Novartis AG (NVS) 2013 Q2 法說會逐字稿

Good day, good morning, and good afternoon, and welcome to the Novartis Q2 half-year 2013 results Conference Call and audio Webcast.

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

After the presentation, there will be an opportunity to ask questions by pressing star and 1 at any time during the conference.

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 the conference over to Mr. Joe Jimenez, CEO of Novartis.

Please go ahead, sir.

Thank you.

I'd like to welcome everybody to our Second-Quarter call.

At Novartis today, I have with me Harry Kirsch, the CFO.

Got all the division heads here -- David Epstein, Pharma; Kevin Buehler, Alcon; Jeff George, Sandoz; Andrin Oswald, V&D; George Gunn, Animal Health; Brian McNamara, OTC; and also Tim Wright, Head of Development.

So, before we start, I'd like 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 the actual results to be materially different from any future results, performance or achievement 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 -- we delivered solid performance in the second quarter.

We had growth across all of the divisions.

So, sales, as you saw, were up 3% in constant currencies, and core operating income was up 2%.

The solid performance, together with the lower-than-expected generic erosion, has led us to raise our outlook for the year, and we're going to come back in a few minutes and talk about the assumptions behind that.

Next slide you can see the overview of the financials.

Core EPS of $1.30 was up 1% in constant currency, and net income at $2.5 billion was essentially flat.

We continue to make progress on our three strategic priorities.

So, in terms of innovation, we had four key approvals and five positive clinical trial read outs.

We also received FDA breakthrough therapy designation for serelaxin, and this made Novartis the first pharmaceutical company this year to receive that designation for two different medicines; LDK was the second.

Now, in terms of accelerating our growth, net sales grew in each division, and it was driven by our growth products, which were up 31%, and also by emerging markets.

In terms of productivity, we delivered about $650 million, with about half of that coming from procurement.

Let me just touch a little bit deeper on innovation.

The Pharma division delivered three product approvals, including the FDA's approval of Ilaris for systemic juvenile idiopathic arthritis.

This is a very severe and potentially life threatening form of childhood arthritis.

In Alcon, Simbrinza was approved for glaucoma, and that launch is now under way in the US.

Sandoz had three -- actually had started an important Phase III with the Enbrel biosimilar, and it's important to note here that Sandoz biosimilar pipeline now includes seven Phase III trials, and it's across five different molecules.

This is one of the strongest in the industry.

Turning to growth on slide number 9, you can see that our growth rates range from 1% in Pharma, to double digits on Vaccines and Diagnostics, and also on our consumer health business.

So, let me just touch on each division.

Pharmaceuticals grew nicely, driven by the growth products.

So, Gilenya and Afinitor continue to see very strong growth, and also the new respiratory launches, Onbrez, Seebri, are now starting to ramp up, and also Jakavi is accelerating in the second quarter.

Alcon grew 6% in the second quarter.

This is driven by a solid 8% growth in the surgical franchise.

The division here has a full lineup of new launches in the second half of 2013, including its new refracted suite in surgical, as well as in Pharmaceuticals launching Jetrea and also Simbrinza.

Now, Sandoz growth was 3% in the second quarter, and the growth was pretty well distributed globally, ahead of market in most markets, except North America where we saw lower pricing for enoxaparin versus a year ago.

In terms of Consumer Health, we continued to show solid growth.

OTC delivered double-digit growth driven by the international markets outside the US, major brands, as well as within the US the relaunch of Excedrin continues to go well, and in fact, the division also started shipping Benefiber in June.

And Animal Health delivered strong growth behind the relaunch of Sentinel in the US, and share there is performing very well.

Now, in the second quarter our emerging markets business grew at 11%.

This is lead by China and Russia of 25% and 18%, respectively, for the quarter.

And I think overall, our emerging markets business has continued to strengthen.

You can see that this is now the sixth consecutive quarter in which we've accelerated our growth versus prior year in these markets.

As you know, in the past year, we focused pretty extensively on upgrading our quality systems across our more than 100 manufacturing sites.

Overall, we're making good progress.

In the second quarter we had 63 health authority inspections, including 8 from the FDA.

97% of those were either good or satisfactory.

Although you probably also saw the last -- a few weeks ago we received a warning letter on the Sandoz site in Unterach.

This follows an inspection that occurred in October of last year.

It relates to two cGMP violations, but we're working very closely with the FDA to address the concerns, and we don't expect any supply disruption at this point.

Now, finally, in Q2 we made strong progress on productivity.

Our focus on procurement continues to pay off.

If you remember, last year we generated $1.3 billion in savings through group-wide purchasing across all divisions.

So, this is a cross-divisional initiative.

Also, we're continuing to manage our M&S spend well across the group, so despite the increased number of launches and the spending, we were able to in the second quarter reduce M&S spend as a percent of sales by about 10 basis points.

Okay, now I'd like to turn it over to Harry.

Thank you, Joe, and good morning or good afternoon, everybody.

I'm very pleased to report that we had a solid quarter and strong first half in both sales and operating income.

On slide 19, you can see our numbers in constant currencies.

For the second quarter, net sales were up 3%, core operating income was up 2%, and core EPS was up 1%.

The only exception to this positive picture is free cash flow, which I will explain later in my presentation.

These are impressive numbers, given we had approximately $0.8 billion of generic erosion in the second quarter.

As you likely saw in the release this morning, they included the benefits from the delayed entry of generic competition for Diovan mono in the US.

However, even if we exclude this effect, it was a solid second quarter contributing to a strong first half for Novartis.

On slide 20, you can see the components of our top line performance, which looks very familiar in the second quarter and the first half.

In the second quarter, we delivered 8% volume growth, and more than offset the 5% impact from generic competition.

This generic impact, by the way, was higher than it was in the first quarter, mainly due to some major generics.

Price was slightly negative, at minus 1%, mostly due to enoxaparin-driven price declines in Sandoz compared to the previous year, and Fougera contributed plus 1%, which brings us to our robust underlying sales growth of 8% for the group in the second quarter.

