Novartis AG (NVS) Q3 2012 Earnings Report, Transcript and Summary

Joseph Jimenez - Chief Executive Officer Susanne Schaffert - Head of Oncology - Novartis Pharma Germany Jonathan R. Symonds - Chief Financial Officer David Epstein - Division Head of Novartis Pharmaceuticals Kevin J. Buehler - President, Chief Executive Officer, and Chairman Brian Mcnamara - Division Head of Novartis Otc Andrin Oswald - Division Head of Vaccines & Diagnostics Jeffrey George - Member of Executive Committee Timothy C. Wright - Head of Exploratory Development

Gbola Amusa - UBS Investment Bank, Research Division Michael Leuchten - Barclays Capital, Research Division Naresh Chouhan - Liberum Capital Limited, Research Division Graham Parry - BofA Merrill Lynch, Research Division Matthew Weston - Crédit Suisse AG, Research Division Alexandra Hauber - JP Morgan Chase & Co, Research Division Andrew S. Baum - Citigroup Inc, Research Division Odile Rundquist - Helvea SA, Research Division Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division Florent Cespedes - Exane BNP Paribas, Research Division

Good morning, and good afternoon. And welcome to the Novartis Q3 9 Months 2012 Results Conference Call and Live Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions] A recording of the conference call, including Q&A session, are available on our website shortly after the call ends. [Operator Instructions] With that, I would now like to hand the call over to Mr. Joe Jimenez, CEO of Novartis. Please go ahead, sir.

Thank you. I'd like to welcome everybody to our third quarter conference call. Joining us on the Novartis end are Jon Symonds, the CFO; David Epstein, Head of Pharma; Kevin Buehler, Head of the Alcon business; Jeff George, Head of Sandoz; Andrin Oswald, Head of V&D; George Gunn, Head of Animal Health; Brian Mcnamara, Head of OTC; and we have Tim Wright with us also, Head of Development Pharma. So before we begin, I'd like Susanne Schaffert to read the Safe Harbor statement. Susanne?

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.

Thank you. Okay, starting on Slide #4. As in the first half of the year, our recently launched products supported Novartis sales in the quarter. Our core EPS was $1.34, and importantly, cash flow was $3.5 billion in the quarter. We also achieved a number of regulatory milestones in the quarter, most notably Afinitor in advanced breast cancer and Jakavi in myelofibrosis. So next slide shows the financials for the quarter, sales of $13.8 billion and core operating income of $3.9 billion. And Jon's going to take you through some of the details in a minute. We continue to execute against our strategic priorities of extending our lead in innovation, accelerating growth and driving productivity, and I want to just touch on each one of those, starting with innovation. So in the third quarter, on Slide #7, we delivered 9 regulatory milestones. Besides the 2 that I mentioned, Afinitor and Jakavi, we received approval to Seebri Breezhaler in Europe and Japan. This is key to our respiratory pipeline and to QVA, which we also have filed now in the EU. On Slide 8, importantly, we received first interpretable results of our Phase III trial on Serelaxin in acute heart failure. So we're right now in the process of discussing results with the regulatory agencies, and we're going to present our results on November 6 at the American Heart Association congress in Los Angeles. In terms of growth, Pharmaceuticals had a very good quarter, with the launched brands offsetting the Diovan patent expiration. And importantly, we were able to show an increase in core operating margin during this period to 33.4%. On the next slide, in emerging markets, China really led the growth, with 22% for the group. Our businesses in China continued to perform well behind not just the new…

