Novartis AG (NVS) 2012 Q4 法說會逐字稿

Good morning and good afternoon.

Welcome to the Novartis full-year 2012 results conference call and live video webcast.

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

(Operator Instructions)

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

Please go ahead, sir.

Thank you, good afternoon.

I'd like to welcome everybody to our fourth-quarter and full-year 2012 earnings Webcast.

Now joining me on the Novartis end are Jon Symonds, our CFO, David Epstein, Head of the Pharma division, Kevin Buehler, Head of Alcon, Jeff George, Head of the Sandoz Division, Andrin Oswald, Head of Vaccines and Diagnostics, and Brian McNamara, Head of OTC.

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

Thank you, Joe.

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

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

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

I'll hand back across to Joe.

Thanks, Samir.

So as you saw today, we made the announcement that Daniel Vasella, after 17 years of being either Chairman or CEO at Novartis, will not stand for re-election at our February annual general meeting.

If you know Dan, you know that he shaped this Company for many years, and also had a significant impact on the overall healthcare industry, so he definitely will be missed.

I'd like to welcome Dr. Joerg Reinhardt as the proposed non-executive Chairman of Novartis.

Many of you know Joerg, he spent 20 years with Novartis.

He knows the Company well, and I'm looking forward to working with him.

Now, on to the results.

We delivered strong innovation in 2012, and we were able to offset the patent expirations that we saw, so our sales were flat versus year ago in constant currency, and this is fully offsetting the almost $2 billion worth of patent expirations.

Our core operating income was down 2% in constant currency.

Cash flow was very strong, at $11.4 billion, but I think the most important thing about 2012 was the progress that we made on innovation.

We had 17 key approvals across the US and Europe.

You can see an overview of the financials on this slide for the full year.

We had net income of $9.6 billion, up 4% versus year-ago in US dollars.

Core EPS of $5.25 was down 6% in US dollars, and Jon's going to go through more of the numbers in greater detail.

If you look by business segment, you can see that we had the strongest year in Alcon and Pharmaceuticals, and this offset some of the supply issues that we had in the other divisions.

You've heard me talk a lot about the other divisions in 2012 and the action that we're taking in those divisions and all divisions, ex-Pharma, are projected to grow in 2013.

Now in terms of the priorities, 2012 was a great year for innovation.

I talked about the 17 key approvals, but we also announced nine positive Phase III clinical trials across all divisions, also Bexsero, which did have a positive CHMP opinion this week, received full EMA approval.

Now, in terms of growth, our recently launched products accounted for almost 30% of the Group's total, and this is key, because this is really the rejuvenation of the Company.

Then from a productivity standpoint, we delivered $1.3 billion in procurement savings.

We also reduced marketing as a percent of sales in the pharmaceutical division by almost a point, and this is despite funding an unprecedented level of launch activity.

Now, a little bit deeper in innovation, you can see that the Pharma division had 11 product approvals, including Afinitor for advanced breast cancer, and we have said we expect this to be a significant indication for Afinitor, as well as Jakavi for myelofibrosis in the EU, and that launch is now under way.

In the Alcon division, we had a couple of key approvals.

We increased the line of advanced technology intraocular lenses in Europe to multi-focal lenses.

These are critical, cataract surgery patients can have a lens implanted in their eye that removes the need to wear glasses, basically for the rest of their lives.

We also had approval to a new breathable daily disposable contact lens, called Dailies Total1, and that launch is under way.

Sandoz paved its way for future growth.

Sandoz currently has the most biosimilars of any Company either approved or filed or in the clinic.

They also achieved a record 12 US first-to-files in 2012, and this increases the first-to-file pipeline to 45 for Sandoz.

Vaccines and Diagnostics had a good year in terms of innovation.

I mentioned Bexsero full approval, and we expect to begin shipping in 2013, but also the approval of Flucelvax, which is the first cell-based flu vaccine.

This was approved in the US, and we expect to begin selling Flucelvax also in 2013.

Now one of the metrics we watch very closely is the percent of sales that come from our newly-launched products, and it's a measure of how we rejuvenate the portfolio.

In 2012, we grew 13%, off of a base of $14 billion, so this is a significant number, and it's driving a significant amount of growth.

You can see that some of the individual drugs that are driving that, key products that are growing double digit, and in fact, Gilenya, up triple-digit, you saw the announcement today that Gilenya has crossed blockbuster status in its second year since introduction.

In terms of emerging markets, our emerging markets business is benefiting from a lot of the cross-divisional activity that we're doing, across whether it's Pharma or Generics or Vaccines and Diagnostics, and I want to call out two countries in particular.

Our China business was up 24% in 2012, and China has now crossed into one of our top 10 markets for Novartis, so it's becoming an even more important part, and India up 14%.

In terms of productivity, we made great progress in the area of procurement.

I've said before that we've organized our procurement in a virtual central organization across all divisions and geographies.

We're able to pool the total spend of Novartis, reverse auction it, and we're seeing significant savings in the area of procurement.

Also, in manufacturing, we started in 2010 the manufacturing footprint project, and since then, we have either sold or divested 15 sites out of our manufacturing sites, and 7 of those occurred in 2012.

Also in the past year, we have focused extensively on upgrading our quality systems, as well as our talent across the organization in QA, and we're focused not just on remediation, but we're also focused on increasing the overall level of quality no matter what the division is, whether they've had issues in some sites or not, and I think the focus really is paying off.

We had over 260 health authority inspections in 2012.

Over 55 from the FDA, and the vast majority of those were either good, or they were satisfactory.

In fact, our Sandoz site in Boucherville Colorado, which is one of the sites that was under the FDA warning letter, achieved full compliance, so this is a very important step for us.

The work is continuing here.

I've said before there may be bumps in the road, but we're definitely headed in the right direction.

So now what I'd like is for Jon to come up and give a little bit more detail on the financials.

Jon?

Thank you, Joe and good afternoon, everybody.

So before I get into the numbers, let me start with the score sheet for 2012.