This is at the upper end of the guidance we issued in January, in which we said that underlying [net sales] growth in 2013 would be at least in the mid-single digits.

After you have seen the building blocks of our top line results, let me explain currency on slide 21.

In the second quarter, currency impacted sales by 2 percentage points, and core operating income by 4 percentage points.

This was mainly due to the strengthening of the US dollar, mainly against the Japanese yen, which depreciated by about 20% in the first half versus the average 2012 rate.

The yen accounts for a larger portion of our operating income than our sales.

In 2012 for example, we booked 9% of our sales in yen, and only 5% of our operating expenses.

This means that the currency impact on core operating income is greater than that one on sales.

If June average exchange rates prevail for the remainder of the year, we expect negative impact of approximately 2 percentage points on sales, and approximately 4 percentage points on core operating income for the full year.

If you think about what's driving the 8% underlying volume growth, the answer is our rejuvenated portfolio.

Slide 22 shows the evolution of our growth products over the last six quarters.

In the second quarter of 2013 at the group level, our growth products account for 31% of group net sales, or $4.5 billion, up 13% from the previous-year quarter.

At Pharma, this contribution is even more impressive, with growth product accounting for 37% of division net sales, or $3 billion in the quarter, up 26% in constant currencies from the 2012 period.

David will give you more detail on some of the key products driving this growth in his presentation shortly.

Let me now turn to growth at margins by division.

As you can see on slide 23, all divisions contributed to sales growth in constant currency.

Core operating income margin for the group decreased by 0.3 percentage points in constant currency due to Pharma margin being impacted by generic competition, and continued investments in pipeline projects such as serelaxin and LDK.

For the other divisions, the change in core margin was positive.

The Alcon performance in the quarter was led by the Surgical franchise, which grew 8%.

This was driven by a market rebound in cataract procedures, and market share gains in the major markets.

Sandoz margin declined from its first-quarter level due to full annualization of (inaudible) cost and lower sales of enoxaparin.

In 2013, Vaccines and Diagnostics is expected to report a negative operating income, although losses are reducing compared to 2012.

Operating losses are predominantly caused by investments in our pipeline, including next generation meningococcal and flu vaccines, as well as the Bexsero production ramp up.

Margins and profitability are expected to improve as we launch Bexsero.

The Consumer Health division saw an increase in margins over the year, but a slight decline quarter over quarter due to one-time income from divestments of [Tate and Franze] in Q1, while continuing investments to support relaunch of key brands.

Now let's talk about productivity.

As you know, we have been measuring productivity for some time to ensure that all parts of the Business have the discipline to sustain long-term performance and improve profitability.

Slide 24 shows you the contribution from these measures in the first half.

There are a lot of individual initiatives here relating to procurement and resource allocation across the portfolio, as well as our manufacturing network and supporting infrastructure.

Overall, the initiatives are delivering well, with 4.3 percentage points of benefit to margin generated in the first half.

Now let's review cash flow and net debt.

As you can see on slide 25, cash flow in the first half was $3.1 billion, down 29% versus first half of 2012.

The main driver for this variance is $0.9 billion higher trade receivables.

Of this, $0.5 billion had to do with the timing of large collections, which are expected to reverse in the second half of the year.

Capital investment increased as we built our resource center in Shanghai, and two pharmaceutical production sites in Switzerland and Singapore.

Inventory went up as we carry slightly higher safety stock in inventory to ensure high customer service levels.

After correcting for the collection timing of receivables I mentioned earlier, the historical pattern in free cash flow generation should remain valid for the full year.

On slide 26, you see how net debt increased from $11.6 billion at the end of 2012, to $13.6 billion at the end of June.

First, there is the $3.1 billion of cash flow I just described.

Then, the dividend payment of $6.1 billion in the first quarter.

Next, you'll see in the middle of the slides that we received a cash inflow of $1.4 billion for a movement of about 30 million shares.

These are mainly related to the exceptionally high exercise of [E] options.

We are mitigating the dilutive impact of these programs on an ongoing basis, and have already repurchased 13.4 million shares year to date.

Now a word on our generic assumptions.

In January, we had assumed generic Diovan mono would enter in quarter one in the US.

This has not happened.

The timing of generic entry is totally unknown, and your guess is as good as ours on this.

However, in order to update our full-year guidance, we have to put in a placeholder assumption.

We assume absence of generics is likely to continue in the third quarter, and assume that generics entry would happen some when later this year.

On slide 27, you see in an illustration the impact of this delay in 2013 and 2014.

With this placeholder assumption, the total impact of generics reduces from up to $3.5 billion to up to $2.7 billion in 2013.

While this will provide upside for reported sales and operating profits in 2013, we expect the benefit to reverse, and we start in higher generic erosion in 2014.

This will obviously impact the reported 2014 growth rate, but not actual 2014 sales levels.

Regardless of the uncertainty of generic Diovan, the most important part of our 2013 guidance was the trajectory of underlying growth.

If you take out the impact on generics on slide 28, you see our underlying sales growth is strong and on target with our January guidance of at least mid-single-digit growth.

In fact, in the first half, our underlying sales grew at high-single-digit rates of 8%.

Our underlying core operating income growth was also extremely strong in the first half, and well ahead of sales at 17%.

However, please take care not to extrapolate this growth in underlying core operating income for the full year.

Historically, there's a higher second-half spent, and this year the variance will be somewhat higher due to pipeline and pre-launch investment in Pharma, investments to [Sandoz], and increased launch of (inaudible) at Alcon.

Putting all of that together on slide 29, we have raised our guidance for full-year 2013 top line and bottom line.

I talked about the benefits from delayed entry of the generic Diovan mono in the US.

It has now gone on significantly longer than we anticipated.

As we mentioned on our last earnings call, every month of delay is worth about $100 million in sales in Pharma.

Next, we are raising our guidance for 2013 [solely] to reflect the net positive Diovan impact.

In terms of reported results, our new full-year guidance in constant currency (inaudible), group sales upgraded to low-single-digit growth; previously it was in line with 2012.

Group core operating income upgraded to low-single-digit decline.

Previously it was mid-single-digit decline.