Thanks, Joe, and good morning or good afternoon to you. As you have already concluded, there's a lot to talk about this quarter, both in terms of performance for the year-to-date and perhaps more importantly, some of the trends which lay over the next 3 or 4 quarters. But before getting into the detail, the summary is also shown here. Sales declined 2% in constant currency for the quarter and 1% behind last year for the 9 months. Core operating income declined by 3%, while reported operating income grew by 5%. In the interest of time, I won't go through this reconciliation. But a simple explanation is that the net impact of amortization on one-off items was lower this quarter than last year, and there's a full reconciliation as a backup to these slides. Core EPS for the quarter was 6% below last year, while reported EPS was 2% higher. Cash flow remains pretty strong with $3.5 billion generated in the quarter and almost $8 billion for the 9 months. Slide 19 shows the disaggregation of sales for both Q3 and the 9 months, demonstrating, as always, that there's a lot of moving parts under the surface. Importantly, however, the underlying growth of volume remained solid at 6%, and the other parts here are reasonably self-explanatory. The significant part of the price erosion comes from Sandoz and the recent acceleration of price competition for enoxaparin. Pharma business as a whole remains pretty resilient, with a net price decline of 1%, even though in Europe it's running at about 5% negative. The generic impact is 4% in the quarter as we begin to face competition to Diovan in the U.S., and this includes a significant reduction in the value of Diovan inventory in the channel. I'll come back to this in…

Thanks, Jon. As you mentioned, the Pharmaceutical division delivered solid profit growth in Q3, and that's despite seeing the first generics against Diovan HCT. Top line was flat, actually up a very small amount. But more importantly, the main story is the 6 points of growth in core operating income driven both by productivity initiatives, as well as beginning to see some of the initial benefits of having a portfolio that's weighted a little bit more toward specialty products. Turning now to Slide #33. You see that the recently launched products are growing strongly, contributing 8 points of growth. Unfortunately that's offset by pricing, as well as generics, for the overall net change of 0 in constant currency. On Page 34, we see the group of recently launched products that we've been tracking each quarter for you. They grew strongly at 24% in constant currency, and very importantly, and it's good news going forward, now represent 36% of our total sales. So essentially, our sales pace is being rejuvenated, replacing old legacy brands like Femara and Diovan. Turning now to Page 35. You see our track record of driving efficiency. In this particular slide, we reticulate M&S spend as a percent of sales, which we've been managing, I believe, quite well despite funding a fairly broad set of new launches, which will pay benefits well into the future. On Page 36, our growth platform continues to deliver, and I would argue it has been exceeding most expectations. You can see strong double-digit growth across each of these key franchises, particularly happy with the continued strong growth of Lucentis, which is growing 23% as we continue to expand it to DME and RVO, as well as the very strong performance of Tasigna, which is growing 49%. I want to take you…

Thanks, David. So to close, we've made solid progress on our 3 strategic priorities in the third quarter, and our full year performance is on track. So our outlook for 2012 remains unchanged, and that is group sales expected to be in line with 2011 in constant currency, and we expect corporate operating income margin to be slightly below 2011 on a constant-currency basis. The final slide I just want to look forward to welcoming everyone to our R&D investor day on November 8 in Boston. You'll have the opportunity to hear our key people from research and development, as well as the commercial side of the business. So you can see the agenda here. It's going to take you through our approach to innovation, our key programs, how we measure success, and I hope that you leave with a better understanding of how this innovation machine is different from some of our peers. So thank you, and now I'd like to open the session to questions.

[Operator Instructions] We will take our first question today from Gbola Amusa from UBS.

The mortality result on Serelaxin, was driven by cardiovascular causes and assuming you can't comment on that, can you at least say the process that drives your decision to include or not include the CV result in your headline press release? And then lastly, I know it's early days and you have an R&D day upcoming, but can you comment on what benefits, if any, come from potentially commercializing Serelaxin with LCZ696, your other heart failure drug?

Yes; regarding Serelaxin, I really don't want to try to address any questions that might end up having me say more than I should be saying before the data is presented at AHA or before our discussions are completed with regulatory authorities around the lag. Just say that we are excited about the data. We think that this is a great additional opportunity for our portfolio, and we will share as much as possible at the R&D day. For LCZ, as you know that's a product for chronic heart failure while Serelaxin is for acute heart failure. Should both of them end up with good data and approval, the ability to market both together can certainly drive an even better opportunity for our company.

We will take our next question today from Michael Leuchten from Barclays.

