Novartis AG (NVS) Q3 2011 Earnings Report, Transcript and Summary

Good morning or good afternoon, depending where you're attending from. I'm Stephanie, the Chorus Call operator for this conference. Welcome to the Novartis Q3 2011 Results Conference Call and Live Webcast. [Operator Instructions] This call must not be recorded for publication or broadcast. At this time, I would like to turn the conference over to Mr. Joe Jimenez. Please go ahead, sir.

Thank you, and welcome to the third quarter conference call. Joining me on the Novartis end are Jon Symonds, CFO; David Epstein, the Head of the Pharma division; Kevin Buehler, Head of Alcon; Jeff George, Head of Sandoz; and Andrin Oswald, Head of Vaccines and Diagnostics. Before we begin, I'd like to ask Susanne Schaffert to read the Safe Harbor statement.

The information presented in this conference call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the Securities and Exchange Commission for a description of some of these factors.

Thanks. Hey, before we start, I've been asked by a number of people why we delayed our press release from 7 a.m., when we typically release, to 8:30. Due to the job eliminations that we announced this morning, I wanted our people to hear that news face-to-face as opposed to hearing about it over the radio or as they were coming to work. So I apologize for putting a number of you in a tough spot in terms of timing to get notes out, but I felt it was really important from a human resource standpoint to make sure that they heard it from us. So if you flip to Slide 4, we had a strong third quarter. Our sales were up 12% versus year ago in constant currency, and we were able to show continued strong operating leverage with our core operating income up 15%. Free cash flow was very strong for the quarter at $3.7 billion, and I feel good also of the innovation in the quarter and the 3 key approvals that we obtained. On Slide 5, you can see an overview of the financials. So sales of $14.8 billion for the quarter and core operating income of $4.1 billion. Slide 6 shows what I think is the benefit of our diversified portfolio. So we had, in the quarter, the strongest growth from Alcon, which was up 7% versus a year ago. Pharma also a very good performance, up 3%, and that's even while absorbing 5 points of generic erosion on Femara in the U.S. and on Diovan in Spain. Vaccines and Diagnostics, you can see is down slightly 2% due to lower sales of flu products against a pretty strong 2010 and also the delay of some of the bulk product shipments that we have in V&D. So on Slide 7, we're continuing to execute well against our 3 priorities of innovation, growth and productivity. And I want to highlight some of our progress starting on the next slide, 8. We continue to lead the industry in new product approvals, and 2 of the key approvals in the third quarter were the Gilenya approval in Japan, so we think this is a very important approval for us, and also Afinitor approval in Europe for pancreatic neuroendocrine tumors. In terms of innovation, we're able to turn this innovation into profit growth and sales growth that hits the P&L. So on Slide 9, you can see that our newly launched products accounted for about 25% of group sales, up 31% versus a year ago. And importantly, Afinitor soon is going to get a boost based on the very strong Phase III clinical data in ER+ breast cancer, and we intend to file around the world in the fourth quarter. David's going to talk a little bit later about Afinitor and Galvus and a number of other products that are transforming the portfolio. On Slide 10, we saw a strong performance in our top 6 emerging markets, led by Alcon, OTC and Animal Health, all of which grew above 20% in constant currencies. I also want to point out China. For the group, China grew 35% versus year ago. So we're really starting to get some leverage in China On Slide 11, you can see that our Alcon division really delivered solid growth. And to me, this confirms that the integration work is not affecting execution of the business. So Surgical was up 11% in constant currencies. Pharmaceuticals in Alcon were up 9%. And the third franchise, Vision Care, was below expectations at down 1%, but it was really a mix. We had very good growth on contact lenses. In fact, AIR OPTIX lenses were up double digit, and that was offset, though, by the discontinuation of our specialty contact lens business and some weaker sales in multipurpose solutions. But overall, Alcon had a good quarter. Sandoz on Slide 12 also shows some very strong performance in some key regions. So you can see strong performance in the U.S. This is for 9 months, almost $800 million on enoxaparin. We also have a very impressive success story in Canada on Sandoz, driven by their focus in the hospital channel, also double-digit growth in Western Europe and emerging markets. So you can see that the growth in Sandoz is very broad based. Our Consumer Health division grew 3%, with OTC and Animal Health driving some key brands, and they also showed very strong emerging markets growth. And then on Slide 14, our Menveo vaccine is ramping up market share in the U.S., as you can see by this graph, and sales have surpassed $100 million globally year-to-date on Menveo. As you know, we filed the infant and toddler indication in the second quarter of 2011, and this new age group is going to add some additional sales upside once approved. On Slide 15, you can see that today, we announced some additional cost-reduction activity in Switzerland and the U.S. We expect ongoing savings of about $200 million through the following action. We're going to close 2 production sites in Switzerland and transfer that activity to other Novartis sites or to third parties. We intend to transfer some research activity out of Switzerland, outsourcing some of our development activity, such as data management and clinical trial marketing, and we also intend to reduce G&A and some of our functions. So right now, we're in the consultation period with our works councils, and we expect to execute this plan over 3 to 5 years. Some of the manufacturing is going to take time in terms of planning and execution. This will result in a charge of around $300 million in the fourth quarter. So overall, a very strong quarter, and we're taking action on the cost base that I think will strengthen our future even more. So now, I'll turn it over to Jon.

