Novartis AG (NVS) 2017 Q4 法說會逐字稿

Good morning and good afternoon, and welcome to the Novartis Q4 and Full Year 2017 Results Release Conference Call and Live Audio Webcast.

(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.

(technical difficulty)

Okay.

Sorry for the technical difficulties.

Good afternoon, everybody, and welcome.

To start off, I would like Samir to read the safe harbor statement.

Samir?

Good afternoon, everybody.

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.

Since this is my last quarterly earnings call as CEO of Novartis, I'm going to have the bulk of the presentation presented by Harry Kirsch, who you know, our CFO.

He's going to cover 2017 financial performance.

Paul Hudson, Head of Pharma, is going to give us more detail on Cosentyx and Entresto.

And then Vas, incoming CEO, is going to outline his vision and priorities for Novartis going forward.

But first, I just want to share my thoughts on Slide #4.

You'll have seen from the press release that we can say 2017 was a good year for the company.

We grew sales in constant currency despite the patent expiration of Gleevec.

We had a great year in terms of innovation.

We executed well on the growth drivers and returned the Alcon business to growth, and at the same time, we continued to strengthen the company by implementing the new operating model.

So as I come to the end of my time as CEO, I'm leaving confident that the company is in good hands.

Vas and I have worked very closely over the last few months planning and preparing for this transition.

And the next phase of this company is all about executing on the growth potential, and I know that Vas and the executive committee will be focused on bringing the pipeline to its full potential.

So now I'd like to turn it over to Harry to talk about the '17 results in detail.

Thank you, Joe.

Good morning and good afternoon, everyone.

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

On Slide 6, I want to start with a quick comparison between the guidance we gave in January last year and the final results.

As you can see, we came in above or at the upper end of our guidance.

Full year sales were up 2%, and core operating income was in line with prior year despite 2017 being our second year of Gleevec generic erosion.

Turning to Slide 7. We show the quarter 4 and full year results.

On the left side, you can see that we had very good performance in quarter 4. Net sales grew 2%, and core operating income growth accelerated to plus 5%.

In the full year, sales grew plus 2% as strong performance of our growth drivers, including Cosentyx and Entresto, more than offset Gleevec generic erosion.

Core operating income was in line with prior year as sales growth and productivity fully offset generic erosion and growth investments.

Operating income grew 7%, including lower amortization.

Net income grew 12% driven by higher income from associated companies.

Core EPS was $4.86, growing 3%, including the benefit from share buyback program.

On free cash flow, we have delivered a solid full year growth of plus 10% to $10.4 billion.

Now moving on to Slide #8.

These are the key brands, as you know, and Innovative Medicines driving our top line performance.

As expected, the greatest contributors -- contributions came from Cosentyx and Entresto, and Paul will provide more details on those later.

I want to point out that Promacta, Tafinlar-Mekinist and Jakavi continue to grow strongly with sales increasing around 30%.

Kisqali was launched during 2017 and contributed full year sales of $76 million.

As a result, the total oncology business unit sales excluding Gleevec were up 10% the full year and 13% in quarter 4.

Now let's turn to the margins on Slide #9.

As you can see, all divisions grew core operating income in quarter 4, resulting in margin improvement to 25% for the group.

Innovative Medicines sales grew 4%, leading to 9% growth in core operating income.

Core ROS increased to 30.5%, driving the overall group margin performance.

Sandoz sales declined 4% mainly due to industry-wide pricing pressure in the U.S. However, core operating income grew plus 1% as the sales decline was offset by continued strong gross margin improvement and gains from the divestment of small, tail-end, nonstrategic assets.

Core ROS increased to 20.9%.

Alcon sales grew 6% in the fourth quarter, driving 36% growth in core operating income.

Core ROS was 14.1%.

To note, in quarter 4, stock and trade movements accounted to approximately 1 point of Alcon sales growth so the underlying CC sales growth is about 5% in quarter 4, in line with the underlying growth in quarter 3.

On Slide 10, you see that the Alcon -- you see the Alcon quarterly results throughout 2017.

For the full year, sales grew 4% and core operating income grew 5%.

Importantly, Alcon grew sales in every quarter based on the actions taken by Mike and his team to fix the basics, improve operations and customer relations.

As a result of this, Surgical grew 5% and Vision Care grew 3% in the year.

And with the continued progress of the turnaround in Alcon, we expect continued sales growth and improved margins in 2018.

Slide 11 shows our strong free cash flow of $10.4 billion in 2017, up 10% versus prior year.

This was mainly driven by favorable working capital, lower legal settlement payments and lower CapEx.

On Slide 12, you'll see our improving CapEx trend over the past 5 years.

CapEx was higher in 2013 through 2015 as we completed our new campuses in Boston and Shanghai.

In 2017, we continued to prioritize our investments in manufacturing projects.

On Slide 13, you can see that net debt stood at $19 billion at the end of the year.

The increase was mainly driven by the $6.5 billion annual dividend payment, net share repurchases of $5.2 billion, mostly offset by the $10.4 billion free cash flow in 2017.

On Slide 14, we propose dividend of CHF 2.80 per share.

This is in line with our policy to have strong and growing dividend in Swiss francs.

It's an increase of 2% in Swiss francs and 6% in U.S. dollars.

In terms of payout ratio, this dividend represents 87% of our net income and 64% of our free cash flow.

Slide 15 shows our full year guidance for 2018.

We expect group sales to grow low to mid-single digits.

For Innovative Medicines division, we expect sales to grow mid-single digits, driven by a continued uptake of our growth drivers.

For Sandoz, we expect sales to be broadly in line to a slight decline with 2017 due to continued industry-wide pricing pressures we assume in the U.S. For Alcon, we expect sales to grow low to mid-single digits.

We are pleased with the 2017 return to growth and look forward to another strong year as the Alcon team completes the turnaround.

The transfer of the ophtha OTC products into Alcon will not have a material impact on 2018 top line growth but will increase Alcon's margins.

We will issue updated segment financials reflecting the new structure toward the end of quarter 1. For group core operating income, we expect growth to be in the range of mid- to high single digits.

On Slide 16, let me briefly comment on the expected half 1 and half 2 core operating income dynamics.

We expect our Innovative Medicines growth drivers to deliver an increase in contribution throughout the year.

Of course, Alcon results are expected to be growth contributor, but we also expect Sandoz U.S. price pressure to continue, which will likely result in Sandoz sales decline in half 1. In half 1, we also expect a stronger impact from Gleevec generic erosion, the tail end of it, and investments behind oncology launches.

Therefore, we expect core operating income in quarter 1 to be broadly in line to a low single-digit increase versus prior year.

In half 2, we expect stronger core operating income growth, which will benefit from expected increased contribution of Innovative Medicines launches and new launches at Sandoz.

On Slide 17, I would like to add some perspective on other key elements of our expected bottom line performance in 2018 beyond core operating income.

We expect core net financial expenses to be about $100 million higher, mainly due to the higher interest costs, including financing the AAA acquisition, and the full year effect of the bonds we issued for the 2017 share buyback program.

On core tax, we expect a slight positive effect from U.S. tax reform, but how positive is not yet clear as the details and interpretation of the law still have to be finalized with the IRS.

We also expect a shift of profit mix to higher tax jurisdiction, and as a result, the core tax rate could stay broadly in line with 2017 or increase slightly to around 16%.

We will update you with quarter 1 results on where we think we will be for the full year on the tax.

On Slide 18, you see how currencies would impact our results if mid-January rates prevail for the remainder of 2018.

Due to the weakening U.S. dollar mainly versus the euro, the full year currency impact on sales would be plus 3%.

The full year impact on core operating income would be plus 4%.

For quarter 1, the currency impact would be plus 5% on sales and plus 6% on core operating income.

We will continue to publish every month the expected currency impact on our website.

And with that, I'll turn it over to Paul.

Thank you, Harry, and good afternoon, good morning to everybody.

It gives me great pleasure to share some of the highlights from the Pharma business.

Entresto surpassed the $500 million mark in 2017, delivering on our promise for the patients and, indeed, for the business.

