the highly regulated markets of Europe, North America, Japan and Australia.

So we feel good about our momentum and in terms of our future pipeline, we feel our pipeline is unrivaled with the 8 to 10 programs that we have with a high share of those being monoclonal antibodies.

And to your last question, we plan on using whatever pathway makes the most sense for Novartis, be it the BLA pathway or the new biosimilar pathway.

And we'll make those decisions on a case-by-case basis.

Okay.

I want to thank everybody for tuning in and we look forward to updating you at the second quarter.

Thanks a lot.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.