Thank you, Joe, and good afternoon, everyone. As you can see from Slide 17, we've had another good quarter. Sales were up 12% in constant currencies to just under $15 billion. Core operating income, up 15%, as Joe has already said, another quarter of delivering operating leverage. Earnings per share, up 10% to $1.45 and a very nice performance on cash flow, up 27% to $3.6 billion. It's probably best to start my comments with currency as it affects so many elements of our performance in the quarter. So if you look across the left-hand side of Slide 18, you can see that the weakness of the dollar continues to be positive on sales. But in the quarter, as we expected, the impact on operating income increased as the Swiss franc strengthened significantly, particularly against the euro. Note that the impact is higher on reported operating income than on core operating income, as a result of many of the acquisition adjustments and the one-off items being denominated in Swiss francs. Obviously, forecasting, given current volatility, is highly speculative. However, if we model, using end-of-September rates, the effect would result in around a 4% positive impact for sales and a 4% negative impact on core operating income. It's perhaps a bit counterintuitive that it hasn't improved since the Swiss franc has stabilized. However, since then, we've seen the dollar strengthened against all of our -- many of our tail currencies, taking us more or less back to where we started. As you can see on the right-hand side of the slide, at the 9-month stage, we were 5 points positive on sales and 4 -- and 2 points negative on core operating income. This implied less of an impact on the top line in quarter 4. In fact, it could even become negative. While on core operating income, the impact is likely to be more negative than we saw in the third quarter. Let's see how it turns out. At least one benefit of the recent volatility is that we're becoming much better at modeling the impact. So now let's turn to the business performance for the quarter. Slide 19 shows the number of moving parts in the top line. It's difficult to nail down the performance to a number of simple elements. But if there is one, it's the underlying volume growth in the business, which is, in my view, the best indicator of where the business is heading overall. It remains at a healthy 7%, and as you hear from David shortly, it's even stronger than that in the Pharma business. It's worth noting that the impact of generics will increase in quarter 4 with the -- with European generic competition to Diovan, and it's reasonable to expect pricing pressures to increase. But without this volume growth of new products, it's pretty hard to drive the business performance and the underlying profitability. At the heart of our business performance lies the growth in recently launched products, as you can see on the next slide. As you can see here, for the 9 months, recently launched products have totaled $10.7 billion, and it's still growing strongly at 41%. The growth rate for the Pharma products continues also to be very strong at 36% and has now almost reached 30% of Pharma sales. So turning to operating performance on Slide 21. In constant currency, we've delivered operating leverage with sales growing 12% and core operating income by 15%. This slide shows the development of margin in reported terms and the impact of currency movements we've seen in the quarter. Overall, currency reduced core margin in the quarter by 2.3 percentage points, masking an underlying improvement in the core margin of 60 basis points. You should understand also that this performance fully absorbs the impact, the full impact, of H1N1 in the 9 months results. We continue to deliver on our productivity promises generating 3.9 percentage points from productivity in the quarter and 4.1 percentage points for the 9 months. Slide 22 shows you how the 60 basis points of core margin improvement was delivered by division. It's a slightly more complicated picture than we've seen in previous quarters. Pharma continues to perform very well, as David will show you in a moment. There is a robust top line performance, executing extremely well on the new product launches, as well as managing the cost base very well. 70 basis points of incremental margin improvement puts the division in good shape to defend against the Diovan generics, which begins next quarter. Excluding currency movements, the 9-month core margin would have been in excess of 34%. Alcon also had a strong quarter delivering on business performance as well as on synergies and integration plan. Core operating margin improved by 210 basis points. Synergies amounting to $32 million or $21 million in the quarter have been delivered so far, accounting for 80 basis points of the margin improvement. The balance of the margin improvement came from good Pharmaceutical performance and a better Surgical performance following a pickup in the U.S. Lens care continues to face challenges, especially with solutions. Sandoz has had a great run for the last 6 quarters or so but has now reached the annualization of the launch of enoxaparin, with an exaggerated effect in this quarter, a result of heavy pipeline stocking in the third quarter last year. Enoxaparin sales this quarter were $259 million, down from $290 million in quarter 3 last year. In addition, as I explained to you last quarter, the second quarter -- the second half has seen an uptick in R&D costs, as the biopharma portfolio moves towards the later stages of clinical trials. For V&D, while there's a huge swing from last year, the moving pieces are really unchanged from what I said in previous quarters. Q3 is a strong flu quarter, although expected to be a little weaker than last year. We also continue to invest in meningitis and the early pipeline, leaving the division as a whole around the breakeven mark. For Consumer Health, there should be no surprises in this picture. As I said at the half year that we would rebalance spending after last year's back-end loaded patent. While the fourth quarter will still have higher spending levels because of the bias towards cough and cold, it will be a lower percentage of sales last year, resulting in a better margin than we saw in the fourth quarter of last year. Turning to Slide 23. Performance continues to be complicated by one-off items. This slide highlights the main moving parts, and in the appendix, there is a similar chart for the 9 months. The press release gives you full details of each items, but 3 items stand out: of the impairment of agomelatine in Pharma; the ongoing restructuring initiatives, particularly the manufacturing footprint project; as well as the integration costs in Alcon. Joe has already described the overall intent of the program announced this morning. So let me say a few words from a financial perspective. From a financial perspective, the restructuring announced represents both new projects, together with an acceleration of what was already planned. Restructuring charges of around $300 million will be incurred in quarter 4, and this charge will cover Pharma research and development, manufacturing in Pharma and OTC, as well as G&A cost-reduction programs across many sites. The biggest impact is in Switzerland with around 1,100 of the affected positions, together with around 1,100 of the affected positions in U.S. Pharma development organization accounting for most of the balance to get you to the 2,000. Around 700 positions will be added mostly in low-cost countries. And when complete, the program will deliver in excess of $200 million of annual savings. We need to continue to prepare for a harsher environment. And as you've seen from the currency impact that we've been discussing for some time, we need to achieve a better balance of revenue and costs, although the significance of Switzerland to us will always go beyond its simple size in revenue terms. On Slide 24, I want to point out the story below operating income, as the mix is beginning to change in quarter 3 and will continue to do so in quarter 4. Now that we've passed the Alcon acquisition date at 25th of August, the comparisons will no longer include associated company income. Note that in quarter 3 2010, we included a onetime revaluation gain of $200 million, which accounts for the $0.09 deviation on associates in the reported column. The impact of the share increase will continue until we pass the issue date of April 2012. You should note here also that the tax rate has improved for the year-to-date and now stands at 15.5%, and the range for the full year is now estimated to be between 15% and 15.5%. Slide 25 shows the evolution of net debt. It is a good picture of the strength of the underlying cash generation of the business. Net debt now stands at $18.3 billion compared to $21.9 billion at the end of the second quarter. Share repurchases in the quarter represent around 8 million shares purchased to cover future grounds under the employee share schemes. Cash flow continues to be good, as already mentioned, growing 27% over quarter 3 last year to $3.7 billion. So in closing, it's been another good quarter with operating leverage being delivered in constant currency terms. We remain committed to deliver strong financial performance without compromising the investments necessary to secure the long-term success of the business. And with that, let me hand you over to David for the Pharma review.