Q4 recorded the strongest quarter-on-quarter growth this year, plus 43% worldwide, with a full year growth of over 195%.

Performance is fueled by continued momentum and progress on access and uptake ex U.S. as well.

We've now launched in over 60 countries, just France to come.

Now we won't guide to a specific number this year.

I'm very pleased with our current trajectory.

And it's probably worth saying that we've seen and learned that Q2 and Q4 are the areas where we get our biggest volume uptakes, so signposting '18 is going to be important to establish what we could actually achieve this year.

Next slide.

Thank you.

The underlying dynamics in the U.S. have taken a real positive trajectory.

I put on here the January number, first couple of data points, 22,000 on TRx.

We broke the 20,000 in December for the first time.

We sort of predicted this would happen.

We said that our peak productivity per salesperson would really reach optimum impact in November, December, and indeed, that has happened exactly as we hoped.

We're picking up over 640 new writers in the U.S. every week, over 55,000 patients -- sorry, physicians having prescribed Entresto.

Although cardiology remains the bulk of the prescribing, it is fair to say PC adoption is accelerating.

The underlying access situation has also improved as well.

I think -- and we regularly get questions on this.

Our coverage in Med D is up to 93%, our coverage in commercial is at 70%.

And importantly, no PA restrictions in Med D at 60%; and no PA -- in 48% in commercial.

We will improve that slightly in Med D in the first quarter of this year.

Looking longer term and -- I said this time last year that we would try and give some sense and perspective about how big Entresto could be when we exited Q4 of '17.

Whilst delighted with the performance, we can now see a path for reduced ejection fraction that would take us somewhere beyond $3 billion before LOE.

Now on this chart, you can see we tried to dimensionalize preserved ejection fraction in relation to reduced ejection fraction.

Whilst no real credible medical treatment in preserved ejection fraction, we get our readout -- final readout in the summer of next year, we think that, with some good education, this is going to provide not only a great benefit to patients in HFpEF but also have a positive impact on reduced ejection fraction patients.

What does that mean ultimately?

Well, we think it means that we'll be, somewhere before LOE, a $4 billion to $5 billion at-peak medicine in Entresto.

And importantly, we expect Entresto to be margin accretive from the very beginning of 2019.

Turning to Cosentyx.

Now Cosentyx itself has had also a fantastic 2017.

We've seen new entrants launched, but we've seen ourselves become a multi-blockbuster in the full year, Q4 sales of $615 million, which is 11% quarter-on-quarter growth.

In fact, we've seen growth in all indications in all geographies.

Our ex U.S. performance, in fact, Q4 results are annualizing now at $1 billion on their own.

Now with new entrants, we've still continued that great performance.

Our NBRx leadership, out of all of the new entrants in Q4, has been maintained despite Taltz and Tremfya.

And in fact, our NBRx growth over that period is the leader amongst all of the medicines.

Outside of psoriasis, in spondyloarthropathy, we continue to maintain market leadership against Humira and Enbrel in AS and PsA, which is a huge statement of the clinical benefits of this medicine.

2018 is an important year clearly with Tremfya, Taltz and, of course, with risankizumab to come at the end of the year, and we've been very thoughtful again about our rebasing at the beginning of 2018.

Our access is in good -- very good shape, in fact, for 2018, and we recognize what an important year it is to decide who comes through this year in great shape because, after that, most of the innovation is in the market and our opportunity to grow for the next half decade is in play.

Let me give you some sense of perspective on my last slide around dimensionalizing the opportunity for Cosentyx.

We get continually asked questions mainly around psoriasis, and we've tried to share over the last year how big an opportunity PsA, AS and, indeed, in the future, non-radiographic axial SpA is.

The number of PsA systemic-treated patients is bigger than that in PsO.

The number of AS patients is almost the same size, if not slightly bigger, than PsO.

And you know I think that the anti-IL-17s have a greater degree of efficacy in AS and PsA and non-radiographic axial SpA.

What that does is set us up in a very strong position for our performance over the long term in these indications.

Importantly though, in psoriasis, we still make a breakthrough.

We have landmark 5-year data.

We have head-to-head studies, most recently, the CLARITY study versus STELARA, and we feel strongly positioned that the efficacy bar has now been set and probably doesn't need to go any higher.

We feel well positioned to win and to at least preserve and grow share in psoriasis.

Right across the indications, we're already deployed in dermatology and rheumatology so the need to add more investment becomes less and -- which is a great opportunity for us given that our overall expectation is that we can become a blockbuster in each of these indications separately.

So coming to the conclusion, we're delighted with the progress with Entresto.

With Cosentyx, I think it's a great statement of our ability to commercialize on the great science from the company.

I'll hand over to Vas.

Great.

Thanks very much, Paul, and thanks, everyone, for joining the call.

As I come into the CEO role, I'd like to share some of my initial reflections on the future direction of Novartis.

Over the past 5 months, I've been getting external perspectives on the company, meeting with investors, meeting with external stakeholders as well as meeting with our own internal associates, and really trying to develop a strong perspective on the company informed by my many years here but also trying to take an outsider's view.

Now my thinking will continue to evolve, and I look forward to keeping you updated over the coming months and years, but I wanted to share some of my initial thoughts.

Now if you go to the next slide.

As you all know, we face a dynamic and complex external environment.

When you look at the opportunities for a company like Novartis, there are high unmet needs that remain with many people around the world not living to their full healthy life expectancy.

We have many new therapeutic modalities and platforms that are coming forward as we demonstrated with our work with Kymriah and cell therapy, and I think there are many more to come.

There's increasing demand for curative therapy as an improvement in quality of life, and we're clearly in the midst of a data and digital revolution in pharmaceuticals but also across multiple industries.

But we also face challenges that you're also all well aware of: increasing competition, rising and more difficult standard of care to beat, increasing payer and pricing pressure and an industry reputation which we need to continue to strive to improve.

Now when I reflect on where Novartis stands with respect to these opportunities and challenges, I sincerely believe we're well positioned for the future.

We have global scale.

We have innovation power.

We have world-class talent, and we've really increased our capability in data and digital, which I think will power us into the future.

So if you go to the next slide.

Our aspiration as a leadership team is to lead for the long term.

From a strategic perspective, that means continuing to lead as an innovator of transformative therapies, be a leader in data and digital, be a productivity leader in building a lean and agile organization that can confront the challenges that we'll face and a leader in attracting and retaining the best talent in the industry.

From a financial standpoint and for our shareholders, we want to drive solid and sustainable top line growth, drive ongoing core margin expansion, deliver solid cash flow and keep improving our return on capital employed.

Now moving to the next slide.

When you think of all of that in perspective, if you go back to the 1920s, Novartis was a medicinal chemistry and industrial company.

And for most of our history as Ciba-Geigy and Sandoz, this was the core of the company.

In 1996, with the formation of Novartis, through 2009, we became a diversified health care group, spanning a number of different sectors in health care.

Now under Joe's leadership, we've undertaken a portfolio transformation where we've really focused the company in 3 leading businesses: Sandoz, Alcon and Innovative Medicines.

Now as I look into the future and look at a more complex environment, an environment that's going to be increasingly competitive with rapidly changing technologies, I believe we have to focus the company as a focused medicines company powered by data and -- data science and digital technologies.

This will allow us to allocate our capital to where our core capabilities are.

We'll continue, of course, to evaluate if relevant adjacencies make sense, but we really want to focus our investment in our core.

Now when you go to the next slide, as we look to the future, there'll be 5 priorities we'll be driving across Novartis for the years to come.

First is an increased focus on operational execution to ensure launch excellence, high levels of productivity and keep driving that margin improvement.

Second is to pivot even harder to breakthrough innovation.

Access will also remain important with our Sandoz division, but we need to pivot to high-end transformative innovation, be a data and digital leader, rebuild trust with society and shift our culture to a more inspired, empowered and unbureaucratic organization.

I also have 4 specific goals over the next 5 years related to our longer-term financial performance, and I wanted to discuss those with all of you today.

So if you go to Slide 30.