Pharmaceuticals sales upgrade to in line or better with 2012; previously it was low-single digit decline.

Our guidance for the other divisions is unchanged, but don't forget that Sandoz includes the benefit of an authorized Diovan mono generic launch in the US.

As I mentioned earlier, for our underlying business, which excludes the impact of generic competition, the guidance we gave in January is still maintained.

So to summarize, we delivered solid results in the second quarter, contributing to a strong first half.

We raised our guidance for group sales and core operating income to reflect the positive impact from Diovan monotherapy, and to deliver solid underlying performance at the higher end of the full-year guidance we issued in January.

With that I'd like to hand over to David.

Thank you, Harry.

Our results this quarter further confirm that our strategy to replace our old legacy brands, such as Diovan and Zometa, is working as we delivered 10% underlying volume growth.

Growth products were clearly the engine, with $3 billion in sales now representing 37% of the total, up 26% from the previous period.

Turning to the next page, we see that after generic offsets, the division delivered a net top line growth of 1% in constant currency.

Looking now at core operating income margin, we further captured productivity savings that were used to further contain its decline as we absorb the impact of generic Diovan HCT, and began the prep for several very exciting launches, including QVA, LDK, serelaxin and others.

Turning now to page 33, you see that emerging market sales growth was quite robust, in line with our strategy to further build our presence in some of these markets.

Based not just on old products, as some of our competitors are doing, but also new product launches, which we believe will provide sustainable growth well into the future in these regions.

On page 34, we give you a snapshot look at the dynamic that we're experiencing in China.

And you see there that we are outpacing multi-national growth since essentially mid last year, with 21% sales growth for the quarter.

Looking forward, we expect to continue to beat the market -- the multinational market in China.

On page 35, you'll see a familiar slide.

This is just a reminder of our strong growth platform, products that we believe are either blockbuster today or products that we believe will have blockbuster potential with exclusivity until 2017 and beyond.

All products reported very strong double-digit growth, with the one exception of Lucentis, which I'll describe to you now on page 36 in a little bit more detail.

Through Lucentis, the key to really understand the VEGF market is to really take a look at the underlying increase in demand.

We actually, during the quarter, despite the negative 3% in reported sales growth, had strong double-digit volume growth, which was offset by one-time price reductions that were required to secure reimbursement for some of our new indications, such as DME and RVF.

In addition, as you know, we are facing competition from a new competitor who has done well in Australia and Japan.

Overall, the outlook for this product and this category is intact, and we remain very excited about the growth potential for Lucentis over the medium and long term.

Turning now to page 36, we see that Gilenya reported very robust results.

Looking at the left-hand side of the chart where you see the 41% growth in the US, you'll note that even this quarter versus the previous quarter we had strong underlying growth in demand of approximately 5% despite the launch of Tecfidera, and this is because the oral market is rapidly expanding as physicians are moving their patients from injectable to oral medications.

Probably even more important than our very good results in the US is the extraordinary growth rest of world, which I believe remains underappreciated.

Currently we have more than 87,000 patient years of experience with Gilenya, and we expect this product to deliver on its expectations for blockbuster growth.

On page 38, we take a quick look at Tasigna, and just want to report there that the movement of the market from Gleevec to the better product, Tasigna, continued as planned.

During the quarter, we made continued progress on our treatment-free remission pivotal trial, which we believe will be very important to show the full potential of this product, and give the patients the opportunity to go off medication rather than stay on an older medication in a chronic manner.

Now what I'd like to do is something a little bit different, and just give you some insight into some really good news on our development portfolio.

In fact, if you look across our development portfolio, we've been beating even our internal expectations with very, very good clinical trial success and regulatory success due to Tim Wright and his team, and Alessandro Riva and his team.

Let's start with serelaxin.

As you know, this is our new product that has -- where we now have regulatory submissions both in the EU and in the US.

This is going to be a new product for the treatment of acute heart failure, a condition where there is little opportunity to really make a difference for these patients.

You'll recall that previously we reported a relative risk reduction of 37% in terms of mortality.

Taking a closer look at the data, in particular the biomarkers, we see consistent improvements in biomarkers, whether it be troponin T, pro BNP or cystatin C with the use of serelaxin versus placebo.

The key takeaway from looking at these biomarkers is that the administration of serelaxin over 48-hour period essentially protects the heart and protects the kidney from damage, and it's our belief that that protection during that period is what translates into that mortality benefit at six months.

You'll recall here that FDA also granted breakthrough therapy designation in June, and just the other day, FDA accepted our file in the United States.

Turning now to page 40, we'll take a look at secukinumab, previously knows as AIN457.

We have actually now completed a series of Phase III clinical trials, which will form the basis for our regulatory -- our upcoming regulatory submission.

What we have on this chart -- on the left-hand side of the chart is the study design for the fixture trial, which was a head-to-head trial planned in order to demonstrate the superiority of two different doses of secukinumab to Enbrel.

Let me just leave you with the fact that both doses were indeed superior to Enbrel, and the differences were very clinically meaningful.

You'll see the stat at the EADV Congress in October in 2013, and we will file this data with regulators all around the world in the second half of this year.

Last but not least, on page 41, in terms of new products, I want to speak a little bit about a new substantial opportunity for Xolair in chronic spontaneous urticaria.

This is a disease that is not well known by many, but devastating for patients.

These patients are extremely unhappy.

They have severe itching.

They have angioedema.

They very often cannot work, and live basically in constant fear of unexpected attacks.

This particular study, the ASTERIA II study, showed that approximately 34% of patients had symptom resolution by week 12 compared to only 5% on placebo.

The drug was well tolerated.

There were no safety signals, and actually the prevalence of the disorder is much bigger than most people expect.

The EU file is now submitted.

On page 42, just want to say simply that I'm very proud of our development teams.

They have done very well.

In the first half of the year, with the pipeline having delivered six major approvals and CHMP opinions, and with up to three more expected in the second half of the year; some are quite important.

QVA 149, which is our combination LABA/LAMA for the treatment of COPD, Ilaris in the EU for juvenile arthritis, and potentially the first opinion on serelaxin for the treatment of acute heart failure.