Thanks, Jon. I'm pleased to report solid sales growth of 3% in constant currency and a continued leverage in terms of op inc and free cash flow. As Jon mentioned earlier, core op inc margin in constant currency is actually up by 70 basis points, and I believe this is primarily the result of our ongoing productivity initiatives to streamline how we work, as well as increased focus on resource allocation to the decisions that we think will have the biggest impact on the company. If you turn now to Page 28, you see that launch brands are driving overall sales growth, despite the patent expiration and price cuts. In fact, recently launched products drove 8 points of growth, more than offsetting the loss in sales from products like Femara and the beginning of loss of sales to Diovan. The way I view this is that our sales are now have a much higher quality as they are more sustainable going forward. Looking at Slide 29, you see one of the charts that I am most proud of, and I think one of the slides that differentiates us perhaps more from other companies than any other one, and that is an unparalleled platform for growth now with 1 current and 7 potential blockbusters. These products all have longer-term patent protection of at least 2015, in most cases, well beyond that period of time. As you look down the right-hand column of the chart, you see strong double-digit growth for all these key assets. What I'd like to do now is just talk about a few of them very briefly, starting on Page 30 with a look at Lucentis, which grew 19% during the quarter, driven primarily by continued expansion of the wet AMD indications and just the beginning of first sales in diabetic macular edema, as well as retinal vein occlusion. And we believe these 2 new indications have the opportunity to substantially expand the size of the potential market and to continue to fuel Lucentis growth into the future. On Page 31, we take a look at our Gilenya launch, which we believe has now been demonstrated to be best in class in the MS market in the U.S., where we continue to outpace analogs in that business with 6% TRx market share, just really a few months after launch. Likewise, in the German market, we have already achieved over 5% market share, and we're outpacing several of the other key products in that marketplace. Of note, as of today, more than 25,000 patients have been treated globally. Of that 25,000, more than 20,000 are in commercial drug, and the side effect profile that's developing is very, very similar to what we saw in our pivotal Phase III clinical trials with no surprises. We just came out of the ECTRIMS meeting where I felt quite good about how the brand is being perceived, and I'm optimistic about -- based upon that meeting, we will see continued strong uptake of the product as we also continue to get new reimbursement approval in several markets in Europe, as well as in Asia, which should fuel the growth of the brand. On Page 32, give you a quick update on our CML franchise. What we now see is that Tasigna continues to grow as a percentage of our total Tasigna and Glivec sales, now representing 19% of the CML sales. Globally, we've also now achieved 48% of the second-generation market, which is a 6.8% increase over the last 12 months, which speaks to the increasing appreciation of the benefits that Tasigna offers over competition and Glivec. Looking at that critical newly diagnosed segment of patients, we see that already 1 in 3 newly diagnosed CML patients are started on Tasigna, which is a very, very important marker for us to gauge how -- what -- how this market will likely evolve in the coming years. On Page 33, you see that our development teams have continued to do a solid job with multiple approval and/or submissions during the quarter. I'll let you read it for yourself, but this chart gives you an idea of where some of the future growth of our portfolio will come from: Afinitor, our respiratory portfolio, which I'm sure I'll have an opportunity to answer some questions about in the not-too-distant future; as well as new important data on QTI571 in pulmonary arterial hypertension; and for Ilaris in juvenile arthritis. Page 34, we have some of the strongest data generated for us this year, and in fact, some of the strongest data ever generated in the field of ER+HER2- breast cancer, where we show that Afinitor, when added to exemestane, more than doubles progression-free survival. We have regulatory filings planned to start in the not-too-distant future. This data has now been shared with the FDA where they have encouraged us to go ahead and file that file. As I said, it's almost done and ready to be submitted, and we're looking forward to being able to bring this product for this indication to market and help literally tens of thousands of women who would benefit, adding potential peak sales of, we believe, over $1 billion for this indication alone. In fact, if you look at Page 35, the Afinitor Phase III results is a result of a decision we took a few years ago, which said that we had a very good understanding of both how this drug works, in terms of its mechanism of action and the mTOR pathway, as well as an understanding of the biology of multiple different conditions, both in the cancer arena and beyond, that we felt going into a fairly broad program, a fairly expensive program, that the risk was well justified because we thought this was a product that we could build into a substantial brand based upon multiple new indications. And in fact, the data that we're generating is delivering very much on that promise, and the next set of data should be in gastric cancer in the not-too-distant future. I'd like to wrap up on Page 36 as we usually do and share with you the expected news flow for Q4 and some selected news flow for the beginning of next year. As you can see, we remain very, very busy. The investments that we're making in R&D continue to pay off, and we'll have a lot more to share with you in the not-too-distant future. And with that, I will turn it back over to Joe.

