Novartis AG (NVS) 2017 Q3 法說會逐字稿

Good morning and good afternoon, and welcome to the Novartis Q3 2017 Results Release Conference Call and Live Audio Webcast.

(Operator Instructions) And the conference is being recorded.

(Operator Instructions) A recording of the conference call including the Q&A session will be available on our website shortly after the call ends.

(Operator Instructions)

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

Please go ahead, sir.

Thank you.

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

Joining me from Novartis today are Harry Kirsch, our CFO; Vas Narasimhan, our Global Head of Drug Development and CEO-elect; and our 4 business leaders, Paul Hudson from Pharma; Bruno Strigini from Oncology; Richard Francis from Sandoz; and Mike Ball from Alcon.

So before we start, I'd like Samir to read the safe harbor statement.

Thank you, Joe.

The information presented today 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 U.S. Securities and Exchange Commission for a description of some of these factors.

Thanks, Samir.

Okay.

Starting on Slide #4.

I'm pleased with the performance in the third quarter.

Every division contributed to growth on both the top line and the bottom line.

You can see that, for the group, net sales were up 2% in constant currencies.

Innovative Medicine performance was quite strong, sales up 2% with the growth drivers more than offsetting the Gleevec patent expiration.

Our Sandoz generics business had sales up 1% in constant currencies.

We had strong growth outside the U.S. and that offset the continued price pressure that we're seeing in the U.S. Alcon sales were up 7% with growth in both Surgical and Vision Care.

And for the group, our core operating income grew 1% and core EPS was up about 6%.

Now we continued this quarter to have strong innovation momentum.

We had significant news flow in each part of the business, you could see some of it on Slide #5 and Vas is going to take you through more detail in just a minute.

Moving on to Slide #6, our growth drivers.

Cosentyx delivered another very strong quarter with sales of over $550 million.

So we're now within striking distance of full year sales of $2 billion.

And our continued strong momentum is driven by all indications and all geographies.

So we continue to grow in psoriasis despite its competitiveness, this is behind a best-in-class profile and the 5-year data that we presented this quarter.

And then in rheumatology, if you look at U.S. NBRx data, you can see that we now have a leading share ahead of Humira and Enbrel.

Now at the same time, Entresto is progressing steadily.

Sales were about $128 million in the third quarter.

We did see a bit of weakening in script trends over the summer, but they're now starting to pick up again.

So for example, earlier this month, U.S. weekly NBRx reached close to 2,500, which was the highest point in the last 12 weeks.

We are counting on this and further acceleration in the fourth quarter to deliver our full year sales of about $500 million.

In Oncology, as you can see on Slide 8, the underlying growth rate was very strong if you exclude the Gleevec patent expiration.

Sales were up 11% and this is driven by strong growth of around 30% from some of the products like Promacta, Taf + Mek and Jakavi.

On Slide 9, you can see that our new launches in Oncology are under way.

Now while Kisqali got off to a slower start in the U.S. than we would have liked, as of late August, the field force has full promotional material, we're starting to see some impact.

While TRx share is still around 5%, our NBRx share has climbed up into the teens.

And then ex U.S. we're also making progress.

We had EU approval in the third quarter followed by a launch with reimbursement in Germany.

And then with Kymriah, we're first-in-class.

We've launched in pediatric ALL in the U.S.

In Sandoz, on the next slide, you can see that our launches of rituximab and etanercept are off to a good start.

Physicians are using Rixathon, which is our generic -- our biosimilar of rituximab.

They're using it across all indications and we're seeing some customers switching whole patient population to this biosimilar, which is something that we did not expect.

We're also getting quite positive feedback on Erelzi.

These products are helping Sandoz create great performance outside the U.S., which is more than offsetting the continued price pressure in the U.S.

Now on Slide 11, you can see that we're making good progress on the Alcon turnaround.

Sales growth has been accelerating over the last few quarters.

This quarter, we're comparing a bit to a low base so the underlying growth is more like 4% to 5% versus the reported 7%, but the story is the same.

The growth is driven by positive dynamics on both the Surgical side and the Vision Care side of the business.

In Surgical, all segments grew including IOLs.

And in Vision Care, we maintained solid growth in contact lenses.

And I was particularly pleased to see core operating income growth on Alcon up 23%, and core margins increased to almost 16%.

I really believe this reinforces our confidence that 2017 is expected to be the trough year for margins on that business.

Now while Mike and his team have been very focused on the turnaround, we've also made progress on the strategic review at the group level.

We have considered all options from retaining the business to an IPO or a spin-off.

And as part of this process, we have updated Alcon's strategic plan, which confirms to us that this business has the potential to grow sales at or above market while delivering profitability that is at least in line with the industry.

And I think the last 2 quarters show that we're on the right track.

In the near term, Alcon's going to benefit from completing this turnaround, leveraging the infrastructure and the financial strength of Novartis.

However, the strategic review also indicates that creating a stand-alone company via a capital markets exit could create additional shareholder value.

To that end, we have made significant progress on developing a potential capital markets solution including financial carve-outs, tax and legal entity structuring and even identifying locations for listing and incorporation.

No decision has been made yet, but key criteria for a final decision and timing are dependent on continued Alcon sales growth and margin improvement, which need to be demonstrated for multiple quarters.

And this means action is not likely before the first half of 2019.

Now as all of you know, Vas Narasimhan, our Global Drug of Head -- of Drug Development was named my successor, effective February 1. So working closely with Vas, we're working through the transition now and Vas is going to fully own the budget for 2018 as it comes together here at Novartis in the month of November.

And this is going to really ensure a seamless transition and ensure that he's off to a good start in 2018.

So with that, I'll hand it over to Harry to take us through the financials in a bit more detail.

Okay.

Thank you, Joe.

Good morning, good afternoon, everyone.

As usual, my comments refer to growth rates in constant currencies and compared to prior year quarter, unless otherwise noted.

Slide 15 shows the summary of our results.