So, in summary, Pharma division also had solid performance in the quarter, and we have taken up our full-year sales guidance to be in line or better than 2012.

The underlying volume growth of 10% has more than offset the loss of sales to generic.

Regulatory performance has been strong, and when you look at Xolair in CSU and secukinumab together in psoriasis you see the basis for a very exciting new growth opportunity for us in the context of a new dermatology franchise, something that we will start to benefit from towards the second half of next year.

So, with that, I turn the presentation back to Joe.

Okay, just want to close by reinforcing our strategic priorities.

In the second quarter, we further strengthened our pipeline in terms of innovation, and we expect that to continue.

We accelerated our growth by driving our new launches, and particularly emerging markets, and we made progress in productivity, which is helping us offset generic erosion, and this is an important piece of what we're doing.

So, with that, I'd like to close, and then now open the call for questions.

(Operator Instructions)

Matthew Weston of Credit Suisse.

Good afternoon and thank you for taking my questions.

Three, if I could.

The first two on products.

I have to say I'm a little bit confused with the pricing comment on Lucentis.

So, based on your comments on volume and a minus 3% constant currency revenue development, it suggests somewhere around 20% price reduction.

If I recall DME and RVA were both approved in 2011.

I know that reimbursement discussions can take some time, but it would suggest that there are problems or there have been big price cuts in markets which have huge influence on the total ex-US sales.

So, can you give us a little bit more detail in terms of any large markets and the magnitude of some of the reimbursement reductions or the price reductions that you've had to give to get those two segments reduced or is it that more of that 20% estimate is to do with IIaris's entry and reimbursement issues you've had to give up there?

One comment that you make on Gilenya is around the royalty impact on gross margin.

Can you explain what's happening with Gilenya royalties?

Is there some sales milestone that's led to a step up in what you're paying away or you anticipating that you'll reach a sales milestone by end of year which will require a step up in royalty pay aways.

And then the final question is a bigger picture one for Joe.

China clearly a very important driver for the industry, but particularly on stage results for Novartis.

Given the problems that one of your competitors has in that market how confident are you that your compliance structure in China is sufficient to ensure that the sales that you're delivering are being achieved correctly?

Okay, David, you want to take the first two?

Yes, so your overall calculation on Lucentis, while slightly high, is not that far off.

Remember that Lucentis is heavily concentrated in just a few markets and these are price sensitive markets around the world.

We are not, for example, in the US market.

The RVO and DME indications, the reimbursement discussions can be fairly protracted.

The other thing is the ongoing pressure, which we've talked about in the past, on price due to Avastin, which can be used off label at a much lower cost, and the general price cuts that we see across all products that occur within Europe.

We believe these price reductions or recent order of magnitude price reductions is really a one-time effect.

It actually started in the back half of last year and it's continued through the first two quarters of this year.

This category will be under constant price pressure but it should go back to more normal level as we go forward.

Regarding Gilenya, there are no milestones paid.

The royalties are what you would expect for a product of this type.

Simply what's happening here is that if Gilenya becomes a bigger percentage of the portfolio then obviously we're paying more absolute dollars in terms of royalty payments.

Matt, regarding China, you're right.

It is an important growth driver for the Company and it's not just Pharma.

It's across all divisions.

Alcon has a very important and growing business there.

The way that I think about China is the fact that the market is growing double digit and will continue to grow double digit and it's because of the governments commitment to expand access to rural Chinese and this is driving -- as far as we see this is going to drive double digit growth.

So, then the question is what is the expectation for Novartis?

My expectation is that whatever division we're operating in that we grow sales ahead of that market growth whatever it is.

So, if the market is growing 15% we should be able to grow 20% or 20% or more in an individual division.

Now in terms of compliance, obviously, we have spent a lot of time and money training from a compliance standpoint and this has been a particular area of focus over the last 24 months.

As always we say this all the time, that we have thousands of employees and whenever -- no matter how much training you do there could always be areas of bad behavior.

As soon as we find that bad behavior we root it out and we act on it and we would not be any different in China than we would be in any part of the world.

So, I'm confident that as long as the markets in China continue to grow like they're growing we're going to continue to see growth.

Maybe not 25% every quarter, but my expectation is we'll be ahead of market.

Thank you.

Our next question--

Operator, are there other questions?

Richard Vosser of JPMorgan.

Hi, it's Richard Vosser from JPMorgan.

Thanks for taking my questions.

A couple of product ones, then a couple of vaccine ones, please.

Just on Glivec, it seemed to have a very good performance in the US this quarter.

So, just wondering whether there's any stocking there and ex-US seems to be impacted by generics.

Just your perspective on the news that China is granting a generic of Glivec as well and the further impact from that.

Secondly, on Afinitor, just quarter on quarter the growth appears a little bit slower, obviously year on year very, very good.

Just wondering how the penetration into the breast cancer indication is going?

Whether that seems to be slowing now or whether there's a lot of room to go?

And then on the vaccines, just as we go into the northern hemisphere flu season and you're starting to think about the US, sending your shipment to the US, whether you're seeing any impacts from not having a quadrivalent vaccine for this season.

Any perspective there, given your competitors both have quadrivalent vaccines.

And then just on Bexsera, we obviously know that there's a decision coming very soon in the next couple of weeks in the UK for putting on to the vaccination schedule.

Just wondering what's happening around the rest of Europe whether those sort of decisions are being taken, whether those decisions are upcoming in the coming quarters as well.

Thanks very much.

So, starting with Glivec.

So, the just market has done actually better than we would have anticipated and it's helping build the brand.

We've also seen some one-time clinical trial orders as companies do head-to-head trials versus the product although relatively small.

The other thing that's interesting and it's very early to making anything of it, but if you look into, for example, some of the Eastern European markets where there are generics now, the market is not switching to the generic as fast as we would have expected.

So, it's giving us a little bit of a boost on Glivec.

Regarding Afinitor, we're happy with its growth.

It has slowed, as you said, a bit in the US.

We've penetrated well under 50% of the possible patients.

So, there will be further growth.

