Novartis AG (NVS) 2013 Q3 法說會逐字稿

Good morning and good afternoon, and welcome to the Novartis Q3 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.

(Operator Instructions)

A recording of the conference call, including the question-and-answer 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.

Thank you.

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

Joining me on the Novartis end are Harry Kirsch, the CFO, and we've got the division heads here -- David Epstein from Pharma; Kevin Buehler, Alcon; Jeff George, head of Sandoz; Andrin Oswald, head of Vaccines and Diagnostics; George Dunn, head of animal health; and Brian McNamara, head of the OTC business.

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

Samir?

Thank you.

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

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

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

Thanks, Samir.

Okay, starting on slide number 4, I was pleased with the sales performance of the Company.

We delivered nice sales growth in the quarter, and it was really driven by all of the divisions.

Sales were up 6% in constant currency.

Core operating income was up a point, or 1%, in constant currency, as was core EPS.

We also made good progress in the pipeline for the quarter.

You can see on the next slide the overview of the financials.

Net income was $2.3 billion for the quarter, up 1%.

That was down, though, 6% in US dollars.

Harry will talk more about the currency impact that we have.

Free cash flow, though, was quite strong at $3.5 billion.

It was up versus year-ago in US dollars -- up by about 1%.

Now we continue to make progress on our three strategic priorities.

In innovation, we had four key approvals during the quarter.

In terms of accelerating growth, our net sales grew in all divisions, driven by the growth products that were up 17% in constant currencies; and also by emerging markets.

We also had a good progress on our productivity agenda.

We generated about $730 million, with about half coming from the churn.

Now going a little deeper on innovation on slide number 7, the Pharma division had some important product approvals -- two of the most critical were the Japan and Europe approvals of Ultibro and COPD.

So this is a new therapy for COPD, and we're right now in the process of launching that drug across Europe and Japan.

In vaccines and diagnostics, the FDA approved an indication expansion for Menveo to include infants and toddlers from two months, so that also was an important piece of innovation.

We also received FDA breakthrough therapy designation for BYM338.

This is our anti-body for a degenerative muscle disease called sporadic inclusion-body myositis.

If it's approved, this will be the first treatment for patients with this disease.

I think the important thing is that this designation brings our total to three in terms of new molecules, and that's the highest achieved of anyone since the program began.

For Alcon, we've built now a complete refractive surgical suite, with the launches of two new pieces of equipment, Verion and Centurion.

This is important because the up-front diagnostic piece, the GPS, is able to take an image of the eye, and then it communicates with the other pieces of equipment downstream, from laser incision to cataract removal.

This is now a more automated surgical procedure that will improve patient outcomes for those patients with cataracts.

In Sandoz, we also strengthened our leadership in biosimilars, launching a simple and secure device for Omnitrope.

This is the fastest-growing human growth hormone worldwide, and Omnitrope generates about $200 million in sales annually.

This is going to help us differentiate this biosimilar.

Now, second priority of accelerating growth.

You can see the growth rates for all the divisions, starting with double-digit growth in Sandoz and consumer health in constant currency; and good solid growth in Alcon and in pharmaceuticals.

Pharma core operating income was negatively impacted by generics -- the generic impact of Diovan and Zometa, as well as investments into the pipeline.

Our growth products, though, continue to play quite a key role in driving our performance.

You can see on this slide that they were up 17% in the quarter to just over $4.5 billion.

But importantly they're now up to about a third of our total group sales.

I think this is another indication that the transformation of the pipeline -- of the portfolio is quite robust.

Let me just touch on the division highlights, starting with Pharma.

You can see the growth products grew nicely in the third quarter, particularly Gilenya and Afinitor, with growth that was over 65% versus a year ago.

Alcon grew 6% in the quarter, and this was driven by very strong 9% growth in the surgical franchise.

This was again driven by the cataract segment.

It was both an increase in procedures, as well as improvements in overall market share.

For Sandoz, you can see that we had a strong quarter across the globe.

Really, we grew faster than market in all regions around the world for the generics business.

In consumer health, we continued to show very strong growth this quarter.

OTC delivered double-digit growth.

This was driven not just by the US re-launch, but also outside the US we have brands growing like Voltaren and Otrivin growing in the teens.

This is a business that is performing very well.

Animal health also successfully re-launched Sentinel back into the US market.

Now our third -- in the third quarter, our emerging markets business grew about 9%.

China and Russia led that growth, with 18% growth in China and 15% growth in Russia for the quarter.

On productivity we're on track to deliver our productivity targets of 3% to 4% of net sales.

This focus that we've had on procurement continues to pay off.

We're now standing at almost $1 billion in savings for the first 9 months of 2013.

I think we are also managing our marketing and sales spend well across the group, even during this period of very heavy number of launches.

MNS as a percent of sales dropped again, about 30 basis points versus prior year.

Now one thing not on the slide, but I want to bring to your attention, is some breaking news.

Yesterday the FDA completed a week-long inspection of our Lincoln, Nebraska, manufacturing site.

It was a very thorough inspection, and we got the news last night that they have closed out the inspection with zero 483 observations.

This is an extremely positive result.

It's too early to characterize what the FDA's reaction to that was, but factually, the facts are that was a thorough inspection, and it is now closed out.

Really, it's a signal that we are on the right track on the Lincoln site.

We still have work to do, still work to do on some of the Sandoz sites, but a definite positive piece of good news.

Okay, now I'll turn it over to Harry.

Thank you Joe, and good morning and good afternoon, everyone.

You've heard from Joe that we have continued to make good progress on each of our strategic priorities through quarter three.

As you can see from the summary slide 20, Novartis again delivered constant-currency growth in both net sales and core operating income in the third quarter of 2013.

This reflects the strength of our growth products which Joe highlighted in his presentation.

Currency had a significant impact on our results in the third quarter, especially on the bottom line, which somewhat distorted this picture of our solid underlying performance.

In the third quarter, we delivered net sales of $14.3 billion, up 6% in constant currencies over the prior year.