We delivered solid performance in the third quarter with net sales of $12.4 billion.

This is up 2% versus prior year as growth from Cosentyx, Entresto, the acquired oncology assets in Alcon more than offset the decline of Gleevec.

Core operating income were $3.4 billion, up plus 1% as higher sales and productivity more than offset generic erosion and growth investments.

Core EPS was $1.29, growing plus 6% including higher core income from associated companies and the benefit from the share buyback program we announced in January.

Net income was $2.1 billion, growing plus 10%.

This includes a onetime gain from a Swiss pension plan amendment and higher income from associated companies.

Finally, it was another strong quarter for free cash flow at $3.1 billion, growing plus 18% in U.S. dollars.

Now let's turn to the margins on Slide 16.

Overall, the group core operating margin was 27.2%, broadly in line with prior year.

Innovative Medicines sales grew plus 2%, driven by Cosentyx, Entresto and the acquired oncology assets.

Core operating income grew plus 1% and gross margin expansion and productivity offset investments for our growth plans and generic erosion, resulting in a core margin of 32%.

Sandoz sales were up plus 1% as Europe and the rest of the world grew plus 9%.

This growth more than offset the decline in the U.S. from industry-wide pricing pressure.

To note, in quarter 4, we expect a low single-digit sales decline at Sandoz mainly due to seasonal shipment phasing and continued U.S. pricing pressures.

Core operating income grew plus 8%, mainly driven by a strong gross margin expansion and some divestment gains from nonstrategic assets.

This was partly offset by growth investments, resulting in a core margin of 22.4%.

Alcon sales grew plus 7% in the quarter, reflecting a broad recovery in Surgical and continued growth in Dailies Total1.

The Alcon results of the third quarter benefited about 2 points from stock and trade movements.

Alcon core margin was 15.6% plus 2% points versus prior year driven by the higher sales and lapping of the growth plan investments.

Please note, as Joe mentioned, we still expect full year 2017 to be the trough year for Alcon core margins.

Slide 17 shows strong free cash flow of $8 billion in the first 9 months, up $1.5 billion versus prior year.

This was driven by favorable working capital, lower CapEx and a higher dividend from the OTC joint venture partly offset by lower operating income.

Overall, we also had a more balanced quarterly free cash flow phasing compared with prior years.

On Slide 18, you can see that net debt stood at $20.7 billion at the end of Q3.

The increase during 2017 was mainly due to the net share repurchases including the buyback program we announced in January.

The strong 9 months free cash flow of $8 billion more than covered the $6.5 billion annual dividend payment and M&A investments.

On Slide 19, we showed the expected currency impact for quarter 4 and full year 2017.

Assuming mid-October rates hold for the rest of the year, we continue to anticipate the full year 2017 currency impact on sales to be 0% and minus 1% on core operating income.

For quarter 4, it would be plus 3% on sales and plus 3% to plus 4% on core operating income mainly due to the weaker U.S. dollar versus the prior year.

As always, we will update you mid-month in November and December on these expected impacts.

On Slide 20, I would like to turn to our full year outlook.

We are reconfirming our full year group guidance.

Group net sales are expected to be broadly in line with the prior year and group core operating income is expected to be broadly in line to low single-digit decline.

By division, we are revising the Innovative Medicines guidance upward to a slight increase versus prior year.

This reflects the strong performance of our key growth drivers.

We are revising the Sandoz guidance slightly down to broadly in line with prior year to a slight decrease, reflecting continued U.S. price erosion from competitive pressures including customer consolidation in the U.S. We reconfirm the guidance for Alcon at low single-digit growth.

Before handing over to Vas, I want to mention the product shift between Innovative Medicines and Alcon on Slide 21.

We have made the decision to move the Ophtha OTC products from Innovative Medicines to the Alcon division effective January 1, 2018.

These products generated $0.7 billion sales in 2016.

We believe the products will create most value as part of Alcon as they are complementary to the Alcon Vision Care business.

At the same time, this transfer will allow our Pharma business to focus on delivering the exciting Pharma RX product pipeline, including RTH.

Our leading Ophtha prescription business, which generated $4.8 billion sales in 2016, will remain with Pharma and the Innovative Medicines division.

Updated segment financials will be released prior to our quarter 1 2018 earnings, as usual.

And with this, I hand over to Vas.

Thank you, Harry, and thanks, everyone, for joining today's call.

Moving to Slide 23.

I wanted to first provide an update on our upcoming investor event on November 13 in London.

At that event, we plan to cover 4 main topics as well as a general update on the pipeline.

First, we'll cover the RTH258 data as presented on November 10 at AAO.

We'll provide an update on the CANTOS subgroup analysis as will be disclosed at AHA on November 13.

Paul Hudson and I will provide an update on the prelaunch planning for AMG 334.

And we'll also present new data on long-term persistence in AS and PsA for Cosentyx.

So we look forward to seeing you there at that event.

Moving to Slide 24.

As Joe mentioned, we had a very good quarter in terms of innovation news flow across all of the various divisions of Novartis.

Importantly, we had the approvals of Kymriah in the U.S. and Kisqali and Rydapt in the EU, and data readouts ranging from ACZ885 in cancer and cardiovascular disease, Mekinist and Tafinlar in adjuvant melanoma as well as additional readouts on long-term persistence on Cosentyx and in pediatric Gilenya.

So overall, a good quarter.

Moving to Slide 25.

When you look at the list of potential late-stage blockbusters we had first introduced in January of this year, we're making very good progress across the whole range of potential blockbusters.

Importantly, in the case of Cosentyx non-radiographic axial SpA, we are moving the readout of that program to 2019 based on our latest forecast for enrollment.

But when you look across the various therapeutic areas, you see we're making very good progress on these key assets to drive the long-term growth of the company.

Moving to Slide 26.

As we've already noted, Kymriah had its approval in U.S. -- in the U.S. in pediatric and young adult ALL.