When we look out over the next 5 years, I believe we're well positioned to drive dynamic sales growth.

When you look off of our 2017 base, we will have the generic impact of Gleevec, Afinitor and the tail end of Gleevec, but as Paul nicely outlined, when you move to the next bar, Cosentyx and Entresto are growing well.

In addition, we have multiple potential blockbuster launches coming through the portfolio in the next 3 years.

And when you look across that portfolio, I think there are exciting medicines like BAF, RTH, amongst others.

In addition, our onco growth drivers continue to perform well.

As Harry mentioned, excluding Gleevec, we achieved over 10% growth in our oncology business.

Kisqali, Kymriah and Rydapt are key growth drivers for us that we believe will continue to help us deliver on our growth trajectory.

And finally, with the leading biosimilars portfolio in the industry and Alcon returning to growth, both Sandoz and Alcon will also contribute to this growth dynamic.

Now moving to Slide 31.

We're also committed to expanding our margins.

If you take Innovative Medicines specifically, our full year 2017 margins were around 31.3%.

We know our industry -- relevant industry peers are in the mid-30s in terms of their core operating margins per our own estimate.

Now we believe we can be in this range by accelerating our key growth drivers, continuing to be aggressive with resource allocation and productivity across our commercial unit and with the new operating model we've set up to drive synergies across Novartis technical operations, NBS and drug development.

Now this will, of course, be offset by the challenges of generic entries as well as the need to invest in our potential blockbusters, but our ability to drive core margin improvement will be a key priority for us as a leadership team and for myself as CEO.

And then moving to Slide 32.

When you think about our innovation power, our ability to keep reinventing our pipeline is absolutely critical for our long-term success.

We've demonstrated over the recent years that we have leading industry pipeline productivity.

We have limited binary risk throughout our portfolio where we can counteract the challenge in one TA with performance in another.

And when you look at some of the highlights on this slide, 21 Breakthrough Therapy designations, 90 NMEs in the clinic, we think our innovation engine is strong.

Lastly, on the longer-term perspective, I want us to turn to capital allocation.

Now Novartis has been very disciplined in capital allocation under Joe, and we plan to continue that with our 4 key priorities: investing in our organic business; growing our annual dividend in Swiss francs; pursuing value-creating bolt-on acquisitions.

And I'll continue to have a focus on looking at acquisitions that are true bolt-ons where we believe we'll bring in new technologies and capabilities into our core area as a company; and then share buybacks when appropriate.

An external analysis on the right-hand side of this slide shows the kind of discipline that we've had.

When you look at R&D as an investment decision of our cash, you could see that we've consistently invested over the last 5 years 35% of our cash into R&D.

We have a solid investment into Capex of 15% and bolt-on M&A at 15%.

And then we've returned 35% of that cash to shareholders in the form of share buybacks and dividends, and we want to continue to maintain that kind of capital discipline.

So moving to the next slide, I'd like to turn to 2018 as well as wrap up and give you some perspectives on how we see this year unfolding.

So moving to Slide 35.

2018 is our return to growth, and it's going to build the foundation for the future of the company.

We have multiple priorities across each of the 5 areas that I described earlier, and they all will enable us to deliver the financial outlook that Harry provided.

I'd like to go into a few of these in more detail.

So turning to Slide 36.

In operational execution, our core priority is going to be to continue to drive our key launch growth drivers.

With Cosentyx, we want to maintain our competitive edge in psoriasis as well as grow our penetration in SpA, as Paul has nicely outlined.

With Entresto, we want to keep the momentum going we have in the U.S. and drive further uptake in Europe and around the world.

And then finally, in oncology, where we have a broad portfolio, our goal will be to continue to maximize our GSK-acquired brands as well as our launch brand.

Now with Kisqali, we did have a slower start than we had hoped, but we continue to believe, with the MONALEESA-7 data coming out positive as well as the upcoming MONALEESA-3 readout as well as our launches now across the European marketplace, that we can continue to drive Kisqali towards a blockbuster medicine.

With Kymriah, we'll add our DLBCL launch when approved in the U.S. and Europe.

And with Rydapt, we have the potential to transform the care of AML patients.

Overall, we believe, in oncology, we have the opportunity to continue to drive dynamic growth in one of our important segments -- most important segments.

Moving to Slide 37.

As well on operational execution, it's going to be critical for us given the challenging environment we're in to deliver on our upcoming blockbuster launches.

You can see that across the next 2 years, we have 6 major launches as well as 6 more potential significant launches in 2020.

Our ability to deliver through the registration process, prepare these launches and execute on them flawlessly is core to our executive team's goals, and we'll continue to provide you updates as we progress in preparing for these important medicines.

Now on Slide 38, we're also progressing on the portfolio review of Alcon as well as accelerating our review and focus -- in Sandoz and focusing on a differentiated portfolio.

With respect to Alcon, our management is focused on completing the turnaround, as you saw nicely in the performance in quarter 4. We're making progress towards a capital markets exit with dedicated teams working towards that, but there's no change on the timing of a potential action.

We continue to guide toward the potential action in the first half of 2019.

Now with respect to Sandoz, we have a very strong global Sandoz business, and it's growing well outside the United States as well as the leading biosimilars portfolio.

But we are facing challenges given the U.S. -- oral solids' industry-wide pricing pressure in the United States.

We will plan to continue to reshape our U.S. business with a focus on more complex products, and that will include looking at how to best shape that portfolio for us to be successful in the future.

And we'll continue to keep you updated as those decisions evolve.

On Slide 39, finally, on operational execution, our goal will be to continue to drive the cost savings that we've outlined in the past: to deliver over $1 billion of savings in Novartis technical operations; drive flat costs in Novartis business services; and keep our R&D spend in the 20% range, enabled by increasing scale and better digital technologies.

Now moving to innovation.

There's a few additional updates I wanted to provide to the group.

So in 2017, as Joe outlined, we had a real landmark year, 16 key approvals, 16 key submissions, 6 Breakthrough Therapy designations and, importantly, a rebuilt interface between research and development that has allowed 14 new projects to transition into the mid-stage portfolio.

Now turning to Slide 41.

What we expect in 2018 is 15 key approvals and 15 key submissions, highlighted by a couple of big ones.

Aimovig, our migraine prevention medicine, is on track for approvals in both U.S. and Europe, and we recently released additional data from a trial called LIBERTY, which demonstrated Aimovig's effectiveness in patients who had failed 2 to 4 prior lines of therapy.

We believe that's unique data and will be compelling to payers and enable us to build an excellent launch for Aimovig.

We also have Kymriah, which continues to progress as well in DLBCL in U.S. and Europe.

And 2 key submissions that I want to particularly highlight.

RTH258 is on track for a submission in Q4 of this year.

We've initiated the bridging study, which we've previously outlined.

And BAF312 is on track as well for a filing in the first half of 2018.

So moving to Slide 42.

One of the other areas I wanted to provide an update on is on the IO portfolio.

So when you look at the IO portfolio, we are a leader in CAR-T, and I think you're all well aware of that.

And we've continued to expand our CD19, CAR-T presence across a range of B-cell malignancies, and we'll be starting a range of pivotal studies in the coming months across the various indications.

We also continue to progress our CAR-T programs in solid tumor so, of course, the science is more challenging.

But now in our IO-IO combinations and other efforts within immuno-oncology, as we've previously outlined, we've in-licensed 19 second-generation IO agents.

We're now in a position to say that we're initiating, as we previously outlined, our trials with canakinumab in the non-small cell lung cancer adjuvant and metastatic settings.

Our Phase III is ongoing with PDR001, our anti-PD-1, with Mekinist and Tafinlar in melanoma.

We will be initiating late-stage studies in 3 combination programs with our anti-PD-1: one with INC280, our cMET inhibitor in non-small cell lung cancer; the second with our anti-LAG antibody, LAG525 in triple-negative breast cancer; and finally, our PD-1 plus our adenosine receptor (inaudible) antagonist in non-small cell lung cancer.

So we'll look forward to providing additional data on the performance of these agents in upcoming medical conferences over the course of this year.

