Novartis AG (NVS) 2015 Q3 法說會逐字稿

Good morning, and good afternoon, and welcome to the Novartis Q3 2015 results conference call and live audio webcast.

(Operator Instructions)

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

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

Please go ahead, sir.

Thank you, and welcome to our third quarter results presentation.

Joining me on the Novartis end are Harry Kirsch, the CFO; and I have the three division heads, David Epstein, Jeff George, and Richard Francis.

Now, before we get started, I would like Samir 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 the actual results to materially differ from any future results, performance, or achievements expressed or implied by such statements.

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

Thanks, Samir.

Okay.

Starting on slide number 4, we delivered what I would call a solid quarter in Q3.

We had very strong core margin expansion, and we continued to strengthen the pipeline.

Obviously, currency had a significant effect on our reported results.

But if you look at the underlying strength of the business, it was quite strong.

We had net sales growth of 6% in constant currencies, and core operating income was up 14% and that led to a very nice 220-basis point improvement in our core operating income margin.

We had what I would call very strong performance on the pharma and Sandoz side, and that more than offset a weaker Alcon quarter.

Looking at the results a little bit more detail on slide number 5, you can see that our core EPS was up a strong 14% in constant currencies to $1.27.

Harry is going to take us through more detail here in a minute.

Now, I want to touch on each of the five priorities that we said we had at the beginning of the year.

So starting on slide number 7, which is delivering strong financial results, you can see that pharmaceuticals delivered nice sales growth of 7% and double-digit core operating income growth of 18%.

This is driven partly by growth products, but also very good cost control at a time when we are launching multiple new products.

Sandoz also had a very strong quarter, sales up 9% and profit up 17%, and biopharmaceuticals was a big part of this growth, up almost 30% versus a year ago.

Alcon, as you can see, had a weaker quarter and the primary drivers were a decline in the surgical equipment sales in the US and also in emerging markets, as well as increased generic competition in the US in ophthalmic pharmaceuticals.

We're now in the process of doing a deep analysis of the Alcon business.

We're going business by business, looking at the competitive situation, the regulatory, the innovation that's coming in each of those segments, and we're developing a growth acceleration plan that we'll be able to unveil at the January earnings forecast.

And we'll show you how we're going to get this business back to a decent growth rate.

If you look at the second priority of strengthening innovation, we're advancing our Entresto and our Cosentyx launches.

As you saw, Entresto received a positive CHMP opinion for Europe and also received approval in Switzerland on top of the approval in the US.

Now as we predicted, our US launch is initially slow as we continue to work through the NDC blocks, and David will talk more about that in a minute.

Cosentyx is having a successful launch, sales of almost $90 million in the quarter.

We continue to gain share and getting very positive feedback from patients and clinicians.

Importantly, on Cosentyx, you probably saw very recently a positive CHMP opinion for the two new indications, ankylosing spondylitis and psoriatic arthritis.

Those are important because together they are just about as big as psoriasis.

Also, in innovation in immuno-oncology, we're building a very strong second generation immuno-oncology pipeline.

You probably saw the press release last week where we've strengthened the position with three additional deals.

A TGF-beta inhibitor from XOMA, an adenosine receptor antagonist from Palobiofarma, and also an IL-15 agonist from Admune.

I think it's important to note that we have six assets in the clinic today, and we'll have our first combination therapy in the clinic by the end of the year.

So I think this continues to be an under-recognized area of the Company, and we're just going to continue to drive it.

Now, Sandoz on slide number 11 is making great progress with the biosimilars launches.

Zarxio has been launched under the new BPCIA pathway, and we also have filed and that file has been accepted by the FDA for etanercept.

If you look at our plans, including etanercept, we have 10 major filings planned for the next three years, so we're starting to see this pipeline mature.

On the next slide, you can see that as Mark Fishman has decided to retire in March, we have appointed Jay Bradner as the new President of the Novartis Institutes for Biomedical Research.

Jay was our number one choice for this role and he brings with him a great amount of experience.

He's a physician scientist at the Dana-Farber, as well as Harvard Medical School.

He's got a great history of strong partnerships across academia, but also industry, and he's also got strong business acumen as evidenced by a number of biotech companies that he's founded.

So we're very excited about him joining us after the first of the year.

Now, our third priority is to complete the portfolio transformation, and we're on track.

So just in terms of the oncology integration, all major markets have closed and associates are transferred, and as you saw, oncology sales grew 27% versus year ago.

So we have significantly strengthened the oncology business.

Meanwhile, the separations that are occurring with the other businesses are on track.

There's a lot of work going on, but no business disruption.

Our fourth priority is to capture cross-divisional synergies.

Novartis Business Services is executing well against its objectives.

Their costs under management are flat versus year ago, and this is really one of the things that helped us generate a 220-basis point improvement in margin in the third quarter.

We're scaling up five global service centers at low cost locations, and that's also going to lead to additional cost savings in the years ahead.

And then finally, we continue to build a high, strong, high-performing organization with the continued focus on quality assurance.

So you can see on this chart that we've had over 130 health authority inspections year to date at our manufacturing sites.

100% of those inspections across all divisions and sites have been deemed good or acceptable.

Now, if you remember, last year we told you that we had one bad exception, inspection at our Indian sites and we began remediating immediately.

There were two sites.

One of them, we've decided to close.

We've remediated the other.

We did, however, receive a warning letter from the FDA yesterday, so it will be posted.

But a lot of the remediation has already taken place because it was over a year ago.

And there's no supply issues as we continue to ship out of that site.

But overall, very strong quality performance progress this year, and it's something that we just continue to build.

Now, I'm going to turn the mic over to Harry to take us through the financials.

Thank you, Joe.

Good morning.

Good afternoon, everyone.

Unless otherwise noted, my comments relate to our continuing operations and also to growth rates and constant currencies.

Slide 17 shows a summary of our performance.

In quarter three, net sales were up 6%, as very strong performance at pharma and Sandoz more than compensated for a weak quarter at Alcon.

Core operating income was up plus 14%, generating very strong core operating leverage with quarter three core margin improvement of 2.2 percentage points.

Core EPS grew in line with core operating income and was up 14% to $1.27.

There was a significant currency effect in the quarter, 17% on core operating income, which as expected, was more pronounced in quarter three driven by continued US dollar strength.

Reported net income declined 28% in the quarter, mainly due to the prior-year gain from the sale of our Idenix shares to Merck and the current quarter three provision of $0.4 billion for a conditional settlement of the specialty pharmacies case with the Southern District of New York.

In the first nine months, net sales were up 5%, and both core operating income and core EPS were up 10%.

Free cash flow for nine months were $6.3 billion, but more on that later in my presentation.

On slide 18, you can see that our sales growth was driven by double-digit volume growth, which more than offset the impact of generic competition.

In the third quarter, we achieved strong volume growth of 11%, driven by our growth products including the new oncology assets we acquired from GSK.

This more than offset the generic impact of negative 3% largely for Diovan monotherapy, Exforge and Exelon Patch in the US.

Pricing had a negative impact of 2% bringing us to a net sales growth of 6% in constant currencies which became a negative 6% in US dollars due to the strong currency impact.

