Novartis AG (NVS) Q1 2013 Earnings Report, Transcript and Summary

Joseph Jimenez - Chief Executive Officer, Member of the Executive Committee Samir Shah - Global Head, Investor Relations Jonathan Symonds - Chief Financial Officer, Member of the Executive Committee David Epstein - Member of the Executive Committee, Division Head, Pharmaceuticals Jeffrey George - Member of the Executive Committee and Division Head, Sandoz Kevin Buehler - Member of the Executive Committee, Division Head, Alcon Andrin Oswald - Division Head, Novartis Vaccines and Diagnostics Brian McNamara - Division Head, Novartis OTC George Gunn, MRCVS - Division Head, Novartis Animal Health, Head, Novartis Corporate Responsibility Timothy Wright - Global Head, Development

Matthew Weston - Credit Suisse Andrew Baum - Citi Graham Parry - Merrill Lynch Alexandra Hauber - JPMorgan Florent Cespedes - Exane BNP Paribas Tim Anderson - Sanford Bernstein Naresh Chouhan - Liberum Capital Alistair Campbell - Berenberg Jeffrey Holford - Jefferies Mark Purcell - Barclays Peter Verdult - Morgan Stanley

Good morning and good afternoon and welcome to the Novartis Q1 2013 results conference call and audio webcast. Please note that during the presentation all participants will be in listen-only mode and the conference is being recorded. (Operator Instructions). A recording of the conference call, including the Q&A session, are available on our website shortly after the call ends. (Operator Instructions) With that, I would like to hand over to Mr. Joe Jimenez, CEO of Novartis. Please go ahead, sir.

Thank you, and I would like to welcome everybody to our first quarter conference call. Joining me on the Novartis end are Jon Symonds, CFO, David Epstein, Head of the Pharma Division, Kevin Buehler, Head of Alcon, Jeff George, Head of the Sandoz Unit, Andrin Oswald, Head of Vaccines and Diagnostics, George Gunn, Head of Animal Health and Brian McNamara, Head of OTC. Now, before we start, I would like to ask Samir Shah 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, Samir. Okay, starting on slide number four, before we start on comment on the announcement that we made today about Jon Symonds. As you saw from our press release, after 17 years as CFO, of which four those years were at Novartis Jon has decided to step back. I want to say that I am personally going to miss working with him. He has done a great job at Novartis. He brought a strong productivity agenda to the company. He improved our internal processes significantly, and beyond that, he is just a good guy to work with. So I have relied on him heavily and now, I am in my fourth year as CEO and Jon has been there every step of the way. He has agreed to stay on through the end of the year to be an advisor to me and also to help with the transition for Harry Kirsch. Many of you know Harry. He is the CFO of the Pharma division. He has been in the division for over 10 years. So he has got a very deep knowledge of the business and one of the reasons why Harry got this job is his focus on productivity and also his execution skills. Jon has brought focus on productivity that we are absolutely going to continue and Harry will continue in that tradition. He has been able to generate margin improvement in the Pharma division even at a time when they faced generic competition. So he will be able to bring that to the entire group. Okay. So, let's talk about the business. We delivered a solid quarter in the first quarter. Our sales were up 4% and our core operating income was up 6% in constant currency, but I think more importantly, we are good…

Thanks Joe, and good afternoon or good morning, everybody. As you can see from slide 20, Q1 was a sound quarter and it is good to see a page of almost positive numbers. The exception is cash flow, which I will come to in a few moments. Nevertheless, the constant currency performance of plus 4% sales plus 6% core operating income plus 9% core EPS, that’s a good foundation for the year. I won't cover the reported numbers in any great detail as we include the usual reconciliation in the back-up of this presentation, but there are a couple of points I just briefly wanted to mention. Firstly, as already been said, we have taken a charge of $51 million relating to the restructuring of Lincoln. The total charge when the restructuring is complete will be around $100 million. We also established in Sandoz legal provisions amounting to $79 million. Finally, you will notice as you go down the USD column the widening gap of the impact of currency as you move down the P&L is a 7 percentage point difference of reported EPS compared to 4% at operating profit. This is primarily due to $44 million charge related to the devaluation of Venezuelan currency, which is recognized in net financial income. On slide 21, you can see the disaggregation of sales into its component parts. I will start from the right-hand side and carry on to the left. The FX impact for the quarter is predominantly the devaluation of the yen moving by a massive 16% in the quarter. In fact, the impact for the full year could even be slightly higher than this as the yen has devaluated further since the quarter end, and currently it is closer to 25%. The generic impact is obviously more significant than…

Thanks, Jon. Okay. I want to close by reinforcing our strategic priorities for 2013. I think, in the first quarter we strengthened our pipeline in terms of innovation. We accelerated our growth by driving those new products and also driving emerging markets and we also made progress in productivity which contributed to our margin improvement in the quarter. So, as Jon said, our outlook remains unchanged. We expect sales to be in line with 2012, and our group core operating income to decline in mid-single digit on a constant currency basis while absorbing the patent expirations that we have for the year. Okay. So, with that I would like to open it up to questions.