Thanks, David. Okay. So just to conclude on Slide 39. Based on the performance that we have had in the first 9 months, we're confirming our outlook for 2011 with sales growth expected to be in the low double digits, and we continue to expect to improve our group core operating income margin on a constant-currency basis. And now I'd like to open the call to questions.

[Operator Instructions] First question Mr. Amusa, Gbola from UBS.

Two questions. On your China growth, what's responsible for the pickup? Is it leadership, recent investments coming through, or is it long-awaited reimbursement decisions finally becoming final? And then on European austerity measures, it seems like we're starting to see some signs of targeting drugs that have been on the market for 10 years or more, for example, what's happening in Spain. Are these measures material for the industry do you think? And given that your portfolios -- particularly new as Glivec, your exposure there?

Okay. Starting with the China growth, I think what's happening is you're seeing us hit on a number of cylinders. So the management change that we made almost a year ago is starting to get some traction, in terms of aligning that team and really honing the marketing and sales skills of that team in China. We're also seeing better distribution. And as you know, we pushed our organization from a central system to a decentralized system into the provinces, and we're now starting to see the payoff of that. So I would expect to see some pretty significant and continued growth in China. We're running the division a little bit differently than outside of China, in that our leader in China has all divisions reporting to him. That's partly because of the fact that Pharma is so well developed in China and some of the other divisions are less developed. And what that's doing is it's enabling us to attract a higher level of management attention on some of those non-Pharma businesses. Regarding European austerity, David?

Yes. Well, I would say that European austerity is here to stay. It will fluctuate up and down from time to time. And if you look across the continent, you see very different kinds of measures. And you spoke to one in particular, which is the reduction in prices for older medicines, which, given our portfolio, is something that we would prefer to see, so that new innovative drugs would -- there'll be room created in the market for new innovative drugs to enter. As you know, we've seen a price impact year-to-date in Europe. That's around minus 5 points, and I don't really expect this to be materially different from that going forward. And that's part of the reason that we are both focusing on allocating resources to the right places and driving productivity. So that we can do our best to offset as much of the price decline as possible.

Next question from Mr. Tim Race from Deutsche Bank.

First question on Gilenya. Just very strong performance in the quarter. Can you just talk about any stocking on that, and are we seeing actually underlying demand and out of what we see is sort of a washout of promotions and sampling? And along the themes of Gilenya, just a feedback from ECTRIMS seems to be that you need publication of long-term safety profile on, particularly, sort of CD4 count safety as well. When might we be getting that data? And second question on currency. Just I'm glad that Jon finds it much easier to model. Just -- could you just explain the fourth quarter, the moving parts there, particularly sort of the deterioration at the operating profit level? What's really driving that? Are we seeing sort of a higher Swiss franc cost base in the fourth quarter, or is it just actually be hard [ph] to model currencies versus the dollar? And the last question if I may, the NVA237 delay, could you just help us understand the magnitude of that delay, and what additional clinical data are we looking for, perhaps a split dose study or something along those lines?