I think that you can see here that we've done pretty well against all the promises and targets we set at the beginning of the year, and especially given what this year has thrown at us.

And I think it gives you also a sense of just how determined we are to deliver against the promises we make.

On this slide, you can see the summary of the performance for 2012, and let me just pick out four numbers amongst them.

You can see under the reported column the growth rate in quarter four of 94% is rather dramatic, but I'm sure you'll all appreciate that this is a result of the provisions we made last year, in relation to Tekturna and Rasilez as well as on the shutdown of the Lincoln plant.

And I've included at the back of the slides, a full reconciliation of the quarter reported results, and I won't go into it in any more detail there because there should not be any surprises.

What I do think is striking in the middle column, however, for the fourth quarter, is that all the P&L numbers are positive.

Granted, we've only had half, about a half of the Diovan generic competition in the US, but that generic competition still added up to $600 million, and you can see notwithstanding this, our profit performance is pretty robust.

Finally in the full year column, you can see that sales were flat with core operating income down slightly, as we were unable to fully absorb the impact of generic competition, $1.9 billion for the year, the loss of output from Lincoln, and the higher quality costs in Sandoz.

Although negative compared to last year, I believe our free cash flow performance, particularly in the final part of the year, was actually pretty good, and I'll come back to some of the factors behind that in a moment.

This slide shows you the normal disaggregation of the top line into its component parts, and this is a particularly important slide to think through, as it's going to become much more relevant to understanding the business in the future, particularly as the Diovan impact begins to get into our base.

In fact, the Lincoln impact will also be in our base for 2013, and therefore, there are really three main components for you to think through.

Firstly, price, and as you can see here, with the broad portfolio we have, the overall impact is relatively small.

Secondly, the impact of generics, which as I'll come to in a moment, will increase significantly over first two or three quarters of 2013, and that leaves you with the underlying volume growth.

And as the impact of generics begins to work through this picture, it will increasingly -- this volume growth will be increasingly visible in our reported top line, and this stands at the heart of the longer term guidance that Joe will come back to shortly.

This slide shows you the performance of the recently-launched products for both the Group and for Pharma.

This product portfolio has been at the center of our business transformation, and the rejuvenation of our portfolio for the last three years, and will continue to be so.

As you can see here, these products comprise 29% of Group sales and 35% of Pharma sales, and the group growth rates remain strong, even in the face of the significant contraction of enoxaparin in the Sandoz numbers.

We've been using this definition of recently-launched products for some time as a measure of portfolio rejuvenation, and as we move to the situation where Diovan becomes increasingly in the base, our growth should be more visible from the reported sales figure.

As a result of this, we're going to give less emphasis to this measure in 2013 in favor of reported sales less generics, this will show the underlying performance, so as I say, increasingly as part of the reported numbers.

And secondly, we'll focus more on products that are five years old or younger, or have protection to 2017 or beyond, and David will show you the products in his portfolio that references this definition.

So as the slide I've just described presents the growth potential of the business over the coming years, this slide lays out the generic competition we expect to face in 2013.

But before I look at 2013, it's clear that 2012 did not go according to expectations.

This time last year, we were assuming our generic exposure to be more or less equally split between 2012 and 2013, with a generic impact of around $2.6 billion in each year, or $5.2 billion across the two years.

As you can see here, things turned out considerably better in 2012 than expected, at only $1.9 billion, mostly as a result of the failure of Ranbaxy to launch a generic version of Diovan Mono in the US.

All things being equal, however, the generic impact is a nil-sum gain and what we benefited from in 2012 simply becomes a higher burden in 2013.

This is why you can see that the total impact for 2013 is now something like $3.5 billion, including a small recalibration of the total impact of around $5.4 billion over the two years.

Of course, this estimate still depends to some degree on Ranbaxy's ability to launch Diovan Mono, something that is completely out of our hands.

We've included a small amount of Diovan Mono in our outlook for 2013, but we'll just have to see how it develops week by week.

This is why we say the generic impact could be up to $3.5 billion.

This slide gives you the divisional story on core operating margins for the fourth quarter and for the full year, and it's clearly a mixed picture, although for the reasons that you're very familiar with.

Two divisions stand out for being positive, Pharma and Alcon.

Pharma managed to extend its record of core margin increases in the fourth quarter and for the year as a whole by 70 basis points to 31.8%.

In fact, this margin of 31.8% corresponds to the highest annual margin ever reported by the division back in 2009, when the exchange rate environment was much more favorable than it is today, and without the impact of $1.9 billion of generic erosion that we absorbed in this performance.

Alcon had a good fourth quarter, recovering well from a weaker third quarter with sales growth of 8% and a good performance across all three franchises.

Alcon's core margin now stands at 36.2%, which is approximately 3 percentage points higher than it was at the time of the merger.

You'll note that we have now delivered more than $350 million of synergies than we anticipated then, and a year ahead of time.

As a result, we'll stop reporting the benefits separately, although there will be some further integration costs to be charged in 2013.

You're aware of the challenges in the other divisions, and I won't labor the points here.

For Sandoz, it's been a year dominated by the lower sales of enoxaparin, over $500 million and with higher margins, as well as lower volumes and significantly higher costs at the plants impacted by the warning letter.

All of these factors will be apparent again in 2013, and therefore, it's unlikely we'll see Sandoz margins improve.

Look through these factors, however.

You'll see that there's a very strong performance across all markets and regions, and with excellent momentum heading into 2013.

V&D had a good final quarter in what has been a challenging year.

The approvals of Bexsero and Flucelvax are important for the future, but 2013 will be a tough year until these sales start to come through.

As for Consumer Health, the news in the last quarter has been much better, with a return of some of the key OTC brands.

So turning now to productivity, and I think by now, you know that driving productivity savings is a critical piece of our business performance, and I think generally we've done a good job, yielding productivity benefits to the order of $2.8 billion and that's well ahead of the 3.5 to 4 percentage points of sales we target.

As you can see here, a substantial proportion of savings come from procurement.