Thank you. (Operator Instructions). We will now take the first question and it comes from Matthew Weston of Credit Suisse. Please go ahead.

Good afternoon gentlemen and thank you for taking my questions. Three if I can. Firstly, Jon it's very fair to say that there are many people disappointed to see you move on, and we wish you well in the future. I wondered if you could comment on the key challenges that you think you are handing over to Harry coming forward over the next 12 to 18 months. Secondly on Lincoln, effectively you lost the $1 billion of revenue when the plant was suspended, and now clearly we have the restructuring to move a lot of brands either to third parties or to other sites. Are you still confident that you can get to $1 billion of revenue annualizing back, and if so when? And then finally on Lucentis, if you could just give us some idea as to how much Australia and Japan contributed as a percent of total sales and how much you have lost in those markets?

Yes. I think, Harry will set his own agenda. I think the challenge for Harry is managing growth, and I think the performance that you've seen in the Pharma business while Harry has been at the helm has been extraordinary, so I think I'll let Harry speak for himself in the months and years to come.

Yes. The only thing I would add to that is, I think at the end of the day, our shareholders are going to care about performance and that is what Harry is all about, so I would just say watch and see what happens. Okay. In terms of Lincoln, Brian is on the line, but let me just also start by saying that I think in the end of the fourth quarter, we said that we would expect to be shipping out of Lincoln about 50% -- or whether it was Lincoln or third-party about 50% of the SKUs that were coming out of Lincoln before, and so I think you can assume that we will get back what we lost and that it will happen over time not all the way by the end of this fiscal year, but the vast majority of it by the end of 2014. So, assume a ramp up over that, let's say, 18-month time period. And then Lucentis?

Yes, on, Lucentis, we had a, I would say quite different impact market-by-market. So in Europe, things went actually quite well. Germany, we have lost roughly, I would say, at this point in time about 10 share points. Japan and Australia did not go well. The negative contribution to growth, and although we showed 7% in the first quarter, it was actually about eight points, so we would have done about eight points better if we hadn’t lost any business to Eylea just to give you a rough idea. The business in those two countries combined during the fourth quarter of last year was about $120 million.

Next question.

We would now take the next question from Andrew Baum of Citi. Please go ahead, sir.

Good afternoon. Three questions, please. First, in the press release, you highlighted Novartis as entering a new track obviously with departure of Dana and now Jon. I just want to make sure I understand. I think you are referring to the growth trajectory that Jon outlined, perhaps you could clarify if there is something else that you mean by new track that we may not be appreciating? Second, I know you have initiated a new Phase III trial with LCZ696. In regard to the ongoing PARADIGM trial, how many interim endpoints have already taken place? I understand they are three. I am assuming that at least two have taken place by now, in terms of interim analysis, both for efficacy and futility. Finally, could you give us some guidance regarding Bexsero, when you expect decision from U.K. government regarding tender and should we assume that if the U.K. does not tender for the broad population, it would trigger restructuring of that division? Thank you.

Okay, thanks, Andrew. Regarding the first question, in terms of Novartis entering a new track or a new phase, what I was referring to was the coming growth phase. So as soon as we get through the patent expiration of Diovan, we are entering into guidance that I have given as at least mid-single digit sales growth, but importantly margin improvement as we grow the business, so this is not just invest for the long-term, this is where we enter a phase where we start growing and we grow our -- the expectation is that we grow our margins also if we execute well. So that really is what we are talking about. Now you did mention the change of Chairman and changes in the company, and what I have said previously is that the strategy of the company is sound that we are a science-based company. We are focused on innovation, and we are focused in high-growth segments of healthcare. So while the strategy -- I don’t anticipate the strategy of the company to move, the way that we execute that and the way that that looks could potentially change as we evaluate our portfolio, as we evaluate the market, as we evaluate a lot of things over the next 24 and 36 months. So, I think you have to think about this as a dynamic company that is entering a growth phase, that if you look at our history constantly things about ways that we can continue to position the company for good and solid growth. David, on the PARADIGM trial?

Yes, I think just to help everybody understand, we are talking about LCZ. LCZ is a novel product which we are pretty excited about. It’s in Phase III for two indications. The first is hypertension which could result in a submission later this year particularly with a focus on Asia and Latin America. I think your questions about the chronic heart failure indication and the PARADIGM trial, also to remind people that it is also in Phase III with a plan for a submission in 2014. We usually don’t talk much about our interims unless something surprising happens, but I am going to ask Tim is there anything that we could say?