Let me take the first and the third questions, Joe. So starting with Gilenya. We're very pleased with the uptake of the products as you can see. And in fact, from what I'm seeing in terms of early launch results in some of the new markets, some countries are going even faster than the U.S. and Germany. In terms of stocking, there are -- there's nothing other than the normal increase in stock as demand goes up. So the inventory levels as calculated as a percentage of monthly sales, there is no -- there's no meaningful change. So it really truly is all demand. In terms of what you're hearing from ECTRIMS, I believe this is mostly being generated by our competition who likes to, from time to time, try to come up with reasons why Gilenya may not be the ideal drug for certain patient types, and from time to time, they jump around on different themes. And at this meeting, it was around more publication of the safety data. We recognize that we are publishing that data routinely. We will continue to as patients are followed, both the Phase III patients as well as any post-marketing surveillance events. And we will now look at some way to get the world's leaders together and let them go deep into our database, so that they can see that the results are exactly as we saw in the Phase III trial. So I suspect that will go away in time. Regarding NVA, what I'd like -- this is our inhaled anti-muscarinic product for COPD. This product, as you've seen from the Phase III result has clearly demonstrated efficacy in a device that is extremely well received, which is the Onbrez Breezhaler. So there are -- there's -- there are no issues either in terms of efficacy or the device, which are some of the rumors I had heard coming into this call. And also recognize that x U.S., which is Europe, rest of world, we're very much on track for the approval of NVA, which is an indication -- a new medicine, which we filed just last month. In the U.S., we're facing issues similar to what we saw with Onbrez, which ultimately ended up in approval with just over a year delay. So, in other words, we're being asked and questioned about things like which dose was -- the dose that was selected. From what we're learning in the marketplace and from competitive intelligence, we understand that others are dealing with exactly the same environmental issues that we are, and we see that we're still very much in the race with this product. Obviously, any delays with NVA immediately spill over to QVA. And we will ensure that any additional work on QVA takes the NVA delayed, as well as the appropriate dose, into account. We believe that NVA, QVA and Onbrez, together, the Q family, as we call them, will become a blockbuster franchise. And as you can see, it's on our chart of our top 8 priorities for future growth. So I -- the sense I get from reading some of what came out in early reports this morning is that people may have somewhat overreacted, so I would encourage you to take another look at the opportunity before us.

Okay. Just coming back to your question on currency. Yes, we're getting better at modeling it, but unfortunately no better at forecasting it. And so all we can do is give you a calculation at a point in time. The 2 things that are relevant in the model is, number one, what's happening with rates. And I think you can see, generally, that the dollar continues to be weak but there's been a couple of instances, particularly with Swiss franc over the year, where that has got very, very much stronger. Now the second point after rates is what the structure is, and that really depends on the mix of sales and profits. Our sales mix is generally fairly -- is fairly stable because it is very widely based, whereas we have more concentration in our cost base. And as you see, generally, we have a higher spend in the second half. Generally, our highest of the 4 quarter spend is in the fourth quarter. And therefore, as you rightly pointed out, that we probably have a higher proportion of Swiss franc cost in the fourth quarter, which leads to that -- which leads to the implied profile that you can see on the slide that I went through earlier. So that you can see that moving from 5% for the 9 months to 4% for the year on revenues, the impact on sales should be neutral to slightly negative, whereas on core, moving from minus 2% from the 9 months to minus 4% for the full year would imply a slightly higher impact on core in the fourth quarter on currency. But I should stress again, that this is simply an estimate based on rates at a single point in time and is not quite equivalent to a forecast.

Next question from Mr. Graham Parry, Bank of America Merrill Lynch.

Just getting back to the QVA issue. Can you confirm that the issue with the FDA is about once versus twice daily dosing or just dose level or both? What conversations did you have with the FDA on dosing, both on level and frequency, before going into Phase III? So is -- can you remind us whether there was an end of Phase II meeting to select the dose? And could you clarify why NVA237 requires additional clinical data or, as your release says, QVA will require additional studies? And then secondly, on Lucentis. Just wondering what your thoughts are on the failure of Roche's arbitrage to show non-inferiority for PRN dosing of Lucentis versus monthly dosing or any benefit of the higher 2-milligram dosing. How it might affect your ability to compete with Eylea when it launches next year?

Yes. So let me just start on Lucentis. The HARBOR trial has never been a key part of our strategy. And what that trial essentially says to me is we have the optimal dose for the product in the marketplace, and we can continue upon this path. And I would urge everybody to remember that Lucentis is dosed PRN, essentially, in Europe, which is very different from the situation being faced in the U.S. And in fact, we recently adjusted our label so that physicians could dose to essentially optimum visual acuity, which we think is the best way to use VEGF inhibitors. So we feel quite good about them. I'm not dismissing that we will have a competitor. We will, but we're in a good place in terms of dosing and labeling. In terms of QVA, I do not want to go through all the detail. As you can imagine, this is a fairly competitive segment, and it's interesting to note that some of our competitors have given even less information than we have. Suffice to say, FDA would like to know what the optimal dosing regimen is for this drug, and we will make sure that we provide that data to them.

Next question from Mr. Matthew Weston, Credit Suisse. Matthew Weston - Crédit Suisse AG, Research Division: Three questions if I could. The first following on from all the queries about NVA. It's really about U.S. regulatory success versus European regulatory success. It's very notable that your key catalyst for the first half of next year are all European, because the U.S. side of those studies and filings have hit some problems. Do you think there's some inherent issue there at Novartis? And if so, what are the plans to address it going forward? Secondly, with respect to cash flow, Jon highlighted the very strong cash flow in the third quarter. When do we expect it to see that reconverted into a resumption of the share buyback, or what plans do you have for that cash going forward? And then finally, really, with respect to Pharma as we move into 2012. It's obviously a year where there are number of loss of exclusivities but also, as you've clearly highlighted, very strong new launches. How are you going to manage potentially reducing the Diovan sales force but also anticipating the long-term data on Tekturna? And similarly, moving towards the end of exclusivity for Femara and Zometa but also with the potential Afinitor in breast. Does that mean we're going to see a significant margin squeeze in Pharma next year?

Let start with NVA.