Our procurement group is really functioning well and approaching buying decisions from the group perspective, rather than from a single division, and this is really paying off.

There is still, however, further to go to make procurement really mission critical to the business bottom line that it needs to be.

The other areas are just a selection of what in practice amounts to hundreds of individual initiatives, and it's not just about saving money to the bottom line, but it's also about the reallocation of resources to ensure that we really fund our priorities.

Pharma, for example, has yet again reduced M&S as a percentage of sales by 90 basis points to 26.6% of sales, and fully invested behind its portfolio.

Turning now to cash flow, and as I said earlier, this was a very good performance, indeed somewhat better than we expected.

Overall cash flow for the year of $11.4 billion was 9% below last year taking into account around $500 million of higher capital spending and an increase in inventories of around $700 million.

I would not expect the same level of performance for 2013 for three reasons.

Firstly, the lower operating profits, CapEx will remain high, and could be above 5% of sales, and some of the working capital improvements are not repeatable.

As a consequence of the better cash flow, this has translated into expected net debt, at a lower expected net debt position at the end of the year.

Overall we were able to reduce debt by $3.6 billion as free cash flow exceeded the dividends and acquisition.

I'd give just a word of caution on this.

The rating agencies will see a slightly different picture as the pension deficits increase from $2.9 billion to $5.2 billion, most of which arose from lower discount rates and the adoption of later mortality tables.

So finally to Slide 28, which seeks to pictorially present the moving parts in our performance expectations for 2013.

This essentially follows a picture presented last year and is the way we think of performance inside the Company too.

On the top half of the slide, you can see that for sales, how we get to the flat line with 2012, with the increase in growth products broadly offsetting the impact of generics.

This analysis is also the source of our confidence in future years, where we expect lower impact of generics, while the growth products will continue to grow.

For core operating income, you can see that with the higher impact of generic erosion than was expected last year and with continued investment behind the growth products, we're unable to prevent a decline in earnings, even with substantial amounts of productivity.

So it's clear that 2013 is going to be the transition year, with a significantly higher impact of generic erosion falling into 2013.

Overall, we estimate that this will result in a decline in the core operating margin around the mid-single-digit mark, with a consequential decline in core operating margins.

Obviously it's the Pharma business that takes the biggest strain on all of this, and as you've seen from the Group guidance this morning, we expect the Pharma sales to be down in low single digits.

But if you step back for a second and think about what this means, the business is able to absorb $3.5 billion of patent erosion, with only a small negative impact on the top line.

I really think that this is an unprecedented performance.

Finally, I've not mentioned currency at this point, as with the rates as they are today, it does not seem to be a big deal.

Broadly neutral on sales and slightly negative on earnings, but of course we'll have opportunities later in the year to update on that.

And with that, I'll now hand you over to David for the review of the Pharma business.

Thank you, Jon.

We'll just start with some numbers.

The Pharma division delivered 2% sales growth and 5% core operating income growth, which was ahead of what most would have expected at this time one year ago.

And as Jon mentioned, productivity improvements allowed us to increase the margin, while we continue to invest in our growth portfolio.

More importantly is where that 2% sales growth came from, and on this chart, you see that 8% growth was driven by our recently-launched products and that was offset by a 6 point loss or $1.9 billion generic impact for the net of 2% sales growth.

Taking a look at geographies, and where that has come from, what you start to see is that the emerging growth markets are becoming an ever large portion of our Pharma business, and they contributed nicely during 2012.

Going forward, as we lap Diovan, you will see the established markets contributing more to the future growth of the division.

Very importantly, we have talked often about being an innovation-focused Company, an innovation-driven Company, and it's very clear that in our hands, those innovation investments are paying off, with recently-launched products growing 28% in constant currency and now representing 35% of the business.

In addition to this innovation focus, we've built a very strong global commercial launch capability, which is also contributing and paying off, particularly when one looks at our very strong growth platform, products that have protection whether it be patent or exclusivity until 2017 and beyond, products that all have in our opinion blockbuster potential, and these are products that we will continue to talk a lot more about.

In the next couple of slides I want to give you an update on a few of these brands, and also share with you some new data that was generated towards the end of 2012.

Starting with Gilenya, I'm very proud to say that the launch of Gilenya is the best launch in the MS space ever.

Gilenya reached blockbuster status within two years after launch, and the rest of the world is now accounting 46% of the business and 67% of the growth, driven by very strong launches in markets like Germany and France.

As you know, the business has been less dynamic in the US post the label change in part because physicians in the US practice more in a community setting, where doing EKGs has been a bit more of a hindrance.

We put in place activities and alternatives for these physicians, such as remote monitoring centers that would do the pre-work-up on these patients, and we're seeing now encouraging signs in terms of increased volume demand during the fourth quarter, and in fact, Gilenya in the US is gaining market share.

Turning now to Lucentis, this is a product that did very well for us in 2012, driven in large part by continued expansion of the wet AMD market, which is not yet fully tapped out, and we've launched new indications in diabetic macular edema and retinal vein occlusion, making up about 20% of our current sales.

We also filed for a new indication in pathologic myopia towards the end of the year in Europe and in Japan.

I think it's still not fully understood the potential for the VEGF inhibitor market, and although new competitors are launching, we believe there's an opportunity to continue to grow Lucentis, given the large unmet need, and the large numbers of patients that are not yet either treated or not optimally treated.

Turning now to Afinitor, as you know, we have now expanded the label to include hormone responsive breast cancer, patients that are HER2 negative, Herve Hoppenot, our Oncology Head, presented data at our R&D meeting earlier this year.

You see the launches in the US, Germany, Austria and beyond have helped really accelerate this brand.

We believe the 85% growth versus prior year puts us well on track to achieving our outlook of incremental sales of $2 billion alone, in breast cancer.

In fact, during the second half of this year, we will see the first data in the HER2 positive segment, which can further expand the opportunity for Afinitor.

We also presented data at the American Society of Hematology meeting on a study which compared Tasigna to Glivec, and in this study, we proved we believe now conclusively that Tasigna is the better product.