Right, at this point, we are not commenting further on any interim analyses.

Okay, so in other words, if we get a surprise, we will certainly tell you about it.

Okay, Andrin on Bexsero.

Andrew, we expect a decision from the vaccination policy committee in the U.K this summer. I think we should remember that in the U.K. alone, there are about 2,000 cases of meningitis type B every year. Even teenagers, many of them die. Those who survive often are handicapped, lose limbs, some of them all four limbs, so we are quite confident that this vaccine is needed and will be used. Our focus is not on restructuring, but on making it happen.

Thank you. We will now take the next question from Graham Parry of Merrill Lynch. Please go ahead.

Thanks for taking the questions. Just firstly broad on guidance showing 6% reported growth Q1, just pointing to – if I just read your guidance, it is probably still mid-single digit decline plus 4% FX would be a high-single digit decline in EBIT for the full year. Just it does seem rather conservative. I just wonder if you could talk us through the bridges that you see as the key negatives that would take your guidance down that low given the good quarter you've had so far. Secondly, on Gilenya in the U.S., sales of $243 million were up from $192 million in fourth quarter 2012. There wasn't really a major change in the actual absolute number of prescriptions though, can you just talk us through stocking or price impact between the two quarters there? And then thirdly on Lucentis, is it fair to say that European impact thus far of Eylea has probably been inhibited somewhat from reimbursement, and perhaps so you can talk us why it wouldn't look like Japan once you actually see broader reimbursement there? And then, one final one on consumer margins, and maybe can you just talk us through the one-off divestment gain, quantify those so we can understand what the underlying margin is, and then talk us through whether we should be expecting a sequential quarterly margin uplift from here or are there other things that would make that a little bit more lumpy through the year? Thanks.

Yes, Graham. I wanted to try and give you all the factors in my comments earlier that affected the guidance. Obviously, the big positive is the Diovan mono and what we haven't done as of today is make an assumption about how long the benefit which we are currently enjoying now will continue into the future. So, based on where we are after four months, yes, we do have a positive, but we don’t have a huge positive against what we were expecting in our original plan, because we knew at the end of January that there was at least one or two months of the Diovan mono that. If you then take into account the fact that Sandoz for assuming an authorized generic then as of today the benefit isn't quite as great as you might initially calculate. I think, a sense is up by the middle of the year, it will be better to draw some conclusions and rather having multiple steps and looking at guidance it would better to have a conservative view in the middle of the year.

Yes. Graham, so you can see Gilenya is doing quite well with $420 million of sales in the quarter. Let me just break down the pieces for you. Ex-U.S. as we've been indicating is up to the bigger opportunity than what I think many were predicting that 125% growth quarter-over-quarter. In the U.S. post the label change we are currently seeing a return to growth the growth of about 46% Q1 versus Q1 and 28% Q1 versus Q4. That 28% is in fact overstated as you pointed out. You recall that we had a little bit of inventory drawdown in Q4 and then we had a modest inventory build in Q1. If you put that all together, we would estimate that the real underlying growth in the US quarter one versus Q4 is probably mid-single digit, although it's hard to get an exact handle on it, because IMS tells us they are going to restate the numbers in the category. Overall, we are quite pleased with how the product is going and I think most importantly, what we are seeing is the market is starting to reach a tipping point and you are starting to see this shift of therapy which will benefit all the oral products.

And Lucentis the question about Europe and is it a reimbursement in fact as opposed to why wouldn't we see…

I think that you would expect new competition to come in slower in Europe because of reimbursement. Having said that, we believe we are executing better in Europe and we are seeing much less interest in Eylea on the part of the physician. Japan is not a success story on our part. We are learning a lot of lessons from that Japanese launch and those lessons are now being applied in the countries where Eylea has not yet launched.

David, do you also want to just mention the frequency of the dosing difference maybe that would occur between urban Australia?

Yes, so Australian is a unique market. Australia had the heaviest usage of Lucentis on a per patient basis. In a word, the Australia doctors are fairly aggressive in injecting every month. So there the Eylea story resonates fairly well. But even there, Joe, we are starting to see some mass stabilization after their penetration as some of the reality about the lack of differences between the products really start to come to the forefront.

Okay, and on the consumer margin, one of the things that impacts the consumer margins this quarter is that pretty heavy investment on the relaunch back in to the U.S. So its not just the divestment gain but I will let Brian McNamara, who is on the line also address this.

Yes, so we did make some small tail burn investments in a couple of our European countries. So that had an impact on the core operating income in Q1. If you look at the balance of the year, the run rate is a little bit high for the balance of the year, and again our focus is mainly to invest in the relaunches and in the brands and regain our share.