As usual, you see a similar but more pronounced story in our core operating income with underlying volume growth of 30%, more than offsetting negative 9% of generic impact and negative 7% of pricing.

This gave us an increase in core operating income of 14% in constant currencies and 3% in US dollar.

We give a bit more color on the currency evolution on slide 19.

In the third quarter, currency impact was negative 12% and negative 17% on the top and bottom line.

As expected and assuming no further significant currency movements, this is the worst currency quarter in 2014 as the US dollar started to significantly strengthen in quarter four at 2014.

If early October exchange rates prevail until the end of the year, the full-year currency impact would be negative 10% on sales and negative 14% on core operating income, with the primary reason being the continued strength of the US dollar.

For quarter four, this would be roughly negative 7% on sales and negative 13% on core operating income.

Slide 20 illustrates the continued improvement of our core margin, which grew 2.2 percentage points in the third quarter and 1.3 percentage points in the first nine months.

As you can see, the core margin increase for the first nine months was driven by pharma and Sandoz.

Pharma delivered a strong sales performance with plus 5% growth, core operating income grew plus 12% driven by leverage of function cost and ongoing productivity initiatives, while at the same time investing in critical launches like Entresto and Cosentyx, which David will talk about later.

This results in a core margin expansion of 2 percentage points in pharma.

Sandoz also had a very strong nine months, growing sales by 10% and core operating income by 21%, thereby increasing core margin by 1.7 percentage points.

This reflects the strong base business performance and the continued progress of new launches, including Glatopa and an authorized generic Exelon Patch.

This result was despite cycling over the Diovan mono authorized generics exclusivity period in the prior year.

The core margin improvements at pharma and Sandoz more than offset Alcon's margin erosion.

Alcon core margin was down the first nine months impacted by higher R&D spend.

R&D increased behind higher investments for mainly RTH258.

M&S increased mainly due to investments to rejuvenate growth and an increase in bad debt provisions in Asia.

Slide 21 shows the significant improvement in our core margin from 26% for the total group last year to 29.1% for continuing operations this year.

As illustrated on the chart, we gained 2.8 percentage points through the portfolio transformation, and our continued focus on driving sales and productivity contributed an additional 1.3 percentage points.

This results in a core margin of 30.1% for continuing operations and constant currencies and currencies took us down by 1 point to a core margin of 29.1% in US dollars.

Let us now turn to free cash flow on slide 22.

Free cash flow for continuing operations was $6.3 billion in the first nine months, down from $7 billion in the prior-year period.

This decrease is mainly due to a negative currency impact in operations, which was partially offset by higher hedging gains and increased proceeds from divestments of [tail end] products.

On slide 23, you can see net debt increased from $6.5 billion at the end of 2014 to $16.6 billion at the end of the third quarter.

The increase of $10.1 billion was mainly driven by outflows of $16 billion from the acquisition of the oncology assets from GSK, as well as the dividend payment of $6.6 billion and share repurchases of $4 billion.

This was partially compensated by our total group free cash flow of $6 billion, which includes discontinued operations, as well as net divestment proceeds of $9.9 billion related to the portfolio transformation transactions, and proceeds from options exercised of $1.6 billion.

Lastly, on slide 24, I want to reconfirm our outlook for the full-year 2015.

Our group guidance for continued operations, net sales, growth remains unchanged at mid-single digit in constant currencies and our core operating income guidance from continuing operations also remains unchanged, where we expect to grow ahead of sales at a high single-digit rate in constant currencies.

With that, I hand over to David.

Thank you, Harry.

The pharma division had a good quarter with 7% increase in sales growth in constant currency, and 18% increase in core operating income in constant currency, resulting in a core operating income margin of 31.8%.

Turning to the next page, what you see is that through a big focus on productivity, we've been able to grow core margin almost every quarter, in fact six of the last seven quarters benefiting from the establishment of NBS, manufacturing efficiencies, focusing on R&D operational excellence, and as well most recently benefiting from the restructurings we did in the pharma division last year.

Last but not least, a big contribution has been our ability to better allocate resources to the greatest growth opportunities in our businesses.

Turning to the next page, you see that those growth opportunities are in fact responding with 34% growth of our growth products representing now 46% of total division sales as of Q3 this year.

On the next page, you see our attractive growth platform.

I want to point out a few things on this chart to you.

First of all, Cosentyx and Entresto made their first significant contributions to the quarter with $88 million and $16 million in sales respectively.

Several of the products in particular, Gilenya, Tasigna, Galvus, our COPD portfolio, and Jakavi have strong double-digit growth.

And I would say the only real disappointment on this slide is Lucentis which continues to face pressures from the use of Avastin, Eylea market share gains, as well as price pressure in the VEGF segment.

That overall segment is growing, but nonetheless, we are not able to put up sales growth during this quarter.

On page 30, we take a look at our oncology business, which is now representing 46% of total pharma sales.

You see, as Joe mentioned, that oncology franchise grew 27% from the same period last year, and even extracting the newly acquired GSK products, you see the underlying business is growing strongly at 8%.

The integration continues to proceed on plan.

Looking forward for oncology business on the next slide, I wanted to help with the questions we often get about what will happen to Tasigna after Gleevec loses exclusivity.

As you recall, we expect first generics for Gleevec in February of next year in the US and in Europe towards the end of the year.

However, in a number of markets, Gleevec has already lost its exclusivity, and what we try to show on the chart is what happens to Tasigna in those countries.

You see that in most cases Tasigna continues to grow.

In some cases, Tasigna grows even more strongly and there are, however, at least one example where Tasigna growth slowed down a bit.

So we would anticipate looking forward that Tasigna will continue to grow despite the loss of Gleevec's exclusivity next year.

Taking a look at the next page, you see that we're doing well with our skin cancer drug approvals, Tafinlar and Mekinist, as well as Odomzo.

Taf and Mek together now have a run rate that's in excess of $500 million, focused on that BRAF segment of metastatic melanoma.

Odomzo will be a new, yet small opportunity in the treatment of basal cell carcinoma.

Now turning to Entresto on the following slide, you see we've made really excellent regulatory progress.

We gained approval in the US in July, in Switzerland in September, Canada in October, and the EU issued a positive opinion -- actually the CHMP issued a positive opinion on September 25, which brings some of these launches forward from our original plan.

While we achieved modest sales during the quarter, we are getting positive qualitative feedback both from physicians and from patients who have used the drug.

Our biggest challenge remains the block that we face in terms of Medicare Part D formularies.

As you recall, 65% of the patients are Medicare patients and until October 1 of this year, no formulary was open to patients.

That first formulary approval was achieved, and we would expect to see more such decisions to come early next year.

Some may come a bit earlier and some perhaps a bit later, but we think much of the formulary blockage will start to lift as the six-month mandatory Medicare period comes to an end.

Turning now to Cosentyx on the next slide, you see that we are doing very well in psoriasis, with $88 million in sales in the quarter and $140 million sales year to date.

In the US, we have over 12,000 SRFs that are processed or being processed.

And this represents roughly a 6% of biologic share, which is really a great start for a new product launch.

In addition, during the quarter we were able to show new long-term data, which shows that Cosentyx demonstrates sustained efficacy and safety over a three-year period.

As you know, many of the TFC, their efficacy wane over time, we think this is good news for patients and patients are likely to stay on this drug longer.