In fact if you look at the data and you look at complete molecular response rates, or lack of evidence of active disease in these patients, what you see is about a 24-month, 22% of the Tasigna patients had a complete molecular response, versus only about 9% with Glivec.

And it's based on this data that we've designed now a comprehensive development program to prove the possibility that patients could actually have a period of treatment-free remission.

So whether those be de novo patients in the ENEST-Freedom trial or patients who have been on Glivec, but not achieved a CMR in the ENESTop trial, we will be able to show, we hope in time, that a portion of these patients can go off therapy and we completely then changed the paradigm of the treatment of CML, just as we did several years ago when we introduced Glivec, and we took a disease that was fatal and made it a disease that was possible to live with, with chronic therapy.

We now will be in a position with this data to offer patients the opportunity to actually be treatment-free.

Also in our oncology business, we licensed in a product from Incyte a few years ago for the treatment of myelofibrosis, a blood cancer, that is associated with really disabling symptoms for these patients.

Itchiness, lethargy, enlarged spleen and the like, and you can see that the European launch is going very, very well, actually better than we had anticipated.

And during the quarter, data was also shown that Jakavi has a potential for a survival benefit in addition to the benefits in terms of symptoms.

What does this mean?

That means more value for patients and health systems, but it also means that over time, it's quite possible that our estimates of the numbers of patients on therapy are underestimated as people live longer, and thus the revenue potential for the product can continue to grow over time.

As Joe mentioned, it's been a very dynamic period for us in terms of major approvals as well as new filings, with 11 major approvals in the US and Europe alone, rejuvenating our portfolio during 2012.

What you don't see on the chart is, we also had a dynamic time in our Japanese market.

In fact Seebri, which is a new product for COPD, we were able to achieve approval in Japan about 11 hours earlier than the European Union, and the reason that's important is that when I started in this business quite some time ago there was a five to seven-year gap between European and Japanese approval.

By consolidating those approvals in a similar time period is an opportunity to bring revenue forward, and bring peak sales up, something that needs to be included.

As one estimates the potential for products, one needs to look beyond just the US market and the European markets.

Perhaps one of the most interesting products in the portfolio and I would even go as far as to say most exciting projects in our portfolio, is a drug called RLX-030 or serelaxin which has been developed for the treatment of acute heart failure.

As you know there are about 2 million hospitalizations each year in the US and Europe alone, and there's really not much you can do for acute heart failure patients.

You can give them a drug like Lasix and you can reduce some of the water build up, vasodilators, oxygen, and then beyond that, it's symptomatic therapy such as propping people up in bed with more pillows because they simply can't even lie flat and they are unable to breathe, it is so really uncomfortable for them.

We've now shown in both a Phase II trial and a Phase III trial that this product reduces all-cause mortality as well as cardiovascular mortality.

In fact, at six months that's a 37% reduction.

In addition, the trials show improvements in important biomarkers, troponins, creatinine, and BNPs.

Based upon very good conversations with the US and the European regulators, we have put a file together, in fact, we filed early, we filed in Europe in December of last year and we'll file in the US in the second quarter of 2013.

In addition, our development team will do a second Phase III trial, with mortality as a primary end point because it's our expectation that while mortality could well be in the initial label, it may not be a claim, and a second trial could be required to make that an actual claim so as a post-approval commitment, we would then be able to update the label.

Last but not least, at the American Society of Hematology meeting, data was shown on a whole new approach to cancer treatment, a T-cell therapy, a modified T-cell therapy called CTL019.

As you can see from this chart, there's a real opportunity to treat patients with end stage or late stage CLL and ALL, and give these patients an opportunity to live much better lives.

In fact, even the possibility that some of these patients could ultimately be cured.

We have a dose optimization trial that has now been initiated, and this is something to consider as one models this product, as it was not in our forecast that we showed at R&D day, because the data is just so new.

So in terms of news flow, we will keep you busy yet again this year.

We have quite a number of regulatory decisions in the first and the second half, I'll let you read them for yourself, but these will then add to the growth opportunity at Novartis, and as we report to you, the percentage of revenue coming from that growth portfolio, some of these products will be entering that growth portfolio over time.

Also as a reminder, at R&D day, we mentioned that over the next 24 months, we had 24 pivotal study readouts, so it will be extremely dynamic period, and I know Tim Wright and his development team will be very, very busy.

So to summarize, we had strong performance in 2012, above expectations.

I believe our sustained focus on growth, productivity, and innovation is the right one, cooperating income grew well ahead of 2011 and is well ahead of sales.

We have a very strong growth platform with multiple products on the market today, but also multiple additional product launches, products like Seebri, QVA, serelaxin, AIN, LCZ, LDK, Xolair in chronic idiopathic urticaria, all these are new opportunities for our Company.

And then finally in terms of an outlook, this year, 2013 will be impacted by the loss of Diovan Mono, we expect in the US, although we cannot predict it with any kind of certainty.

That would generate a low single digit sales decline in constant currency, and then with taking that out and just looking at the underlying growth, it would be high single digit growth, excluding the impact of generics.

And with that, I'd like to hand it back to Joe.

Thanks, David.

I'd like to close by talking about 2013 and beyond so you are going to see us focus on again innovation.

We will strengthen the pipeline in 2013.

In terms of growth, it's all about executing these launches with excellence because this is going to be key to the 2014 and 2015 time period.

And then you also see us focus on additional productivity activity in the area of primarily in procurement, because we see a big opportunity there.

So our guidance for 2013 is Group net sales expected to be in line with 2012, so in terms of the divisions, this results in Pharma low single digit decline, but then all the other divisions up.

Alcon, Sandoz and V&D, mid to high single digits increase, and Consumer Health, high single digit increase.

In terms of our core operating income, we expect to decline mid-single digits, but that's while covering $3.5 billion of patent expirations.

I want to give you a view also of what happens post-2013.

We expect to begin our next growth phase once the Diovan patent is in our base, and this will start in 2013, and it's going to be driven by three factors.