Two, please, one for Jon. In terms of the comment you made about the ongoing work on short-term productivity improvement, can you talk a little bit about cost savings versus phasing this year? Clearly, some things have gone according to plan, others haven't. So how do I look at the margins in Alcon and Pharma in terms of efficiency gains and cost phasing? And then second question for David on Galvus. I think in the past, you've been saying you've been thinking that the product could make $1 billion this year. It looks like it's not going to quite make that sort of level, and the Q3 results seem to be off-trend. Is there anything going on in that line? Or is it just taking a breather?

Well, on the first one, I mean, I think we're not dependent in productivity for any one initiative. And if you think about the total portfolio, which includes maybe hundreds or several hundreds of projects in procurement, which are phased over, in some cases, 2 or 3 years, all the work that we've been doing in manufacturing, all the work that's been done on adjusting sales forces in the Pharma business, I mean these are not programs that really impact any one quarter and which is why we can say with a reasonable degree of confidence that they continue at a 3.5% to 4% rate. And in fact, we've probably done a little bit better than that this quarter. So these are pretty sound and well-established programs. In Alcon, however, you've got the added benefit of, I guess, the shorter-cycle synergy programs, some of which come with the integration of the business. And if you notice on Page 6 of the press release that the Alcon -- sorry, it's on top of Page 7. You see that Alcon has generated already $200 million of synergy benefits this quarter, some of which from the obvious things, but also joining our procurement programs has really given Alcon quite a considerable boost. So there's no one item that you should be looking out for thinking about it. It's a very broad program.

David?

Yes, for Galvus, continues to perform very strongly, so it was up about 40% for the quarter. We're particularly pleased with both Europe and Japan. We have not yet seen sales really out of China yet, but we will after we get reimbursement in the future. You're right, we were hoping it would be a blockbuster, but it seems like FX have gotten in the way. For this product, it was going to be a close call, and it looks like with FX, it's probably going to have to be wait until next year before it becomes a blockbuster.

We will take our next question today from Naresh Chouhan from Liberum Capital.

Firstly, on Diovan, we've now lost 1/3 of U.S. Diovan sales, and the earnings have held up particularly well this quarter. That, to me, should provide some sort of floor in earnings. Now in the second half of next year, we should have annualized most of Diovan. So should we expect EPS growth to resume in the second half of next year? And if that's not a given, can you talk about some of the investment decisions that could lead to cost being higher than expense? I know you've talked about not wanting to be hamstrung and needing to invest in the business, so some of the things that you could be investing would be helpful. Then on the manufacturing issue, obviously, there've been issues at pretty much all of the businesses that could be considered non-core. Presumably, there's been some sort of investigation at the group level. Could you tell us what those issues might be down to? Have the cost savings essentially gone too far? Just some help us to whether or not there's some sort of systemic problem there or it's just been bad luck? And then on Alcon, sales have grown 5% in the 9 months [indiscernible], and one of the key drivers for it being slightly lower than we'd expect were EU pressures, which show no real sign of abating. So can you help us understand why you think Alcon will grow at mid- to high-single digits in the coming years? I'm assuming also that the guidance still holds.

Okay, starting with Diovan. You're right that Diovan has gone in the U.S. and as we've said, 2013 is really going to be a year of 2 halves, where the first half is impacted significantly by Diovan. In the back half of 2013, we would expect to come out with a growth trajectory that is nice. We're not going to give guidance today in terms of how '13 will look. We'll do that at the end of the year. But one of the things that we're also thinking about is you look at this launch machine and you look at new medicines, like Afinitor, like Jakavi, continued growth on Gilenya, Tasigna and how important that is to the future, and we want to make sure that we are funding those launches in a way that will ensure that as Diovan gets in our base in the back half of 2013, we come out with a nice growth trajectory. So those are the things that we're thinking about, and we're going through the budget process right now. And we'll be prepared to talk about 2013 at the close of the year. In terms of manufacturing issues, we have -- since January, we have had 50 FDA inspections across all of our divisions, and the vast majority of those inspections have gone, what I would describe as well or at least satisfactory. There are 1 or 2 where we've still got some significant amount of remediation. And while we're not out of the woods on those sites, it really is isolated to a very few number of sites. Now regardless of that, though, back in January, we started on a group-wide effort to elevate quality on the agenda and to ensure that we have highest quality standards across all of our divisions, and we've executed well against that. You just look at those 50 FDA inspections that have occurred, and I can say confidently that we do not have a systemic issue. It's isolated to a very few number of sites. I don't believe that cost savings has gone too far. For example, when you reduce your costs, you should be able to improve quality, and that is really what we're focused on because then you have fewer variations, you have fewer deviations, your costs are reduced and your quality goes up at the same time. And that's what we'll continue to execute against. Kevin, on Alcon?