So what about margin? The way that margins develop, Brian, just in terms of the back half. Should we expect to see improvement as we go or is it going to be relatively flat as we saw in the first quarter?

Yes, I thin you are going to see relatively flat throughout the year and the first quarter a little higher than the balance of the year.

Thank you. We will now take the next question and it comes from Alexandra Hauber of JPMorgan. Please go ahead.

Good afternoon. Thank you very much. Four questions, please. Firstly, European growth in Pharma was 9% as this is probably the sweet spot this year as you, through Diovan, but not quite suffering from Zometa or Aclasta yet. Can that stay in view of Zometa and Aclasta generics and, I appreciate, given that we don’t have the visibility on the actual sales in Europe of these products. Can that stay in positive perhaps towards all the remaining quarters, particularly also thinking of some the new product opportunities such as Ilaris in gouty is going to be potentially making significant contributions this year. Second question on Sandoz gross margins. I do understand that Fougera makes a huge positive impact but why was there no such positive impact on the gross margin in the fourth quarter and when I make that comment is, I mean on the quarter-on-quarter comparisons, the fourth quarter compared to either the third quarter of last year or the first quarter this year, I do understand that year-on-year comparison on the first quarter due to the you enoxaparin situation, but just looking at the last three quarters, Fougera didn’t seem to have a positive impact on the margin. Thirdly, on Alcon. Can you give us a little bit more color on what's happening in cataract? Is that procedure slowdown across the globe? Is this received simultaneously? Or is it one geography where that is particularly pronounced? Can you also comment on pricing, which I recall was an issue in the third quarter? And just a more bigger picture, that acceleration towards the double-digit level which you promised in September 2011, is that still a realistic prospect to get there, let's say, within the two to three year horizon? Or is that something for the longer term? Finally, just a small question on the Consumer division, you mentioned for Lincoln, the inspection is one thing which is still there as the issues on consumer complaints, which I actually find a bit surprising given that it was part of the original finding of the FDA over 15 months ago, and given that you haven't shipped from that plant, can you just tell us what's happening there, why that hasn't been fixed? Is that just a huge backlog that you have been addressing those? Or is it still not happening with the procedure you are suggesting? Or have there been simply just been so many new complaints that the guys cannot catch up?

Okay let's start with the European growth in Pharma, David.

So you are correct. We had 9% growth. The actual volume growth is a strong double-digit. I would venture to say, we are probably one of the best performing companies in the European market largely because of the breadth of the new product launches which are going quite well. Very strong contributions this year will be coming from the oncology business, particular the launch of Exjade,, the growth of Femara and Tasigna. The Seebri launch is off to a good start and Galvus continues to grow. Having said that, as you pointed out, we are facing generic competition later this year for Zometa, Aclasta and the Ilaris. Ilaris will be in fact will not be a big contributor this year. So you would expect the outlook to be less than the first in Europe, but I won't go further and tell you quarter-by-quarter what we would anticipate.

Yes. Alexandra, as Jon highlighted earlier. The Fougera impact almost exactly offset enoxaparin in fact on the bottom line did not quite offset it in Q1. The reason that you saw a higher gross margin in Q1 this year versus Q4 of last year was due to a couple of factors. First really a favorable sales mix that we saw with very strong 16% growth as Joe mentioned in Central and Eastern Europe, where we tend to have strong margins as well as good performance across Europe, including Germany in Western Europe. Secondly, we saw a rebound in our injectables business, particularly oncology injectables improving performance and better gross margins in that business. And third costs were well controlled and a number of areas within cost of goods sold, so we saw a productivity performance in Q1 overall.

So, how much of that is sustainable in into coming quarter how much of that is one-off?

I think the seasonality impact, we had a strong flu season than we've had in a number of years this year and so clearly that doesn't repeat itself in Q2 and Q3. We'll see how things evolve in Q4. I think the rebound in oncology injectables and the improved performances sustainable given the improvements that we are seeing there both, top and bottom line so I think it's a mix on that front.

On Alcon and cataract surgery procedures.

Sure. Alexandra. As you know, we have a relatively large equipment installed base around the world. And when we look at the disposable used on that equipment, we can get a pretty good sense for directionally which way procedures are going and I would put them in a couple of different groups. First of all, we continue to see procedure weakness in the southern part of Europe. Secondly, we did see weaker procedure growth in Japan in the first quarter and also against the U.S. while the U.S. procedure volume looks to be up, it's going against the very, very strong period ago. When I look at our intraocular lenses, which obviously are absolutely reflective of procedures. I am pleased with the growth that would look like we are holding share against these procedure trends. To your point on the longer-term strategy, obviously the growth priority continues at Alcon. That growth is going to be driven primarily by new products as Joe highlighted. That flow of new products is obviously starting this year with the approval of new glaucoma product as well as the Jetrea and the next-generation phaco unit. When we introduce equipment, you go through a normal cycle period where you are increasing units to take out against your existing installed base plus against competitive equipment, but when you on the backside of that curve, obviously the volume slows down. What we are signaling is that, with a new phaco unit coming at the second half of this year, that cycle is going to ramp up. Also, I would tell you that a large part of the growth plan that we talked about involve contact lenses, the [DT1] launch continues to go well. We are making steady improvements in terms of our manufacturing output and will be launching in the U.S. where we already have approval.