So NVA, so first of all, I think it's -- we should be clear that we continue to have regulatory success in the U.S. There's plenty of label, for example, which is perhaps the best label in the world is one of the -- is an example of that. In addition, we have been quite successful in the U.S. with quite a number of regulatory filings and approvals in the oncology arena. The issues that we face on NVA are issues that, I believe, all sponsors are facing or have faced. So there's nothing particularly unique in that area. Looking forward at 2012, while I'm not going to give you a margin outlook, I know it'll be up to Jon if he chooses to do so, I suspect he may not, but that's certainly his choice, it is true that we are continuing to look around the world at how our sales forces are allocated in those -- in all countries based upon our product portfolio, which is going through a very significant shift right now. So for example, you mentioned Femara, Zometa and Afinitor, in the U.S., we've -- we stopped promoting Femara more or less at the beginning of the year prior to the generic patent expiration. We've already taken actions to reallocate brands and to realign that field force. And it's quite a nice thing actually that both Afinitor and breast cancer, which is coming as it should be, we think is significant opportunity and Zometa gets sold to exactly the same customers. So we're in actually in a very good place. For the U.S. primary care field force, you're right. The timing is not quite as neat, because we won't get our first Tekturna data until the end of next year. And we will, of course, look very close at how that field force is allocated and make sure we're putting them on brands where there's the greatest return. And if there's any case where we don't think there's a good return, then we will do what we've done in other countries and we'll make the appropriate adjustments with those selling organizations.

Jon, on cash flow?

Yes. On cash flow, Matthew, what a nice problem to have. When we met in September, I wanted to be quite clear as to what the allocation of cash flow would be over time through investment in the business, repayment of debt and adjustment to capital structure. I mean, you should notice that we have spent the best part of $0.5 billion on share repurchases. But in terms of reactivating a structural program, I think that, as I mentioned then, this is pretty much an annual event, not something that we're going to look at on the basis of we've got a -- we've had a good quarter, let's start the buy back program again. This is a serious discussion about the usage of cash flow that involves the board and so on. So I would, if I was you, leave the question as part of the annual results discussion on how we are outlooking cash flows and investments at that point.

Next question from Seamus Fernandez from Leerink Swann.

Just -- first, can we talk a little bit about the investment behind the Biopharmaceuticals portfolio inside Sandoz? Again, when we look at some of the uptake of products in that market, it's difficult to see what kind of a return you're generating outside of an ANDA-type portfolio in the U.S. And internationally, there's growth, but obviously, substantial investment involved. So just kind of wondering how long the disconnect between R&D investment is going to be versus potential growth there? Secondly, on -- again, on NVA237. When you think about the product, I guess there have been some questions around potential low-level side effects and getting the dose right, some questions around a competitor product with regard to stroke that ultimately was disproved. Can you just give us a sense of, again, any evidence of low-level side effects that -- or safety issues that might be driving the FDA's concerns in that regard?

Jeff, you want to start with Biosimilars?

Sure. So for Q3 2011, our development stand in Biosimilars did increase significantly over Q3 of last year as we are further along in our pipeline than we were last year and as key programs advance closer and closer to moving into the clinic, as we have recently with rituximab for a Phase III onco trials in follicular lymphoma starting a couple of months ago, patient recruitment as well as on rituximab for rheumatoid arthritis, which began in January. We also have several programs moving into Phase III clinical trials in 2012. So naturally our development spending will follow. Having said that, I want to comment on your point that you raised on the end-market performance. I believe we're very well positioned as Novartis in biosimilars. We have now, as of the most recent IMS data, the #1 position in each of the 3 marketed products in Biosimilars that are on the market, in human growth hormone, which recently became first-ever $100 million Biosimilar. In EPO, where we've recently overtook Hospira as the global #1 there, and in G-CSF, the biosimilar for Amgen's Neupogen, where we became #1 displacing Teva and ratiopharm just a few weeks ago on an IMS M8 [ph] basis. And I think if you look at our share uptake, it is quite significant with double-digit shares in G-CSF and EPO in many markets around -- particularly in Europe, and we've now launched in over 35 countries. With respect to returns, the returns are actually great. I mean, these are very high-margin products for us. I think it depends a lot on where you get in. If you come in late to the party on biosimilars, the returns are not going to look nearly as nice because you're going to see more pricing compression. But we feel very good about where we are there. I think there is, to your point, a disconnect between sales growth and R&D that is driven by a gap in patent expiries on biologics for the next couple of years. So the big biologics, particularly on monoclonal antibodies, we're going to be seeing patent expiries in the '15, '16, '17 period, couple in '14. So there is that gap in the short term. But having said that, we feel good about our performance in market. We're growing 34% year-to-date.

Yes, the thing I would add to that is we are investing. As Jeff said, there's a disconnect a little bit in terms of when the patents expire and when we have to invest. We're looking at this case by case because the pathway -- the approval pathways, obviously, are going to be on a case-by-case basis. It's how similar we can get the actual antibody, put that level of clinical trial program is going to have to look like. And we're deciding on a case-by-case basis whether to make the investment or not, make the investment based on the returns that we can get. But I can tell you that there is no better company positioned for biosimilars. We think this can be a potentially multibillion business for us long term, because we have the technical capability of a pharmaceutical company in pharma, but we also have the generic commercial capability through our Sandoz arm. And if you look at everybody else who's competing in biosimilars or who's claiming that they're going to be big in biosimilars, they only have 1 of those 2 capabilities that we think are going to be critical. David, you want to talk NVA?