In addition, we received in the EU a positive opinion for ankylosing spondylitis and psoriatic arthritis in October which should mean a full approval towards the end of this year and another big growth opportunity for the brand.

On the next slide, I want to give you a little bit of insight to how the product's being used around the world, because as you know, while we launched early this year in the US, our launches in Europe really started midyear.

In the US, we see about 20% of the patient starts are for what we would call biologically naive patients.

These are patients that have not been on a biologic therapy prior to Cosentyx.

That's in the US roughly 20% of the patients.

Strikingly, when you look at Switzerland or you look at Germany, you see it's more like 40% to 50% of the patients have not been on a biologic before.

And you might ask why that's the case, and I think it comes down to a few things.

First of all, physicians are recognizing that Cosentyx is a better product given the data and given the possibility of having 90% to 100% clear skin.

However, in the US, because of the blocks of formularies put in place, patients often have to pass through another biologic therapy before getting on medication.

The good news from all of this could mean, and we'll have to wait for a few more quarters to be sure, but it could mean that the market actually for biologics and Cosentyx in particular, particularly outside the US, may expand and we may find actually that our ex-US sales come in bigger and better than we had originally hoped for.

On the following page, I just want to give you a little bit of insight how our strategy translates into action.

You'll recall about a year and a half ago, we decided to focus more heavily on seven therapeutic franchises and you see them across the top of the chart.

We wanted to go deeper because we thought that once the Company had developed experience, whether it be in drug development or in commercialization in a category with a particular physician type, there was value in having other products in that basket.

You essentially would develop the drugs more efficiently and sell them more efficiently, which would position us to be able to commercialize at a higher profit margin.

In addition, we believe in the future increasingly payers will pay for outcomes and we will need to send patients home with devices which will help with monitoring and such.

To the extent you have multiple products in a therapeutic category, that becomes an easier investment to swallow.

When we did our analysis, however, we realized that despite our success with Gilenya, which is well on its way to becoming a $3 billion brand, we didn't have enough coming in the future so we acted.

We did an acquisition of Spinifex, which gives us a product with good Phase II data in neuropathic pain.

We acquired or we reached an agreement to acquire the remaining ofatumumab from GSK for autoimmune diseases, which will allow us to start a Phase III pivotal trial in relapse remitting MS early next year and possibly also PPMS.

And we did a partnership with Amgen, which allowed us to de-risk our Alzheimer's investment and also gain access to their what looks like very good migraine drug ex-US and ex-Japan where we can now put our commercial expertise to good use for that product, thus providing us one of the better, I believe, neuroscience franchises in the industry.

On the following slide, you see our typical checklist of achieved and expected highlights in terms of our news flow, which has been a very solid if you're the only meaningful disappointment being BKM120 where we hit a primary endpoint, but the clinical meaningfulness of that endpoint in terms of numbers of months additional progression-free survival is not where we would like it to be.

Also, while it doesn't say on the chart, you notice in the first half we talk about the regulatory filings in the US and Europe for Cosentyx, but of course we also were able to achieve the recommended approval this year, which puts us almost five months ahead of our timeline.

Now, I think it's worth taking a moment here to give you a little bit of a forward look to see what's coming because our investment in innovation, I believe, is really paying off.

We have multiple key milestones expected over the next year or so, and you can see across products for AML, with PKC412, we will see the top-line results in Q4, the exacerbation study called FLAME for Ultibro Breezhaler also in that quarter.

We have two data points for Promacta coming.

The focus here is the Phase II ASPIRE trial, which potentially could result in a new filing for MDS.

The Phase II data, hopefully the filing afterwards for Tafinlar and Mekinist in BRAF mutated non-small-cell lung cancer.

The first pivotal data for BYM, the first pivotal data for BAF312 in secondary progressive MS, Phase III trial for Votrient in the adjuvant setting for renal cell carcinoma, which would expand that market.

Two potential analysis dates for Serelaxin in acute heart failure, an interim analysis that will occur in Q4, and then a final top line expected result in mid-2016.

And last, but not least, our oncology, our breast cancer drug LEE011, which will have interim early next year in a readout mid next year.

You can see the future from a development perspective is quite bright and with that, I would like to turn it back over to Joe.

Okay.

To wrap up, we continue to deliver sales growth with margin expansion in our third quarter, very strong performances from pharma and from Sandoz, and a growth acceleration plan for Alcon that's under development.

And I think also importantly, we're advancing our key launches, as well as the fact that we're on track to deliver our full-year guidance that we gave at the beginning of the year.

So now I would like to open the call to questions.

(Operator Instructions)

The first question comes from the line of Alexandra Hauber from UBS.

Please go ahead.

Good afternoon.

Thank you for taking my questions.

Firstly, on Alcon, I understand you probably won't tell us much about your growth acceleration plan, but the question I got all morning was, what is the rest that you have to do significant write-downs after [intanimus] testing at the end of the year?

From the annual report, it's not really clear what you have, what you are assuming right now.

We know it's a 3% long-term growth, which I assume is probably still okay.

But given -- I would assume near-term growth assumption at probably closer to 5% and 7% and probably somewhat higher margin than we currently have.

So the question is, is there a risk of significant asset writedowns this year?

Also, on the disclosure, you do provide -- I'm trying to learn more about this business and something I was surprised this quarter is just that the contact lens weakness is not as bad as originally thought based on a capacity bottleneck you have for DAILIES TOTAL1.

It seems that business is actually doing well, but it seems like you're having significant share losses in the other contact lenses especially in Asia.

Could you just elaborate on that?

Then I have a couple of pipeline questions.

Just firstly on BKM, you cited as a disappointment and it wasn't quite clear from the chart on slide 38 whether you do not file in the first quarter or you do not file before you have further Phase III data available for BKM.

And then also on the Votrient PROTECT study, you flag as a midyear filing and you also say in the press release you have the data in house.

Is it likely that we get the headline results from the study still before year end?

And then a quick one, could you perhaps give us the PDUFA date for Ultibro and Seebri the US?

Thank you.

Okay.

Let's start with -- I will pick the Alcon question into two parts.

One was an asset question and I think Harry will take that.

Then we'll move to Jeff.

Okay.

Thank you, Alexandra.

So foreseeable cash flow of Alcon is well supporting the asset values, so I do not expect asset write-down.

And Jeff, do you want to talk about the growth acceleration plan and specifically contact lenses?

Yes, so Alexandra, on contact lenses, I think as you noted correctly on some of our newer, more innovative launches, we've seen very good growth there.

DAILIES TOTAL1 is up 50% year to date, over 270% growth in AIR OPTIX COLORS.

We have seen mixed performance I would say, some markets gaining share and some markets losing share on our core brands.

AIR OPTIX in the weekly monthly segment and DAILIES AquaComfort Plus in the daily segment, which is a PVA technology and competes more head-to-head with some of the hematechnologies.

Two factors on a regional performance that are important to note.

One is on Asia in particular.

We did have a destocking effect in the quarter, which was about 1 point of growth.

In the US, we have seen I think between six and eight new launches in the daily segment, particularly in the premium daily SiHi segment.

And so while we're still growing consumption at 8% growth versus market growth of about 3% to 4%, that's off of the growth that we were seeing, which was a little bit north of that, really around 11% last year.