We are on track to file in DLBCL in Q4 of this year.

In Europe, we're also on track to file in pediatric ALL and DLBCL in Q4 of this year.

And then as part of our goal to provide a comprehensive solution to B-cell cancers with this platform, we are continuing to accelerate programs in second-line DLBCL, follicular lymphoma, relapsed chronic lymphocytic leukemia and as well as DLBCL in combination with pembrolizumab.

We also continue to advance our own in-house program with the BCMA card against multiple myeloma, so good progress across our platform.

Moving to Slide 27.

Looking at the data we released at ESMO in Tafinlar and Mekinist, which demonstrated a 53% risk reduction in BRAF-positive adjuvant melanoma, we were very pleased to see a consistent effect across all subgroups specifically for Stage IIIa, b and c, and now we've accelerated our submissions, which we now moved up to Q4 2017 in both the U.S. and the EU.

In addition, the FDA has recently granted us Breakthrough Therapy designation for this product.

Moving to Slide 28.

I wanted to provide an update on our regulatory interactions in cardiovascular disease and advancing -- and in advancing ACZ885 in the oncology setting.

We have begun regulatory interactions with both FDA and EMA with first meetings taking place with both agencies in which we've discussed the overall primary endpoint as well as our subgroup analysis in the cardiovascular subgroup of CRP responders, and we continue to look forward to progressing towards filing in Q4 2017.

We're also advancing ACZ885 in the oncology setting, and there, we've been working closely with FDA and EMA on getting agreement on the final Phase III designs of these studies.

We are on track to begin the adjuvant non-small cell lung cancer study in Q1 of 2018 as well as the first- and second-line non-small cell lung cancer programs in the second quarter of 2018.

So progress on ACZ885 and we'll look forward to providing you a further update in November.

Moving to Slide 29.

We presented new data on AMG 334, which we think will be important as this -- particularly given the importance of getting payer acceptance of this new therapy.

With this data, we looked at patients who are in the hard-to-treat population, so patients who have failed greater than 2 prior lines of therapy.

And as you can see in the overall population, 50% of patients achieved a 50% reduction in monthly migraine days at the 140-milligram dose and you can see also in those patients who had failed 2 or more prior lines of therapy, a 36.2% of patients achieving the 50% reduction in monthly migraine days.

So we look forward to bringing this product now rapidly to patients.

We believe we have an attractive profile overall and are the only product that will be coming forward that targets the receptor, which we hope over time will prove to be differentiating.

Moving to Slide 30.

We have completed regulatory interactions pre-NDA meetings with FDA on BAF312 in which we focus on showing the FDA that we had a unique effect on patients who are actively progressing without recent relapses.

And based on that conversation, we can now confirm we will file in the U.S. in quarter -- beginning -- starting to file in Q1 2018 in secondary progressive MS. The final language in the indication statement will be subject to final negotiation, but we expect that we will be able to reflect the unique SPMS study population that we had in the EXPAND study.

We've also advanced discussions with the EMA over the course of the last quarters, and we look forward to finalizing agreement with EMA to go forward with an SPMS filing in the second half of 2018.

So moving to Slide 31 with Cosentyx.

We had a further long-term data that we showed that, at 5 years out, we continue to maintain very good PASI 75, PASI 90 and PASI 100 responses.

We're the first IL-17A that could really demonstrate that consistent response.

We believe that's in part because of our low immunogenicity potential with Cosentyx.

And importantly, we also continue to demonstrate low to no immunogenicity with -- and a very clean safety profile with the drug.

So moving to Slide 32.

RTH258, we announced in our Q2 earnings call that we met the primary endpoint with the majority of patients achieving q12 dosing.

At AAO, we'll share the additional details on the primary endpoint as well as important secondary analyses.

A couple of the analyses, I think, that will be important to look out for, anatomical parameters of disease activity including retinal fluid and retinal thickness as well as overall disease activity at week 16 as well as the changes in best-corrected visual acuity both at week 48 and during the last 12 weeks of the study.

We'll also provide an update on the safety of the medicine.

Both our DME and RVO studies are advancing as planned, and we expect to initiate those studies over the course of 2018.

Moving to Slide 33.

We continue to progress our biosimilars pipeline.

With respect to rituximab in the U.S., we did have the file acceptance during quarter 3. And when you look at pegfilgrastim, we have now seen the data of our PK bridging study in Europe, which gives us confidence now we will file that on track in Q4 2017.

Now based on that data, we have increased the sample size of our PK bridging study with the FDA and that had pushed that filing time line into the first part of 2019.

So when you take it together, if you look at Slide 34, we are on track to achieve our remaining milestones for the year, and we've had a very good year for innovation at Novartis.

With that, I will hand it back to Joe.

Thanks, Vas.

So in summary, we had a good quarter with all divisions growing top and bottom line.

We're executing well against our key launches and maintaining strong momentum in innovation.

So with that, we'd like to open the call to questions.

(Operator Instructions) The first question comes from the line of Vincent Meunier from Morgan Stanley.

The first one is on the Alcon separation and the decision not to take action before the beginning of '19.

It looks a bit far from now, especially in the context of improving visibility for Alcon.

So what are the next steps?

And what do you need to decide between an IPO or a carve-out?

And the related question is if you decide not to divest Roche and if you decide to separate Alcon later, does it mean that the probability for you to make a large acquisition is really small now?

I have also a question on Sandoz.

Can you give us the breakdown of price volume in the U.S. and also the drivers for the margin evolution of the business units?

I mean, are you closing U.S. sites and relocating production to other geographies in order to offset the impact of the U.S. pricing?

Okay.

Thanks for your questions.

Starting with the Alcon separation, we said that while we hadn't made that decision yet, the strategic review was showing that we felt like that we could generate additional shareholder value with a capital markets exit of that business, but the issue is Alcon really needs to show multiple quarters of top and bottom line growth.