Yes. For NVA, we think that the 50-microgram once-a-day dose, which we filed in Europe, is a very good benefit risk profile, improves FEV1 breathlessness and has a safety profile that's no different from other drugs in the class. Having said that, as I said earlier, I think this particular division of FDA wants to see really with almost absolute certainty that we have the optimal dosing regimen. And it's very akin to discussions we had with them with Onbrez, which ultimately resulted in an approval.

The next question from Mr. Tim Anderson from Sanford Bernstein. Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division: Two quick product questions and then another question. On Diovan, why were sales down as much as they were in the U.S. in the third quarter? Second question's on Gilenya, the percent in scripts that are now coming from first line usage and what the ramp of first line usage is starting to look like. And then the last question on Consumer Health. You described that business as having 2 main categories of products, Over the Counter, Animal Health. On the latter, there could be a large business coming available at some point in the near future from Pfizer. And I'm wondering if we can expect that Novartis remains open to looking at a business like that, which might be something like a $15-billion acquisition, or would a deal of that size be too big for Novartis over the next couple of years?

Great. David, Diovan.

Okay. So sales -- maybe I'll just give you the first 3 quarters. Quarter 1, we were down roughly -- in the U.S., we were down roughly 5 points; quarter 2, down roughly 3 points; and quarter 3, down roughly 4 points. What we're seeing there is the dynamic where generic Cozaar is taking a bigger percentage of the market. We're actually gaining share among the remaining branded ARBs. I mean, if there's any good news here, the good news is that we reported very good overall sales growth for the division. And Diovan is actually a little -- probably a little bit smaller than what people have forecasted, which means we have a little bit less of a problem after we lose the patent next year. So I'm quite comfortable with Diovan. There's nothing striking happening yet. Regarding Gilenya, I can't tell you exactly how much its first-line use. What I can tell you is about half of the patients have not been on therapy in the previous 12 months. So some of those are new patients, but some of those are patients who may have taken, for example, an injectable interferon and then gave up on it in the past. And that number has stayed relatively constant so far. I think as physicians get more and more comfortable with the long-term side effect profile, we saw some of this discussion at ECTRIMS, we'll see first-line use increase over time.

Regarding the Consumer Health question, obviously, I don't want to speculate on any kind of M&A in Animal Health. I can tell you that we've said in the past, we're going to use our cash to pay down our debt, okay, that's a level of $18 billion as of right now, as well as buy or acquire bolt ons that could increase the scale of our businesses that, today, could use scale, so whether it's over-the-counter drugs or Animal Health or Vaccines and Diagnostics. I think those are businesses that could benefit from bolt on. Obviously, $15 billion would be one heck of a bolt on.

Next question from Mrs. Alexandra Hauber, JPMorgan. Alexandra Hauber - JP Morgan Chase & Co, Research Division: Three questions, please. Firstly, your cost of goods increased substantially this quarter, especially in Pharma and Sandoz. And I think FX -- both if I look year-on-year or sequentially. And I think FX, only, doesn't even explain half of it. So I'm wondering whether the remainder is just simple mix, or whether there's something in that number, which is not immediately obvious from -- externally, such as that there is some cost of plants you have shut down still going into that line? Second question is -- I mean, this -- 2011 is the first year where your U.S. Pharma business is declining. And last year, in the fourth quarter, in anticipation for that, you have announced a restructuring in the fourth quarter. So I'm wondering whether Europe may share that fate with the U.S. next year, a decline and restructuring that's yet to be announced, especially as austerity comes on top of Femara and Diovan declines, or can new products avoid that? And the third question is on AIN, you've reported some very promising data in psoriasis yesterday. Can you just give us some details on the 3% serious adverse events you've seen in that study? What kind of serious adverse events it was, unless that not a too detailed question for this call?

Okay. Cost of goods, David?

Yes. Alexandra, I think you're pretty close to what's going on there. It's primarily driven by mix. And some of that mix effect is the move to products like Gilenya and Lucentis, which have a higher royalty, and then there's FX them and some other things going on in there. I don't really have much more detail than that. In terms of structure in different markets, we're constantly looking at what's the optimal structure to get the most advantage out of the products we have today and the pipeline that's coming. Beyond that, there's really not much more for me to say other than whenever we do make changes, we'll certainly would let you know about them. And in terms of AIN, I am just -- let me check to see if I have any notes here on this because it wasn't something I had looked into in great detail. When I do -- I'm looking at the data in front of me now. The SAEs are not in any one particular area. So it doesn't look like there's any kind of meaningful signal. You got to remember these patients are pretty sick. They have pretty advanced disease. So overall, there seems to be a quite good safety profile, and we think that will actually be one of the differentiators of the drug. But we can look -- I can look -- try to get more information from our development team on that. Don't consider this the final answer on this question.

Next question from Mr. Mark Beards from Goldman Sachs.

Firstly, on Sandoz. I was wondering how confident you are that your current clinical strategy is going to match the FDA biosimilar guidelines we're going to be seeing later on this year. And then secondly, what the dynamics are for generic Lovenox right now? How are pricing and share changing from previous quarter, and what you think the impact of authorized generic entering the market will be? And then finally, we're hearing that France is potentially looking to cut the price of drugs quite substantially, potentially double-digit prices on some drugs. Is this something you have more information on that you could share with us?

Jeff?