Finally, on innovation, on Slide 43, we continue to have strong progress in our mid-stage pipeline.

Just wanted to briefly highlight we have a range of readouts in both -- the Phase II readouts as well as Phase III initiations, continuing to build the mid-stage pipeline that will enable us to drive future growth.

And be happy to answer questions regarding this in the Q&A.

Slide 44.

We announced 2 recent deals, which I wanted to make sure everyone was aware of.

With the acquisition of Advanced Accelerator Applications, which we completed this week, it brings into the portfolio a near-term launch in Lutathera, which is already now approved in Europe, and we're expecting an approval in the U.S. in the near term.

And that also brings into the portfolio potential therapies in prostate cancer, gastric cancer, amongst others solid tumors.

And we also announced a partnership with Biocon in biosimilars, and this partnership enables us to broaden our portfolio of the next wave of biosimilars, enabling us to share development costs [print].

And as I previously stated, we'll continue to look at such partnerships and bolt-on opportunities.

Now on the last 3 points, just to briefly highlight.

In data and digital, we continue to make good progress in our ability to build core digital capabilities in our R&D operations and our commercial operations and our technical operations.

This will be critical for us to drive further productivity gain, but also enabling us to find new patient populations, new medicine and, we believe, drive innovation of the company into the future.

Now on Slide 46, one of the important priorities for me as CEO will be to rebuild trust with society.

We, as a company, are -- want to uphold ourselves to the highest standards in terms our values, our quality, our compliance.

We want to be a leader in delivering value-based health care to health care systems and continuing to work to expand coverage of our medicines in underserved populations.

And this will be something we'll continue to focus on and, we believe, will be important for investors to consider when looking at a company like Novartis.

Lastly, I want to just turn to a brief comment on culture.

Culture is what is the DNA of any company of our size with the legacy that we have, and it's increasingly recognized that culture is a factor that can make the difference between a very high-performing organization and a mediocre one.

Now at Novartis, we have high levels of engagement, great collaboration, strong commitment to our core purpose and values.

We believe we now have an opportunity to focus on culture to drive a more inspired, empowered culture, eliminating bureaucracy to enable the best ideas to come forward.

Entering into a world where we have to attract the next generation of talent, getting this cultural transformation in place is going to be also a priority.

I'd like to close just on -- one last comment before the closing slide, on a recent appointment.

We brought on Liz Barrett as the CEO of Novartis Oncology.

We're thrilled to have her onboard.

She has 20 years of oncology experience across a range of geographies.

She'll be succeeding Bruno Strigini who we thank for his excellent contributions to the company, and we'll look forward to introducing Liz to all of you in upcoming interactions.

So to close out, we're incredibly excited about the future of Novartis.

We're focusing Novartis as a medicines company powered by data and digital.

We're entering a next growth phase with a full pipeline to sustain growth into the future, and we're transforming our productivity culture and reputation.

And we look forward to continuing to demonstrate to you the performance of the company in the quarters to come.

So with that, I'll hand it back to Joe for the Q&A.

Thanks, Vas.

Okay.

We're ready for any questions that you have.

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

The first one is on corporate and capital allocation.

I mean, you said earlier today that the stake in consumer is attractive, so how should we read this?

Does it mean that it has reached the right valuation point?

Or does it mean you still see upside in terms of generation of synergies?

And I mean, to put it more simple, what will be the rationale for keeping a stake in consumer given the clear picture you just described, dominated by transformative innovation, data-driven medicine, et cetera?

Second question is on Innovative Medicine.

Could you make comments on your ability to sustain your operating margins and even maybe improve the margins further going through the wave of patent expiries in a couple of years?

And lastly, on Sandoz, the pricing pressure and the commoditization of the U.S. generics has worsened despite the improvement of core margins.

So what should we expect now?

Any stabilization or further improvement for the top line?

And to which extent can you continue to maintain the profitability at this level?

Vas?

Thanks for the questions, Vincent.

So on capital allocation and the GSK stake, the GSK stake is a financial stake for us, where we put these 2 businesses together with an expectation we would drive synergies, and we have a clear strategic plan we have agreed on with the leadership of the consumer group at GSK.

Now what we see going forward is an opportunity to fully realize the value of that stake as that business plan is executed.

So we're continuing to monitor that, but we want to, of course, think about our timing of when we might exit that stake based on the value-creating situation, and we think that's not been reached yet.

So it would be some more time before we think our value is fully realized.

Yes.

Vincent, so on the Innovative Medicines margins, we absolutely think it's sustainable, and the improvements also are sustainable.

You all saw on the slide from Vas that we actually expect over the next years to go -- to industry -- improve industry benchmark, and I think we have several levers.

Actually, Vas laid them also out.

One of them is, of course, over the next couple of years, less generic exposure; then the growth drivers that Paul, with Cosentyx and Entresto, laid out; and the whole oncology portfolio outside of Gleevec; and then, of course, all the productivity initiatives we have driven and which we continue to drive.

Now the majority of the technical operation savings up to $1 billion is not yet achieved, so we are on a very good way.

We are actually slightly ahead on that program, but still a lot to come.

So I believe both on the top line, on the productivity programs, we have a lot of margin improvement potential for the future.

Thank you, Vincent, for the question on Sandoz.

So there's a few points there, so I'll try and go through them.

We anticipate, in 2018, the pricing pressure in the U.S. market to continue.

And beyond that, we start to see that our portfolio mix starts to play a role as we move the portfolio far more towards the biosimilars, which we have coming through in the differentiated specialty products.

Obviously, we filed a number of biosimilars in the U.S., and we'll start to see those coming through.

It's more of a question of timing.

Going on to core margin -- I mean to talk about gross margin.

You've seen gross margin improve throughout the course of this year, and that comes down to the strategy we've been executing around geographical focus and portfolio product mix.

And we've been focused on the geographies which we think will drive long-term profitable growth and making sure that our portfolio mix can also do that.

And that's why that has continued to improve, and we are going to continue executing that strategy.

And obviously, with the biosimilars coming through, we're confident that, that can happen.

So I think, hopefully, that answers your question.

I think one of them in there was the top line growth.

Obviously, we forecasted a flat to slight decline.

And that's taking into account the fact that we've got a good business, as Vas said, ex U.S. that's growing in 2017, and we continue that growth in 2018.

But the pricing pressure in the U.S. is something that's holding back that growth.

And although we have the biosimilars coming through, which is a very exciting portfolio, both in Europe and the U.S., it's really the timing of that and the impact that can have on the top line for 2018.

So hopefully, that answers your question.

The next question is from the line of Jeff Holford calling from Jefferies.

So first off, Vas, I wonder if you can elaborate a little more on where Novartis has an edge on data and digital.

Are these skills and capabilities internal or external?

And how and when will we see this manifest in terms of R&D productivity and margins?

Is this through machine learning to discovered drugs and targets, use of blockchain to increase clinical trial efficiency?

Or are those things still a way off?

And second, just on Sandoz and the generics business.

I wonder if you can just give us a bit more color on your thoughts on the future of that business.

And if you could potentially give us a score of 0 to 10 as the likelihood of ever separating that, that would be interesting, I think.

And then just lastly, Paul, on Entresto and Cosentyx.

When do you think we're going to reach the point of true stabilization both on net pricing, particularly in the U.S., for both products now that access to both seems to have improved and be pretty good?

Thanks, Jeff.

So on data and digital, as Joe previously announced, we have now a Global Head of Digital Medicine that is reporting into the CEO, so will be reporting to me, Bertrand Bodson.

He comes from actually the tech sector.

He's worked in Amazon.

He's worked in retail.

He brings a very different mindset to thinking about technology and how technology can impact a business like ours.

I would say there's 3 levels of how we're thinking about embedding data and digital.

So first is automation and how we can bring automation into all elements of the business to drive productivity, and there, we're really making concrete progress.

Whether that's automating our safety data -- safety case processing, automating our data management, automating our approach to supply chain, automating many of our FRA and other elements within our financial work, this automation should, over time, deliver real productivity gain in the company.

The second is how can we use this technology to help us make better decisions.