So it has become more competitive in the contact lens space.

But I do expect that we'll be able to accelerate our growth in contact lenses as well, looking forward.

So 1% of growth, was that just of Asia growth or of total consumer growth?

Yes, I'm going to just double-check my numbers.

I'll come back to you after David answers his questions.

Thank you.

Alexandra, the three questions.

For BKM, we're talking to regulators and we're going to make a decision about when and if we file.

Two things to just keep in mind, we will be getting overall survival data towards the end of 2016.

That could change the thinking.

But also, we're accelerating the development of BYL, which is the alpha-specific PI3 kinase and if actually BKM is significantly delayed, it may make sense to focus everything on BYL.

But we're not in position to make a final decision today.

The next question I think you asked me about was the Votrient PROTECT trial.

We have now hit enough events to do the analysis.

We have not seen the data yet.

We should soon.

We expect to file I think it's around middle of next year or so, what I had on my chart.

And then last, but not least, Ultibro Seebri, the PDUFA date is the end of October, so it's very soon.

And Jeff?

And Alexandra, the 1% trade inventory reduction in Asia was on the overall vision care sales growth, so 1% on the franchise.

Overall, we did see from Asia destocking effect of about 1% of the global business on the divisional business, but that included pharma as well.

Thank you.

Okay.

Next question, please?

The next question comes from the line of Andrew Baum from Citi.

Please go ahead.

Hello, Andrew.

I'm here.

Sorry.

I was speaking to mute.

Three questions, please.

I think pharma is obviously of significant interest to investors in respect pharmacies.

In relation to your provision for a pending assessment with the Department of Justice, could you talk to the extent to which there are any restrictions anticipated that may impact your operating abilities in that segment?

Second, for Jeff, in relation to Alcon, I didn't feel I fully got my hands around the exact causes, what has driven all the facets of the slowdown.

Could you outline to us to what extent senior management you have changed within Alcon, either at the beginning of [tenure] or more recently in order to implement the acceleration program?

And then finally, with regard to your recent hire of Jay Bradner, could you outline the extent to which the signals an uptick in your investment in epigenetics.

And in addition, in the price setting with GSK's portfolio, if you could outline how that is set, is it entirely up to GSK, or is there some independent assessment of the assets if you want to up that.

Thank you.

Okay.

Let's start with the provision for the legal settlement, any expected restrictions.

Yes.

So as you know, it's -- when you're in discussions, it's hard to go into lots of detail.

But we would not expect anything that would be a problem for Entresto, per se.

And Alcon, Jeff, do you want to talk about the changes that you've made at Alcon and what is in store?

Andrew's first question, Joe, if it's all right, was on the root causes of the issues that we're facing.

So I'll address that as well.

Andrew, I think as Joe had mentioned earlier, we've seen a significant slowdown in emerging markets, particularly in Asia, which has led to a corresponding drop in our surgical equipment sales, which was a significant prior-year comp driver for us.

We've also seen increasing competitive pricing pressure in our IOL business.

So despite 3% volume growth that we've had year to date, that's been offset by a combination of price erosion, as well as a negative mix effect.

And I think the third factor, as Joe mentioned, is the increasing generic pressure that we've had in our US pharma business, in particular in the allergy segment where PATANESE went off patent and we expect PATANOL and PATADAY to face generic competition in the coming months, as well as challenges in the inflammation segment.

I think in terms of your second question on the leadership, two-thirds of my leadership team is new in a role since last summer.

I feel really good about the new leaders that we brought on board.

We still have 130 years of experience, Alcon experience on my executive committee, but it has been significant upgrade in a number of areas.

And about half, a little over half of our GMs globally.

So I think coupled with one, making sure that we have the right leaders in the key roles.

Number two, improving our commercial execution, particularly in the US and Asia, where we have new leaders since August and have not been happy with our performance on the execution front really is about those few factors coupled with accelerating our innovation, particularly near to midterm innovation in surgical.

And then Andrew, regarding Jay Bradner, I think based on his background, you can expect him to have some high level of interest in epigenetics and maybe an uptick.

As you know, we have a pretty extensive effort right now at the company led by En Li in Shanghai in NIBR but given Jay's background, you can probably expect a focus there.

The other thing that Jay is going to probably bring is he's very externally focused.

So very agnostic as to where a technology rests or sits, whether it's in academia or in another company or in our Company, and so you could see much more open view of where we're going to source new technologies, develop -- bring new technologies to Novartis.

So we're quite excited about him joining the Company.

We're going to miss Mark because of the great work that he's done, but really believe that Jay will be able to take us into the new world and we feel like NIBR is in good hands.

Harry, on GSK?

Andrew, you'll have to repeat your question.

My question is in terms of the -- you have first rights over GSK's oncology portfolio.

Is the price determined by GSK?

Or is there any independent assessment of the price of any assets?

We have basically the first right of review.

Then there's review time of six months.

If GSK would not be happy with our offer, they are free to shop somewhere else.

Thank you.

Next question, please.

The next question comes from the line of Richard Vosser from JPMorgan.

Please go ahead.

Hi.

Thanks for taking my questions.

First question, a follow-up on Andrew's question on the sort of corporate integrity agreement on the DOJ.

David said that it wouldn't affect Entresto, but the settlement seems to mention Tasigna.

So just more generally on the portfolio, would such a corporate integrity agreement hit any ability to promote any of your products?

Second question on Alcon, it just seems like the timing of the great acceleration plan suggests that we should see a similar revenue decline across all parts of the business in Q4.

Is that how we should think about it and should we be expecting very limited margin expansion in 2016 in that business now?

And then two final questions, one on Glatopa which is just an update on where we are on sales trends and penetration that you have been able to achieve so far that you can say.

And then finally, on emerging markets, growth much lower.

Obviously, Alcon equipment sales have hit the group level, which is 4%.

But how should we expect that to go to develop going forward, given the Chinese and Brazilian issues we know about?

Thanks very much.

Okay.

David, starting with the CIA?

First, let me be clear, whether we end up with a CIA or not is subject to discussions.

Having said that, I would expect should there be anything, it will be focused on the subject of this case, which was specialty pharmacies.

And we would not expect that to have any significant impact on how we do business.

And Alcon, Jeff?

Richard, on Q4, we don't give quarterly divisional guidance, as you know.

I think we had mentioned that we're up against a very strong Q4 in prior year, and we do face a number of headwinds.

I think as Joe mentioned, we're going to be coming back to you in January with full-year earnings with the comprehensive plan, sharing the comprehensive plan to accelerate Alcon's growth.

That will be really across, as Joe mentioned short, midterm, and long-term innovation levers, deep dive on the competitive landscape, and potential moves we could make.

Pricing and reimbursement, and then also acceleration plans by franchise.

And Richard, Glatopa?

Thank you, Richard.

Glatopa, we're pleased with the launch of Glatopa.

While we don't generally disclose product-specific sales, I can tell you the launch is going according to plan.

It has been very well received by payers, PPMs, and the trade.

And currently the patients here sit at around 30%.

And maybe I can give you a bit of context on our strategy.

This is a very much a considered approach to the launch and our strategy is around managing price and volume to make sure we bring value to both the payers, the patients, and ourselves.