So first, Mark, on our regulatory strategy. We expect that the FDA will issue direct guidelines by end of the year and on how to actually implement the biosimilar pathway that was signed into law by the Obama administration. I think it's interesting to look at Janet Woodcock's recent New England Journal of Medicine article, where -- which provided some thoughtful perspective on some of the key issues and, I think, give some clues as to the likely content of the final guidelines. And specifically, she and her co-authors highlighted the likely overall FDA approach around totality of evidence, which supports our belief that demonstrating a highly similar product attribute, so fingerprinting of 2 products, for example, will allow for an appropriately focused or abbreviated clinical trial program. And this was the approach that was already used by FDA for our generic enoxaparin approval. Secondly, there's clearly, I would say, a caveat in that. There's clearly uncertainty anytime a pathway is not completely spelled out. With respect to enoxaparin, in terms of the situation there, as you know, Watson and Amphastar received approval on September 19, somewhat surprisingly from our point of view, given that no Watson or an Amphastar products is on the market yet. Sanofi made the decision to launch and authorize generic under its Winthrop label with -- corresponding some impact on pricing and share, but we feel very good about where we are on both of those. We do anticipate, looking forward to 2012, that generic competition will result in a significant sales decline once there's added competitors. But we can't comment a lot further, because we don't disclose pricing or channel strategy on this. I also can say there's pending litigation with the district court recently having granted a TRO that's been extended until, I think, a couple of days from now on the Watson-Amphastar product. So we'll see how that PI hearing goes.

And, David, France pricing?

Yes. So far French price reductions, which are something we've grown accustomed to, are more or less in line with the rest of the European price reductions. There are often -- as you know, there are pressures on governments to continue to reduce their healthcare spend. Drug is one of those categories. What we do is we usually encourage them to bring their cost down by making generics more readily available in their market. And in addition, we often suggest that they put in place pricing regimens that allow for innovative new products to come to market. The French have been very good about ensuring there's access to patients living in their country.

. Next question from Mr. Andrew Weiss from Bank Vontobel.

One for Joe. You cunningly skipped Slide 38 where you suggested that you're on track to deliver $2 billion of savings. Could you quickly just tell us how far you're already ahead of that in getting to the $2 billion, if most of that has already been achieved? One for David. The LASOR data for Tasigna, is that not scheduled for ASH? I have not seen that in the presentation before. And one to Jon, the tax rate for 2011 looks like it's low. Should we assume that for 2012 and beyond?

Okay. Regarding the savings, yes, we are on track to be at or ahead of the $2 billion. And I think we showed in September that we were -- if you just took time elapsed at the half year, we were ahead of $1 billion, and that trend continues. So I feel very confident that, that number will be delivered. David?

With Tasigna, we're running, as you know, a series of clinical trials looking at different populations that would benefit from moving from Glivec to Tasigna. So the ASH meeting, the key data is 2 trials, so the follow-up of the ENEST newly diagnosed patients and probably the most -- potentially, and I haven't seen the data yet, but potentially the most interesting information is the CMR trial. The other trial that was not on my page means it's coming just a little bit later.

And Jon.

Yes. On tax following the integration of Alcon, we said that the tax rate would be in the 15 to 16 percentage range. And it looks like this year, we could be in the lower end of that range, but I would not predict it'll be permanently at this level going forward. So I think it -- around the middle of the range prospectively but at the lower end this year.

. The last question for today is with Mr. Craig Maxwell from UniCredit.

So I have a couple of questions on Sandoz, just a follow-up on the R&D spend. It's -- it is rising very quickly. And just going forward potentially with a lot more Phase III studies required to basically get this product to market, should we be looking at that actually going up still quite a lot more over the next couple of years? And then on GP2 2013, the Phase III study and first-line FL, what about for second line and maintenance in FL? And then for diffuse large B-cell and CLL, are we expecting Phase III studies in each of these areas to basically get on the market? And then lastly, on just a follow-up on the U.S. Best I can tell, that study is in Brazil and Israel. Are you expecting that study to be suffice for -- I know you don't know the guidelines yet, but I assume the guidelines were okay for a U.S. file.

Okay, start with R&D spend.

Yes, Greg, I don't have too much more to add to what I've said earlier. As we have a number of programs that are moving into Phase III clinical trials in 2012, development spend will certainly increase. And we see that as a positive as we're moving along quite well with our programs. But clearly, in the short term, that has an impact on development spending. That's not as was alluded to earlier fully offset by end-market products. With respect to rituximab, we don't disclose a lot around our filing strategy. In fact, I don't disclose anything there. But we -- what I can say is for -- we generally file for all indications at the same time, including the data that we have on extrapolating to other indications. The recruitment for both the rheumatoid arthritis and follicular lymphoma trial is underway. For competitive reasons, you can understand I -- we don't comment further. But we're targeting a little under 800 patients in those 2 studies, the Phase II RA and the Phase III follicular lymphoma trials. Can't comment on the U.S. trial that you referred to earlier for competitive reasons again.

Okay. I just -- I understand you can't comment. Just a brief follow-up though. I know obviously for the Indolent or the first-line FL, those patients are looking to be alive for about 10 years. So 6 months efficacy and up to 2 years safety follow-up seems a little short.

I appreciate your input, Craig. As I said, not much more that I can comment on our biosimilar programs.

Okay. So with that, I'd like to thank everybody for attending and now close the call.

Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.