And there, as well, we've rolled out a couple of platforms, one within Global Drug Development to help us choose clinical trial sites to optimize our patient enrollment patterns and figure out when we need to intervene on studies.

We've also got a -- you saw on the slide, a digital cortex at NIBR, which is looking to help us better tie a target to -- or try to identify the right target and identify the right molecule using these kinds of technologies and maybe not some of the older technologies we've historically used.

The biggest opportunity, where we're still in the early days, is to use deep learning and artificial intelligence to identify completely new indications, completely new medicines, and there, we are investing.

We have a series of partnerships with external companies.

We have partnerships as well with a number of universities.

And that's an area of investments because, in the longer term, if we can use the power of data to find new drugs that are high -- more high efficacy, find patient populations that are going to respond better, that's going to drive tremendous value for the company and value to society.

So I'd say we are in the early days, but we've made substantial progress, and stay tuned for us to make more concrete progress and give you real concrete outcomes.

Now with respect to Sandoz, Sandoz is a $10 billion global business that is attractive that has many different well -- good -- highly performing elements.

So first, I think in biosimilars, we are a leader.

We have double-digit biosimilars growth.

We have over $1 billion in sales, a broad portfolio, more and more launches coming.

So quite pleased with how we're progressing in biosimilars.

And then similarly, when you look at our hard-to-make generics business, our work in injectables, inhalables, et cetera, I think this is also a very strong performance that we've seen around the world.

Also, when you look at retail generics outside the United States, depending on the geography, but overall, we've had great performance over the recent years in our retail generics business, and that ties in as well to the fact that we have a big tail of established medicines as well in any -- as we do like any pharmaceutical company, both in pharmaceuticals and oncology.

So there's a clear fit and synergy there.

I mean, right now, our energy is focused primarily at looking at the U.S. oral solids business, where it is a discrete business.

It's a unique situation.

There are significant pricing declines.

At least in the medium term, we don't see a shift to that situation, and so we're assessing how best to optimize that given that dynamic.

And Paul, on pricing?

Yes.

Jeff, thanks for the question.

I'll answer it mainly relating to the U.S. market.

I mentioned earlier that Entresto will take the benefit of some small adjustments just to remove a few more PAs.

Whilst we think the national picture is in good shape, just 1 or 2 plans that we want to just make sure that we give the patient the best shot of getting the medicine.

We feel good about that.

As for Cosentyx, I also touched on it a bit.

2018 is quite an important year.

Between the 2 new entrants already here and one more to come, we felt it was important to be thoughtful, not rash, but to make sure that we had a strong position for '18.

The market will settle down after '18, we hope, certainly in terms of share, and then we'll get to decide how quickly price settles down, too.

So I think Entresto, I think, some stability now really and going forward.

I think Cosentyx, probably another year before we really see it settle, but we're pleased with our position.

The next question is from the line of Tim Anderson calling from Bernstein.

A high-level question for Vas.

So as the new CEO, I'm sure you're focused on making sure that nothing really goes wrong.

But when you look ahead in 2018, can you just identify for us what you think could be the couple of biggest challenges that lay ahead that maybe make you worried?

Is it something like the Cosentyx trajectory?

Is it making progress on certain pipeline products?

What would be the 2 or 3 things that are the greatest risk, in your opinion, in 2018?

And second question goes back to Sandoz.

You had mentioned biosimilars, an important driver today, year-on-year growth.

I think quarterly sales were about $300 million.

But when are we going to really see that start to blossom in the numbers with Sandoz?

Is that the sort of thing where we'll see sharp acceleration in 2019?

Is it more like 2020?

And is there any way for you to kind of just put a stake in the sand and quantify how many billions of new revenues this could bring into the Sandoz P&L over the course of, let's say, 5 years?

Are we talking a couple of billion?

Are we talking $5 billion?

Anything like that?

Okay, great.

Thanks, Tim.

In terms of what I'd say the big risks are for 2018, I outlined 3 that are top of mind for me.

One, we have a couple of binary events within our Sandoz portfolio that we need to go our way, and we're going to be watching them carefully.

One is the timing of Copaxone 40, and then the other is the timing of the Advair generics approval.

And I think these are things that are difficult to predict.

We've done all of the right things.

We have confidence that our team is approaching this in the best possible way, but these are just items that are difficult to predict and have some volatility in the system.

The second is going to be turning Kisqali.

We need Kisqali to continue to perform towards where we have hoped.

I think the combination of the MONALEESA-3, the MONALEESA-7 data as well as the fact that we're not as far behind Pfizer in Europe should enable us to get pick-up on Kisqali, but that's something we're watching closely.

I hope that in totality, when you look at Rydapt, Kisqali and Kymriah, that those can really enable our oncology division to drive growth, the growth that we all hope for and expect from a business like that.

And so I think those would be the big 2 on the top line.

I think on the pipeline, I mean, the key is for us to deliver on RTH and BAF in terms of filing time lines, and these are important medicines.

We're on track.

We feel good about where we are, but these are the 2, I think, we're going to have to deliver on.

Now in terms of Sandoz, to give my perspective on biosimilars, we've invested and built a broad portfolio.

I think, in Europe -- it's really a tale of 2 worlds.

In Europe, we're seeing very strong uptake.

We're seeing an organization that's able to launch biosimilars with great success across multiple geographies.

We're going to be launching more over the course of this year, as Richard can highlight.

And then in the U.S., we have a dynamic where we know eventually there's going to be a significant uptake for these medicines.

It's a health care system that desperately needs biosimilars to be successful, to create physical space for new medicine.

Payers, the FDA, HHS are all on the side of biosimilars.

We know we do have to overcome first the complexity of the patent hurdles in the U.S. And we have to overcome the complexity of the payer dynamic in the U.S., but we're fully aware of that.

We're confident we can do it.

I think it's not a matter of if, it's a matter of when.

And then we would continue to expect biosimilars to be a multibillion-dollar business for us.

Richard, any other additional thoughts?

I think you summed it up really well, Vas.

I think the way I look at it is similar, it's a -- it's not an if, but it's a when.

And if you look at the pipeline that we filed, adalimumab, infliximab, rituximab, pegfilgrastim, and that's all coming in the not-too-distant future both in Europe and the U.S., which is the largest markets, I think we've set ourselves up really well and we feel we can execute.

Despite some of the challenging unknown environments, we can pivot well.

So I think we're set.

For the medium term, it's a timing issue in the U.S. that we've got to manage carefully.

The next question is from the line of Richard Vosser calling from JPMorgan.

Richard Vosser from JPMorgan.

Just a couple of questions on Sandoz, first of all.

Just the assumptions you've taken into 2018 on generic Advair and Glatopa, what contribution you have in the guidance for Sandoz.

Then just going back to the Biocon deal.

Could you go into a bit more detail around the rationale for that deal?

Was it driven by gaining new products?

I would have thought, commercially, Novartis would have more presence than Biocon, say.

I know you mentioned commercial, but that seems a lesser effect.

And just wondering whether it signifies the thought that the opportunity in biosimilars might be less attractive.

Perhaps, there's more competition.

Secondly, on Alcon, could you just talk about the inventory fill that you've had benefiting the last 2 quarters?

Should we think about this reversing?

Or is this an ongoing fill for the new material IOLs?

And then just finally, on PARAGON.

You sounded quite bullish on the PARAGON trial, so just some thoughts on what's behind that.

Do you have increased confidence in the interim readout or in the trial overall?

Richard?

Thanks for the question, Richard.

So on the assumptions on (inaudible) 40 milligrams Copaxone, so the assumption for Copaxone 40 milligrams is that we are aligned with Momenta our partner on this, and we'll launch in the second half of the year.

(inaudible) FDA and our manufacturing partner, Pfizer, to make that happen.

On Advair, we have forecasted we will launch that year into a competitive market, so that's the second assumption you asked for.

On the Biocon deal and the rationale behind that, to build on what VAS said in his presentation, we are currently the #1 biosimilar company in the world.

We aim to stay the #1 biosimilar company in the world.

We believe having a broad and significant portfolio is important to do that.