Then Brian on the consumer complaint handling.

Yes. So, a couple of points on your question, so we did have a backlog of complaints when we shutdown our plan a year ago and we worked through that backlog of complaints and continue to work through new complaints that do come in as products are still out there on the market. So, as Joe mentioned, the comments were about the completeness and timeliness of the complaints, so we are aggressively working to remediate where we brought in experts into the plant to handle this as we go forward and I don't want to lose sight of the fact that we also did make progress in a lot of other areas in the plant, which is why we were happy to begin shipping Sentinel in early April.

I would just add that the group did make progress on complaint handling. They completely reworked the system. They have upgraded people and processes. There was a very large backlog that they are now through. We believe that we have got the right things in place to get it done, but it just wasn't enough. It was a tough audit, obviously. At was written up as areas that need to improve into three months.

Thank you. We will now take the next question of Florent Cespedes of Exane. Please go ahead.

Good afternoon, gentlemen. Thank you for taking my questions. Three quick ones. First, a question on outcome for Kevin. Could you give us some color on the launch of gen Jetrea and if you could share with us the potential of these drugs and some feedback from prescribers? Second question is for Jeff on Sandoz. Following all the setbacks from your competitors on biosimilars projects, could you give us an update on your view, on your projects in this front, in terms of timing and different projects there? Last for David. On Emerging Markets, can you give us more color on the dynamic there and if you believe that the performance delivered in Q1 is sustainable? Thank you very much.

Kevin, Jetrea launch.

Sure, the Jetrea approval, obviously, was planned for this time period and the label was everything that we had wished for, as it relates to macular traction and macular holes within a certain size tolerance. You have to keep in mind though that the sizing of this category is a little bit difficult, because the patient today is really not being treated. The current course is to simply watch the patient until you either see resolution of the traction or you proceed to surgery. So what we have said is roughly the 250,000 patients in Europe but I think what I would like to do is to let this rollout with, obviously, reimbursement that we are pursuing. Our first two markets are Germany and the U.K., and then obviously what we need to do is to engage with the retinal specialist in order to discussing that the benefits of early treatment so that you can avoid surgery in the cases where we think we can have impact.

Okay. Jeff?

So, Florent, we continue to see good progress in our biosimilars pipeline. We have six Phase III clinical trials across four molecules right now as well as several monoclonal antibody projects on route to the clinic. We have, as you alluded to, seen a shakeout in biosimilars. The most notable example is in rituximab where we have seen two of our competitors terminating their Phase III follicular lymphomas trials and two others putting their trials on hold. Well, for competitive reasons, we don't provide specific timelines for our biosimilar development programs, because we have never given a timeline, for example, on rituximab, I can say that we continue to track according to our plan in terms of patient recruitment, both for that Phase III follicular lymphoma trial as well as our Phase II rheumatoid arthritis trial. I think a key advantage that Novartis has over the competition is our strong cross-divisional collaboration between Sandoz and Novartis Oncology where we are able to leverage our clinical experience and network to provide a similar patient recruitment in the clinics. As we expected clinical trials with life-saving oncology medicines take longer to complete than trials for supportive care products. But I think, in summary, we believe we are very well positioned versus the competition, both in rituximab and (inaudible) and that frankly the shakeout that we are seeing shows both the development in this area is harder than some of the aspiring entrants had anticipated and its more rewarding for those who are successful in the end.

David EGM?

Yes, so we had a good first quarter. We were up 9% in the emerging growth markets. As you recall, one of our strategies is to invest to grow those markets. So it's clearly paying off. You asked me about an outlook. One thing I caution you about emerging markets. These often are tender driven, which means they bounce around quarter by quarter. So I wouldn't look at any one number in any given quarter. Having said that there was nothing unusual in the first quarter. So you can take that as you do your extrapolations.

Thank you. we will now take the next question fro Tim Anderson from Sanford Bernstein. Please go head.