And the reason for this is that if this company does make the decision to do the capital markets exit, we want the business to come to market from a position of strength so that there is investor confidence in a stand-alone business called Alcon so that, that will do well in the public markets and we believe that, that would take multiple quarters of top and bottom line growth.

Now remember, if you look at what we said, we said that action likely would not take place before the first half of 2019 and that's only 4 quarters away.

We're sitting here in the fourth quarter of 2017.

So I don't think it's that long in terms of when we are taking the final action or when we will make a final decision.

Regarding your question on the Roche stake, I think we have said publicly that our M&A strategy is to do bolt-on acquisitions, smaller acquisitions that would supplement the pipelines of each of our important divisions, and that hasn't changed.

So we are not -- a larger acquisition would not be on strategy with that, whether we have the Roche stake or not.

Richard, on the Sandoz question?

Yes, thank you for the question.

So if I can maybe start in reverse order.

So talking about the gross margin and the improvement of that, that's directly related to the strategy we've been implementing the last 3 years, which is around making sure we focus on the right geographies, which can drive profitable growth as well as the right portfolio.

So you've seen that mix now come through in the gross margin.

With regard to your question about are we driving that through site closures?

As you know, we did announce the closure of a site in the U.S. earlier in the month and that's really reflective of our ongoing drive for efficiencies within the organization and reflecting the pricing pressures we're seeing in the U.S. and trying to make sure that we have our manufacturing set up to maintain competitiveness.

With regard to the breakdown of pricing, as you see in our statement, we say that we've had a 7% price erosion that is global.

What we've seen is an excess of that in the U.S. this year and in this quarter that's been slightly lessened by a slowing of price erosion in the rest of the world.

So hopefully that answers the questions.

The next question comes from the line of Jeff Holford from Jefferies.

Congratulations to Vas on the announcement, and great to see Joe handing over the business in great shape, primed for growth for 2018 and beyond.

But first of all, Vas, just in your current role, just looking at CANTOS and the discussions that you've been having with regulators there, I know it's fairly early, but wonder if you can just give us a bit of an update on how that's impacting your level of enthusiasm and expectations for commercial potential of this product in that indication and whether there's any potential for lung cancer data to just be included on the label?

Second, for Michael or Joe, whoever wants to comment on this.

I wonder if you might be able to elaborate a little bit more specifically on what kind of financial growth or level of financial -- or revenue growth or margin metrics that you think you need to hit for a spin or separation of Alcon?

And whether you're considering putting some of Novartis' debt into the spinco?

And then lastly, Joe, it seems you're really pouring some additional cold water on any expectations of a put during 2018 on the consumer business.

With some of the pressures there in that industry, could you explain to us why that is the right strategy?

So based on the regulatory interactions we've had today, I think, first and foremost, the focus has been on the robustness of the single study result and really ensuring the regulators feel comfortable with that, and we feel good about the result and the robustness of how the study was conducted.

But the absolute critical thing for us in terms of determining our commercialization strategy is having the ability to promote the subgroup analysis to payers so that we can be sure that the patients who are going to have a benefit from the medicine are the ones that we're able to target and that payers can have confidence that the population is one where the overall benefit is compelling.

So that's been the focus of our discussions, both with FDA and EMA we've been presenting at them, the initial analyses.

And I think in the coming months, that will be the key focus for us that will really determine the commercialization plan when we have the final labeling over the course of next year.

Jeff, on the specific financial metrics we need to see, we haven't defined that.

What we want to see is just continuation of what we're seeing in the second quarter and the third quarter, and specifically the third quarter where we did see nice operating income growth.

I think if we can do that for a few quarters, it will make that decision and action much easier.

Obviously, if we did 100% spin, there would be room to push some debt down on that new entity, but at the same time you don't want to overburden a new business that's just getting off that's also going to have a number of things to invest in their capital as opposed to just servicing debts.

So really, this has always been about maximizing shareholder value, not necessarily what the mothership could get out of it.

And so if we do make a decision to spin, we're going to do it in the best interest of the shareholders.

In terms of the pit -- the put for GSK, because we don't control that joint venture, it was very important for us when we negotiated it to control the outcome when we could exit and we negotiated a deal that gives us great flexibility beginning in March of 2018.

So the way that you should think about this is with a press of a button, we can turn that asset into cash.

Nothing -- not much has to happen.

But in the meantime, while we're holding that cash, we are generating significant additional value.

Every month, every quarter that those synergies increase, that the margin increases on that business and that the top line grows, this is a good investment so we're going to be watching it very closely.

We're obviously watching what happens to the entire sector in consumer and I'll just leave it at that.

The next question comes from the line of Graham Parry from Bank of America.

So firstly, on the Alcon review, do you have any preference between spin-off to existing shareholders versus an IPO for cash as the commentary to date seems to suggest that a spin-off, a complete spin-off, looks like the more favorable option especially if you don't have uses for that cash.

And is there a risk here, though, that the timing means that you'll be spinning just as Pharma hits a new patent cliff that's actually the remain co, the mothership company will actually have slower growth laid there?

Secondly, your thoughts on CAR-T pricing given that Gilead's Yescarta is now being priced in DLBCL at $373,000.

How does that compare to your expectations for Kymriah and DLBCL, given how you talked about indication-based pricing?

And could you talk about the potential advantages for your product of it being an outpatient procedure and how that impacts on reimbursement versus Yescarta presumably needing a DRG code?

And then finally, on Sandoz, just a follow-up on the gross margin question.

Could you just help us understand how much of the benefit is mixed or how much of that is one-off in nature and the extent to which the third quarter gross margin is a good guide going forward?

Okay, Graham.

Thanks.

In terms of the Alcon review, really no decision has been made obviously between a spin or an IPO.

But when we're doing our review, obviously we're looking at ways to maximize shareholder value, not necessarily generating proceeds for the company.

So you're right in that if this thing comes to market from a position of strength, a 100% spin could be worth a lot to our shareholders as those who hold the shares get to write it up and those who don't want to hold the shares could exit without creating depression in the value of the company on the market.