And as much as we have the largest portfolio now, we currently are developing products to increase that.

We also see the rationale and the benefit of partnering with a company like Biocon to make sure we have an even more extensive portfolio.

I think that's the deep rationale behind the Biocon deal.

(inaudible)

So just addressing the inventory position, with respect to what Harry said earlier on, it's about 1% of our net sales in Q4.

So that was an underlying 5%.

As we go forward, it's tough to predict the different shifts, et cetera, and one things can offset the other.

So I won't predict things moving forward.

What I will say is what I said in the last call, which was that most of the inventory adjustments took place in 2016 relative to our Surgical business in the Asia market.

Again, there's a lot of offsets going back and forth.

On PARAGON?

And then on Entresto, the thing we've always highlighted about the PARAGON study is our unique end point that we've taken, repeat hospitalizations.

We've really learned from all of the past failed trials within preserved ejection, heart failure.

Now the interim readout in 2018 is just that, it's an interim readout.

I think the reduced ejection fraction study was a very unique situation where we had an astonishing P value, which enabled the study to be stopped earlier.

I think in this case, because it's going to be likely an endpoint driven less by death and more by hospitalizations -- repeat hospitalizations, we're going to need all of the endpoints in order to demonstrate efficacy.

So that's why I think the interim readout will be useful, but we really would still guide to a mid-'19 firm readout on the study.

And in terms of the opportunity, Paul?

Yes.

So Richard, we are -- as Vas has outlined, there's nothing specific that's getting us more excited or less.

We'll just go through the normal results.

The only thing I would add is in terms of executing with that indication, I think that's where we're much more confident than we've been previously.

You have to remember that by the middle of '20 or early '20 when we'd be campaigning, we -- our working knowledge of the cardiology community, the patient population and these things that are really and absolutely critically high level.

So we think we can do more with it when we get it than we thought previously, and I think that's why we're excited about it.

And after all, there is no medical treatment, and we are the only real credible alternative in this space.

The next question is from the line of Andrew Baum calling from Citi.

Three questions, please.

First, I note you have an SGLT1/2 inhibitor in Phase II.

It's a 1,000-patient program, which is very substantial.

Could you just help us to characterize the profile of this molecule versus the existing SGLT2 inhibitors both in terms of weight loss, nausea?

And I'm assuming you would be able to do a Phase III start as early as the beginning of next year.

And then finally, is there any risk to your Entresto outlook from the established SGLT2 inhibitors given the anticipated data?

Second, could you comment at all on whether you've seen any abscopal responses with your STING agonist in combination with your PD-1?

You've been dosing it for a while now in combination.

And then finally, for Vas, who will -- and I may have missed this, in which case I apologize.

Following your ascension to CEO, who takes the Head of Development and CMO spot?

Thanks, Andrew.

So on the SGLT1/2, so this is a unique drug that targets equally SGLT1 and 2. So SGLT1 is expressed on the gut, whereas the SGLT2 is expressed in the kidney.

Both transporters are involved with glucose transport into the intracellular space.

So what we saw, in a Phase II study -- Phase IIa study with this medicine, there's a significant weight loss over a relatively short period of time, about 12 weeks.

We saw extrapolated value that would indicate we could get from -- to 15% to 20% weight loss perhaps out at 1 year.

So what we've done is we've enrolled a Phase IIb study, which was one of our fastest enrolling studies that I can recall.

That is now fully enrolled, and we're now waiting for the Phase IIb results.

We should have that result over the course of this year.

And then if it was positive, we would then look to move it forward (inaudible) -- in a Phase III trial that could start at the end of this year or early next year.

Overall, the side effect profile is good.

And one of things we are looking at is to mitigate any of the mild diarrhea with split dosing in that Phase IIb study.

Now with respect to the STING agonist plus PDR001 and the abscopal effect, I don't believe we've publicly disclosed anything further.

I think our partner, Aduro Biotech, will plan to disclose more about the STING molecule's performance soon.

So I would prefer not to comment on that at this time.

And in terms of the GDD, we've named a interim head.

He's name is Rob Kowalski.

He's a Pharm.

D. He's our Global Head of Regulatory Affairs.

He's been our Global Head of Regulatory Affairs now for over 6 years, one of the most well-respected people in this space, knows all of the key regulators, knows all of our key programs.

So he'll be continuing to guide the shift as we complete the search for a successor.

And Paul, the risk of Entresto?

So to my understanding, the SGLT2 studies are on top of standard of care in heart failure, so we wouldn't expect anything other than as an add.

The next question is from the line of Graham Parry calling in from Bank of America.

So -- and Vas, going back to Slide 30 and 31.

I wonder if you could help quantify the sales upside that you're expecting by 2022.

And just confirm the relative proportions -- and I'm afraid I did get my ruler out, and it looks as if you're proportionately expecting about half of your incremental to growth to come from Cosentyx, Entresto and new launches and about 1/3 from oncology, but could you just confirm that it is representative?

And secondly on pharma margins.

When you're talking about industry margins in the mid-30s, is that a target or an ambition?

And what absolute operating cost progression are you expecting to see to get to that sort of level?

So are you thinking flat?

Are you thinking inflationary growth and then the rest coming from top line leverage?

And do you expect to grow margins each year through Gilenya and Afinitor patent expiries in the pharma business?

And then thirdly, could you help us understand how to read the lack of renewal of the $5 billion buyback this year in terms of your appetite for M&A?

Thanks, Graham.

So we figured everyone would be taking out their rulers on Slide 30, but I think it would be -- it's not our intention to provide specific guidance when you look across those next 5 years, only to indicate we believe we can deliver solid growth over that period of time.

We'll, of course, continue to keep you updated.

I would say proportionately, we do believe the key growth drivers will be Cosentyx, Entresto and the launches as the #1 growth driver in the company, followed by the growth of the existing onco and recently launched portfolio.

So I think the relative contributions are accurately depicted because these are based on our own current forecasted -- the graph is based on our own forecast of our outlook.

Now in terms of the margin, I'll take a stab at it and then Harry can add.

When we look at this mid-30s, I mean, this for us is a goal to get to the mid-30s, and we believe we can deliver a margin improvement between now and 2020.

And that's what we previously stated, and we continue to stick to that aspiration to deliver consistent margin improvement between now and 2020.

Now the way we do that is in part, we get through some of the patent expiries, particularly Gleevec.

We have strong growth in terms of our key growth drivers, which now are getting to be accretive, as Paul mentioned as well as continuing to drive strong productivity measures and resource allocations as the slide outlined.

Harry?

Now for the -- I think it will be also a combination of very accretive top line growth.

As you know, many of our growth drivers are our own products or fully acquired.

So there's no royalty burden, they're very limited whilst the generic erosion, for example, Gilenya, has a royalty on it.

So we have also -- from a gross margin standpoint, think some good opportunity and overall, a combination of sales uptake, and good cost management and all the productivity initiatives that we have set up for the company.

So I think therefore, we are well established for sales growth for the 5 years as well as margin growth in the years.

As you know, 2020, from a sales growth standpoint, will be a little bit challenged with Gilenya U.S. not (inaudible) to U.S., but we believe with our growth drivers, we will also get through that.

Okay.

Buyback?

On the buyback, so we have completed our up to $5 billion share buyback program in 2017.

Under that program, we bought back $4.5 billion.

We did buy another $700 million worth of shares back from every participation programs as we have an ongoing commitment to always avoid any dilution from every participation programs.

And then as now the AAA's, bolt-on acquisition had to be financed, we simply adjust our capital allocation priorities and we don't finish the $5 billion, so to say, but we stop at $4.5 billion in 2017.

And Vas, I think Graham's questions also is about your appetite on M&A, does this signal a higher appetite for M&A.

Yes, we continue to have the focus on bolt-on acquisitions, like AAA that build up -- build in to our core therapeutic areas and that bring in new capabilities into the company.

So we're actively and continually looking at those kinds of opportunities.

I think as you all know, valuations in the sector continue to be quite high so we're only going to pursue things where we're clear we can create value for the company and our shareholders, but nonetheless, that is the focus.