Thank you, a couple of questions. Afinitor had a good quarter. You've consistently described the growth prospects in very bullish terms, but the landscape in breast cancer seems to be changing. In the HER2 space, we've got new and improved [Valsartan]. We also have Fougera that seems like it could render BOLERO-1 and 3 a little bit obsolete, because Valsartan is one of the drugs being used in that trial and then we have pipeline products like Pfizer's 991 that would be direct competitors. How confident are you in the outlook for Afinitor in terms of hitting multibillion dollar sales potential now relative to where you might have been a year ago, because it seems like some things are in fact changing. And then if I can just ask you about the Roche stake in the past, you've said before there is strategic value in owning the stake in Roche that you do. I have not understood what that strategic value is. Can you describe that? Thank you.

Sure, David. Afinitor is going very well. I'm very pleased with the launch and the uptick. As you recall, this is in estrogen positive breast cancer that is HER2 negative. One of the things that you should consider is that we will be having also more data coming in breast cancer in the not too distant future in the HER2 positive patients, which would expand the opportunity even more. It is true that new products launching in breast cancer, in fact breast cancer if you were to look at all the clinical developments going on in the industry is a very crowded area as people try to match the right drug to the right patient using different biomarkers. All these drugs are designed to do is to delay the eventual use of chemotherapy. Plus, it's a matter of sequencing in combination and I think people are just underestimating the breast cancer opportunity in general for the market, and our forecast for Afinitor remain unchanged both, in breast cancer and other indications yet to come.

Okay. And then, just in terms of the Roche stake, just to define strategic value. First, to have 33% voting stake in one of the great companies in terms of healthcare or Pharma would mean that for that company to issue shares to do something they would have to have the agreement of Novartis, so there is an element of strategy when you think about, let's say, freedom to operate that is valuable. I've also said that you can't recreate that stake in the market today, so to me it has value that is beyond the market price and so that doesn't mean we would never exit it. What it does mean is that the value created whether it's dollars or whether it's something else, would have to compensate Novartis shareholders for that value and the fact that it's not just the market price.

Thank you. We will now take the next question of Naresh Chouhan, Liberum Capital. Please go ahead.

Hi. Thanks for taking my questions. Just a couple. One on Pharma. Firstly, the Pharma margin continues to surprise on an upside versus consensus. Clearly, obviously, Diovan is very profitable and that would be part of it this quarter, but in addition that you've also got Afinitor, Gilenya and the rest of the specialty care portfolio growing really quite quickly, and so you've got a positive mix to that which is something you've talked about in the past and it looks like it is finally coming through, so can you give us some sense as to how you expect that mix effect to evolve over the next year or two? And, of the $600 million of cost savings you delivered in the quarter, could you give us some sense as to how much of that actually flow through to the bottom line?

David, on Pharma?

Yeah. So, Pharma, Harry and I have worked extensively in making this business more productive. We think there are still opportunities to do so by off-shoring, outsourcing, working with our suppliers, streamlining processes and drug developments. In the near-term, the real key on the margin is going to be when this Diovan go live, which will have a negative impact as we told you at the beginning of the year. If you take a mid-term view then you are correct as a portfolio shifts more to specialty products, we would then eventually start to see that come through in terms of margin improvement.

And, Jon in terms of productivity?

Yeah. On the productivity, actually we don't quite look at it in terms of how much productivity do we generate and how much of it we are willing to invest. I mean if you take the business as a whole, we have a number of big blocks. Firstly, there is the contribution margin from the new products. There is the margin loss on generics' productivity. Then there is the investment package. We try not to link the two together and probably try and optimize all of them. We try and optimize the amount of productivity which we generate. As David has said, we try and look at what the investment requirements are to maximize the revenue from the products and then we subsequently optimize in terms of what do we think is an appropriate overall margin to go forward. So we don't really look at productivity in the sense of how much did we generate and how much we are willing to invest, because it's part of an overall operating philosophy which has productivity pretty close to the center of it.

Thank you. We will now take the next question from Alistair Campbell of Berenberg. Please go ahead.

Thanks very much for the questions Actually I have only got a couple left. Just on Consumer Health, just so I have this right in my head. Obviously quite significant restructuring at the Lincoln facility. Should I think of those cost savings as essentially being defensive, so that ultimately the Consumer Health business can come back to margins enjoyed prior to the closure of Lincoln? Or actually could there be a chance that you actually get back to a profitability level best that we have seen in the past? Then just one more on Alcon. I think back obviously a year, one of the two stories now Alcon was increased penetration of advanced technology, IOLs, and the mix affect that would drive. I am just looking at the numbers. It looks like our AT IOLs was growing around the same rate as the market of normal IOLs. So can you maybe give a little bit more color on how that switch is going and then how you see penetration of AT IOLs? Thanks.

Okay, Brian on Consumer Health restructuring.

Yes. So I mean the restructuring of the plant, obviously, is focused to get our plant back and remediated in shipping products and our intent is to get our business over the long-term back to the margins we had before the Lincoln issues.