What you're seeing happen is the average patient stays on drug around eight or nine months.

So, you're seeing that very first bolus of patients that we got reach the end of their therapy.

So, while we're continuing to get new patient starts you get this effect where we flatten out for a little while in the US and then we go back to growth.

Ex-US, the growth is quite robust.

We're still working through reimbursement and we really just got started with the launches.

And then on flu?

Yes, so, on flu we don't see any impact on the (inaudible) on our demand, which is more or less unchanged from last year.

On Bexsera, there are of course discussions ongoing with other governments outside of the UK.

We will start shipping to some countries for the private market, but I think until we'll see a proper campaign starting in some of the markets it's more likely going to be 2014, however.

Okay, next question please?

Tim Anderson of Sanford Bernstein.

Thank you.

A few questions.

The first is on Gilenya's growth prospects ex-US, which you say it's unappreciated.

Biogen Idec's Tecfidera has not received data exclusivity in Europe and there's been some speculation that they may not even launch in Europe because of this to protect their existing MS franchise and that would naturally be good for Gilenya.

What are your expectations on whether they will get data exclusivity and are you fully expecting that they will launch in Europe.

On Serelaxin, while you've received breakthrough therapy designation, do you also expect that the product will get the shorter priority review designation, too.

Have you asked for it and do you expect to get it.

And then last question, I'm pretty sure I know the answer to this, but given the fact that much of the pressure from Diovan generics will be pushed into 2014 can you at least confirm that 2014 will be a year that returns to positive revenue and operating income growth.

In a couple of cases with other companies like Glaxo and Sanofi, we've seen a return to growth period pushed a little bit further out into the future than what investors were initially expecting.

David?

Yes, so the first question is around Tecfidera, really, ex-US.

Obviously we do not know what the discussion between Biogen and the European Union may or may not be.

For our planning purposes we assume that we're going to have a competitor and we're going to launch and certainly the forecast that we've given for the product assume a launch.

Now if they don't launch or their launch is delayed that would be a positive thing for us.

And there is really not much more that I can say.

In terms of Serelaxin, we did get breakthrough therapy designation, it will be a standard review and the reason is very clear.

This is a new approach to therapy.

As you recall from the Phase III clinical trials, there was one trial and while we hit the primary end point in terms of essentially ability to greet, that improvement was modest and the real big benefit for the product was in terms of the mortality benefit, but that was not the primary or secondary end point of the trial.

It was a safety end point.

So, given all that, the agency has said they want to do a very slow, thoughtful review and get the input they need to make the right decision.

In our opinion the discussions with the agencies are going very well and ultimately the timing will be the time at whatever they decide.

Okay?

And then, Tim, regarding the outlook.

If you remember in January I said that as a group we expect for '14 and '15 mid-single digit sales growth at least and core operating income that is growing ahead of sales.

As we look at the underlying business today and think about what that means, we don't see any real change.

So, even under a worst case scenario of, let's say, Diovan mono coming right at the beginning of 2014 where we've got the full benefit this year and you'd have to take it out of next year, we still see return to growth both on the top line and the bottom line.

So, we'll give you a better update as we get closer to the end of the year.

Thank you.

Florent Cespedes of Exane BNP Paribas.

Good afternoon, gentlemen.

Thank you for taking my questions.

First for Kevin on Alcon.

Could you give us more color on why you experienced some relief in Q2 and is there a trend here, should we see Q3 and Q4 as robust as Q2 and not as soft as Q1 or Q3 last year.

Second question will be for Jeff on Sandoz.

Could we have more details on the countries where you have experienced a main pricing pressure and could you remind us what could be the growth drivers for this division going forward?

And the last question is on Serelaxin for Tim.

Could we have some color on why you have decided to enroll more than 6,000 patients in the clinical trial, as in the previous one you already showed a mortality benefit with much lower number of patients even if the cost was not a primary end point?

And do you believe that we could have some results before 2016, which is the official timing we could see in the clinical trial website and could you remind us when you will have the first interim analysis on this trial, thank you.

Okay, Kevin, Alcon?

Starting with Q2, we talked earlier that the growth really accelerated in the surgical area and that is primarily driven by two things.

One is an improvement in terms of cataract procedures.

We've got the ability to look at the market through the use of our disposables on our machines.

So, we saw an improvement in Q2 over the Q1 level.

We also saw market share growth on IOLs and very positive performance on Toric IOLs.

And then secondly I would point to looking at our Asia market.

We got off to a relatively slow start in Q1, but we had very robust growth, 16% in Q2.

So, then when you think about the balance of the year it's going to be somewhat dependent upon procedure growth continuing, but this has been a trend that we've seen over time.

We would still see procedures year-to-date in the 3% to 4% range, which is a little lower than what we've seen.

So, we're expecting that to continue.

And then secondly we've got very positive product launches in the second half of the year across all three of our businesses.

Okay, Jeff?

So, we've seen, Florent, 12% price erosion year-to-date and over 5 percentage points of that are from enoxaparin alone in the US, which was well over a $200 million impact year-to-date.

That means that the underlying price erosion is in the range that it normally is.

It is usually in high single digits, so, it's a little less than that around 7%, 6.5%, 7%.

In terms of specific countries where we see price erosion I would say it's really year specific in Europe, depends on who takes price cuts.

We saw 10% price cut in Switzerland this year.

Spain has been hit hard by EndoLISA, which has gone to a tendering system.

So, that's caused massive double digit price erosion in that market and other years we've seen it in Italy and France and elsewhere.

Two other markets that I would say where price erosion is a bit higher than average would be Australia and Canada, which are both impacted by higher competition and higher gross to net spreads in terms of price erosion.

And Tim on Serelaxin trial?

Yes, thanks a lot.

As David mentioned earlier, the RELAX-HF trial already completed, which had about 1200 patients showed 37% reduction in cardiovascular mortality.

And the design of RELAX-AHF II took this into account and as well building in a ability to detect a smaller effect size.

So, we want to have continence that is clinically meaningful and we will deliver the results we want, but also factoring in that 37% may or may not be replicated.

It could be less than that, but remain highly clinically meaningful.