Core operating income was up 1% in constant currencies to $3.6 billion; and we had strong cash flow of $3.5 billion in the quarter.

In the first 9 months, net sales were up 4% in constant currencies to $42.8 billion, and both core operating income and operating income were also up 3% in constant currencies.

Important to note that we are clearly tracking above the full-year guidance we issued last quarter.

These are solid numbers, and especially given that we had generic launch of about $0.5 billion in the third quarter, and $1.8 billion in the first 9 months.

On Slide 21, you can see that all divisions made a positive contribution to base growth in constant currency.

Joe has already commented on Alcon Pharmaceuticals Group.

Sandoz saw strong volume growth of 17%, which more than offset the price erosion of 6%.

This year-over-year comparison benefited also from having only one month of Fougera acquisition in quarter three, 2012.

As you look at Sandoz and its growth trajectory for the remainder of the year, it's important to remember that quarter four 2012 includes four months of Fougera sales.

This, combined with the likely absence of an authorized generic Diovan mono therapy in US, will challenge growth rates for the division in quarter four of this year.

V&D was up only slightly, as Menveo sales were partly offset by a later start to the US flu season.

Consumer health, which includes OTC and animal health, saw double-digit growth, mainly driven by strong performance of key brands globally, and product re-launches in the US.

Slide 22 shows the breakdown for our top-line and bottom-line performance.

In the third quarter, we achieved underlying sales growth of 10%, driven by strong volume flows of 9%, with an additional posted 1% from prior sales.

This more than offset a negative impact of generic competition of 4%, and recited and reported sales growth of 6% in constant currency.

Currency had a negative impact of 2%, mainly from the weakened yen, and weakening emerging market currencies, which bring us to a net sales growth of 4% in US dollars.

You'll see a similar but more pronounced story for core operating income, where strong performance is offsetting 11% impact from generics.

Now on Slide 23, I want to talk about our underlying performance, because this is important, not only for our 2013 outlook, but also for our longer-term trajectory.

If you adjust for the impact of generics, you can see that for the first 9 months, our underlying net sales grew 8% in constant currency.

This is indicative of the strength of our growth product portfolio, which we expect to drive our performance in the future.

Our underlying core operating income was up 16% in constant currencies in the first 9 months, growing faster than sales.

This shows that our accrued margins would have increased excluding the impact of generics.

As I mentioned in the quarter two earnings call, you cannot extrapolate this underlying core operating growth rate for the full year for two reasons.

First, we have historical pattern of spending more in the second half than the first, which will be more pronounced this year.

Second, we have a very robust pipeline with promising projects, and we will be investing in R&D to get into market as quickly as possible.

This explains also why the underlying core operating income growth in quarter three was at 12%, lower than 16% for the first 9 months.

On Slide 24, you can see the currency impact on sales and core operating income over the last seven quarters.

In the third quarter, currency had a negative impact of 2% on sales, mainly due to the weekend yen and weakening emerging market currencies relative to the US dollar.

On core operating income, currency had an impact of 6%, again due to yen and emerging markets.

They represent the larger portion of our operating income and sales.

If September rates -- or September average rates -- would continue for quarter four, there would be a negative impact of about 2 to 3 percent points on sales, 5% to 6% on core operating income, and about 8% on reported income for the fourth quarter.

This would result in a negative full-year effect of currencies of about 2% on sales, 5% on core operating income, and 6% on operating income.

Let's now turn to margins on Slide 25.

Year-to-date core operating income in constant currencies has been growing ahead of full-year guidance, as a result of the growth product momentum and the lower impact of generic competition.

In the third quarter, accrued level of our core operating margin decreased in constant currency by 1.4 percent points.

Pharma in Alcon declined by 1%, a bit more time explaining the circumstances behind each.

At Pharma, of course there's significant effect of generics which eroded high-margin sales.

In addition, two other factors impacted the quarter.

R&D expenses as a percent of net sales increased to support incremental investments in multiple pipeline projects in oncology, respiratory, and heart failure; higher cost of goods sold -- from the performance of Gilenya, we're starting in higher net royalties; and from higher production write-offs this year, compared to a low prior-year base.

At Alcon, the decrease in margin this quarter is mainly due to one-time other revenues, and some accounting adjustments in the prior year as part of the integration, leading to a higher margin comparator for a year.

Year to date in constant currencies, Alcon has been margin accretive, growing top line by 5% and bottom line by 7%.

This is closer to the outlook for the full year.

For both Pharma and Alcon, there's also obviously a negative currency impact.

Slide 26 shows our strong cash flow of $3.5 billion in quarter three, up 1% versus prior year.

For the full year, as mentioned earlier this year, we expect to stay somewhat below 2012 cash-flow levels, due to increased capital investments for manufacturing and research labs, safety stock increases, and currency impacts.

On Slide 27, you'll see how net debt decreased from $11.6 billion at the end of 2012 to $11.4 billion at the end of September.

To note, we are mitigating the dilutive impact of employee-option programs on an ongoing basis, and have already repurchased 26 million of shares for the amount of $1.9 billion on the first [ready] line year to date.

On Slide 28, I want to explain the benefit we have had from the lower impact of generic competition in 2013 compared to earlier expectations.

At the start of the year, we estimated that a generic impact would be up to $3.5 billion in 2013, assuming Diovan mono generics would enter in the US in quarter one, 2013.

Of course, we still don't know when generic Diovan mono therapy will enter the US market.

On the modeling assumption that it doesn't happen through the fourth quarter, we now estimate that the generic impact will be more like up to $2.3 billion in 2013.

The upside from the lower impact of generic competition falls for large part to the bottom line, with the exception of the additional investments in key development projects I alluded to earlier.

Before we leave this slide, I just want to reiterate our outlook for 2014.

At the start of the year, we said 2014 and 2015 growth rates would be at least mid-single digits, and core operating income growing ahead of sales in constant currencies.

This remains intact, but obviously needs to be adjusted for the Diovan mono generic upside in the US.