So pleased with where we are.

Hopefully that answers your question.

And then on EGM, Richard, from a group standpoint, yes, our growth rate did slow to 4%, but I think if you dissect that and you look at pharma and Sandoz growing 7%, 8% and then Alcon having a minus 7% in the quarter, that was really the drag on emerging markets for the Company.

And as you know, Alcon's been disproportionately hit with equipment sales in those markets, as their economies have started to slow.

To the extent that we can turn Alcon in those businesses, I mean, in those countries, you'll see the total group EGM number go up.

Thanks.

Next question, please.

The next question comes from the line of Matthew Weston from Credit Suisse.

Please go ahead.

Thank you very much.

A number of questions, if I can, please.

Firstly, for David, I would love to understand how you envisage Entresto launching as we see the NDC blocks roll out.

Is it very simply that once the NDC block is off, we should see rapid patient accumulation or are there other barriers that mean you think it's going to be slow in the first half of next year?

Secondly, I see within your guidance you still cite $2.4 billion of generics for the year.

As I understand it, I think you lost Exelon Patch, which was something that you weren't expecting, and clearly the impact of generics on Alcon is considerably worse than we were all expecting.

So my question is, what's doing better in the generic landscape that means that you've not increased that assessment?

And then sticking with guidance, divisional guidance, you gave it to us at Q2.

It's absent at Q3.

Can you give us some detail as to where you expect the divisions to be by the end of the year?

And then finally, a quick one on Alcon, other revenue within the ophthalmic pharma division, it seems extraordinarily volatile.

What is it and what drives the volatility?

Thank you.

Okay.

David?

Okay.

So let's start with Entresto, try to give a bit more color.

So the primary issue is the managed care blocks, in particular the NDC blocks within Medicare.

Interestingly enough, to just give you some other numbers that might be helpful, 25% of the patients are commercial patients.

65% are Medicare.

10% are other.

Yet 72% of the current business is coming from commercial.

So it gives you a sense of what starts to happen when you get to the block.

The commercial is also still relatively blocked, but not nearly as much as Medicare.

As we get through that, what we need to do is to fully educate these physicians to create the sense of urgency to move patients from an ACE-inhibitor ARB that they have been using for many years to a new drug.

For the most part, cardiologists have relied on older, generic medicines for a very long time, and they are a bit different from customers that we're more used to.

So for example, an oncologist or even a rheumatologist or a dermatologist will fight for their patient.

They will fight with the managed care entity to get the drug to them.

A cardiologist is less likely to do that for a variety of different reasons.

So we asked at the same time we work through the payer issues, we have to create an even greater sense of urgency on the part of the physician.

The other thing that we are starting to notice is that there has been some media around heart failure in general.

You may have picked some of it up.

And what we see is that when a patient or a caregiver actually asks the doctor for the drug, they are much more likely to get it.

So we need to make sure that patients and caregivers are hearing about the medicine as well.

So the uptake for Entresto will clearly be slower than it is for Cosentyx, given the dynamics.

On the other hand, we have very good expectations about the ultimate profile of the product and being able to hit the peak sales forecast that we shared with you in the past.

Thanks.

And on the generic question, let's start with David just in terms of additional deals that are doing better than what we assumed.

So as you pointed out, Matthew, so Exelon Patch went generic in Q3, which was a negative and certainly be a negative for Q4.

On the other hand, Diovan during Q3, we no longer have as much.

And we've -- negative.

And we've done a little bit better than we had projected.

They sort of neutralize each other.

Okay?

Harry, on divisional guidance?

On divisional guidance, overall I think it's very important to step back.

The Company overall is fully on track for the full-year guidance of mid single-digit sales, high single-digit core operating income growth, and pharma fully on track for the mid single-digit sales growth.

And then Alcon with the 1% year to date, you can imagine that a low single-digit sales growth may be a stretch, also given last year's quarter four.

So there may be some volatility around that.

On the other hand, Sandoz is growing very strongly, maybe a bit better than the guidance.

So I think stepping back, fully focusing on total Company guidance is the best thing to do.

And Jeff, on the other revenue and pharma?

So overall, the ophthalmic pharma business, because you asked about it broadly, was last year a $4.2 billion business.

If I look at the volatility that you referenced, I would say the first thing is our allergy business, which is about $600 million globally a year.

It's a seasonal business, and we did see a weaker season this year.

Secondly, on dry eye, the double-digit growth that we saw in Q3 and sustained in the US in Europe was offset by the weakness in Asia and Russia, in particular, given macroeconomic situation, the slowdown did have a significant impact on our dry eye business in emerging markets.

Two other factors that I would mention, the third on inflammation.

We are seeing a good bit of generic competition to our NEVANAC and ILEVRO franchises for our anti-inflammatory nonsteroidal anti-inflammatory drug business.

And then really a mixed story on glaucoma.

I continue to be pleased with our performance and fix those combinations in glaucoma, we've seen Azarga, Simbrinza, and DuoTrav up 19% year to date.

Of course, that's offset by some of the patent expiries that we faced in monotherapy such as AZOPT in Europe and Travatan in a number of markets around the world.

Jeff, many thanks.

I don't know whether I'm still alive, but a quick follow-up.

You've gone through each of the franchises opthalmic pharma except the one you list as other, which is down 15% in constant currencies to date, down 35% constant currencies 3Q.

I always thoughts that was Jetrea but there's no way Jetrea selling $44 million in a quarter.

I would just like to know what's in there that makes it so volatile.

Fair enough.

Maybe I misunderstood your question, was then directed at other.

What is in there are the tail brands.

So we've seen -- there are a number of tail brands that are non-promoted, both in Europe and the US.

In the US, it's our vitamins portfolio that's dragging that number down.

In Europe, it's the number of non-promoted tail brands.

So what we're looking to do is looking at fostering agreements that we could do with third parties that would be willing to put resources behind it.

We would help fund that and then do a business development and licensing fostering deal as we've done on a number of cases in pharma and Sandoz.

Jeff, many thanks.

Very helpful.

Next question, please?

The next question comes from the line of Tim Race from Deutsche Bank.

Please go ahead.

Hi, gentlemen.

The question first for David, just on Entresto.

When you talked about the customers obviously getting access to the drug a lot easier, does this mean that you're rethinking or you're spending 2016 in terms of primary care sales force and potentially DTC advertising that should be factoring in sort of greater costs to Entresto next year perhaps?

Then a question perhaps just on the GSK business and what that added in terms of profitability to your margin progression, up to 2% core margin change you've seen in the nine months.

How much is GSK adding to that in pharma division?

And then just lastly, on Alcon.

In the past when you've had perpetually under performing businesses, you've actually either bought into assisted businesses or you've actually sold the businesses.

Is Alcon absolutely core and should we be expecting any sort of further M&A around that division?

Thank you.

Okay.

So starting with Entresto, indeed spending on Entresto will be higher in 2016 than 2015.

That's because we're launching in Europe and in the emerging markets.

And we'll be ramping up as we had planned our US launch costs for the brand, particularly as the NDC blocks start to come off.

And you started to talk about some of the opportunities to do that, with field force, with direct-to-patient, and other activities.

At this point in time, I wouldn't be adding a primary care field force until I was sure that the cardiologists were fully on board.