So, we designed this trial with statistical input as well as input from the external experts.

That's what drove the sample size up to around 6,000 and we're confident that we can recruit this trial fairly quickly.

You can see the placeholder for the estimate of the read out in mid 2016.

And we actually expect it may go a little faster than that, but that's our current placeholder based on estimates for recruitment.

And as far as interims, we don't comment on interim analysis until after we perform them.

Okay.

Thank you very much.

Next question please?

Andrew Baum of Citigroup.

Good afternoon.

Two questions for Joe and one for David or Alessandro.

So, to Joe, do you think the current share price accurately reflects the intrinsic value of the Company's current and future assets?

And if not what are some of the actions you're proposing to remedy this?

And then second, am I right in understanding that despite the consulting contract, Dr. Vasella will have no significant role in shaping the future strategy of the group?

And then finally for David or Alessandro, your pipeline page shows your cart 19 filing as being in 2016 proposed.

What are the potential for materially accelerating the timelines for this product?

Thank you.

Okay, Andrew.

The first regarding share pricing.

I don't want to comment on share price, but if you just look at our PE multiple and the fact that it's in line with the pure average in Europe and you look at our innovation pipeline and what's coming, obviously, I would believe that we should have a premium versus that PE multiple that is in line.

If you look at what happens to companies as they move through their patent expiration period, like we are moving through Diovan, there tends to be that period where people are still waiting to see what the Company's going to look like as we exit that.

So, I think my own belief is that this is an issue that if we just continue to execute well that this is an issue that will take care of itself, if our innovation pipeline continues to deliver.

Regarding the contract, the consulting contract is a minimum of 10 days.

I would like Dan Vasella to continue his mentoring programs, which have been very impactful for a lot of our junior people around the world.

He ran the Company for a lot of years, got a lot of good leadership knowledge and ability and our people get a lot out of it.

So, I've asked him to continue to do that.

But beyond that, obviously, there would not be any involvement because as you read from the press release he will not be attending the Board meetings nor getting the Board minutes.

Question was about fixed DTL?

Yes.

This is, Andrew, as you know, is a potentially paradigm changing therapy, where we modify patients T-cells and then that therapy is then -- the modified T-cells are injected into the patient to treat diseases such as ALL, CLL, and potentially other hematologic and even solid tumors.

We have limited data so far, but as you know the results have been really very, very positive.

The filing date in the chart, as you pointed out, was on the conservative size.

Clearly, if the results would holdup in the clinical trial that we're about to start and assuming that production can come on line in a reasonable period of time because this is not a pill or a standard kind of injection, it's possible that the date could come forward.

But at this point, I can't tell you that with any certainty, so, I'd rather not move the chart or move the position on the chart to be more exact.

Thank you.

Next question, please.

Graham Parry of Banc of America Merrill Lynch.

Hi, thanks for taking my questions.

First one for Harry on guidance.

You're pointing at the moment with FX to an EBIT decline of about 6% for 2013, consensus is currently modeling about 2.5.

When you go through your models what do you think is accounting for that difference?

Is it just the event timing or is it perhaps profitability of the loss Diovan as well.

Second, on Lucentis, if you could give us a bit more detail just on volume and price by region, Europe, Japan and other, so we can really understand where you're seeing the volume uplift and the pricing negatives.

And then thirdly, on Gilenya you commented on the first quarter call there was some inventory stocking with underlying sales running at about 5% quarter on quarter in the US and did that continue into second quarter?

Are we looking at a clean underlying rate here now?

And then final question on China.

Just to take that earlier question further, when was the last audit that you conducted in China and are you aware of any investigation into Novartis practices in China currently by any of your authorities, thank you.

Okay, Harry, starting with the guidance?

Yes, thanks, Graham.

Though I will not comment on the content, its comparisons, but as you say, FX if the yen and other major currencies stay as they are today, we will have on a full year basis of 4% bottom line impact.

And then as I mentioned before, we have a few elements and moving parts in the second half of the year.

One is we have assumed, and again that's a placeholder assumption, some Diovan monogenerics, some when later this year, and then there will be some increased investment levels for pre-launch and pipeline pharma, as well as the outcome launches.

David on Lucentis and Gilenya?

So, Lucentis, I must just say I'm not going to go country by country for this product and going region by region doesn't really help because sales were so concentrated in just a few markets.

Regarding Gilenya, inventories are approximately normal now in the US, so I think you're getting a good feel for what the product can do there.

And then Graham, just regarding China, we have a, as with many companies we have a full compliance organization in China.

We continuously audit activity in terms of just the ordinary course of business and we have not been contacted by the authorities on the matter of one of our competitors that has been in the news recently.

Great, thank you.

Peter Verdult of Morgan Stanley.

Yes, good afternoon everyone.

Peter Verdult, Morgan Stanley.

Just a question for Joe or Harry and I see for David around Serelaxin.

Just, Joe, Harry, on the Diovan sort of hundred million monthly windfall, how should we think about the balance between reinvestment and what's being allowed to flow straight to the bottom line.

If we were to use an average of 50% reinvestment rate, just want to get a better understanding where you are allocating the extra resource versus plans made at the start of the year.

And then, David, on just Serelaxin and also pharma R&D spend, actually, given the pipeline success you're calling out at Novartis, you have got the $7 billion run rate in terms of R&D budget.

In absolute dollar spend terms, how should we be thinking how about trend versus your expectations for sales growth beyond 2014?

Want to get a better handle as to whether we should assume it will have to grow or you can do more with the same?

And then just specific questions on Serelaxin.

Were there any regional variations in the sort of, in the endpoints or the data that you produced for the HF trial?

I'm only asking that because I see that less than 10% of the patients were enrolled in the US and less than 20 from Europe.

So, just want to make sure there was no differing among the regional subgroups.

And then lastly, just squaring the circle, we saw a mortality benefit, it was not an end point, but there was no impact on hospital readmission rates.

So, I want to know how you're squaring that circle, thanks.

Peter, regarding first question on Diovan, I think we said back in January that we did have the assumption that because we were in mid January or late January that we would get something for Diovan this year.