Clearly, 2014 reported growth rates will be impacted by the timing of Diovan mono generic entry in the US.

We do not know when this will happen, and we will give more detailed update of the 2014 guidance in January.

I will close with our revised full-year outlook for 2013.

On Slide 29, you can see that we are raising our full-year outlook again.

This assumes that Diovan mono generic does not enter the US market in Q4.

In terms of report results, our new full-year guidance in constant currencies is group net sales raised to grow low- to mid-single digits, group core operating income to be in line or better than 2012, and pharmaceutical sales raised to grow low single digit.

Raising guidance reflects our strong growth product momentum, and lower impact from generic competition.

With this, I turn now over to David.

Thanks, Harry.

The Pharmaceuticals division, as Harry mentioned, delivered mid-single constant currency sales growth during the quarter.

Our core operating income, however, declined due to, as Harry mentioned, the loss of high-margin product generics, and importantly, the investments we are making getting ready for now multiple launches.

Turning to the next page, you see the underlying volume growth was double digits, which is impressive versus most of the industry.

Growth products now represent 39% of total sales, growing 28% in constant currency over the same period last year, more than offsetting the losses to generics.

On the next page, you see that we continue to have strong growth in the emerging markets.

During the quarter China slowed down a bit; however, we see overall nice progress.

In the case of China itself, it appears that we are gaining share on a relative basis.

Turning now to page 34, this is a chart you're very familiar with.

This is our unparalleled growth platform -- products with exclusivity to 2017 and beyond, all with blockbuster potential.

I'm going to speak about a number of these, but particularly messages are all products with the exception of Lucentis grew strong double digits during the quarter.

Two of the smaller ones on the bottom, our respiratory portfolio and Jakavi, are -- I would say -- in the mode of just warming up, just starting to contribute to our future growth rate.

On the next page you see an overview of Gilenya.

You see that the growth continues.

Annualized sales are now surpassing $2 billion.

Both our US and ex-US teams have done really an outstanding job with the commercialization of this product in the US.

We've strengthened our ability to compete with some really novel commercial programs, and as a result we see that we're able to maintain share in an overall rapidly expanding oral market for our [fingolimod] product.

Outside the US, the growth was even better.

As you know, we've discussed in the past, outside the US it is much easier to get patients started on Gilenya because it's easier to get the screening done that's necessary prior to the patient start.

In addition, outside the US we do not yet have competition from Tecfidera.

Overall, we're very excited about this product and where it is likely to go over the medium-term.

Turning now to Lucentis, this product is making a very significant contribution to our business.

If you look at the chart on the left-hand side of the page, what you see is that the new product launches -- something that we've focused on quite a lot -- are now contributing about 25% of the sales volume.

You'll recall that last time we had spoken about the fact that we had to give up price in a number of markets, particularly in Europe, in order to achieve market access for those new indications.

So while the overall growth of the product is more or less flat to slightly down, you're seeing a change in mix and a good mid-term outlook as those new indications get bigger and bigger.

I'd like to spend now a moment on our respiratory franchise.

From a regulatory perspective, we are doing well.

As you know, we had near simultaneous approval in Europe and Japan for Ultibro, and our filings in the US for Seebri and Ultibro are on track, with the first half of 2014 targeted for Seebri, and the second half of 2014 for Ultibro.

I'd like to give you just a quick snapshot into how Seebri is doing on page 38 of our presentation.

This is just a look at Germany, because there are some surprises here, and I think they're positive surprises.

First of all, on the left-hand side of the chart you see where the business is coming from.

First of all, we're doing quite well picking up new patients, with about 39% of the volume.

The other thing that's interesting is the switches.

Switches are 30%, and while the actual number of switches, the 30%, is not so much of a surprise, it's where those switches are coming from which I think is a positive surprise.

If you look at the pie chart, you see 37% of the sales are from the combination IPS LABA products, and another 10% of the product sales are coming from the IPS itself.

Almost half of the business is because doctors are switching the patients off steroids in the COPD space to Seebri, which tells us that physicians are understanding that steroids are not the ideal treatment, and they are looking for an alternative.

We believe that means when we bring an even better product to market, Ultibro, we will see a nice up-tick of that product.

The other thing that's very interesting is we're getting very positive feedback on the Breezhaler device -- a device that we're using across the respiratory lines.

We're seeing very strong patient preference for this device over the competing [Omicrotics] device.

On page 39, I'm just taking a snapshot of some of the data.

In fact, there's so much data from our Phase III program it would be impossible to show it even on two or three pages; but what you see is the head-to-head comparison of Ultibro Breezhaler to open-label Spiriva, or Ultibro Breezhaler to Seretide, you see very significant differences in peak FEVs.

In addition, we've seen significant benefit demonstrated versus open-label Spiriva in terms of reducing the rate of exacerbation.

Based upon that, we think there is more to do in that space to further elucidate the opportunity to further differentiate this product on its ability to reduce exacerbation.

First launches in Germany and Japan will be some time during the fourth quarter of this year, so I would say stay tuned.

Last product I want to mention to you is one that's in our pipeline.

I know Tim Wright, our Head of Development, has spoken about it in the past.

This is AIN457, or Secukinumab, our IL-17A, initially being developed for psoriasis, but eventually other immune conditions, as well.

You can see here that basically we believe that we are getting -- there are projects working closer and closer to the keratinocyte and basically the source of where we need to intervene.

It was based upon the understanding of the mechanism of action that we felt we had a product that would demonstrate superior efficacy, and at least equivalent safety if not even better safety.

When you turn to page 41, you see some of the Phase III data from our clinical trial, and this is a comparison of two different doses of AIN or Secukinumab to Enbrel, which is the TNF standard of care.

You see both doses did markedly better, statistically significantly better than Enbrel.

Now before you just turn the page and walk away from the chart, you just have to really pay attention to the vertical axis.

This is a measure of what's called PASI 90.

This is a very high bar for skin care.