The first is the growth products, emerging markets, greater exposure and lower exposure to patent expirations going forward.

Our growth products, we showed you how much they were worth in 2012 but we fully expect this number to continue to increase over the next three years up through 2015, and the fact that 80% of the product sales that we expect in 2015 are already on the market, to me underscores the confidence that we have in those projections.

In terms of emerging markets, we expect to have a greater percentage of our total business from emerging markets, as countries like China and India and Russia continue to grow at above total rates.

And then the third growth driver is the lower patent exposure that we expect, so you see in 2012, we had almost $2 billion of patent expirations.

2013 will be about $3.5 billion, we expect, but once we get into 2014 and 2015 we expect between 2% and 3% of net sales to be exposed to generic erosion, and that includes a conservative assumption that Glivec in the US goes mid-2015, so that's in that guidance for 2015.

Now historically, we have not given mid-term or long-term guidance and we don't intend to make this a practice, but as an exception, I wanted to tell you that we do expect to have sales growth, in that 2014 and 2015 period, at least mid-single digit range and we expect our core operating income to grow ahead of sales during that period.

I felt it was important that with the guidance that we give in 2013 we also show you how the investment that we're making in research and development and launch spending today will result in this expected financial performance in 2014 and 2015.

So that's it.

With that, I'd now like to open up the call to questions.

(Operator Instructions)

We take our first question today from Tim Race of Deutsche Bank.

Please go ahead.

Congratulations on the results and the share price moves this morning.

Quite a lot of market commentators are speculating about what Joerg Reinhardt and the change of Chairman is going to do to the Company going forward.

The share price seems to suggest that you're going to slam the strategy into reverse and divest and buy back.

Could you just comment on how Novartis is going to be different going forward in terms of capital allocation, et cetera?

And then a couple of other questions.

Just in terms of emerging market growth, it was very good in China but slightly lower for the overall Group.

Can you just point to which markets you have seen declines in and why?

And just in terms of the long-term growth, you don't mention 2016 when you feel the full brunt of Glivec and Bexsero will that be a growth or decline year in terms of core EBIT margin?

Okay, starting with the first, with the change at the Chairman level, Dan has publicly said that he believes that the strategy of the Company is sound in terms of focused diversification and that we're navigating through the patent expiration period in a way that is as good as I think it could be expected, so we felt like now was a good time to have a smooth transition.

Joerg Reinhardt knows the Company, so he was with the Company for 20 years.

He and I have worked well together.

I don't think you should speculate that there will be a change in strategy.

Some of the way we execute may be different, but I think this is a Company that has continuity, but we also are focused on ensuring that we deliver what we say we're going to deliver.

So I would say, you shouldn't speculate big changes in strategy.

We're going to continue to execute up against those three strategic priorities.

We're going to continue to be driven by research and development, and we're going to invest in research and development.

We're going to focus on translating that into sales and profit that hits the P&L in terms of growth and then we're going to continue to drive productivity pretty aggressively.

In terms of the EGM growth, we did have a couple of the EGM markets that dragged down the total number, but partly because of timing of big tenders So for example, our business in Russia was not robust in the fourth quarter, and even in the full year, partly because of the timing of a specific tender that was significant a year ago.

But overall, our emerging markets business is growing at a significantly faster rate than the business, so it still has some of the characteristics of the rest of the business, but it is growing at a much faster rate, and we would expect that to continue into the future.

In terms of long-term growth not going into 2016, I thought a lot about this but I also agree that when you look at 2013, 2014, and 2015, that's a good period of time and 2015 does have the US patent expiration of Glivec.

So I can tell you that we will move through Glivec in a way that is different than we moved through Diovan.

The oncology group has gone on record as saying that when you look at their pipeline and their launch brands, they believe that unit itself can move through the Glivec patent expiration in 2015 and 2016 with growth.

So you take the oncology unit, and then you add on top of that the Pharma division in which it sits, and then you add on top of that the group.

and so I think that's what we're expecting.

We're not going to go out as far as 2016, but you can see from 2015 we still expect growth.

Thank you.

Thank you.

We now move on to a question from Andrew Baum of Citi.

With regard to your Group structure, when I look across it, you have four areas where I think you'd probably acknowledge you're sub-scale, so Animal Health, OTC, Vaccines and Diagnostics.

A number of your peers in response to shareholder pressure, have been considering whether they're the right owners of these assets, seeking either scale or to divest.

Is it reasonable to expect that given the change in the Chairman position, these opportunities would be carefully reviewed with an eye to looking at both near-term and long-term shareholder value creation?

That's the first question.

Second question with regard to your CHF drug, LCZ696, could you just outline if there is an interim analysis planned for this year related to 75% of events or something similar to that for the primary end point.

And then finally, you have a Phase II compound, a cell cycle inhibitor which LEE011, which is a competitor to a very high-profile Pfizer drug.

Could you just outline your development strategy in breast and indicate how many years you think you are behind Pfizer in bringing this drug to the market in breast, if indeed you are taking it forward in breast?

Many thanks.

Okay, in terms of the Group strategy, we have been consistent in saying that obviously we have three big engines I think at Novartis today, Pharmaceuticals, Alcon and Sandoz.

These are our $10 billion businesses.

They have scale, they're driving good results for the Company, and when you think about the other businesses, particularly Vaccines and Diagnostics, I have said before that I think about this as a business that is in start-up phase, especially with the approval of Bexsero that could really transform that business.

So we're a Company that has the ability to look and invest in a business like that, with the intent of making it a significant return for shareholders in the long term, and that's what the objective is.

I don't think the change of Chairmanship would change that.

We are constantly reviewing our portfolio.

If it looked like those businesses as being less scale than they potentially needed to be successful, we would take action on them.

At the same time, you look at a business like Animal Health, it is a small business but ex-Lincoln, it has consistently grown year after year after year, because when it operates in a market, in a particular category, while it may be sub-scale on a global basis, it is significant and significant market presence in parasiticides, or wherever it competes, and so it is able to have advantage within that category level, and that's one of the reasons why it grows.