And that's why we believe it is so important to ensure that we've got a few quarters of momentum both on the top line and the bottom line before we do that.

In terms of the timing, we -- the Pharma situation is going to be more than offset, if you look at how we see the next few years materializing with Cosentyx, Entresto, Kisqali, Kymriah and biosimilars.

Those are the 5 near-term growth drivers that get this company through that '19 and '20 period with growth.

And then I think the new news that the people haven't yet fully digested is what Vas just said around BAF and what that could also potentially do in terms of a bridge between Gilenya and ofatumumab in multiple sclerosis.

In terms of CAR-T?

So regarding your questions on DRG.

DRG only applies to Medicaid inpatients and we estimate that, that will represent about 35% to 40% of the patients.

DRGs today do not include the cost of treatment, but we don't see that as being a major issue because there are mechanisms in place for hospitals to cover most of it, if not all of their cost.

Now regarding your second question on the price of the competition, as you know we don't comment on the price of competition.

What I can tell you is that these are different therapies and that have been approved to treat different populations.

So when it comes to the launch of the DLBCL indication, we will address the price.

Richard?

Graham, thanks for the question.

So going back to the gross margin, it is really quite evenly split amongst the geographical focus we've applied to the organization and that comes through in the fact that we're growing our branded generic business more substantially than in the past, which has a higher level of profitability and gross margin.

And then you also see the portfolio mix.

So obviously we've launched the biosimilars in Europe this year, which have got off to a good start as well as we continue to grow our base biosimilars business as well.

So you put those 2 things together and then applying some operational efficiency as well and I think you see the gross margin improving based on that strategy.

With regards to how that pertains going forward, we don't really give guidance on gross margin.

All I'll say is we just want to keep executing that strategy.

Yes.

The good news is you said basically half was geographic mix and the other half was product mix.

The next question comes from the line of Tim Anderson from Bernstein.

A few questions.

On Sandoz, the generic business, obviously it's a tough one in the U.S. and one could argue that given the heavy innovation focus at Novartis, perhaps this is not a core business and there has been a trend across industry to skinny down the business, a narrow focus, you guys did this in 2014.

Lilly is doing this with animal health and so on.

So is it possible that at some point you might actually look to get rid of Sandoz?

or do you think the biosimilar opportunity is so compelling that this would be highly unlikely?

Second question is on Alcon.

Is it possible you might actually be looking to put additional assets into that business through acquisition to make it even more viable as a stand-alone company, so it'd come from external business development.

And then last question, just a clarification on BAF312.

Are you suggesting that it's fully in the realm of possibilities that you might get an official indication for SPMS?

Okay.

Tim, starting with Sandoz.

When we think about Sandoz, we think about 2 things.

One is that there's a good business ex U.S. in differentiated generics.

It is very consistent with what we do operationally from a development standpoint in terms of developing new biosimilars, new difficult-to-make generics.

And then the second thing we think about it is in terms of market access, right.

You think about an aging population and these health systems around the world that are under increasing pressure and there's a clear role to play for a pharmaceutical company to have a set of lower-cost, but very high-quality generics to help them lower their total cost and create freeboard for the innovations.

So you never say never because we're constantly looking at our portfolio, and if something materialized where we would be better off focusing, then it could be that, that is something in the future, that's for Vas and the board to decide.

But as of today, there's really no thought of exiting the Sandoz business.

In terms of Alcon, the question about whether we would acquire to put additional assets to improve the profile of the business, we would most likely not deploy a lot of additional capital into that business, but if you saw what we did today, we announced that we're going to move about $700 million of over-the-counter drugs that are -- these are eye drops, mostly dry eye, the SYSTANE brand, move that from the Novartis Pharmaceutical Division into Alcon.

You can imagine at $700 million, over-the-counter drugs that have good margins, relatively mature products should substantially improve the profit profile of the Alcon business also.

So I think you're right in what you're talking about strategically that there are things that Alcon can do to an over-the-counter drug business very much in line with what they do on the contact lens care solution, because those solutions are in the same section of retail pharmacies around the world.

So they're category captains and they're able to grow those businesses, but at the same time it does have a knock-on effect of improving the financial profile, which we'll be able to see in 2018 when we restate the addition of the OTC businesses into the Alcon business.

And then on BAF?

Thanks for the question, Tim.

So to clarify, with the FDA, we presented an analyses that really separated out our effect with BAF on relapses versus in patients who are specifically progressing without relapse.

And the FDA, based on reviewing that data, has agreed to accept the file with an indication for secondary progressive MS. And my language on -- that the final language on it is going to be subject to review really indicates that the FDA now has to decide what is the best way to characterize this patient population.

Is it the language secondary progressive MS or is it alternative language that reflects the unique population that we study, which had EDSS scores that were much higher than typical scores you see in RRMS studies, patients who have disease for a much longer period of time, it's a very unique study population.

But our filing will be in SPMS.

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

Couple of questions, please.

Joe, you've spoken in the past about your optimism for outcome-based reimbursement, which has obviously been slower than perhaps you may have envisaged.

Given that dynamic with Kymriah, is there any sense that this could be a trigger for an acceleration of adoption at this type of program?

And then second, it's for Vas, given the intense competition in the CDK4/6 space in ER+ breast, could you update us on what your plans are for your third development?

I know both -- you have your own as well as Radius', and the extent to which we should expect some commitment to differentiate your product?

And then finally on canakinumab, in the adjuvant metastatic non-small setting, obviously given the position of PDX-based combinations, could you outline the design of the clinical trial?

Is it monotherapy, which seems unlikely?

Combination?

How are you thinking about biomarkers in order to segment it?

Thanks, Andrew.

In terms of the outcomes-based contracts, obviously I'm a big believer that eventually outcomes-based contracts are going to take over.

I think a lot has to happen for that to happen, for example, just IT infrastructure, real-world data.