And if you think about it, you retain 70%, but you do it with 300 fewer people. So coming out of that site, long-term, we should be in a pretty good position. Kevin, on Alcon.

Sure. I think when you look at advanced technology IOLs, we probably need to have two conversations, one is about management of astigmatism and toric lenses and they actually are continuing to grow at a very nice rate, at least on a unit basis twice the rate of what our overall IOLs are. We have got unique capability to address management of astigmatism with both LenSx as well as the toric IOLs. The second side of that story is around multifocal IOLs, which continue to still be an opportunity for market evolution but we are seeing some level of resistance. The market looks generally to be flat in terms of penetration change on multifocality. But, clearly, we continue to work on addressing options for the patient and we are very early in that penetration process. So I think both of them continue to be opportunities but toric seems to be the leading opportunity today.

Thank you. Thank you. We will now take the next question of Jeff Holford from Jefferies. Please go ahead.

Hi, there. Just got three questions for you. First off, can you just give us any updates around your strategy to lengthen the exclusivity of Gleevec and if there is any differential between, say the European markets or U.S. markets, how that might potentially shape out? Secondly, just as in Sandoz, can you maybe give us an update on your expectation for timelines on launch of a generic LABA steroid, the VR315 product in particular? Then just last of, we have seen Pfizer push towards establishing an established products business. Glaxo has announced the creation of ongoing foursome today. Is this something that you consider at Novartis? Is there a potential older products business now that you are less engaged in primary care going forward that you might consider making a separate entity, at least within the group structure? Thank you.

Okay, David on Gleevec?

So, for Gleevec, it's really going to be hard to give you any update on the patent until we get very close to the base patent expiration because, in fact, describing a strategy probably wouldn't be a great idea for us. The one thing that did happen during the quarter as we did get pediatric conclusively in the U.S., which we had anticipated but that added just six months and there is really nothing else to tell at this point in time.

Okay, Jeff?

Yes. Not much more Jeff to add on our respiratory strategy. We try to keep our cards pretty close the best for competitive reasons, so nothing more that I can elucidate with respect to timelines on our respiratory projects.

Then in terms of established products, we do not have an intention to establish an established products' unit. We've looked at it obviously, but you look at some of the fastest growing markets in the blur between what's an established product and what's an innovative product becomes much less clear. These are high growth markets. There is scale, so we don't see it at this time.

Thank you. We will now take the next question from Mark Purcell of Barclays. Please go ahead.

Thanks very much. A couple of questions on the MS franchise. Could you help us understand how you are looking to differentiate BAF312 relative to Gilenya? And then a broader question, I guess Gilenya has already got a proportionate sales ex-U.S. that is enjoyed by the ATCR drug. So, in your opinion how much further can this go? Obviously a question of affordability and differential pricing across the globe. Secondly, just going back to biosimilars, obviously, with the rituximab, the competitive landscape is changing, but so is the regulatory landscape, so I just wondered if you could help us understand whether you are looking to do or start in the U.S. specific focused trials and also an update on what you are expecting mid-year on the Copaxone and the potential ANDA. Next on the Lucentis, obviously, in the past you've talked about how DME and RVO could at some point be almost comparable in size to AMD. Clearly, you've now had reimbursement in a number of countries for a number of years, so I wondered if you could help us understand where you think those indications can now go and offset the potential pressures coming through from Eylea and potential competition. Then lastly, thanks for the update on currency guidance on both, top line and operating profit, so I wondered if you could give us some guidance as to what could happen below the line on FX. Obviously, folks on the hedging gains were booked in Q1?

Okay. David, on the MS and Andrin you also cover the Lucentis.

Okay. So, for MS, you asked about BAF312. This is our follow-on to Gilenya being studied in secondary progressive MS, which would be a whole new opportunity for us. In addition, we are doing work to show that with an appropriate titration study that you can avoid a first dose observation period, which we think would make this an attractive alternative to Gilenya. I think you also asked me about how much more growth there can be ex-U.S. for the brand and the answer is a lot. We think ex-U.S. will be a key driver of the expansion of this product. There is still a lot of interferons and Copaxone to replace and I truly believe that an oral product will become a very, very attractive way to go. We think the overall MS market worldwide could reach as much as $16 billion in a few years time and as much as half of that, maybe even a bit more could be oral medicines. The next question was about.

It was about Lucentis and the DME, RVO set as half essentially.

Yes. So, we said if you add up the DME and RVO patients and you make some assumptions about somewhat of less utilization of that patient segment, the market could approximate that with AMD. That will take time, we stand by that. We have just now gotten through a number of reimbursements for those indications, so although uptake is good, we are still fairly early in the launches.