And so, relative to what we were targeting there's a significant increase, all the sales, obviously, are dropping and I wouldn't think about reinvestment as any material number, but you also, though, have to see that we are executing a number of launches.

We've got the serelaxin breakthrough therapy designation and the filing made us say that we must invest now to get ready for serelaxin.

So, there is a heavier investment plan in the back half of the year, not just on pharma but also on Alcon because of the new product launches.

So, not necessarily directly tied to that, but it's certainly not anywhere near a 50% reinvestment rate.

I would just think about the benefit dropping to the bottom line, and as Harry said, we're still assuming in the outlook that we've given that it goes.

We've said it's not going to go through the third quarter.

We think that's relatively safe.

Nobody knows, so just as a placeholder we've put it in, I guess I would say, some time at the end, some time not in the third quarter and not -- but before the end of the year.

So, to the extent that it doesn't come, there's upside.

So, that's the way that I would think about the Diovan situation.

I think the next question was less about serelaxin and more just about R&D spend levels.

You have a typical quandary in this business.

The more successful we are in development then the more opportunities we have to spend, because there's always additional clinical trials.

There is Phase IV programs, there is indication expansion, and the like.

So, as you see, our R&D spend this year is trending up.

In order to give guidance beyond 2014, which is your question, it would be extremely difficult for me to do now and I am just going to refrain from doing that.

What I want to say is we will constantly look at priorities in our development portfolio.

(inaudible) teams are looking at multiple productivity initiatives and at the end of the day we'll make a call and we will try as we do usually for your results we try to give you some kind of feel for where we're going.

And then there was a number of serelaxin questions.

Do you want to try them, Tim?

I think you had a question about the regional differences.

We did analyze the database on clustering countries with similar geographies as well as standards of care and didn't see any major differences in the results.

The other question related to the re-hospitalization, because one of the end points was alive and out of hospital day 60 and that's a complex end point because it relates not only to out of hospital but also survival.

We did see a benefit in survival, but there were also patients were tending to be, tend to be more re-hospitalizations than expected.

And it's a complex analysis of data that has led us to a couple of potential explanations.

One is that if you survived the initial hospitalization due to a benefit from serelaxin, you may have a higher propensity to be re-hospitalized in the next 60 days.

So, that's one.

Second is that there appears to be an imbalance in the numbers of patients of subject in the serelaxin arm who had hospitalization for acute heart failure in the prior year.

That also puts you in a greater risk category for being re-hospitalized.

So, those two factors may have explained that particular end point not being met, but suffice it to say that we are looking at the data as well as the design of RELAX HF II to make sure that we don't have, for example, imbalances occurring in the next trial.

Thanks, it's helpful.

Next question?

Seamus Fernandez of Leerink.

Oh, thanks very much.

I have several questions with regard to the generics business for and also ophthalmic's business.

In terms of the recent guidance that was provided with regard to cyclosporine, ophthalmic emulsions, I was hoping either Jeff or Kevin could provide their thoughts on FDA's guidance there and the challenges associated with making a product like that.

Incrementally can you talk a little bit about your blow fill seal manufacturing capabilities and the general appeal of ophthalmic generics for either Sandoz or the Falcon division and what your presence is there.

And then lastly, any updates on EU filings in the respiratory space and if you could update us on your thoughts in terms of either timing or your expectations for the FDA's anticipated respiratory generic guidance and if you continue to plan for an ANDA, a direct substitution ANDA going forward, thanks a lot.

Okay, Jeff?

So, did you want to take the cyclosporine emulsion FDA guidance, Kevin, first and then I can comment on Falcon?

I'll give it a try.

Clearly, RESTASIS is an important product in terms of sales contribution.

It's the only approved product for therapeutic dry eye.

The interpretation of the information on the process for approval basically gives clarity to the approach.

I think most of you probably recognize that the original approval in terms of being able to have replicated studies to show impact on dry eye has been a challenge for the entire industry.

And then in terms of Blow Fill and Seal, clearly, we've got capability with a dedicated facility.

We've got primarily dry eye products or artificial tears that are consuming that capacity today.

In terms of Sandoz to Falcon business, as you probably know, Seamus, was integrated as part of the merger with Alcon into Sandoz and Sandoz has the number one position globally in generic ophthalmics in addition to our similar positions in injectables and Derma and biosimilars to round out our differentiated offer.

That business is growing nicely for us.

It's accelerated significantly and it's growing up over 20%.

We continue to see it as a hard to penetrate category because these products have a lot higher barriers to entry.

Clearly the guidance on RESTASIS gives more visibility to generic companies like us to look at assets like Alergan and of course that you can expect is being looked at or has been looked at for some time.

But I don't comment on what we're developing in our future pipeline.

In terms of your last question on respiratory filings, I'm not going to go off what I said in the past, which is we really don't give much guidance here.

We continue to work with both European and US regulators on a respiratory pipeline which we feel very good about.

The pathway for respiratory products in the US and EU could be even clearer.

We feel if you look at the requirements for a 505j for combination asthma and COPD drugs in the US, we do believe an ANDA approach is possible.

It is very difficult to do it, but we do believe that this is a fully substitutable approach is possible for the future and we continue to pursue our pipeline accordingly.

Thank you.

Next question please?

Michael Leuchten of Barclays.

Thank you, two questions, please.

One for Joe.

Just because you've called out the emerging markets growth group at 11% constant exchange rate, the Pharma division didn't quite grow as fast, so I'm just wondering what the delta is.

Which other division has contributed that much to swing the overall business to 11%.

And then related to that you've called out China and other areas, other regions where the growth was substantially higher.

So, which countries are currently not contributing to the growth to get the average down to 11% for the business?

And then a question for Kevin.

For your glaucoma business, that was down 2% in Q2 adjusted for exchange rates.

I thought we were going to look at this in terms of a portfolio that can continue to growth despite -- to grow despite the entry of generics, yet we do see another quarter where we see a negative growth rate.

Does your view still hold?

Are we going to see growth despite generics or is that going to see a drag going forward?