In fact, most clinical trials in the past have focused on PASI 75, because so few drugs are able to accomplish a PASI 90 kind of clearance.

You see here that 70%-plus of patients are achieving this PASI 90 rate with a high-dose.

Importantly, 65% of the patients are maintaining clear or almost clear skin at 52 weeks, versus only about a third for Enbrel.

I want to remind you that the psoriatic biologic market is over $4.5 billion.

We think this is a very good opportunity for the Company, and for patients who really need a better product.

Turning now to page 42, this is a quick snapshot of what we promised at the beginning of the year.

In terms of regulatory outcomes, as you can see, it's been a very positive year.

RLX030 or Serelaxin was last to go.

It may come at the end of this year.

I would say even more likely it will come early next year, just in terms of setting expectations.

The reviews are going well.

We have the usual questions that you would expect and there will be more to say later on.

Wrapping up now on page 43, just a couple of key points, solid performance in the quarter.

We're approving our full outlook for the division for the year.

There's nice -- even beyond a strong underlying volume growth in Pharmaceuticals, which is offsetting this loss to generic.

Regulatory performance has been great.

We have a new opportunity with our respiratory franchise, particularly in the area of COPD.

AIN shows a possibility, I think, of a new and effective treatment, so people living with moderate to severe psoriasis.

In terms of the outlook, sales outlook now being raised to low single-digit growth.

However, I just want to remind you that one would expect a decline in margin in Q4 -- A, because of the normal cyclicality that Harry already mentioned; and because some of these new launches will need investments so they can take off at a really good pace.

With that, I'd like to turn it back to Joe.

Okay.

I want to just close by reinforcing our strategic priorities.

If you think about the third quarter, we strengthened our pipeline in terms of innovation.

We accelerated our growth by driving our launches and driving emerging markets.

We also made good progress in productivity, which helped us offset some of the generic erosion.

Overall, we're on track, and I'd now like to open up the call to questions.

(Operator Instructions)

Matthew Weston, Credit Suisse.

Thank you for taking my questions -- three, if I could.

There were a number of areas of growth within Pharma, but one notable area of weakness was the BCR-ABL franchise, where both Tasigna and Gleevec looked weaker than the market expected.

Can you walk us through what's driving that, and what you anticipate any impact from the recent competitor safety issues may be going forward?

Secondly, we have the Capital Markets Day coming up in November.

There's been a lot of discussion around corporate change agenda at Novartis.

In the interest of full disclosure, what should we expect?

From our perspective, from my perspective, I was thinking it was going to be focused on pipeline and growth product.

But can you say whether or not that's the wrong expectation, and what we should be thinking of for that event and the agenda?

Thirdly, I noticed in the release there was -- litigation has been started by Oriel -- previous Oriel shareholders, which I can only question, does that suggest that they're complaining there's been little progress with the US generic Advair?

Can you give us an update on what that litigation is at least about?

I know you have a policy of not commenting on the progress of your generic pipeline.

Okay.

Dave, why don't you start with --

Yes, we'll start with Gleevec and Tasigna, the BCR-ABL franchise.

A couple of thoughts -- one is I think the overall business is doing well.

One of the things you've got to remember it is that as we get bigger and bigger in emerging markets, the quarterly numbers are more and more dependent upon the timing of different tenders.

If you take a look underlying, and taking out the tender business, we're doing very nicely in the US and Europe.

I think there's nothing to be concerned about there.

In addition, if you look at our ability to move the business from Gleevec to Tasigna, you see that Tasigna is a growing percentage of the business versus Gleevec, which is another good sign.

In terms of [Arriod] safety issue, I think this essentially means that there's one less significant competitor in the market, which from our perspective is good thing; from patients' perspective, they do need other alternatives, and we plan on giving you an update on our research strategy, as well at the Novartis IR date.

We think there's some actually significant things that can happen in the BCR-ABL space.

Matthew, regarding the Capital Markets Day, I think you should expect a focus -- we'll focus around three areas.

The first is we'll provide an update on the group strategy.

Obviously, we've been pretty open about taking a look at parts of our business, and we've said over the next year we would be able to talk about things as they materialize.

That could either be a short conversation or longer depending on time, but I think you should assume it's going to be an update on strategy and capital allocation.

Now in terms of the pipeline, we'll be talking about Pharma and Alcon.

We're going to really focus on those two divisions, partly because of the growth in both of those divisions and potential value creation, so we want to focus on those two.

Then Jeff, in terms of Oriel?

Sure Matthew, I can confirm that there was a complaint -- an Oriel-related complaint filed in the New York state court, which is essentially a refiling of a complaint that was done over a year ago that was denied.

We deny the allegations, and we intend to vigorously defend ourselves in this case.

As it's a legal matter, I can't really comment further.

As far as generic Advair, we have never commented on what programs we're working on and no interest in giving our competitors transparency as to where we are, but I can say that we remain confident in our ability to bring substitutable generics to the market, which will be an important complement to our number one global positions, not only in biosimilars, but in generic injectables, dermatologics, ophthalmics, and antibiotics.

Many thanks.

Andrew Baum, Citi.

Andrew are you on the move?

Operator, maybe come back to Andrew later?

Graham Parry, Bank of America.

Firstly, a question on the guidance and why you've shifted to assuming no generic Diovan launch in 2013.

The timing seems a little strange, given that Ranbaxy's own partner's just been approved for supply to the US market, and certainly some Indian commentators are suggesting that that may open, or at least relieve, the potential hurdles to getting Diovan approved this year?

I was just wondering, is that based on any competitive intelligence, or is it more that we're just close to the end of '13, so losing two months or a month wouldn't be that material to that guidance anyway?

Secondly, on Pharma margins, obviously still seeing cogs stepping up as royalties grow, and you're talking about the phasing in the expenditures on the business on pre-launch in R&D.

How should we think about that spending phasing you're talking about for Q4 going into 2014, where you're obviously still going to have Diovan and presumably still some more of that launch expenditure to go through next year?

Thirdly, on the strategic review, you had indicated that that was completed.