I want to remind you of the 2 factors that Joe highlighted at the beginning of the call regarding the Alcon growth. One is that there were a number of comp issues specific to last year in Q3, as well as one-time events in Q3 of 2012. Obviously, we don't expect those to continue to go forward. The second issue which you raised is the European market environment for procedures. I think based on the work that we've done, we do see weakness in procedures across a few of the obvious markets, like Spain, Italy, Greece. But when you look at procedure volume across the other markets, they seem relatively stable. At the same time, we've seen price sensitivity increase and some impact on market share. So our focus is going to be around how do we capture that market share back, which actually delivers an opportunity for us to grow. So that's the mechanism for how we feel we can grow at an accelerated rate going forward.

We will take our next question today from Graham Parry from Bank of America Merrill Lynch.

Just wondering, in Diovan, how much inventory write-down actually was in there in the quarter and how much of that was against the mono therapy for which you haven't actually seen a generic at the time of taking the write-down. Second is on consumer manufacturing, you said no Lincoln restart this year. Just any thoughts on levels of capacities in the plant in 2013? And if not, how fast can you restore full production via third parties? And what is the margin implication of these third parties? And then fourth, a -- sorry, third, a question on FX impact. You've got 90-basis-point benefit on the operating margin in the quarter, but that was offset by hedging losses in financial expenses, and so you're fairly neutral at the net line on FX. But if FX rates stayed the same, how far out do you hedge? So how long would you actually see that hedging loss headwind?

David, Diovan?

Yes, so as the U.S. patent for Diovan expires September 21, we did increase the product return provision in line with what you would consider normal practices. I've got to tell you though the increase was relatively small because wholesaler de-stocking had already become apparent during the quarter. They had de-stocked in anticipation of the product going generic, and as you know, it didn't work out exactly as anticipated.

Brian, consumer health?

Sure. The Lincoln plant, as we look at the startup, it's a sequential process that we talk line by line, product by product. So I don't want to speculate on when we will be back, but that continues to be the focus at the plant. As far as third parties, we've announced the launch of Excedrin Migraine, Triaminic and Lamisil and Excedrin Extra Strength in January, and we're continuing to focus on bringing up our biggest brands at third parties, as we speak, to relaunch for next year. The margin impact is short term. Gross margin impact really ranges product by product. It ranges from mid-single digits to low-double digits, but again that's a short-term impact that we will address over time.

And I think the only thing I'd add to that is that those products that we launched account for about 25% -- those brands, 25% of what comes out of Lincoln, so the ones that we just started shipping in October. And by the end of the year, we'll be able to give you a better feel for 2013 what percent of sales that were coming out of Lincoln will be up and running in the co-packers and a little bit of more guidance in terms of cost to expect. But we do say that what's important here is to get back into the market, get our market share back and really separate the Lincoln remediation from getting this market share back, and that's really what we're focused on right now. FX?