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

Three quick ones.

First for Paul on Cosentyx.

You explained that the products enjoys a strong potential beyond psoriasis.

But could you give us an idea of the sales current breakdown by indications?

Second question on immuno-oncology.

Could we have some color on when we will have more visibility on the program?

And in other words, when we should have meaningful clinical results?

Although early stage, it could be good to have such update.

And last question on Sandoz.

You explained that you want to focus your company on a more differentiated portfolio, but could you share with us what is the proportion of your business, which is coming from difficult-to-make products, value added drugs beyond the biopharma sales that you disclosed?

Paul?

Florent, to answer your question, we don't disclose the sales by indication, by geography.

But I can tell you, we're growing in all indications in all geographies.

I think one point that you know specifically from the publicly available data sets, I mentioned it earlier, is our performance in spondyloarthropathy PsA and AS in the U.S. And it does get a little bit overlooked, but to be market leader on new patients in the U.S. against Humira and Enbrel, gives you some indication about our ability to execute, particularly in the indications outside of psoriasis.

And we do extraordinarily well in psoriasis too.

Vas, in IO?

In terms of the IO results Florent, we'll expect to -- release those developed in the upcoming medical congresses.

I mean, we would target ideally, ASCO, but it might be at other congresses later in the year.

So you'll be hearing the results from those 3 combination studies in that time frame.

And Richard?

So to give you an idea of the makeup of the business.

I think all we've -- which I've done to some sort of the business architecture, we've got, as Vas pointed out, we have -- which is the biosimilar business, which is over $1 billion now, we have a significant OTC business.

We have a branded generics business, which is a business which we promote, which, in itself, isn't differentiated apart from the fact that we create brands.

So those are significant aspects of our business.

I think when you look at the U.S. exposure to more of the commoditized business, I think Vas and Joe have already highlighted, is around $1.5 billion where we see that commoditized pricing pressure.

But as I said earlier, we're aiming to move that business with the launches of our biosimilars to get -- away from that portfolio makeup as well as we'll be introducing products that go through the 505(b)(2) pathway, which, by definition, will also have a level of differentiation.

The next question is from the line of Steve Scala from Cowen.

I have a few questions.

First, on generic Advair.

If it were approved tomorrow, would you be ready to launch in the U.S.?

What proportion of demand could you satisfy?

And you mentioned it would be a competitive market.

Are you implying you expect other generics?

So that's the first question.

Second, Vas, you didn't mention the Roche stake, at least I didn't hear you mention it, any updated thoughts?

And then lastly on Entresto.

Harry, you mentioned Q4 adjustments.

Would you please quantify?

Richard.

?

Okay.

So we don't actually give guidance on when we're going to launch and sort of assumptions around possibilities.

What we are anticipating is we'll launch it this year into a competitive environment.

We anticipate other people will come to the market with Advair just based on other communications from other companies with that product, and that's how we've assessed and modeled ourselves for 2018.

So on the Roche stake, there's no change really.

I mean, It continues to be something we view as a strategic stake that we continue to evaluate on an ongoing basis.

And as soon as there's a change in our perspective, of course, we'll let everybody know.

Harry?

Yes, Steve.

Actually, I didn't mention anything on Entresto.

But just to also make it clear, there were no adjustments.

So this is pure demand.

Also, no stock and trade movements or anything.

The next question is from the line of Matt Weston calling from Credit Suisse.

Two questions, if I can.

The first on Cosentyx.

You highlighted how important Access on growth is this year.

The one thing that we had noticed is the -- on changed a number of health care plans, which has kicked in, that manufacturers' co-pay assistance will no longer be allowed to contribute to a patient's deductible.

Well, I guess my question is, how do you expect that to impact growth not only of Cosentyx, but in the whole of the specialty category going forward given how significant that is to the pharma industry?

And then the second question on Entresto.

Paul, I note that in 4Q, the release highlights that you launched in China, in terms of the underlying or in terms of the growth we saw in revenue in 4Q, can you walk us through how much of that was underlying patient demand versus channel filling?

Paul?

Thank you, Matthew.

Just to look at points on Cosentyx.

On the first one is, yes, I do think Access is important for '18.

Like I said, this next 12 months has all the major players in the market.

So we want to come out of this year in a strong position in terms of preferred by dermatologists, rheumatologists with great Access.

So we've done -- we've made great progress there.

I think you're referring to the co-pay accumulator that is sort of a emerging trend in the United States.

Just a first initial observation on that.

The affordability in co-pay we put into help patients in the United States is for patients.

And the biggest loser in any change across the sort of pharmacy benefit design would be the patients in this situation.

It's causing a lot of confusion.

It's an industry-wide phenomena.

And it would affect everybody, give or take, where their medicine is in the benefit design more or less.

We have picked it up.

We understand what the implications are.

We -- clearly, at considerable scenarios, we're comfortable with where we sit.

The industry has picked it up.

And really, the biggest loser in the short term is the patient.

And that's not a good situation for anybody.

Entresto, China?

Oh, yes.

Entresto, China.

So we did get approved in China whilst we're not reimbursed.

The team have done a rather excellent job.

We have 2,000 patients approximately that have been initiated to drug in the few months since launch.

And that has meant that we have about $4 million worth of demand pooled inventory.

There are no non-demand generated stocking effects.

And in fact, if you look at December's outturn, from an industry perspective, it's consistent with all previous months and the December before that.

So we feel very good about the underlying demand for Entresto.

Next is Michael Leuchten from UBS.

If I could ask about the value of the volume both for U.S. Entresto and U.S. Cosentyx.

And I'm looking at the quarterly sequential development here where we've seemed to have seen a soft spot in Q2, Q3 for Entresto and another strong uptick of the value of the volume in Q4.

Whereas for Cosentyx, we sort of seen a slide throughout the year.

So could you comment on channel mix?

Could you comment on rebate adjustments?

Could you try to explain what that fluctuation in those 2 products?

What's driving that?

So in front -- I mentioned in the presentation that what we've learned over the last year to 2 years is where the demand to bring in -- and the appetite to bring in chronic patients who have considered themselves well-controlled, but armed.

We see, during the summer, just a staffing -- in cardiology staffing point that bringing and then reviewing in titrates in patient slows down on a chronic med on somebody that's thought to be, but isn't (inaudible) controlled.

So that sort of slow down, as we came out of Q3, is a phenomenon you see with new entrants with chronic diseases, particularly in cardiovascular.

The step up in Q4 is really just about our ability to execute and our -- all the plans point to [no-lease] productivity from the sales force.

Cosentyx is interesting.

Again, remember, we said at the beginning of last year that we do some thoughtful rebating.

We had to grow volume throughout the remainder of the year because that's what makes rebating makes sense because you bought the Access.

And we've done that also this year, therefore, we intend to do that this year.

The bit that I think gets missed also is that free drug programs got rolled in in the second part of the year and patients that were on -- that we were supporting then became part of the overall, which, of course, has a small impact on the value for TRx.

But we're really pleased.

And the evolution of the value is exactly as we predicted.

Your next question is from the line of Kerry Holford calling from Exane.

Just a couple of questions remaining, please.

So firstly, a question for Harry.

Just looking at the disposal gains and the milestones that were booked in Q4 that fell within core earnings.

I wonder if you could quantify those, the vaccines milestones, in GSK and the Sandoz disposal gains, please?

And then just quickly on Gleevec and Tasigna.

I think Gleevec was a little stronger and Tasigna a little weaker than we had anticipated in Q4.

Just looking to understand whether there were any unusual items within the mix there, any rebate reversals or anything else to be aware of.

Harry?

Yes.

Thank you, Kerry, for the question.

So first, the GSK milestone is a $450 million milestone and anything, any gain or loss above $25 million of one-timers is core adjusted.

So that was one of the reasons why op inc was growing ahead of core op inc.

The gain that we recorded on that milestone was net of what we had already on the books as a contingent receivable.

So it was in the $340 million range, but again, core adjusted.

Adjusted out.

Adjusted out, yes.