Would you be communicating on full conclusions for this at the Analyst Day in November, or is this something that we should just expect to hear piecemeal throughout the course of the year?

Thanks.

Harry, maybe you talk guidance, Diovan?

Yes.

Graham, we don't have competitive intelligence that would give us a good idea, or any idea, when there would be a generic launch in the US.

This is simply a forecast modeling assumption.

Now, you mentioned the old sites.

To my knowledge, the site has been released or cleared, so that would mean immediate product flows, and we haven't seen that happening.

As you mentioned, there's another two months to go.

Would there be still a launch, let's say in December, then there would be an authorized generic launch from Sandoz, which probably would offset the Pharma downside.

So I don't see at this point in time even that this impact would happen.

Right, it could come next week, or it could come in six months.

We just put a stake in the ground for modeling within the year.

David, Pharma margins?

Yes Graham, I think the Pharma margin for next year does in fact depend a lot on the timing of the Diovan mono US generic entry.

Further, we do have to ensure that the rich pipeline and launches are appropriately supported.

At the same time, the organization's working intensively on productivity, both in development and in MNS.

If we take a mid-term look, you would expect margins to become more positive, and we would start getting the benefit of the mix effect with more product in the oncology and in the specialty area, and the generic impact will get reduced.

In terms of the strategic review on the smaller businesses, I had said before not to expect us to announce what we want to do, but we'll be announcing as we take action.

That's what you could expect, and that might come -- if it came in pieces, what we would do is provide more color and direction around what it means as we unveil those pieces, but I really want to get in a position on announcing what we've done, instead of what we're going to do.

Okay?

Next question, please.

Thank you.

Andrew Baum, Citi.

Andrew, you line is open.

Andrew seems to have stepped away, so we'll move on to our next question, which comes from Naresh Chouhan from Liberum.

Please go ahead.

On Tasigna, when you gave us guidance on the oncology franchise almost a year ago now, and one of the reasons for you being bullish on or confident that the Glivec patent probably wouldn't be as big an issue as perhaps the market was concerned about was because Tasigna would be become a bigger product and the switch rate would be higher.

If we were to continue to have this mid-teens growth in Tasigna for the next couple of years, would that change your view on whether or not we could get through that Glivec patent expiry with revenue growth in the oncology franchise?

This seems to be slower than we were expecting.

Secondly, on Gilenya, could you give us just some guidance as to what the underlying volume growth is like?

There's been a lot of confusion around scripts, just some underlying volume growth over the last three quarters would be really helpful?

Thank you.

Okay.

Starting with -- I'll start with Gilenya, actually.

Underlying volume growth in the US is single-digit.

Ex-US, it's a very large number, and I actually don't have the calculation in front of me, but you can see it from the sales process -- that's all volume, ex-US, and that product is doing very well.

In terms of Tasigna, it's actually -- if you look at the script data, it's actually very much on our plan.

The percentage of Tasigna sales as a percentage of total worldwide Glivec plus Tasigna sales is about 22%.

That's up about a point from Q2, so it's definitely improving.

As you know, we have under way now a clinical trial to show that Tasigna is a possible way for patients to discontinue therapy.

It's going to take a while for the trials to enroll and play out, and we think that's going to be another boost.

There are better diagnostics coming into the market.

More people are getting used to using complete molecular response as a diagnostic.

Plus, as from the question asked earlier, we will have a little bit now more head room, because there will be probably one less competitor that's going to be making a lot of noise in this market.

The other question essentially was, would oncology be able to continue to grow close or through -- I could say that -- through the Gleevec patent expiration if Tasigna is perhaps a little weaker or a little better?

The answer is yes, there's enough room for oncology to continue to grow though that patent expiration.

That is one of the areas that we'll talk about at the investor meeting in November, to provide a little bit more color on that.

Next question?

Richard Vosser, JPMorgan.

First question on Alcon, please.

Just looking at your commentary around gaining market share, just wondering whether you're giving up on price to gain that market share, or whether the incremental investment in SG&A is giving you that growth there?

Thinking about the incremental spend going forward in terms of incremental SG&A, how long should we expect margins to be suppressed?

Would we think about that into the fourth quarter and into 2014?

Secondly, just thinking about a few Pharma products, just on TOBI, what sort of generic impact should we expect there?

Should we expect a lesser impact because it obviously is an inhalable product?

Then on the pipeline, just thinking about you've moved a MEK and a BRAF, I think, into Phase III.

What sort of differentiation do you see to those products, given of course we have Roche and GSK products already on the market?

Thanks very much.

Kevin, Alcon?

Richard, thanks.

In terms of our performance in market share, specifically we're pleased with the combination glaucoma growth that we're seeing outside of the US.

We are very pleased with what we're seeing in intraocular lenses, both in terms of our monofocal business, but also what we're seeing in terms of Toric continuing to see penetration.

Then we're pleased with what we're seeing in terms of contact lens growth.

But as we've spoken, this portfolio is starting to evolve similar to what we're seeing in terms of the developments in the pharmaceutical division, and we've got new products across each of our three areas.

Now where the impact shows up in terms of our P&L is that when we're launching equipment, you have to assume that's an investment in terms of there's less margin in equipment than you have in the pull-through products.

Secondly, because of the frequency of the new products that we have, we are going to spend against those launches.

But again if you look at our performance from a profit standpoint year to date as Harry said, we're growing sales 5% and profits 7%.

We've already got a relatively healthy P&L to start with, so this is really about top-line growth.

Yes, and the only thing I'd add to that is I think some of the suppression you saw in the third quarter was due to one-timers, so we would expect in the future Alcon to -- or at least our efforts would be to hold the margin or increase it.

David?

First I want to thank you, because no one ever asks me about Tobramycin and we do have some products that are often considered smaller that are starting to make a big difference for the Company.

The combined Tobramycin group of products, both the old solution and Podhaler grew about 45% versus prior year.