Yes. On FX, Graham, your analysis is pretty good. Although the piece that occurs after -- under operating profit in net financial income, I mean, that is a very difficult piece to predict. And it really is the net item of 2 very large movements through our balance sheet because we do hedge the balance sheet, but we don't hedge the P&L. And we don't hedge the P&L because we predominantly rely on the total business mix that we have, which has a number of natural hedging elements in it. In terms of the 5% on the top line, I would say about 2/3 of that came from the weakness of the dollar, and therefore, a substantial part of that also flowed into the P&L. But obviously, in the P&L, we have the offsetting benefit of the Swiss franc cost base. So that's why we saw in the quarter 5% on sales and 2% on profit because of the impact of the euro and the hedging effect of Swiss francs. I think -- I hate to make a prediction on this. I think it should start to lessen in the fourth quarter because the third quarter -- up until the third quarter of last year is when we saw the really big movements, in the early autumn of last year. So I'm hoping that during the fourth quarter the impact will be a bit less than we've seen in the previous quarters, but the piece it operates -- below operating income, there's really no pattern of prediction for that.

We will take our next question today from Matt Weston from Credit Suisse. Matthew Weston - Crédit Suisse AG, Research Division: Three, if I could. Firstly, with respect to Diovan mono in the U.S., your guidance that you'll see $200 million less generic impact this year suggests about 8 weeks of Diovan beyond patent expiry, I think, on back of the envelope calculation. Is there any reason why you've gone for 8 weeks? You already seem to have 4 in the bag. Or are you just guessing with we may see generic entry? Secondly, with respect to vaccines, it's been a tough division for a number of years. But now Q3, which is traditionally when you make your money, also seems to be extraordinarily disappointing, and we have the ongoing problems in Italy. It doesn't look to me like the division will even break even this year. Can you confirm that, that is true? And can you also give us an update on the interactions with the EMA on Men B? Are we on track for a decision before year end? And then finally, on generic Rituxan, you suggested in your opening comments, very many players in biosimilars have highlighted that they are rethinking their strategy in light of regulatory commentary recently. What gives Sandoz the confidence that you've interpreted the regulations such that you are confident of moving forward in the near-term time frame?

David, on the reduction of generic volume impacting this year.

First, the numbers are rough, right? And it's not just Diovan. There's other moving parts. But it's worth -- Diovan mono not being in the market is worth about $25 million a week, about 5 weeks have elapsed so far. There's not much more to say than that. We simply do not know when a decision could be made for that product to enter the market. It's going to be up to the FDA or even the courts, as we understand it.

Okay. In terms of vaccines, Matt, obviously third quarter was a tough quarter for the vaccines business. But if you step back for a minute, we continue to believe that vaccines is a good business, if you look at the pipeline of our business with Bexsero coming and with some of the other vaccines that are in the pipeline. We still believe that this can be a profitable and important part of the company. Now we also -- maybe I'll leave it to Andrin to talk about Bexsero and what we expect.

Yes. So on Bexsero, we still expect to get the regulatory action in Europe before year end. Everything is on track for that. We have submitted all our answers to the outstanding questions, and I think based on that, we are quite positive that we will get a decision quite soon. Of course, once the decision would be made, from a decision for launch and from demand to sales, it will take a bit of time. Vaccines are different from pharmaceutical products. Basically, in every country, we have to go through a very specific policy process before that country would adopt an upheld policy decision to really start such an immunization program. We probably would see some of that next year, but I think the majority would really ramp up then in 2014.

Jeff, on rituximab?

Sure, Matthew. On rituximab, we've seen the emergence of what I would call a potential shakeout in biosimilars looking forward as we have seen several of our competitors putting their Phase III clinical trials on hold for rituximab. What I can say is that we've designed our clinical programs, and we have several Phase III programs in addition to rituximab, in close consultation with regulatory authorities. And we continue to enroll patients and make progress on both our follicular lymphoma Phase III clinical trial, as well as our Phase II rheumatoid arthritis trial. I think 2 advantages that Sandoz and Novartis have versus competition: One is a learning curve factor. We started our development work on human growth hormone in 1996 and on EPO in 1997, and that gives us a bit of a first-mover advantage. I think secondly, we have a strong cross-functional -- excuse me, cross-divisional team that's working on rituximab, along with Novartis Oncology, that's really working diligently to drive enrollment in these clinical trials. And we are firmly committed to our biosimilar rituximab program, as well as our overall portfolio of biosimilars.