There's a lot of stuff that still has to be put in place.

So the contracts that we're doing now are quite blunt instruments.

Kymriah gives us the ability to execute, I think, one of these in a very clear way, but also one that is highly receptive on the other side.

One of the reason why CMS was willing to agree to this is that they're looking for ways to bring these new technologies to the U.S. in a way that will not break the bank.

And that if you are paying for the outcome instead of the transaction, this is one of the ways that I think the U.S. government believes that they can have the best of both worlds, which is let's get the new technology, but let's also do it in a way that is outcomes-based so we're just paying for what we get.

I do believe that, that will be a catalyst for more contracts, but it's still going to be limited by the technology barriers and some of the regulatory barriers that still have a ways to go.

So I think it will accelerate it, but I don't think you're going to really see a step-change until we can attack some of the regulatory and technical barriers.

Vas?

So thanks for the questions, Andrew.

On the SERD, our SERD is currently in Phase IIa studies and we are continuing to wait for the readout, further data, to determine how best to progress it moving forward.

We did see the Radius -- recent Radius data as well so we'll be carefully evaluating to ensure that our SERD is competitive and can hopefully be a first-to-market product.

Now with respect to canakinumab in the metastatic first-line setting, our goal will be to go in combination with an anti-PD-1 versus PD-1 alone, so we won't be supplanting PD-1 therapy, but actually supplementing PD-1 therapy in that setting.

In the second-line setting, we'll be looking at PD-1 failures where we'll compare canakinumab versus placebo to see if canakinumab can salvage -- provide salvage therapy for those patients.

With respect to additional details on biomarkers, patient segmentation, I'd prefer to wait until we have final feedback from the FDA signing off on our protocols before disclosing anything further.

The next question comes from the line of David Evans from Cheuvreux.

Two, please.

First on outcome, again, I'm afraid.

It seems to be that market expectations for the rebound of outcomes, operating margin seem very low, only really getting to 16% in 2019 and only up to 19% in 2022.

I mean, could you just reiterate your expectations for low to mid-20s margin?

And is it possible to give any kind of time frame on when you might reach around the 20% level?

Secondly, one for Vas probably, on Tafinlar and Mekinist in adjuvant melanoma.

Market seems to have, again, very little confidence so far that this combination will have much of an impact given the immuno-oncology regimes.

Maybe, Vas, could you just briefly talk about the benefits you see for this combination and really how doctors think specifically about choosing therapy for BRAF-mutant patients?

Mike, on Alcon margins?

Sure.

So this year, we said 2017 would be the trough year and we'd be working to bring our ROS up towards industry standards over the midterm, and by industry standards, what we said was something 20% plus.

So that's what we publicly said midterm.

Obviously, with the news that the OTC products will be coming in, we'll be looking to revise our strategic plan and making adjustments to it going forward.

Vas?

When you look at the Mekinist and Tafinlar data that we presented at ESMO, it really is compelling versus any other data that's currently out there in BRAF-based patients in the adjuvant setting.

Now I think the key challenge right now in the clinical space is to get physicians to test for the BRAF mutation at an adequate level so that we can really drive uptake.

We already see great uptake with Mekinist and Tafinlar and we believe this study and the additional data will help support that.

But that really is our key challenge right now since you're broader testing.

There is a trend in some environments, particularly in centers in the U.S., to empirically treat with PD-1 before testing for the BRAF mutation and it's our belief it's the best interest of patients to have first tests for BRAF, see if Mekinist and Tafinlar is the right answer before moving to PD-1 therapy.

The next question comes from the line of Florent Cespedes from Société Générale.

Three quick ones, first for Paul on Entresto.

What could you learn from the adoption in Europe to promote the product in the U.S.?

And what are the main pushbacks that you experience in the U.S. I think now you offer a much better and broader access than last year?

My second question is for Bruno.

Could we have some color on the launch in Germany?

Also, I acknowledge it's pretty early days, and Bruno, could you remind us what are the next steps regarding the clinical trials and when we will have the results of the main clinical trials that will help you to differentiate your products under the CDK4/6 competitive market?

And last question for Richard and the biosimilars on rituximab, could you please share with us what is the proportion of the attempts, which are switching the entire patient population?

And Richard, could you tell us what is the price discount versus the products you offer in Europe on average, of course.

Florent, thank you for the question.

The market opportunity has been the same.

The clinical receptivity to Entresto data has been equally as exciting in Europe as it has been in the U.S. That said, and I think we've documented it well, the effort needed to get physicians to understand the benefit, to challenge the patients to come forward where they thought they were previously well controlled, but weren't, the same level of effort is required.

We're making great progress on both incidentally, which is why we're reasonably comfortable with our position and how we're tracking to the prestated commitment towards the end of the year.

On top of that, I will say that we're still learning in Europe and we haven't quite reached general reimbursement in France, and we will do in the beginning of next year, we hope.

Bruno?

So regarding the launch of the Kisqali in Europe, we got approval at the end -- on the 23rd of August.

We launched in Germany mid-September, so it was 4 weeks ago.

It's a bit early to talk about numbers.

What I can tell you though is that physicians are responding positively to our message on efficacy and speed of response and that it's going well.

But again, as I said, it's only 4 weeks.

In terms of the next milestones for the trials readout, MONALEESA-3 and MONALEESA-7 will read at the end of the year and in the first half of next year and that will allow us once we have the results of MONALEESA-3 and MONALEESA-7 we have updated the label to cover most of the breast metastatic cancer and to be competitive in the whole field.

Richard?

So thank you for the questions.

So moving on to Rixathon launch in Europe.

So as you mentioned, yes, it's being very well accepted.

And as Joe highlighted, in Germany we're seeing accounts of physicians and doctors across all indications.

I can't give you specific numbers -- number of accounts because it's a pretty dynamic situation right now.

But it is going well and we're pleased with the level of enthusiasm that physicians have and clearly our education of the value of pricing, which is paying off.