And, currency guidance, Jon?

Yes. I mean, I obviously can't give you guidance as to what's going to happen in the future, but I think as you know, that our currency structures that we have two big short positions which is the U.S. dollar, which is obviously represented by all the non-US profits and the Swiss franc because of our cost base. The Swiss franc is fairly well covered by euro, so long as the Swiss franc continues to be peg there, it's not a problem. We then have a long yen position and we have a massive tail. Because we have such a long tail, the euro and Swiss franc are hedged. We actually don't have a dynamic hedging program. Where we do see currency gains from hedging is, what I would call occasional taking positions, where we think there's a structural overall undervaluation and we did get some benefit because we thought that the Yen was overvalued for some considerable time but going forward, I would assume that you just see the straightforward currency, group currency exposure coming through and make no allowance for the future hedging gains because I think they will be limited from here.

Okay, maybe one final question.

Yes, the biosimilar question.

Sorry, I missed biosimilar.

So Mark, with respect to your question on the regulatory landscape and the U.S. specific focus trials, as well as Copaxone, let me take those in turn. First on the regulatory landscape, we are pleased with both the EMA's final guidelines for the approval of biosimilar mAbs as well as the draft guidelines that FDA has put out which call for a stepwise approach and totality of evidence approach where we can use the analytical tools to minimize the size of clinical trials and it also allows for extrapolation across indications. The key, for us, is how the FDA will interpret and then implement their guidelines, especially around the extent of clinical trial requirements and, for us, it's important that the agency recognize that the goal of a biosimilar trial is to prove similarity to the originator and not to confirm safety and efficacy all over again. But we are optimistic based on what we are seeing from them. I don’t want to comment on what specific trials we are doing in the U.S. or outside of U.S. for confidentiality and competitiveness reasons. With respect to Copaxone, we have the first to file for Copaxone. As you know last June the District Court of Southern New York, it issued a decision in favor of Teva on those patents. We have appeal that decisions to the U.S. Federal Circuit Court of Appeals and the oral hearing is scheduled for May. So we will look forward to those hearings and to seeing how that progresses.

Okay, one final question.

We will now take the last question from Peter Verdult of Morgan Stanley. Please go ahead.

Good afternoon, everyone. It is Peter Verdult here from Morgan Stanley. Jeff, just a couple of follow-ups on biosimilars. We have talked about biosimilars for a number of years. We look at the Q1 over Q4 number. Not much growth there. Just broadly, from a Novartis point of view, how has the opportunity changed over the last nine to 12 months, when we are thinking about biosimilar competitor stepping back the way that Russia is discounting Herceptin when used in combination with Perjeta in markets outside the U.S. and some ongoing regulation certainty in the U.S. as well. So I want to get a sense from you in terms of how you are thinking about the biosimilar opportunity and how quickly you can commercialize that? Then just a quick follow-up on that. In terms of future filings, I realize you hadn’t comment on individual products, but can you give us a sense as to whether you are planning on using the biosimilar pathway as laid out or still is the BLA pathway an option that you are considering? Thanks.

Yes. So we actually have seen quite good performance of the biosimilar business. If I just look at end-market products, those were about $75 million in 2008 and we have roughly the same portfolio a few years later but expanded now to over 55 countries. The business was just under $350 million in sales last year, up about 22% to just under $100 million in Q1. We are seeing really strong performance with each of our three end market brands, which are number one, respectively and EPO, both for nephrology and oncology. Secondly, for G-CSF, which now is up to about a 24%, 25% share of the short-acting G-CSF market in Europe, which is on par with the Amgen's Neupogen and in human growth hormone, which is the largest biosimilar globally, should be well over $200 million brand for us this year and, notably, up to 18%, 19% share in the U.S. with six originators, including Pfizer, Merck-Serono, Eli Lilly, Novo Nordisk and Roche Genentech. So I think the commercial performance has been quite good. The issue is, of course, that there is a gap of patent expiries in between 2009 and 2014. There is very little in terms of what's coming off patent. I think as you get into more patent expiries looking out a few years, it starts to become a more exciting business building from just under $500 million or so in the course of as we look forward in the next year or two to a multibillion-dollar business. We feel good about the position we have. We have about a 53% market share in products that have been approved in the highly regulated markets of Europe, North America, Japan, and Australia. So we feel good about our momentum. In terms of our future pipeline, we feel our pipeline is unrivaled with the eight to 10 programs that we have, with a high share of those being monoclonal antibodies. To your last question, we plan on using whatever pathway makes the most sense for Novartis, be it the BLA pathway or the new biosimilar pathway, and we will make those decisions on a case-by-case basis.

Okay. I want to thank everybody for tuning in and we look forward to updating you at the second quarter. Thanks a lot.

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