We will take our next question today from Alexandra Hauber from JPMorgan. Alexandra Hauber - JP Morgan Chase & Co, Research Division: Several questions, please. Firstly, at the second quarter results call, you said you would spend up to $300 million in the second half of this year on growth initiatives, and yet you have delivered a very, very strong Pharma margin. So did you spend any of that money in the third quarter? And if not, is that due to phasing issues and a lot of it will come in the fourth quarter or is it more like your hurdle to actually spend this money for the marketing team is quite high and you will end up spending out very much? Second question, can you just tell us what your European growth would have been if you strip out Diovan? Because, I mean, European growth has impacted those generics and the price, so I'm just wondering. Excluding Diovan, you said that you're already growing. Thirdly, I was quite surprised to -- well, to see when I looked at your new Phase III studies for NVA, QVA that are required for the U.S. approval that these seem to be predominantly safety studies with safety as the key endpoints, with a particular focus on cardiac safety. Could you actually comment whether there has been any specific ECG observations with NVA237 or whether this is a general FDA concern related to the class and view of what has been observed with the Rebif estimates and of course the LABAs? And the fourth question is on vaccines. All of your competitors seem to have either an approved or a filed version of quadrivalent flu vaccine, so I would expect 2013 flu season to pretty much go quadrivalent. What are you going to do to protect your flu sales next year, given that you don't seem to have one of those in the pipeline, unless I have missed it?

Okay. Starting with the first question on the $300 million spend. Yes, at the second quarter, we said we would spend up to $300 million in the back half of the year. I can tell you that we have prioritized and started to spend against some additional incremental marketing on Afinitor, on Jakavi, on Gilenya to boost those growth rates and to continue to keep them strong. But the majority of what the incremental piece will probably hit the fourth quarter because, again, this was -- third quarter is when we basically made the decision to do it, and so spread a little bit third quarter, more fourth quarter, and the margin on Pharma would have been slightly higher because there's some incremental spend there. In terms of European growth x Diovan, David?

Yes, it's very good. It would be high-single digits.

Okay, Tim, maybe Tim Wright could talk about the Phase IIIs on QVA, NVA in the U.S.

Sure. Well, I think perhaps there's a little bit of a misconception. The endpoint -- the key endpoints here really and primary endpoints are on efficacy. There are key secondary and key endpoints for safety throughout our program, and that's not unusual. That's important for determining the benefit/risk, and this is really no emphasis -- no particular emphasis other than what is known for the class in terms of making sure that we have established cardiac safety as one of the key elements of this program.

Okay. And then Andrin, on the quadrivalent?

I think, Alexandra, the -- in flu, we are having a clear long-term strategy to upgrade the fairly old manufacturing network. And for the U.S., our key priority is to build a new cell culture modern vaccine. For that reason, we have invested and built a large facility. And we expect that cell culture vaccines to be licensed later in the year. And then, of course, we will develop the vaccine into the right indications. So it really is a strong, very competitive vaccine. So we are having a QIV program, but of course, it's not going to be launched next year but that's -- it's in our pipeline.

We will take the next question today from Andrew Baum from Citi.

Two questions, one for Joe, second for David. Regarding portfolio management, Novartis has never been one to follow strategic trends, but nonetheless, a number of your competitors are looking at the shapes of their portfolio. You previously addressed vaccines and diagnostics, the importance in Men B to what actually happens to that division. Just focusing on consumer, to us at least, you look subcritical in mass and under-invested. I appreciate you're fixing the GMP issues, but it'd be helpful if you could talk us to what it would take to actually exit from these areas, the group potential for JV. What are the gating factors that we should be thinking about? And is this a possibility or is Novartis intrinsically wed to that division? Secondly, for David, perhaps you could give us the breakout of Pharma sales in China. I couldn't find it in the press release. And also, just some sense of what's driving those revenues. I'm assuming it's older rather than newer drugs. And then the final point was it's terrific that you've got 20%-plus growth rates following the restructuring you've put in place there. One trend we've noticed from some of your peers is where there is a sudden acceleration of growth in China, it's often closely followed by scrutiny under the Foreign Corrupt Practices Act. Could you just give us an update of what you're doing to ensure compliance in Novartis in China is held in check so that doesn't become a risk?