So we will continue to review the portfolio.

The change in Chairmanship will bring what it will bring, just in terms of how the future is going to look, but I don't think that really changes the way that we are looking at our portfolio, and the standard by which we're holding each of these businesses to return to shareholders in the long term.

David, on the pipeline questions?

There were two questions, one was on LCZ, so just to remind you there are two indications, one is in hypertension, where we are focusing largely on Asia.

We will actually be in a position to submit before the end of this year for hypertension.

And I think Andrew, your question was mostly about the chronic heart failure indication.

We'll have data in 2014 for that indication.

We're particularly excited about it because this will be a chronic therapy, which will complement the use of serelaxin in the acute setting, which would really set up a nice franchise in heart failure for our Company.

The other question was about our cell cycle inhibitor in breast cancer.

I think to take a step back we have multiple assets in the breast cancer arena.

As you know, we are just launching Afinitor for HER2 negative patients.

Hopefully, we'll have nice data in HER2 positive patients before the end of 2013.

We have a series of PI3 kinase inhibitors in clinic.

In fact we're in pivotal clinical trials in breast cancer with our PI3 kinase inhibitors, and that should position that as potentially one of the next launches in the field of breast cancer.

Then, we have a cell cycle inhibitor, which is much earlier.

What's unique about the Novartis strategy is we're in a position to combine these drugs in a way that other companies can't, because we have each of them in our portfolio, and we firmly believe that breast cancer patients will rotate through all these therapies, all these lines of therapies pushing off chemotherapy as long as possible, and the company that figures out the ideal combination will be best-positioned to win, and we think that's an advantage that we have.

Just to clarify is there an interim analysis for LCZ696 during 2013?

All I can tell you is I don't have it in front of me.

I don't recall an interim analysis.

If it turns out I'm wrong, we'll let you know.

Thank you, David.

Next question?

Thank you.

We now move on to Matthew Weston of Credit Suisse.

Please go ahead.

Good afternoon, gentlemen.

Thank you for taking the question.

It's two for Jon and one for David.

Jon, there was a sharp ramp up in costs in 4Q as a percent of revenue.

It seems to be across the divisions, but particularly in Pharma and Sandoz.

Was it a function of effectively having super normal revenue in both those divisions, and therefore trying to allocate costs accordingly?

I thought we were trying to get away from that and smoothing the impact of the cost base going forward?

Or is the 4Q effect a fairer reflection of what we should consider for those divisions going forward?

And then the second financial question just some indications on tax.

You normally help us out at the beginning of the year, 15.2% reported for full-year 2012.

Is that a fair indication going forward?

Does the Diovan US loss have any impact on tax and should we consider it going up?

And then finally, for David, you mentioned the opportunity for Seebri in Japan.

I note that your joint venture co-promote deal with Eisai was cancelled, only about a year after it was formed.

What's your intention for marketing the respiratory assets in Japan?

Why did you decide to end that deal and does that require incremental investment going forward?

Okay, Matthew, thank you.

On your first question, we have tried to smooth costs out, but there's an inevitability about the fourth quarter being slightly higher than the rest of the year, because some of the costs are only determined at the end of the year.

If I look at the overall distribution of profit for the group, it was just over 22% in 2011 and 24% in 2012, and for the Pharma business, it was pretty much the same contribution of the annual profit in the fourth quarter as it was the same year, so I would assume the costs broadly phase, as you've seen them this year.

I didn't see an opportunity to dramatically rebase them beyond what we've done.

And on tax rate, I'd pretty well assume for 2013 what you saw in 2012, and there won't be an impact on the tax rate because of Diovan.

David?

Yes, in terms of Seebri, just as a reminder we've now launched in Germany and Denmark.

It's too early to give you sales numbers, but qualitatively, we're hearing physicians are happy to have an alternative to Spiriva, and as you know, this is a key component for QVA which is the big opportunity for the Company.

In terms of Japan, it was a joint decision with our co-marketing partner that both our strategies had changed, and it didn't make sense to continue.

Yes, we will put some incremental resources behind the product in Japan, and we have a very nice outlook for the brand there.

Next question?

We take our next question from Alexandra Hauber of JPMorgan.

Please go ahead.

Firstly, on your dividend, a dividend of CHF2.30 is about a 47% pay-out ratio of core EPS, which is basically at the bottom end of the peer group as you're all targeting 50% plus.

We have a pretty good idea where you stand on buybacks, have less good idea of what your outlook on the dividend policy is.

Can you just see how, tell us how you see that pay-out ratio evolving in the coming years?

Secondly, on Alcon, you emphasized that you have exceeded your cost savings target and achieved the target one year early, but you made comments on productivity.

So is it correct to assume that you are leaning towards further margin improvement for that division, and if so, can you just tell us whether this is mostly coming from the gross margin or whether fixed costs are continuing to shrink further as a percentage of sales?

Third question is on Bexsero.

I have not watched too closely, a huge number of European vaccine launches, so can you just point out what's different to the rollout of a new vaccine versus a new drug?

In terms of the approval, can you launch straightaway in the private pay markets in the UK and in Germany?

Is this going -- can you to launch with free pricing and then -- go through the [Amno] procedure?

Is anything different in the reimbursement procedures, and to which extent does the inclusion into the pediatric vaccine schedule really slow things down?

I think I'll stop here.

Okay, let me start on the dividend and then Jon can jump in.

The dividend of CHF2.30 that is proposed is a pay-out ratio, you said of 47% of core, but it is 65% of reported operating income, I think about a 65% pay-out ratio, Jon do you want to?

No, that's right, and that is the way that we have and will continue to look at the pay-out as part of the actual reported numbers.

Yes, on Alcon, I tried to signal that actually we've done a pretty good job, well, Kevin has done a very good job on delivering the synergies, and we delivered $370 million which attributes about a 3 point improvement in margin from the time we took it on, although we've given a little bit of that margin back because they're now absorbing some of the research costs.