Right now, just to give you some rough ideas, we've been very good at introducing the Podhaler device -- that's the microsphere dry powder innovation, which is much easier to use than the old solution.

That's approximately 40% of the business already, which is I think protected really from generics, because no one's going to want to go back to using a difficult-to-use nebulizer.

So yes, we will lose a little bit of the exclusion business to generics; but I think the Podhaler itself will continue to grow, and this will be a nice business for us over the medium-term.

The other program you asked me about was the MEK and BRAF for mutant melanoma.

I'm going to leave it to [Irbe] to describe it in more detail the advantages of this particular drug during our November investor day.

I want to let you know from our filing chart you probably noticed that we've now accelerated filing by about a year to 2016.

So we're pretty excited about the program.

Okay.

Next question?

Eric Le Berrigaud, Brian Garnier.

I have four, actually, in that I will try to make short.

First is on tax rate.

Tax rate was an all-time low this quarter.

What would you guide us with for 2014?

Is 15% rather top end rather than low end of the range?

Second, on share buy-back you bought back some shares this quarter.

Was that opportunistic, or do you plan to buy some more by year end?

Third on Afinitor, could you update us on breast cancer penetration, duration of use, and perhaps could you make a comment -- referring to the investor day in Boston, you suggested that your internal forecasts were much higher than consensus.

Are you still on this page?

Lastly, on emerging markets there was a lot of concern about slow-down in growth.

Is there anything significant to report in terms of any change in trend in any region in emerging markets?

Thank you.

(inaudible - background noise ) tax rate (inaudible - background noise) for next year, but we expect overall to be a very comfortable 14% to 15% range.

In terms of share buy-backs, yes, you're right, we have bought back (inaudible - background noise) as we always try to mitigate the diluting impact of every option share programs.

As you have maybe seen, $30 million were exercised, so we will continue to opportunistically make sure we eliminate (inaudible - background noise) go forward.

David?

Afinitor, as a backgrounder, for people with renal cancer.

It's tuberous sclerosis, and it's PNET, and it's also the most visible program -- it's the best breast cancer program.

We still estimate less than 50% of the US eligible breast cancer patients are on the product, so there's certainly room to expand, and it takes time to change that treatment paradigm.

In addition, we have launches expected in the next 12 months in France, Italy, Spain, Brazil, and Japan.

This product is still pretty early in its life cycle.

In terms of emerging markets, we saw fairly robust growth across most of the markets.

We are seeing a general slow-down in China, as you've heard from many companies.

In fact, we just got the latest data a couple of days ago that shows the category in August grew only about 8% in terms of the pharmaceutical market.

Those would be products going to hospitals, which is a good proxy for what's happening to the market.

That's down from the teens before August.

I think what's happening in China is you are going to see an impact.

I don't think it's going to be permanent.

I do think that it will bounce back in a few months, and I think that it will return to nice growth rates.

Novartis is somewhat insulated from this.

We've focused on innovation in China.

As we've been able to show in the third quarter, we were up 18%.

Okay, thank you.

Andrew Baum, Citi.

Hi, it's Andrew Baum from Citi.

Can you hear me okay?

Yes, we hear you now.

Terrific.

Thank you for bearing with me, I apologize.

There are three questions.

First, I think George is on the call, but should we interpret George Gunn's planned departure from the group's CSR responsibilities, coupled with the green light on Lincoln, as accelerating the near-term divestment of your animal health business?

Second, regarding Gleevec, Sun filed their declaratory action this June.

Could you outline next steps, and would you agree that a settlement with Sun in the US would extend the potential of generic Gleevec, potentially until 2018, given the appeal case trigger?

Finally, it's difficult to understand quite what's going on with your vaccine business, because on the negative side, Bexsero has not been reimbursed, and you've delayed the development of staph aureus TDAC and Group B strep by at least a couple of years.

Yet on the positive side, I see you are opening a new R&D site in North Carolina.

If you could help us clarify the strategic intent around the vaccine business, that would be very helpful?

Thank you.

Sure.

Yes, Andrew, I'll start on the conspiracy theory (laughter).

I thought it was very interesting, but no, we announced this morning that Juergen Brokatzky-Geiger, who has spent 10 years in human resources, leading human resources, is going to step down from the Executive Committee, and he's going to run our corporate responsibility program across the Company.

As you know, corporate responsibility is becoming much more important in terms of the Company's reputation, and I want 100% focus on it by at least one person, and one point of accountability.

George has done a great job managing corporate responsibility over the last two years.

He's made good progress in a lot of fronts in terms of access to medicines in Africa.

At the same time, he's got a day job, this animal health business and re-launching into the US, it's a lot of work.

After 10 years in any function is a long time doing one job.

Juergen, I think, will be very energized to move into this assignment; but there was no linkage between that and the review.

Andrew, it's David.

I understand your interest and probably others' interest in understanding when there will be first generics in the major markets for Gleevec.

I think it goes without saying that if there's litigation ongoing or ways to defend intellectual property, we can't really talk about them in a public forum, because that would weaken any position we have.

But for everybody's information just to reset the baseline, because I think it's good to get clarity on it, the current assumption is that in the US we would lose exclusivity in July of 2015.

In Europe, including the recently granted pediatric exclusivity, we'd lose that exclusivity in December of 2016.

We do, however, currently have several other patents, including beta crystal and patent protection in the US and many other countries.

The beta crystalline patent expires in Europe in July 2018 and the US November 2019.

That's all I can really say right now.

I think we'll be talking about this for a while, but there's not much I can say until decisions actually occur.

Andrin, on vaccines.

Andrew, I think the key priorities for us have not changed over the last recent period.

Above all, we are (inaudible - accent) franchise and of course, the launch of Bexsero would be absolutely fundamental for that.

Now, there is no negative reimbursement decision yet from the UK, but an interim decision that was published in July.

We'll see how that goes while this decision finalizes.

That wouldn't be focused just on the UK and accelerate global launch.

There is a global market, and we are working with several countries in Europe, in Australia, and Canada, for example, to make that product available, and we do expect to see significant sales from Bexsero coming next year.