And that's going to take, I suspect, at least half of a year.

Then we'll come back and we'll make a primary care decision sometime after that.

In terms of GSK, you saw that we had for the pharma division overall, we had 7% sales growth.

If you take the GSK products out, we would be flattish.

What that essentially means is that our core drug growth drivers have completely overcome the loss on Diovan, the loss on Exforge, the loss on Exelon Patch, so it's actually a quite good performance.

Even if we back out the GSK products, which do have a higher margin than pharma overall, we would still be driving underlying margin improvement in pharma if we hadn't done that deal.

I think that's all I would like to say at this point in time.

Thanks.

Okay.

And then Tim, in terms of Alcon, you know, when you look at the Company now, you look at the Novartis Group since the portfolio transformation, I think we've got definitely a lower tolerance for underperforming businesses.

But if you step back and look at Alcon, it is fundamentally a very good business.

You have an on-trend business with an aging population that's going to need additional eye care.

You have Alcon with leading market share positions in three very important segments.

And so I think we have to -- our first step is to build this growth acceleration plan and get the business growing.

And I think you could see elements of M&A in terms of peeling off underperforming parts of Alcon or adding to Alcon, if there were other bolt-on opportunities.

And that's really where our focus is going to be.

It's building that near-term growth acceleration plan, and if we don't -- we do intend in January to lay out what the plan looks like and also talk about how we internally are going to look at milestones in terms of improvement on that business.

And if it doesn't improve, then we got a different conversation.

But the first step is to get it growing because it is fundamentally a really good business.

Thank you.

Next question, please.

Next question comes from the line of Tim Anderson from Bernstein.

Please go ahead.

Thank you.

On Entresto and treatment guidelines in US and Europe, are you confident that Entresto will be recommended ahead of an ACE and an ARB in the treatment of heart failure as opposed to alongside an ACE and an ARB?

On Gilenya and the eventual entry of ocrelizumab, I saw results of a survey recently of physicians that suggested that high efficacy orals could be at risk to a greater degree than what I would have guessed.

I'm wondering if you can comment on the long-term growth trajectory of Gilenya.

Will that be a brand that continues to grow over let's say the next three years?

And then Tasigna, you commented that you expect continued growth.

Is that sales growth or unit growth?

The reason I ask is it seems like there's a potential you may have to make price concessions given the availability of generic Gleevec.

Okay.

Thanks, Tim.

So a couple things.

Regarding guidelines, as you know, we can't know what's going on with guidelines, nor can we influence guidelines.

All I can say is from what we've been told, we would expect sometime in 2016, we will see both European guidelines and American guidelines and the European guidelines are likely to come first.

What they will actually say, we're going to have to wait and see.

I think the data is compelling, and I would hope that those guidelines would reflect the compelling data.

Regarding Gilenya, we expect Gilenya to continue to do well.

It is the most the most efficacious oral product.

You are right that ocrelizumab looks like a highly effective drug.

To the extent that there's overlap between these two products, I am not so sure that's what's going to happen.

Having said that, as you know, we reached agreements to license ofatumumab because we believe it has the same efficacy as ocrelizumab but it has some dosing and administration advantages, in particular, that it works for a month instead of having the patients' B cells blocked for a full six-month period.

So we do expect Gilenya to continue to grow and not be directly impacted although always at the margin whenever you add a new drug in the MS category, there's some impact.

Regarding Tasigna, the chart I showed you with the other countries, those are countries that really you have no opportunity to raise price.

As you can see, demands continue to grow.

So I would expect that's what would happen.

Volume would grow and also we would see sales growth.

If I could just go back to the guidelines on Entresto, would you agree that it's kind of critically important that Entresto be positioned in the way that I described, which is ahead of an ACE and an ARB?

I think it would help, but we've seen plenty of times in the past when initial guidelines come out and they are revised over time.

I think what's much more important is that the data we have is communicated to cardiologists.

They understand that the first event patients will often have sudden death and they need to avoid that for their patients.

We need to activate patients and caregivers to ask for the drug and we have to get through the reimbursement hurdles, most of which will happen before the guidelines come out.

Thank you.

Next question, please?

The next question comes from Graham Parry from Bank of America Merrill Lynch.

Thanks for taking my questions.

Firstly, a financial question on pharma other operating income and expense.

Were there any small one-offs in that line that were not exclusively from core, as it was particularly strong in helping the margin in that business this quarter?

Secondly, on Entresto, with the reimbursement support program for Part D, should we expect any Part D prescriptions to essentially be netted off to zero in your revenues until coverage starts?

And you mentioned in your slides that commercial plan patients have limited access.

Could you clarify why you are seeing limited uptake from commercial plans at this point?

And then thirdly, on the specialty pharma, pharmacy settlement, can you confirm the Exjade Myfortic to the extent of the investigations and the negotiations for settlement and that no other products or specialty pharmacy agreements are subject to any government investigation at the moment?

Thank you.

Okay.

Starting with Harry?

Graham, your question on core was about the core adjustments?

So it's the pharma other operating income and expense line, the core level.

Were there any small one-offs that were not excluded from core because they come in under the thresholds?

We had one element, which was the reversal of the Entresto launch provision.

Which over time, we basically, whenever we produce large product before approval, this launch inventory is written off or expensed and at the moment of approval, it's activated and basically provides then an income which we do not core adjust.

Could you re-ask the question about Entresto Part D?

I wasn't quite clear on it.

Okay.

So on the reimbursement support program that you talked about in the release, does that mean we should essentially expect any Part D prescriptions that you would have been generating to be zero in your revenues until coverage starts, so essentially we could be seeing this in prescriptions, but not in revenues?

And could you explain why commercial plan patients have limited access?

Why not getting uptake in commercial plans where we don't see NDC blocks?

So there is a patient support plan.

There are patients that are starting out on sample packs.

We do have some prescriptions in Part D. If a physician really will fight with the plan, particularly a deteriorating patient, they will eventually get through part of the time.

So there is some sales, but they are quite modest.

On the commercial side, we also have a number of those plans are blocked, although we're doing better than with Part D. Those plans for the most part are blocked as well.

But as I mentioned earlier, roughly 72% of the business has come from the commercial plans, even though they only represent 25% of the patients.

So we're doing better there.

Those will also open up over time as our negotiations continue with those plans.

Graham, on the specialty pharma question, I've asked Felix Ehrat to join us and just comment on your question.

I'll gladly do so.

The settlement covers our five drugs, Myfortic, Exjade, TOBI, Tasigna, and Gleevec.

Once finalized and approved, it will bring the entire litigation with the Southern District to a close, and we are not involved in any other government investigations as to our relationships with specialty pharmacies.

Great.

Thank you.

Next question, please?

The next question comes from the line of Florent Cespedes from Societe Generale.

Please go ahead.

Good afternoon, gentlemen.

Thank you very much for taking my questions.

A few quick ones.

First, for David on respiratory.

Could we have your thoughts on the potential of Ultibro following the negative Summit results, and could you tell us what you intend to do in the US knowing that we are approaching the FDA decision?

And also knowing that the FLAME trial is designed with the European dose.

Second question is on ofatumumab.

Could you give us a little bit more color on your projects with this product, especially affording the ocrelizumab results presented at ECTRIMS.