And so I think at 36.2%, we're at a pretty high level of margin and we're not expecting really in 2013 to see much improvement in that, but he does have the launch of [Dutria] to come through and there are some important growth opportunities in the emerging markets, so I think the place to focus on Alcon is the top line and less on significantly improving profitability from here.

And Andrin, on Bexsero?

Bexsero, how is a vaccine different from a pharmaceutical?

I think the first point I would want to highlight is that the production time for Bexsero is quite long.

It takes about six months from the moment when we start to fill the vaccine until we can finally release it, which has to do with the quite long sophisticated testing and release procedure.

This is why we would expect supply to be available in sufficient quantity for us to start shipping, only the second half of 2013.

With regards to what happens then in the respective markets, overall, irregardless almost of the country, we can start shipping and sell to the private market once we have product.

However, in most countries the uptake normally of a vaccine is very low unless you have a recommendation from the public health authority.

Now, how you get such recommendations, that differs per country.

For example, in the UK, where I think we are quite advanced, there is a committee, which is called the JVCI, who will review the submission that we make with regards to the public health benefit of the vaccine, including of course its cost-effectiveness at different price points, and that will then make a recommendation to the Minister of Health of the use of the vaccine.

If the recommendation is positive, then the vaccine is automatically introduced into a public health campaign, and what we know from that committee is they will renew the vaccine in June of 2013 of this year, and then make a recommendation.

And of course, we prepare for a positive one, and if it is positive, we will then start to negotiate exactly how to ship the vaccine to be introduced into an immunization schedule, most likely, I would say in sufficient quantities however only in 2014.

So I'm not sure we fully answered your dividend policy question so let me just try again.

We've said before that the most important thing for us is to make sure that the dividend remains strong and growing, so we increased the dividend, or we're proposing an increase in the dividend to CHF2.30 this year which is about a just over 2% increase.

When you look at this, that takes us to about a 65% pay-out ratio, and we also have to take into account the 2013 earnings so we want to make sure that there is room, given the importance of the dividend, to ensure that it remains strong and growing.

We haven't announced a share buyback in 2013.

We have said publicly that we're balancing the balance sheet, a strong balance sheet together with reinvestment in the business and cash returned to shareholders, that when we think about our capital allocation policy, with the priority being on that dividend while we continue to pay down our debt.

Our net debt is now at just over $11 billion, so as you see us start to recover, there may be a change in approach in terms of buyback, but we just have not announced anything formally today.

Okay, so given that, I mean earnings may decline, so pay-out ratio may rise, but if next year earnings are growing, is the pay-out ratio then going to decline as well, as in the pay-out ratio is really not a number you're focusing on?

And it's more like the dividend is growing, and that's the key message.

Well the dividend is growing obviously within an acceptable pay-out ratio, so we want to make sure that we've moved the range that we said that we would stay within in terms of a pay-out ratio.

It is important for us to see that dividend remain strong and growing.

I think if you look at it over time, Alexandra, as Joe, there was a very significant shift in the Swiss franc rate last year and we took the pay-out ratio out significantly.

If you look over the 16-year period, the growth in dividend has been strong, so we're committed to growing it.

It's just that we take as the base the reported, because that's the real number.

Core is a derivative of it.

It's not the real number.

Okay, next question?

Okay, thank you.

Thank you.

We move go to Gbola Amusa of UBS.

Just noticing with the proposed Board changes, that you do have one-off 2014 and 2015 guidance, but we've also seen new IR leadership as well.

So could you comment firstly on changes to culture at the organization, especially around communication and what we might see going forward?

Second of three questions is your Roche stake is now worth over $10 billion and I know you're saying that your strategy going forward is the same, but could you confirm that stake falls under that commentary, or are you looking at how to use it differently today versus a year ago or will you be?

And then lastly on serelaxin, with this new mortality trial coming, in a way it's your third time around.

Could you comment on whether recruitment running the trial analysis and filing might go faster, given that you have some experience now testing this drug?

Okay, in terms of the first question around, let's say change in culture or change in communication stance, I think a Company that is as big as Novartis evolves over time, and while we're rooted in the past, we also recognize market requirements and things that we need to communicate, and full transparency.

and I think you've seen over the last probably 18 to 24 months more information, more transparency, and more guidance.

Now, I think this, today we also gave midterm guidance in a way that we haven't historically, and I want to make sure that people don't think that we're going to continue to do that in the future, but it made sense to do today.

Because, when you look at 2013, it doesn't necessarily reflect what is going to happen as we emerge from our patent loss of Diovan, and we start to move into our next growth phase.

So because we wanted to give the market transparency and visibility to what we believe will be a period of good growth for the Company, that's why we decided to drive that communication, in a way that we haven't in the past.

In terms of the Roche stake, yes, our standard answer is that this is a strategic investment that is worth more than the market price today.

So for example, you could not recreate that position in Roche today in the open market, and so there's value there.

That doesn't mean that we will never exit that stake.

What it means is that, there's a value there that we believe exceeds what we could get for it in terms of if we liquidated it today.

So I guess we would leave it at that and then serelaxin?

Yes, I think your comments are correct, in that the more you do studies in a particular therapeutic area, you get better at designing trials that are more simple, you get to know the sites and things tend to go a little more quickly.

Next question?

But nothing granular in terms of how quickly it could get done?

We're not in a position yet to talk in detail about the serelaxin program.

In addition to this trial there will be other trials, because there are probably multiple opportunities, and at some point during the year we'll update you.

Thank you.

We move on to Seamus Fernandez of Leerink Swann.

Please go ahead.

Just a couple of quick questions.

Joe, can you just give us a sense of your statement with regard to Animal Health and the consumer businesses, which we all know are kind of sub-scale relative to competitors?

We know they're growing or potentially recovering going forward, but is there a true benefit to scale that you see, where those businesses, would prefer to see them larger inside Novartis, or even perhaps even consider strategic partnerships that could benefit those businesses and Novartis shareholders?