Second priority is our flu franchise.

There we are making good progress in shifting to cell-culture platform, which we think is longer-term more sustainable.

Key for that will be the licensure of our Holly Springs facility in the US, which we expect next year.

But in refer to, with regards to an R&D center, there is no R&D center.

But it will happen in Holy Springs -- it's adjacent to the Holly Springs facility, a patent plant of technical development of production processes, and that's the only thing that we do there.

Yes.

Thank you.

Tim Anderson, Sanford Bernstein.

Thank you, a few questions.

Going back to Alcon, ignoring nearer-term pushes and pulls, do you think that we should be expecting to see continued margin expansion in that business as you look out over the next handful of years?

Second question is something similar on the consumer division of yours.

Do you think it's realistic that the margins in consumer can get back to the levels where they were prior to manufacturing?

If so, what's the time frame for achieving that, or should we think about the margin structure as being permanently impaired in that business?

Then last question on the pipeline drug Secukinumab.

The drug obviously seems to have great efficacy in psoriasis.

Can you talk about the indication you're next most excited about, where you have a high degree of confidence, or is it less clear that this will work in non-psoriasis settings?

Okay, starting with Kevin on Alcon.

Tim, if we sort of anchor to a couple of points, if we look at the core profit in 2012, we were in the 36 range.

When you look through the first six months or nine months of this year we're in that same range, so it's more or less at the same level.

Also, when you look at the level of profitability from the Alcon business, it suggests that there's an opportunity for us to focus on top line growth, which is where the real opportunity is.

Now clearly, as Joe said in Q3, we had a number of offsets that when you were to adjust those out, it was more or less 6% top line, 6% bottom line.

When you look at where we're trying to go, I think we want to invest in the business.

There may be some periods of time when we've got gross-margin reduction when we're launching equipment like the Centurion launch that we've got, the microscope launch, but clearly what we'd like to be able to do is accelerate the top line, and try to hold the bottom line consistent at the relatively high profit levels that we have.

The only thing I would say to that is also as you look over the next few years, Alcon is a scalable business.

We would expect in the trend line, given that it is a high level of profitability, not to decline profitability to expand the top line, but we do believe that there is the ability to expand the top line and at least hold margin over the following years, as the business increases scale -- because we've got fixed costs, we don't need to necessarily increase that fixed cost.

We could invest in MNS to launch the new products, still with the objective of maintaining or growing margin.

Now let me start also on the consumer margin.

If you go back to pre-Lincoln on consumer, our margins were not as scintillating, I think, as we even would like.

I do believe that we will get back to margins pre-level, and even exceed them over time.

It's not going to be immediate.

There's going to be time required to ramp up Lincoln as we get a green light in terms of our ability to fully staff and fully move that into full production for OTC and for animal health.

I would be thinking that you're looking at a time period over the next three to four years that we'd move the margins back up to, or exceeding, the pre-Lincoln situation.

Do you guys have any other thoughts about that?

Or --

No, I think that's right.

I think you'll see continued improvement as we get Lincoln back on line and continue to re-launch the brand in the US.

David, on a AIN457?

We've got Tim Wright, our Head of Development in the room, and I've learned long ago not to pick my favorite indications, but I'm going to let him try.

I don't think this is about favorites, Tim, but this is I think based on the unmet medical needs, and the strength of the data that we saw in Phase II -- because the programs are now in Phase III -- I think the two indications that I would be most excited about would be psoriatic arthritis, which obviously will have a positive impact on the uptake in psoriasis when we file that and get it approved; as well as for ankylosing spondylitis, another disease with high unmet medical need.

Thank you.

Just beyond that, there are multiple other indications that Tim's team is exploring, and I think we should wait to see how those trials -- it could turn out there's still an indication ahead that even bigger than the psoriasis indication.

Next question, please.

Mike Leuchten, Barclays.

One question, going back to the Pharma division, please.

If I calculate the operating expenses in Q3, there's about a $400-million increase.

I take what you're saying about the pay-aways on the COGS, and also the increase in R&D, but it still leaves about $200 million in somewhere else, primarily marketing and sales.

If I don't say, you had a $300-million windfall coming from Diovan mono not going generic, that's quite a significant step-up in marketing and sales.

Can you elaborate on how much of that is just opportunistic spending because you have that windfall?

How much of that is temporary, and how much of this is really going to continue?

Thank you.

Yes, if you look at this on a percentage basis -- actually, I do point it out -- so R&D expense went up, mainly because we have a lot of late-stage products that needed support.

COGS went up for all the reasons that were discussed.

M&S actually improved during the period -- not by a lot, but it improved by 0.3 percentage points, because we have a very extensive productivity program under way, and we're getting better and better at resource allocation within the -- across the different brands that we have.

I think if you think about the longer-term view that we created for the group around leverage, this is a -- not just an objective, it's what we're working towards.

We're building plans now for 2014.

We are making hard choices about spending, both on the R&D side, on the M&S side.

We are a launch machine.

We've been able to prove that.

At the same time, we don't have unlimited resources, and we need to show leverage.

We're coming to the end of a patent expiration period on Diovan.

I feel like our cost structure is good to allow us to provide that leverage, and that's what we'll be working towards.

That will be on a group level.

Next question?

Seamus Fernandez, Leerink.

Thanks very much.

A couple questions on the Pharma.

David, can you give us a little bit of an update on your thoughts on reimbursement for the LAMA/LABA franchises, particularly given the fact that you guys have an exacerbation benefit in one of your major studies?

How do you think that will play out with regard to reimbursement and positioning versus potential competitors?

Then do think that the street is underestimating the prospects for that franchise, overall?

Separately, as we said look forward to some of the medical meetings that are still to come in 2013, ASH is obviously a major meeting for Novartis historically.

Just wondering if you could update us on if we should anticipate some key data at ASH this year with regard to the CAR-T technology, and how you hope to advance those programs.