Okay, regarding the first question on EGM growth for the group of 11%.

You're right in that Pharma was about 8%, but Alcon was double digit, Sandoz was double digit, Vaccines was double digit.

So, the rest of them actually fold up the total to about 11%.

When you look across geographies and specific countries, one of the areas that was a drag on EGM, and it's a big market for us, is Brazil.

There was entry of Glivec generic in Brazil, as well as Diovan and that has brought the total pharma numbers down, as well as if you look across the markets you know you've got some markets that are growing well, some markets that are not, but Brazil is really the stand out for us that once we get out from under the Glivec piece that will continue to accelerate up.

In terms of glaucoma, you're right.

We did see roughly 2% decline in the quarter.

What we're going through in the US is basically the competitive pressures from the gold standard with Xalatan going off patent.

We continue to see positive growth in the combination products outside of the US.

And then as Joe highlighted, we just put the pipeline in so relatively small sales in Q2 for Simbrinza.

So, literally we're going to continue to promote the combination products and then launch Simbrinza.

And we're going to be in that range of being flat or up in terms of our glaucoma business.

Okay.

Next question?

Andrew Weiss, Vontobel

Thank you for taking my questions.

David, could you quickly repeat the comments?

Somehow I missed that one on Afinitor with regards to why there's not much growth quarter on quarter and which of the franchises, either renal cell or P man or breast cancer, is responsible for the slowdown.

The marketing and sales line in the Pharma is up, not down.

Somehow I'm still trying to get my arms around why the Diovan lingering on does not give you more margin progression.

And then lastly, on one for Harry, John used to make the comment on buybacks basically what is the hierarchy or the level of importances, payback debt, acquisitions and then buyback.

Harry, do you intend to follow in those steps and keep that type of hierarchy of usage of capital?

Thank you.

David?

Regarding Afinitor, I think the question last time was mostly focused on the slow growth in the US quarter over quarter and as I explained there is plenty of room for future growth, particularly in breast cancer as less than 50% of those patients in that market have been treated.

We had a very fast start, which meant a large bowl of the patients came out early.

They are now rolling off therapy.

So, while we're still getting new patient starts, we expect a period of flatness before we return to growth.

So, our forecast for Afinitor are intact and we feel good about the brand.

The M&S story is pretty clear.

Despite all of the productivity initiatives, yes, we're spending because we have a very exciting launch portfolio and we are making sure that we spend on the things that really matter so that these new product launches take off in a good way.

And when you get breakthrough therapy designations and you have other things that are coming forward that means that our pre-launch spots and that's what you see.

Harry?

Yes, thank you, Andrew.

Our capital allocation and capital strategy is unchanged and number one is certainly investing in the important areas of the business with attractive returns involve our (inaudible) capital hurdle rates accretive to CFRI and cash value-added and second a ever growing strong dividend and thirdly, making sure we mitigate the dilutive impact of every participation programs.

And as you have seen, we have already brought, repurchased maybe 13 million of shares year-to-date and depending on market conditions, we will continue to mitigate the 30 million of issued shares due to many employees exercising options earlier this year.

Thank you.

Odile Rundquist, Helvea.

Yes, good morning.

Two remaining questions on my side.

Just coming back to the census, I just wanted to be sure that you still feel confident with your expectation for 2017, meaning that consensus was standing at 2.7 billion and you felt it was really too conservative.

So, if you could just give us an update on that.

And then on Sandoz, if you could just give me again the organic growth if you exclude Fougera and then also on Sandoz, now that the Diovan monotherapy generic has not been launched.

I mean, you were guiding for mid to low single digit growth.

So, are we going to be at the low side for Sandoz and what would happen if the Diovan mono will only happen in 2014 what would be the guidance, thank you.

Yes, so for Lucentis we remain bullish even if there is potentially a slowdown in the short run.

But if you take the long view, which you've asked me about, we feel that we can deliver on those expectations.

Jeff?

Yes, so a deal for Sandoz growth excluding Fougera.

Basically what you're seeing is that the Fougera growth basically a little more than offset the enoxaparin decline, which explains why in Q2 we had flat sales in the US.

If you look year-to-date US sales are up 2% and in basically flat market Canadian sales are down.

German sales are also at 2% in a flat market and then we're seeing double digit growth for the third year in a row in western Europe, double the market at 13%.

Central and Eastern Europe 13%, high teens in both Middle East and Africa and Latin America and then Australia has dragged our Asia Pacific growth down to about 9%.

From the guidance perspective what I can say is that I confirm, we confirm our guidance of mid to high single digit growth, but as Harry said this assumes a Diovan mono authorized generic launch later this year.

I think that's probably all I should say.

Okay, I think we have time for one final question.

Steve Scala of Cowen.

Oh, thank you.

I have three questions.

What is Sandoz's view on when a biosimilar Enbrel could launch in the US?

Secondly, why was Jakavi down quarter over quarter?

And then thirdly, what is your view of the Pfizer meningitis B vaccine clinical trials targeting adolescence and young adults.

Why is that population an advantage or disadvantage relative to the targeting that Novartis has done with Bexsero.

Thank you very much.

Jeff?

We don't comment on timing of future launches.

What I can say is that we will seek to confirm biosimilarity of or biosimilar Enbrel in patients with psoriasis and seek approval for all approved indications.

And we have designed the clinical program in close consultation with both the European and US authorities using a combination of analytical, pre-clinical and clinical data necessary to give us a full label and we're fully committed to bringing this to market as soon as we can.

So, the Jakavi launch remains intact.

In fact it is actually doing better than we expected.

What you're seeing is actually some one-time events that occurred actually mostly in the first quarter, so the comparison was difficult.

And on Bexsera and Pfizer?

Yes, I don't want to comment on Pfizer's product, but I would say is that our vaccine Bexsera is approved from the age of two months all the way up to adults and we believe it's very important that especially infants and children are vaccinated.

This is the most vulnerable age-group where the disease burden is the highest and direct protection of the infants we think is very critical for a good public health.

Okay, I'd like to thank everybody for tuning in and we look forward to updating you at Q3.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen, and you may now disconnect.