And then separately, as we think about serelaxin, David, maybe you can just give us a sense of how the preliminary kind of positioning would be with hospitals off of a single trial, with regard to this product, and how you would envision in a cost-conscious environment, serelaxin really adding pharmacoeconomic value.

Thank you.

Okay, starting with the first question around animal health and OTC.

I do believe there is benefit to having those businesses in the portfolio, even though, today they are not generating -- or at least from a size standpoint, they don't have the scale to make a significant impact on the results.

They, for example, Animal Health, this is a business where our research and development people in Animal Health can go into the Novartis Institute of Biomedical Research, and they can take products off the shelf for their business, and they can develop them faster and less expensively than if they were not part of a Company like Novartis, so I think there is benefit.

In terms of OTC, one of our biggest brands in OTC is Voltarin, which was an Rx switch so I think there are strategic benefits to having those businesses.

Now that said that doesn't mean we have to acquire in those businesses to make them bigger, and a more material part of Novartis.

We would consider strategic partnerships in a way that would benefit Novartis, if it were right for the business, and if it were right for the shareholders, as well as right for the patients and the customers that are stakeholders in those businesses, so I would not exclude that.

David, on serelaxin?

Yes, first of all, just to remind you, we just submitted, I think there's going to be a lot of discussion around what the right label is with the regulators so until you really have more clarity, and that's hard to know exactly what the positioning will be.

But just remember these patients are miserable, they don't have an alternative, and they die.

There are other categories that are like this, that we have some experience in, like in oncology, so it's not all about health economics, because we essentially will keep people alive.

There were some benefits in terms of reduced hospitalization during the study, but I don't think that should limit our thinking in terms of how the product should be priced, so we have to do more work, and then we'll discuss it.

I think we have time for two more questions.

We take our next question from Michael Leuchten of Barclays Capital.

Please go ahead.

Thank you.

Three questions, please.

One on Glivec, one on corporate expenses, and one on Alcon.

On Glivec, we now have generics in Brazil.

Could you help us understand what other markets are potentially going to see some decline by generic erosion prior to 2015?

On the corporate expenses, that was particularly light in Q4.

I understand there's a reduction in the IT and infrastructure spending.

Just wondering how sustainable is that, how much of that is phasing?

And then on Alcon, you've called out the warning letter in one of the facilities, even though you're saying it doesn't have an impact on the product coming out of that plant.

So I'm wondering why you need to call that one out.

Thank you.

Okay, Glivec, David?

Yes, there are generics in the market in a number of countries for Glivec.

Brazil, Turkey and a few others, in fact, there were even some that were generics out there, as you know, around the same time that we launched Glivec.

Having said that, there will be additional countries, in the not too distant future.

There's some small markets in Eastern Europe, there's Canada, there's Russia, these are probably the biggest ones before the US in 2015 and Europe in 2016.

And Jon, on corporate expenses?

On corporate expenses you're right in spotting out there was a trend breaking quarter -- for the total corporate line was $552 million in 2011 and $337 million in 2012 and most of that difference arose in quarter four, where there was true-up on, as we said in the press release, there was captive insurance adjustments and some environmental provisions that were a bit more one-off in nature.

So I would not assume that would be an annualized effect a one off in Q4 2012 and go back to normal strength for 2013.

And I would also just point out that at this point that the incremental pension costs from the application of the new standard from the 1st of January 2013 will be about $18 million or was $18 million a quarter in 2012, and will be similar amount in 2013, and that will be reported on the corporate call line.

And then in terms of Alcon, I can just also answer that you're right in that this was a very small site in Aliso Viejo, California, that produces the LenSx Laser, it won't impact the sales, and also LenSx is quite a small amount of total sales today, but just I think due to the sensitivity of some of the quality issues, we just decided to disclose it even though it wasn't material, Kevin?

Anything you want to add?

The only point I'd add is that obviously we take the warning letters seriously.

Secondly, we work diligently with the FDA, this is in an area that's around devices and the warning letter was specific to some of the changes that happen when you introduce a new device, and so we're working through those issues.

Okay, maybe last question.

Thank you.

Our last question comes from Odile Rundquist of Helvea.

Please go ahead.

The first one, if you could just give us what has been the impact on the price cut in Europe, and if you assume any negative impact in your guidance for the top line flat sales versus 2013?

Then, on the Vaccines, Menveo had quite the good performance 18% versus last year.

Could you just give us the breakdown of US, Europe, especially versus if you take any market share there?

And then give us an update on the pentavalent vaccines that is currently in Phase II.

Are we going to see any data in 2013?

And finally on Ilaris, we have seen a positive opinion from the CHMP recently.

You still in discussion with the FDA following your complete response letter a year ago, where do we stand there?

Thank you.

Okay, in terms of the impact of the price cuts in Europe across all of the divisions, we do have assumptions about Europe in 2013, 2014 and 2015, and we don't anticipate the pricing environment in Europe getting any better so we do have it built in to the guidance that we gave today.

As long as it's in line with where it was in 2012, which was quite significant.

I think our Pharma division in Europe saw about 5 points of negative price, so that's what would be in the forecast.

In terms of vaccines?

So first on Menveo, the majority of the sales come from the US and the US growth is double digit.

We of course see a bit slowing down as one would expect after a period of time, but we of course also hope that we will get the approval of the Menveo infant indication also, which will give the brand further momentum in 2014 and beyond.

With regards to the pentavalent, we have completed the Phase II as you mean the ABCWY which is the combination of Bexsero with Menveo, that data looked very good as far as immunogenicity it is concerned and we have also not seen any interference between the different components, which is normally the biggest risk in such a combination program, and based on that we can evaluate when and how to start Phase III.

David on Ilaris?

As you know we just got a positive recommendation for the CHMP for Ilaris in gout.

These are for patients that have multiple attacks a year and can't take other more standard medications.

We're in discussions with the FDA on an appropriate study design.

As soon as that's nailed down, we would start a trial for the US market.

I'd like to thank everybody for attending and we look forward to updating you at the end of our first quarter.

Thanks very much for coming.