And the disposal gains, now overall, as I said, some small, tail-end strategic and nonstrategic's assets.

So as we have sometimes financial impairments or legal settlements on the negative side.

Although when we have small positives, we don't core adjust to not make it complicated.

So -- but above $25 million, we do core adjust.

And when you compare year-over-year, it's a $25 million base again, which is 5 points off the core operating and growth of Sandoz.

When you look at the year -- by the way, I also -- asked to look at the core operating income for the -- other income expense for the company, there's no change on the full year basis or also quarter 4 over quarter 4, there's nothing.

We had some small divestment gains, which we did a core adjust and we had some small negatives which we didn't core adjust on a corporate level.

And Bruno?

So on Tasigna.

We continue to see some good growth with the high single-digit growth.

We launched the -- we updated rather our label book in Europe and the U.S. with TFR indication, and we don't see a change in the dynamics between Tasigna and Gleevec.

The next question is from the line of Seamus Fernandez from Leerink.

So really, the question is around immuno-oncology and some of the progress that we're seeing there as well as the research portfolio advances in lung cancer.

Vas, can you just give us a general sense of what you've learned about the mechanism of action for ACZ that has the company moving forward so aggressively with a costly program there?

I have to assume that you're learning quite a bit about the mechanism of action to drive that forward.

So just love to know when we might learn more about that.

Second, there are 3 programs that are listed on one of your slides that's advancing into different settings from Phase I to Phase II LAG with triple negative breast cancer, the MET program with the PD-1 combination in lung, and then your adenosine receptor product as well.

I guess what I'm trying to understand is when I look at value creation, at least investor-related value creation, there's probably a limited number of assets that have gained significantly.

One in particular being a pegylated IL-2 that has gained a lot of investor attention.

Your company knows IL-2 very well, knows IO well.

Can you just help us understand how we should think about perhaps those data relative to the kind of metrics that are bringing you forward into Phase II?

Yes.

So first just general perspectives on IO.

I think when you take a step back, you see that the only agents we've seen with significant efficacy in getting towards patients are the CAR-T therapies, anti-PD-1 and anti-PC LA 4 across a broad spectrum of other agents, a lot of activity, historic levels of activity over 1,000 trials.

But in terms of actual hard data that suggests that there's going to be a significant breakthrough is still limited.

And so I think that is the overall context that we have to take when looking at IO.

So we hold a very high bar when we look at all these programs.

We don't feel like we want to rush in and just chase small signals.

We're really looking for something compelling before we take it into later stages of development.

So to take the questions in turn, with canakinumab, what we have been able to do in addition to looking at preclinical work that is quite extensive and is part of the reason both FDA and EMA feel comfortable with us going forward, we have been circulating tumor DNA work on all -- on the cancer -- the patients who had cancer in the course of the cancer study to understand better their profile, what was their potential stage of disease, how does the drug act on those patients.

So it's based on that understanding, we're moving forward in the adjuvant study and in the second line where we feel clear on our path forward.

In the first line, we're going to have to carefully think about what's the best study design in light of the [Cotruta] recent data, and that's something we're reflecting on.

So I think we'll keep you updated as we think through the first-line trial design.

Now when you think about the second generation IO programs that -- 3 you mentioned, we have seen evidence, early evidence of efficacy in the clinic, which is why we take those into later phases.

When we looked at data, such as the pegylated IL-2 as well as the IDO, which is, of course, out there, we're very interested to see again with control arm data when there is a PD-1 mono arm.

Is there an effect?

What is the incremental effect of the added agent?

And that's something that we have to just all carefully look at.

The agents we've taken forward here, we've tried to be rigorous about trying to look at is this PD-1 alone or is this really a combination effect?

Of course, we can't answer definitively from small studies, but that's in the back of my mind as I look at all these programs, given the variability in the patient profile, the variabilities in the biomarker profiles.

Without good control arms, it's always difficult to really ascertain what is the additive benefit of the new medicine.

I think we have time for one final question.

The last question is from the line of Marietta Miemietz from Primavenue.

I have one clinical question on your EGFR blocker, ensartinib.

Can you share the design of the Phase III trial with us that will be the basis of your 2020 submission in lung cancer, and maybe speak about positioning more broadly?

I haven't actually been able to find any Phase III trials on clinical trials.

And it looks like you're still playing around with all sorts of different combos.

So I wasn't quite sure what to make of your pipeline chart there.

And then a commercial question on Kymriah.

In the press release, you spoke about the progress you're making with the treatment centers.

Can you just give us a little more color on the characteristics of the centers that do and don't get certified, i.e., what are the triggers for getting certified or what are the reasons for holding off on certification?

And is there actually much overlap between the centers that get certified for Kymriah, and those that get certified for Yescarta on the grounds that once you have the expertise and infrastructure in place, you may as well go for both?

Or is it just more economical for the centers to just go for one and operate on the assumption that sooner or later, both drugs will be licensed to similar indications?

And then finally, I just wanted to clarify with Harry on the core tax rate.

The one-off effects that you mentioned in your press release that affected the reported tax rate, have they also been included in your core tax rate?

And if so, what would the core tax rate have been in 2017 without these?

And that brings me on to the core tax rate for 2018.

I'm actually very surprised to hear it may go up.

On my math, the U.S. tax reform could give you a boost of 5 percentage points or so at the group level.

And I appreciate some of that may not materialize and you have incomplete visibility, but your guidance really suggests a massive increase in the underlying tax rate even though it doesn't seem that the shift of your product mix to high tax jurisdictions is more pronounced this year than in the past.

So are you just being conservative and don't want to guide for, let's say, a low teens rate until the dust settles on U.S. reform?

Or is your base case really that mix effects largely wipe out the benefits from U.S. reform?

And if so, should we expect your tax rate to keep on creeping up over the coming years and ultimately move into, let's say, the 20s?

Yes, let's start with tax because that's a big question.

Go ahead, Harry.

Yes.

Thank you very much Marietta.

So first of all, we have one adjustment.

I think you referred maybe to that because of U.S. tax rate where we had to assess our deferred tax assets and liabilities, that's a $61 million tax expense.

Very much lower than some of the other U.S.-based companies who have billions because we have very different structure, IP and headquarter in Switzerland, very limited -- not -- basically, earnings not repatriated, so all of that very limited.

And that is not in the core tax rate because of one-off.

And in terms of our -- I don't want to quantify what we think is the range of potential U.S. tax benefit.

It's certainly not up to the number you mentioned.

It's a smaller benefit that we see, but as I mentioned, many details have to be first clarified with the IRS before we can be more specific.

And then on -- that's why we guide to either it's in line with what we have or 16%.

And over the years, I see a range, overall, between 15% and 17%.

The tax, it's very hard to predict, but I don't see that it would go outside of that range.

Bruno, on Kymriah?

So 33 centers have been -- rents -- set out.

And about 25 of them are fully operational.

Fully operational means that there is a contractor in place.

And we're very pleased with the launch.

Our plan was even the small population in (inaudible) over 30 centers, and we are there or thereabouts today.

In terms of certification, it's very product-specific.

And therefore, we are going for certification of the sites for our products while the competition has to do exactly the same.

Now I can't comment on what the centers -- each and every center, so we'll do it in terms of certifying different products or just one.

And overlap.

Are you seeing a high level of overlap?

Not really, no.

And then finally on the EGFR, we have a third-generation EGFR.

I think as many of you know, the EGFR landscape has been shifting now given some of the recent challenges for some of the players in the space.

Our core goal in pursuing a third-generation EGFR season in combination with INC280 or C-med inhibitor, which is one of the primary resistance mechanisms to third-generation TKI.

So the EGFR study will get posted when -- in due course, but I think our overall strategy is to how fast can we get differential efficacy with the combination with INC280.

Oh, so thank you all very much for joining the call.

A big thank you to Joe.

This is Joe's last conference call.

We're grateful for all that he's done for the company and look -- wish him well on all of his future endeavors.

I look forward to speaking to you at our next quarterly call and continuing to -- the dialogue on how we drive Novartis into the future.

So thanks very much.

Thank you for joining today's conference.

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