Do you envisage to launch a Phase III in the primary progressive remitting form and also on the secondary progressive population?

And could you add a little bit more color on the timeframe?

And my last question is for Jeff regarding the generic impact on the [ophthalmic segment].

Is the erosion in line with your expectations or do you see a stronger decline?

Thank you.

David?

So the US version of Ultribro and Seebri is likely to get FDA approval in the coming days or weeks.

We are still discussing the appropriate way to launch those products, including discussing with potential partners.

And as soon as we have a decision, we're going to share that.

You are right that our FLAME trial, which is a large 52-week multi-center head-to-head that compares Ultribro to Seretide in about 3,300 patients, is an important data point and it will only be used ex-US because it is designed with Ultibro in the ex-US once a day formulation.

We think that trial will be quite important for the brand.

Regarding GSK's Summit trial, which was their mortality trial, we don't see it having any real impact on us.

As you know, we chose not to do a mortality trial.

We thought it was an extremely high risk bet, given patient population, given study design issues, and the size of the trials.

In a way, I'm kind of relieved because otherwise we would have looked in retrospect not so smart, but it certainly turned out okay.

Just to leave you with Ultibro and Seebri, should be growth drivers for our Company ex-US.

And we'll make a US decision in the coming weeks or months and we'll let you know.

Regarding ofatumumab, as I said, efficacy is expected to be roughly similar to ocrelizumab with a dosing advantage.

Basically ofatumumab is a subcutaneous once a month form, which means you don't have to administer in an infusion center.

It means you don't have injection site reaction.

It also means that after essentially one month of B-cell ablation, you can let the B cells come back, whereas with the Roche product, unfortunately those patients are ablated for six months if they run into problems.

We'll start a trial in relapse remitting MS towards the end or beginning -- end of first quarter, maybe beginning of second quarter next year.

The PPMS data, as you know, was a positive surprise on ocrelizumab.

Our team is now evaluating what the right thing to do is and once we have a final decision, we'll share that.

You also mentioned on your question secondary progressive.

We don't have any plans to do a study in secondary progressive with ofatumumab, however, as you know, BAF312, there is a trial that's going to read out mid next year and that will -- may be the last attempt by the industry to do a trial on secondary progressive for a while or we'll be pleasantly surprised and then everybody will focus on it again.

Thanks.

Jeff, on the generic impact?

Yes, Florent, so I would say it's in line with our expectations on Travatan and AZOPT.

AZOPT has gone generic in most of the European countries.

Travatan in a few markets like Canada, Mexico, and others.

It's also I would say largely in line on PATANASE generic erosion and allergy.

Where it's been more significant than we anticipated is in inflammation, specifically with respect to NEVANAC and ILEVRO where we do see compounding pharmacies eating into market shares of the brand of players, not just us, but others, with significantly lower pricing.

So we have seen that erosion a bit more than we expected.

Thank you very much.

Your next question, please?

The next question comes from the line of Amy Walker from Morgan Stanley.

Please go ahead.

Good afternoon.

Thanks for taking my questions.

A quick one on the overall guidance, if you wouldn't mind.

Your full-year 2015 guidance calls for high single-digit growth incorporating income excluding currencies, but you achieved 10% growth in the nine months and 14% in Q3.

So that seems to imply quite a strong slowdown in the rate of growth in the fourth quarter to sort of mid-single digits.

I know you've obviously got headwinds in Alcon and things.

What is intensifying so strongly that you seem to have such a pessimistic view on the run rates in Q4?

Secondly, on Lucentis, the impact of competition seems to strengthen significantly in the third quarter with the year-over-year constant currency growth swinging negative to minus 8% versus a positive 2% growth last quarter.

How should we think about the shape of that growth going forward for the next few quarters?

Is the high-single-digit constant currency decline a good run rate?

Very lastly, you mentioned $850 million of gross savings from the productivity initiatives in the third quarter, which I think is similar to the number that you reported last year at Q3.

Do you expect to be able to continue that kind of run rate of growth savings for the next four or five quarters or should we expect that that's going to start to tail off in the not too distant future?

Thanks very much.

Okay.

Harry?

So first on the guidance, you are right.

Year to date incorporating income and constant currencies 10% growth, and we are guiding for the full year to high-single digits.

So you probably can expect the high end of the high-single digits may flip to double digit but as the macroeconomics are volatile, we stick to the high-single digit, but you may see low-double digit.

And on maybe I'll talk to productivity, we are not concerned at all about productivity.

We are highly convinced that this will continue at a high rate and actually establishment of NBS is one of the measures and the NBS team is maybe up and running, already delivering, but we're materially, I think materialize further opportunities.

Also within the NBS group, the procurement group is now even more forcefully leveraging our full company demand, management, and external contracts, so we expect there also continued good productivity growth and actually our programs and projects for the productivity pipeline for next year is already quite full, actually ahead of the normal curve that we have at this point of the year for the next year.

So I'm very optimistic about our continued productivity growth and drive.

Okay.

Then with Lucentis, so we've been benefiting historically over the last year-plus since the launch of the new indications in RVO and diabetic retinopathy.

As that benefit starts to wane, as that patient population on drug gets bigger and we penetrate, you start to see some of the greater weakness we have in AMD, particularly against Avastin.

At the same time, there's pricing pressures.

I think for the brand going forward, while it's hard to give a good number as guidance, I think flat at best would be the way to look at it.

Even more likely, it will be a little bit negative.

Thank you.

Next question, please?

The next question comes from the line of Michael Leuchten from Barclays.

Please go ahead.

Thank you.

Three questions, please, if I could.

Firstly, just going back to Gilenya, the sequential performance in the US is a slowdown Q3 over Q2.

I haven't seen any commentary around stocking either way in that product.

Wondering what that slowdown, what's driving that slowdown, Q3 in the US?

And related, given the fact that you did not get the patent that you wanted for Gilenya in the longer run, does that change anything in terms of your strategic focusing on multiple sclerosis with the multiple assets you pointed out?

And then the third question, going back to Entresto, for those commercial patients that do not manage to get preauthorization where asked, what is the pushback, what's used as an excuse not to grant the authorization at this point in time, please?

So, a couple things.

First of all, Gilenya volume continues to grow with the product.

You're seeing an odd effect between Q2 and Q3.

I alluded to it last quarter, I believe.

During Q2, we switched from a blister to a bottle pack in the US, which distorted uptake, so essentially there was some stocking in Q2.

That's been worked off in Q3.

And when you neutralize across the two quarters, you end up with sort of a 19%, 20%-ish kind of growth rate.

To give you another data point that might help me feel better about it, if you look ex-US, we grew 18% year over year in Q2 and 16% in Q3.

So you see there's no real -- there's real no change ex-US.

So this brand is doing well.

I'm not quite sure what you refer to with the Gilenya patent.

Nothing has really changed from our perspective, and we're certainly committed to the MS space.

That's why we've invested in BAF.

That's why we did the -- we're doing a deal with ofatumumab with GSK.

It's an important pillar for our business.

Then you said -- I think you asked me the question why don't prior authorizations get approved.

I think it's even a bigger question of our cardiologists used to fighting for prior authorizations.

Remember this, you're a cardiologist.