Okay. Starting with your first question around portfolio management. I've said before that when you look at our 5 platforms for growth, they all play a role in the portfolio, and that really hasn't changed. So I wouldn't say that we're wed. You said, "Are you wed to all of the businesses?" I don't think we're wed to any of the businesses, but we believe today that the platforms that we have are very strong in terms of playing a role in the overall portfolio. For example, at Novartis, less than 55% of our total sales are reimbursed by some kind of a public agency, which means we are less impacted by some of the cost containment that's going on in some of the pure play pharma companies. Consumer health plays a very important role. While it's not a huge division, it's still a division that pre-Lincoln generated over $3 billion in sales and will be a good grower. 100% self-pay, strong brands, so strong consumer loyalty as evidenced by all of those consumers in the U.S. who are writing us and asking us to bring back Excedrin because nothing else works, in their mind. So these are very, very strong brands, and Consumer Health plays a very important role. In terms of gating factors, obviously, we need to see -- when I step back and I look at the divisions, the divisions have to accomplish a couple of things. The first is that they have to have best-in-class pipelines because that's what we're all about, which is innovation. The next thing that they have to do is they have to grow ahead of market trend line, meaning that if their market is growing at 3%, they have to grow at 5%. If their market's growing at 5%, they have to grow at 7%. And then the third is that they have to demonstrate that they can create leverage. That means the bottom line has to grow faster than the top line. And if we decide that we're in a business that is not going to be able to accomplish that trend line, then that would be a gating factor to rethink. But right now, I feel like we've got a very strong portfolio. As we exit the Diovan patent expiration in 2013, you're going to -- you will see the kind of growth that I think we're capable of delivering. David?

Yes. So we're very happy that China is performing well. You'll recall that some time ago, my predecessor, Joe, restructured our Chinese business into a regional setup, which we now have operating quite well. The growth was about 20% for the quarter. You asked me what the main products are. They are mostly Diovan, Glivec, Sebivo, Exforge and Aclasta. We have not yet seen the impact of a very good set of recent approvals in China, which will start to come through in the future. In particular, we have approval for Lucentis, which is off to a good start. We have approval for Onbrez. We have approval for Galvus, which will provide us, I think, even better quality sales that are more price protected in the future. You asked about compliance, and I would just say rest assured, our company has done everything that's in the power to be done on a worldwide basis to teach our people to be compliant, both in terms of training, coming from the top of everything else. So I'm quite pleased with the way our Chinese business is going and leave it at that.

We will take our next question today from Odile Rundquist from Helvea.

Just 3 small remaining. And on Sandoz, you've posted a decline of 6% in local currency. Could you just confirm us if your guidance of sales declining slightly versus last year is still holding? Then 2 quick one. Could you also give us the status of Menveo in the babies less than 2 years old? And finally, I don't know if you have any breakdown of Lucentis sales in DME and RVO.

Okay. Jeff on Sandoz?

Yes. So Odile, our U.S. sales have been a little softer than expected. But with the U.S. co-Diovan launch, we're, as Jon mentioned or David mentioned, we have about 50% of the market and the integration of Fougera in Q4 this year, we should still see a slight decline in sales for the full year. And as Joe noted, on a positive note, we had very strong double-digit growth in Q3 across western Europe, Asia, Latin America and Russia.

Andrin, Menveo infant?

Menveo infant, we have received a Complete Response letter early in the year. We're making good progress in answering the question that the FDA has raised in there, and we are on track then to resubmit the file by year end.

David?

Yes. For Lucentis, about 20% of the volume is DME and RVO. The majority of it is DME as that's where we got the approval in reimbursement first. RVO, though, is starting to contribute nicely.