With regard to price discounts across Europe as we launch in multiple markets, that's obviously pretty competitively sensitive information and so won't go into that at this present, if you don't mind.

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

Three questions, if I can, please.

Firstly, on Cosentyx.

Particularly in 3Q, Paul, we saw a very strong uptick in TRx.

But looking at realized price, the results today suggest that it's been about a mid-teens realized price decline for the product over the quarter.

Can you just quickly walk us through the dynamics in terms of how you manage to achieve the TRx growth and whether there's a strategy in place here around the launch of TREMFYA?

Secondly, Richard, if you can give us an update on Copaxone 40, any signs of the FDA reinspecting your subcontractor's facility and hopes to get that on the market?

And then Joe, we've had a number of comments about biosimilar uptake and particularly Rituxan, being significantly better then you hoped, but you remain one of the largest shareholders of the originator.

Can you just give us an update on given the success the biosimilar strategy seems to be having why you continue to be a shareholder of Roche?

Okay, starting with Paul.

So thank you for the recognition, Matthew.

On the performance of Cosentyx Q3 over Q2, I think it was 12%.

Just looking at our competitor data that just came out today, I think we significantly exceeded that.

I think the growth is with the demand growth.

What you see actually is a function of the growth in the TRx is actual commercial patients and the rollover of the free drug restatement from the summer, so it's a mix of both but it is almost no additional price given away in that calculation.

So we're pleased with the progress.

I think you also asked about TREMFYA, I think, and in terms of our readiness or what we think.

This week at least on the NBRx we're at 16, I think Taltz at 10 and TREMFYA at 5. I would imagine there is going to be some significant free drug in the market, so it'll take another quarter or 2 for us to try and find out what the real underlying trends are, but early indications are a significant proportion of the new Rx is coming from STELARA.

Richard.

Matthew, so thank you for the question on glatiramer 40 milligrams.

Really, all I can really comment on is we're working very closely with the FDA to try and get this product to market as quickly as possible.

There's a good working relationship, but I don't really want to give any more detail than that right now.

Matthew, regarding the Roche stake, not much has changed.

I think you may have seen in the press that your commented that the board considered whether now was the right time to exit and decided that it wasn't.

So there really is no change.

The asset is a financial asset with a strategic asset -- with a strategic value to it and the board has decided that now is not the right time to exit.

So there's basically no change on that.

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

Two questions, please, one on your comment around Erelzi in your slides that you had major account wins in the U.K. Just wondering what that may or may not have meant for your Cosentyx business in the same market, and then how do you think about pricing in the autoimmune space, branded versus biosimilars, given your early successes in the biosimilars again for Cosentyx and overall.

And then also what are your assumptions going into 2018 around pricing given that you do have TREMFYA on the market now as well.

And then lastly, on Entresto, thank you for providing the regional breakdown U.S. versus ex U.S. on your slides.

It looks like the sequential performance really is coming from outside the U.S. yet it looks like you're also spending a lot of money on the U.S. Still at what point do you think it would make sense to shift that investment from the U.S. into the ex U.S. market given that sort of momentum?

Paul?

Oh sorry, we'll start with Erelzi.

On Erelzi.

So we have had significant account wins in the U.K. for Erelzi, very pleased with that.

And we have currently about 2,600 patients queued up to actually get the drug, so the receptivity and the adoption of that is very positive.

I think with regard to price, and I'll start with that and maybe Paul can add.

As a company that both has biosimilars and innovation, we feel that as drivers of true innovation, that as we bring biosimilars to the market, then obviously, an example with Erelzi, is we free up budgetary capacity for innovation, Cosentyx being one to actually be funded and get access to those patients to Cosentyx.

So we think it actually works very well in partnership and that's how we're seeing it play out right now, but I'll also leave Paul to comment on that.

So a couple of comments.

Michael, I think you mentioned the U.K. was the starting point of that question.

Just to give you a flavor, we're up 149% year-on-year and 22% up quarter-on-quarter.

So we're pleased with the progress and we think we understand how to bring value to health systems both innovative and biosimilar.

In terms of the '18 rebate situation, I think you alluded to that, particularly with the new competitor.

We are as sure as we can be with the rebate setup we have going into '18 and both in -- across our commercial book, we actually think will improve our preferred option in both spondyloarthropathy and psoriasis in the U.S. so we're looking forward to that.

Of course, you have to turn that into volume, but we're set up very well.

And in terms of Entresto, I think the split of the business, we continue to grow in every market and we resource all markets to reach the potential of the meds and there is no doubt about that.

I touched on it earlier.

We are still tracking to our $500 million objective this year.

It does require an acceleration in Q4.

Early indications are that we're set up for that.

So I've said repeatedly once we look at that Q4 exit, we'll have more clues about where the growth is coming from, either geographically or by physician type, and indeed, patient and we'll adjust in '18 to make sure that we don't sacrifice growth, but we're as efficient as possible.

The next question comes from Naresh Chouhan from New Street.

In the Innovative Medicines business, obviously SG&A has increased materially in the last few quarters to fund the recent launches.

Should we assume that the absolute amount of spend is now fully deployed and the upward cost pressure in that division will ease in the coming quarters?

And then on Kisqali, can you tell us if there's any stocking in the quarter, and if so, how much?

And on Alcon, how sustainable is the vitreoretinal growth that we saw in Q3 '17 given it drove half of the growth in Surgicals and maybe help us understand different -- what the drivers are and how sustainable that is.

Okay, just so we get your first question, it was on IM SG&A, is that correct?

And whether the -- we should see costs ease over the next few quarters, was that it?

Will the cost growth ease, so is the cost fully deployed behind all those launches?

Or should we expect more increased spend behind Entresto or Cosentyx or any of those?

Okay, let's start with Paul.

Go ahead.

So we're fully deployed against existing launches, of course, in batches, some of the excitement for next year and beyond.