You've been using cheap generics for the last 10-plus years.

And unlike an oncologist or rheumatologist or dermatologist, you haven't had to spend the time and you haven't had to build the office staff that would fight, which literally can be hours, days, or weeks, to try to fight to get a product approved.

They are just not used to doing it and psychologically, it's even difficult for them to do it.

If they really do fight, close to half the time they will actually get a prior authorization approved.

Thanks for the questions.

Next question, please?

The next question comes from the line of Simon Baker from Exane.

Please go ahead.

Thank you for taking my questions.

A few quick ones, if I may.

Firstly, I wonder if you could give us a little bit more color on the higher tax rate in the third quarter and the impact for the full-year tax rate.

Secondly, on the Southern District specialty pharmacy settlement, can you tell us if you had any pre-existing provisions for that settlement?

And finally, I'm sure you were fairly pleased with the assessment from ICER on the cost benefit analysis for Entresto.

I was wondering if you could give us your thoughts on the methodology that they employed to come to that assessment.

Thanks so much.

Okay.

Starting with Harry on the tax rate, as well as the provision.

Thank you, Simon.

So on the tax rate, let's focus on the context for a minute.

We always make an estimate for full-year tax rate, which in the first six months was 14.7% and due to slight shifts of the profit mix from lower to higher tax jurisdictions, that estimate for the full year increased by 0.3 percentage points to 15% for the full year.

So when you look at the nine months core tax rate for continuing operations, that is 15%.

And because we had them to catch up in quarter three for the first six months, that's where you see the 15.7%.

So the underlying is 15%.

That's our latest full-year outlook.

It's always a bit hard to forecast the tax rates.

It's well within our range of 14% to 16% that we see fundamentally for our business.

And then maybe on the question of the provisions, so we always provide for these cases in line with IFRS, so the legal fees have been provided but the 390, we budget provided now that the case is probable estimable.

David?

For mid-September, ICER found Entresto to be both clinically effective and cost effective.

We were very happy with that.

As you can imagine, having such third-party analysis is helpful for discussions with payers.

We believe that we have priced this product correctly.

In terms of methodology, it was generally sound.

If there was any criticism at all, they predicted there would be a 75% market penetration within five years, which I think is on the bullish side.

Next question, please?

The next question comes from the line of Naresh Chouhan from Liberum.

Please go ahead.

Hi.

Thanks for taking my questions.

On Xolair, we've -- there was a notable slowdown.

It went from 19% growth in the first half to 4% in Q3.

Is there anything we should be worried about here?

Then on Sandoz, could you tell us -- give us some sense as to whether or not the costs for Zarzio in the US are now fully included in the Q3 cost base?

Or should we expect sales and marketing to grow from here over the next few quarters?

And then finally on Alcon, it would seem in all three subdivisions we're seeing pressure on products from either generics or from competition from peers.

So do you feel you have the sufficient levels of innovation inside the business to get it grown back to mid-single digit in the not too distant future or are we going to have to see significant inorganic innovation being brought into the business?

Thanks.

So starting with Xolair, you're right.

The sales growth did slow down in Q3.

We would describe that as temporary.

We have a fairly large Xolair business in the emerging markets, which are in part impacted by the timing of tenders and bidding.

We think the product is continuing to grow nicely overall.

One thing to keep in mind is that GSK will launch mepolizumab and that will impact the brand a little bit going forward.

But overall, the growth outlook is quite good, both in emerging asthma and chronic spontaneous urticaria.

And Richard, on Zarzio costs?

I think the question to Zarzio costs, we are prepared to launch successfully so the costs are fully in there so we don't anticipate any significant change moving forward.

Okay.

And Jeff, on Alcon?

Naresh, thanks for your question.

I think the innovation situation varies a bit by franchise, just as the competitive landscape does.

I think first of all on surgical, I feel good about the innovation progress that we're making in surgical having started, initiated our development projects for UltraSert preloaded and PanOptix trifocal only last summer, and gained regulatory approval and launched in Q3.

And then most recently got approval for our preloaded UltraSert IOL in the US several months early.

We are ramping manufacturing up to enable us to be able to meet the demand that we have there because we have a bit of scaling up to do.

I feel good overall in surgical.

I think in pharma, have a more concern given the lack of innovation that's come out of the pipeline in the last 10 years on our pharma business, and so we're evaluating and diligencing assets that could have a more near-term effect inorganically.

We have done 10 deals overall since last summer, but those mostly impacted 2018 to 2025 period, so there's an impetus for us to really look at levers which can more influence the near to midterm.

Okay.

We have time for one last question.

The last question comes from the line of Keyur Parekh from Goldman Sachs.

Please go ahead.

Good afternoon.

Thank you for taking my questions.

First, on pharma and as it relates to the Glaxo products that you brought on forward, it looks like they were flat quarter over quarter.

Can you help us think about how you see the growth outlook for those going forward?

Secondly, on a higher level, as I look at Alcon, can you just -- I realize you look at plans, detailed plans early next year, but how long do you think it might be before we go back to seeing Alcon doing the 5%, 6%, 7% growth that it used to do a couple of years back?

Do you see it as a 12-month objective or two- to three-year objective or a five-year objective?

And then lastly, there's been some recent press about what certain shareholders might want Glaxo to do from a strategy structure perspective.

Would be keen to hear your thoughts, if updated any, on what your impression the consumer healthcare business and how you see that going forward.

Thank you.

Okay, David?

Okay.

So starting with the GSK branch, first I just want to tell you we're quite pleased by how the portfolio is progressing.

It's pretty much on what we modeled when we did the transaction.

Some products are bigger.

Some are smaller.

Votrient is a bit smaller and we're now actually starting to see that product return to growth.

Promacta and Taf Mek in particular are ahead of our plan.

When you look quarter -- Q2 to Q3, what you're seeing is an effect that during Q2, when distribution moved from GSK to Novartis, we had a one-time increase in inventory during Q2.

It's mostly in the May-June period.

And we don't have that in Q3.

So if you adjust for that, the brands are continuing to grow both year over year and quarter over quarter.

Okay.

Jeff, on Alcon timing?

I think it's hard to give specific guidance on when we expect to see growth really accelerate.

I would say just conceptually, this is not a quick turnaround given the LOEs that we faced, particularly in our pharma business.

I do expect that we'll see a bit more of a rapid improvement in our surgical business over the course of the next year as we build in the innovation and some of the launches that I've mentioned in that business.

But I think overall, I'm cautiously optimistic that with the new leadership that we have on board in a number of key roles, that we will improve the fundamental commercial execution.

But as I mentioned, it takes a bit longer on the pharma innovation where we're a bit light.

And on the GSK question, I wouldn't comment on the shareholder activism, but I would say that we're very pleased with the agreement that we have with them on the OTC JV.

That JV board has met a number of times.

We're working on driving growth.

The business is performing quite well.

And we see big upside potential on that if we're able to get the synergies that we had believed were there and that we still believe are there, and as long as that top line is growing and we're getting the synergies, that piece of the business in which we're participating is going to be worth a lot and it's going to be a good growth driver.

So I want to thank everybody for attending the call, and we look forward to giving you our full-year update and outlook for 2016 in January.

Thank you.

Thank you for joining today's conference call.

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