We will take our next question today from Tim Anderson from Sanford Bernstein. Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division: If I can go back to Relaxin. I think investors have been kind of unclear how to think about this program because your level of enthusiasm in the past has been low, and you've often described this in very cautious terms. So now having the data that you have, are you essentially saying that the program has substantially de-risked or is there still meaningful development and regulatory risk going forward? Second question on the generic front, can you tell us what you think will be the first biosimilar monoclonal to launch is and when this might occur? Could it be Merck's REMICADE as soon as something like 2014? And last question is on Glivec and the potential to extend the market exclusivity in the U.S. because of the polymorph patent that you have on the product?

So David, Relaxin?

Okay. So for Relaxin, we were purposely cautious in the past because although the Phase IIb data was very good, there had been no other agent in this -- for this disease in the past that had ever shown a mortality benefit. It was there, but we didn't want to get too excited based upon a Phase II trial. Now we see it again in a Phase III trial, and we are extremely excited about the product. So yes, it is substantially de-risked, and we will tell you a lot more on R&D day.

Jeff?

Tim, I'd be purely speculating at this point, if I was to say which mAb and from whom I think would get approved first. So I think I'll leave it at that, and let's see how the market plays out. But as I commented earlier, I think this is going to be more difficult than some players realize when they first got into it.

David, on...

The question of Glivec exclusivity.

Yes. So the base patents for Glivec in the U.S. expire near the end of -- with extensions, the end of 2015 and you know that similar date is 2016 for Europe. But that, of course, only is the base patents, and there are a series of other patents, which may or may not provide additional opportunity. And we'll try to lay it out in maybe one slide for you at the R&D day. I'll ask Herve to try to do that. It's hard to predict with any certainty exactly how that's going to play out, but I think most people model the worst-case scenario.

Our last question today comes from Florent Cespedes from BNP Paribas.

A few quick ones, one for Jeff, one for Andrin and one for David, starting with Sandoz and Jeff. What could be the magnitude of the impact on the core operating margin of the division of the softer Diovan erosion in the U.S.? Is the 18% guidance for the core operating margin for Sandoz being a little bit too cautious now? And Jeff, could you give us a quick update on your respiratory projects in Europe and in the U.S.? Second question is for Andrin. Could you give us the total amount of sales generated from the Italian plant and also, where are you in your plans for Bexsero in the U.S.? And the last one for David. What is your main objective for the 8th of November meeting, as we see a lot of speakers from the oncology side? Are you also planning to give us more color on your ambitions on the recently launched products and the growth drivers of the Pharma Division outside oncology?

Jeff?

So Florent, on your first question on the magnitude of the core operating margin impact of co-Diovan, clearly the authorized generic has a positive impact, as David spoke to earlier. But as Jon mentioned, at day 181, these things vaporize because you have hyper competition when additional generic competition comes in so in that sense it's ephemeral. There's a positive short-term impact. We don't give margin guidance. So looking forward, there's not much more that I can say, and I'm going to take the Fifth on respiratory as I have, historically, the last 2, 3 years. We continue to make progress on our programs both in Europe and the U.S.

Andrin?

So on the Italian side, we do not break down sites for sales. But in Italy, we do have 2 sites: one is Rosia, where we produce Bexsero vaccines; and then we have in Siena, the second site, which produces mainly flu vaccines, and that site is 1 of 4 flu vaccine sites that we have. On Bexsero in the U.S., I mean, we are making progress in discussing with the FDA on really how to develop a better surrogate for efficacy. It's a difficult, complex and scientific negotiation, but it is making progress. And we are evaluating now what type of Phase III trial to start, and actually, we have a tendency to maybe go directly into a ACWY combination routine, which, of course, would then have a much better public health value. So that's right now where we're staying.

David?

Okay, R&D day main objectives. One is to -- I think maybe the most important one is to give you a sense of how we take our innovation money, our R&D money and turn it into really excellent products, which provides a very, very good return on our investment. In terms of the agenda, it's true that Tim and I will focus mostly on gen [ph] med, and the others will focus on oncology, which is an important part of our portfolio. But we will cover the entire gamut of opportunities, and I hope that you leave feeling as excited as we do about the opportunities that we have.

Okay. I'd like to thank everyone for attending, and we look forward to seeing you on November 8 in Boston at R&D day. Thanks a lot.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.