But for right now, we're resolved to take advantage of the opportunity for each medicine.

No additional investments to be made.

And also Bruno, on Oncology?

So for Kisqali, there was some stocking in Germany in anticipation of the launch, a little bit of stocking there.

But in the U.S., the stock levels were consistent with what we had seen before.

And Mike on vitret, Mike?

Yes, so on the vitret business.

Last year, we took the decision to add some incremental resources in the form of promotion and sales representatives behind the vitreoretinal business.

We do think that the aging population and the dynamics here represent an excellent opportunity.

We also added a product called NGENUITY, which is our 3D visualization system.

So we feel, from a segment standpoint, that this represents a continuing good opportunity for Alcon to get growth from.

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

One other question on Alcon, just thinking about the contribution from CyPass.

Could you quantify that for this quarter and how big you think that is going to be and how well you're doing against the competition from Glaukos?

The second question, just on Gilenya and the potential impact from Ocrevus, I think that's been taking share from across the market.

So how are you being impacted in the U.S.?

And how do you expect the product to deliver in the quarters ahead?

Okay, Mike, on CyPass.

So on CyPass, we are just getting our U.S. reimbursement or have just gotten our U.S. reimbursement nailed down in quarter 3. We don't give out individual product guidance or sales, but suffice it to say we're just starting out with CyPass so it's minimal sales right now.

As I look to the potential of the product, as you saw that Glaukos is well over $100 million product, but I see great opportunities to expand the whole MIGS space.

So in my view, us coming into the marketplace has that impetus then to get the market really moving forward.

If you look at it, these MIGS devices really represent an opportunity for patients to get off their glaucoma medications, and in our case, clinical trial data indicates that of responders 93% are actually off their glaucoma meds after 2 years.

So I think given the dynamics and the population in the marketplace, great opportunities here for this product line.

Paul?

So with respect to Gilenya, overall the worldwide performance was flat Q3 over Q3 of the previous year.

Just within that, though, and you mentioned the U.S., our value share at about 12.8 was stable.

Our new patient share, close to that, was stable.

Our SRF as a leading indicator were stable.

So we feel confident in the underlying business.

Europe, we were up, by the way, 5% partly offset -- on volume partly offset by price and we had some tender phasing, which took 1 or 2 points out of the growth overall quarter-on-quarter.

I will say that the market was soft, and you know this in the U.S. And what we're still trying to understand is what patients were waiting for Ocrevus and a bolus effect, what -- how IMS is picking up the infuse patient, what does it mean for off-label rituximab and clinical trials patients.

So whilst the market was down, our own performance within the market was stable.

The final question comes from the line of Kerry Holford from BNP Paribas.

Three questions, please, just following on from the previous one on Gilenya.

Paul, could you just comment specifically on pricing in the U.S., how that has evolved over recent quarters.

And do you still see the opportunity to take net price in this category?

And clearly, what that then means for BAF and ultimately ARZERRA in this market going forward?

Could also quantify the impact of the EM tendering effect in Q3 that's mentioned in the press release?

Secondly, on Ophthalmics, can I just confirm that the OTC move is a move back into Alcon, having previously moved from Alcon to Pharma?

And if that is the case, why?

Why are we seeing this move now?

Is it preparation for an IPO or a spin?

And why did you initially move it into Pharma?

Also, wondering whether you can give us some clarity on the margin of those products so we can think more clearly about future margins for Alcon, going forward.

And then lastly, a quick question for Harry.

At Q2, you stated the 2017 guidance for net financials would probably now be towards the bottom end of the $850 million to $950 million range.

But given you've only got $550 million year-to-date, I'm wondering whether that target for the full year still looks too high.

Any comment on that would be much appreciated.

Okay.

Paul?

Okay.

So just to the points of clarification.

Really, it's been very small trade-offs between price and volume through Q3.

Whether we would look at price strategically, I mean, we're always open minded, but it's not something that we'd probably debate at this point.

Again, we're comfortable with our progress.

The tender was as simple as something that we thought would have come in Q3 came in Q2, and consequently was enough to make a 1- or 2-point difference.

And Kerry, you're right on the Ophthalmic OTC products.

About 2 years ago, we took the 3.5 -- it was about $3.5 billion, just under $4 billion worth of total Pharmaceutical products, which included prescription drugs as well as OTC, and we put that into the Novartis Pharma business.

Two things happened.

The first is that there was great synergy on the prescription pharmaceutical side, as evidenced by some of the progress on RTH from a development standpoint as well as good work on some of the in-licensing that Alcon had started.

And yet on the OTC products, Alcon continued to manage much of it operationally.

And the reason for that is what I stated earlier, which was Alcon has a very large contact lens cleaning business that sits on the same shelf in the pharmacy as these products do.

And so because they are powerful in that channel, it made absolute sense to, even though Pharma was responsible for the business now, to have Alcon continue to focus on it and execute it.

Then the second thing that happened, though, is that we got good news in terms of the outcome of some of the prescription drugs on Novartis Pharma and what I'd like to do is focus them completely on that, RTH258, on lubricin, which is going to be entering clinical trials very shortly and also on Encore Vision, which was the newly in-licensed presbyopia drops.

And so it just made sense all around.

It does improve the financial profile of the Alcon business and you'll be able -- we haven't disclosed the margin, it's about a $700 million business in sales and you'll be able to figure that out once we restate the numbers for Alcon beginning in the new year.

Harry, on NFI?

Yes.

Thank you, Kerry, for the question.

You're right, we're doing a bit better on our net financial expenses versus the outline.

The key is that the higher interest expenses as we have more higher bond level offset by improved currency results is mainly lower hedging cost due to lower interest rate differentials.

And that leads us on a full year basis that probably net financial expenses are roughly in line with prior year, around the $800 million mark.

Okay.

Thank you very much for tuning in, and we look forward to giving you an update on our full year results in January.

This will close the call.

Thank you for joining today's conference.

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