I know that some of that will be discussed at the analyst day, but just wondering if you could give us a little bit of preview ahead of ASH?

Thanks.

In terms of reimbursement for Seebri and Ultibro, so far we haven't had any unusual reimbursement challenges.

In fact, the reimbursements are coming through largely as planned.

The LAMA class and the combination LAMA/LABA classes do get premium pricing in most of the world.

We're pretty happy about that.

In terms of ASH, yes, there will be an update on CTL109, but I really want to wait for Irbe to tell you a little bit more about that program, and give you a preview as to what you might see at ASH when we do our November investor day.

Okay.

Next question, please?

Florent Cespedes, Exane BNP.

First, on -- for David on Lucentis, do you see Lucentis performance in the coming quarters, inevitably when we should see the volume of offsetting the pricing pressure?

Second question also for David on the European performance of Pharma, could you give us the impact from the health care reforms and pricing changes in Q3?

Last question for Jeff, Sandoz.

Is this nice double-digit growth recorded in Q3 sustainable?

What are the main drivers there, and what we should anticipate going forward?

Thank you.

Okay.

Starting with Lucentis, I think what you're asking me is when will we start to lapse the price cuts that we -- or the reduced price we had to negotiate in order to create market access for the new indications.

Most of those price cuts came second quarter, some into the third quarter, and some in the first quarter.

So if we project forward, you would expect to see some of the volume begin to come through largely in the back half of next year.

In terms of Europe and loss to health care reform, I believe it was about six points for the quarter.

Jeff, help on sustainability?

Yes, so Florent, we are carrying good momentum into back at the remainder of this year and 2014, with the double-digit growth that we've continued to see in Western Europe, outside of Germany, as well as emerging markets in biosimilars.

Q4 will be, as Harry said, a much more challenging quarter for us, given that in the US in addition to the four months of Fougera sales in Q4 last year that Harry mentioned, we also had a very large contribution from our Diovan HGT generic launch, which was under 180-day exclusivity last year, and will be negligible or next to nothing this year.

So we're up against a very big comparator in terms of year over year; but at the same time, I feel good about the underlying growth momentum that we have across Europe emerging markets in biosimilars, as we continue to see strong double-digit growth there for the last couple years.

Good.

Okay, I think we have time for two more questions.

Tim Race, Deutsche Bank.

Just three please, first one Galvus, could you comment on the German GBA assessment?

What are the next steps there, and maybe quantify what sales are at risk in that market?

Second, if you could help us understand the Diovan in Japan issue?

I know you wouldn't talk about potential fines, et cetera, and the magnitude, but could you expand on whether you're actually losing sales in Japan because of this, or are you provisioning for a future fine?

Possibly a third question, could you break out the nine months animal health and RTC sales, just help us understand how sales are performing there?

Okay, David.

Why don't you start with Galvus?

I guess most of you probably read in the press that the German Federal Joint Committee, the GBA, announced that they did a benefit risk assessment of Galvus, as well as a variety of other DPP-4s.

They said that our product did not provide an additional benefit relative to sulphonylurea; so there's now a discussion process that's under way where prices will be discussed.

Hopefully, we can find a way forward with them.

In the event that they choose ultimately not be reasonable, they know the product could potentially worst-case scenario go away in Germany.

That would be a one-time impact on Galvus, but Galvus still has a lot of growth ahead of it, and we would manage our way through.

In terms of Diovan in Japan, I think everybody's quite aware of the conflict of interest issue, where we had an employee quite some number of years ago that was -- his name was published in a clinical paper, and it wasn't disclosed that he was a Novartis employee, and unfortunately we didn't catch that.

There's been then controversy in Japan, and there's been a lot of press.

As a result, we have begun to lose some Diovan market share and Diovan sales.

It's in the tens of millions of dollars in terms of lost sales that we would have had otherwise.

The other thing I want to remind you is that Diovan was scheduled to, and is expected to, lose its exclusivity mid-next year; so while short-term this isn't nice from a financial perspective, the bigger issues in Japan are really on reputation and reputation rebuilding, which we're working on.

In terms of consumer health, we don't break out the individual businesses -- animal health and OTC -- but we have said historically that OTC is about two thirds and animal health at is about a third; and both the businesses are growing nicely.

OTC is growing right now at a faster rate than animal health, but both are growing nicely.

Thank you.

Okay, maybe last question.

Keyur Parekh, Goldman Sachs.

First, just getting a sense from you on the potential for stock buy-back going into 2014, I realize that you won't comment on it until the analyst day, but how should we think about the incremental CapEx expenditures now that the Lincoln manufacturing has been sorted out?

Do you still see 2014, 2015 being an area all year of high CapEx?

Secondly, as it relates to the OTC business, if you can you help us better appreciate the time lines for that coming back on?

When do we see it returning to full production?

Should it be first quarter '14, should be first half '14?

Thank you.

Okay.

Harry can jump in on the buy-back, but I think it would be premature to say anything about an additional buy-back.

We've said that we want to be comfortably in the AA rating from a credit rating standpoint.

We haven't formally announced a share buy-back, because historically we haven't had the debt ability to do that if that were our target.

We're now approaching that, and I think there will be more to discuss at a later time, but that's about where I would leave it.

Do you have anything to add?

Yes, maybe just a couple of points.

You have seen that we bought back 30 million shares opportunistically, almost $2 billion, as we litigate equity share option programs, number 1. Number 2, the CapEx increases you see are not only Lincoln.

We are building our manufacturing site and a research site, so this and next year will be higher CapEx spending.

Okay.

Brian, on the Lincoln?

Yes.

If you remember at the end of Q1 we made the announcement we were going to focus the site on solids manufacturing, and to date we've been producing and shifting Sentinel and from animal health.

We will begin shipping Excedrin at the end of this month, and we're working on the qualification and validation of TheraFlu as we speak.

Over time, we'll continue to increase the complexity of the site at, as we're ready to take that on.

Okay.

I'd like to thank everybody for attending the call today.

We look forward to updating you at the end of fourth quarter.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.