Novartis AG (NVS) Q2 2013 Earnings Report, Transcript and Summary

Good day, good morning and good afternoon and welcome to the Novartis Q2 half-year 2013 results conference call and audio webcast. Please note that during the presentation all participants will be in a 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 the conference over to Mr. Joe Jimenez, CEO of Novartis. Please go ahead, sir.

Thank you. I would like to welcome everybody to our second quarter call. At Novartis today I have with me Harry Kirsch, the CFO. We've got all the division heads here, David Epstein, Pharma; Kevin Buehler, Alcon; Jeff George, Sandoz; Andrin Oswald. V&D; George Gunn, Animal Health; Brian McNamara, OTC, and also Tim Wright, Head of Development. So before we start, I would like 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 the 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. We delivered solid performance in the second quarter. We had growth across all of the divisions. So sales as you saw were up 3% in constant currency and core operating income was up 2%. The solid performance together with the lower than expected generic erosion has led us to raise our outlook for the year and we are going to come back in a few minutes and talk about the assumptions behind that. Next slide you can see the overview of the financials. Core EPS of a $1.30, was up 1% in constant currency. And net income at $2.5 billion was essentially flat. We continue to make progress on our three strategic priorities. So in terms of innovation we had four key approvals and five positive clinical trial read outs. We also received FDA Breakthrough Therapy designation for Serelaxin, and this made Novartis the first pharmaceutical company this year to receive that designation for two different medicines (inaudible) is the second. Now in terms of accelerating our growth, net sales grew in each division and it was driven by our growth products which were up 31% and also by emerging markets. In terms of productivity we delivered about $650 million with about half of that coming from procurements. So let me just touch a little bit deeper on innovation. The pharma division delivered three products approvals including the FDA's approval of Ilaris for systemic juvenile idiopathic arthritis. This is a very severe and potentially life threatening form of childhood arthritis. In Alcon, Simbrinza was approved for glaucoma and that launch is now underway in the U.S. Sandoz had three, actually had started an important Phase 3 with the Enbrel biosimilar. And it's important to note here that Sandoz biosimilar pipeline now includes…

Thank you, Joe. Good morning and good afternoon everybody. I’m very pleased to report that we had a solid quarter and strong first half in both sales and operating income. On Slide 19, you can see our numbers in constant currencies. For the second quarter, net sales were up 3%. Core operating income was up 2%, and core EPS was up 1%. The only exception to this positive picture is free cash flow, which I will explain later in my presentation. These are impressive numbers. Given we had approximately $0.8 billion of generic erosion in the second quarter, as you likely saw in the release this morning, they included the benefit from a delayed entry of generic competition for Diovan mono in the US. However, even if we exclude this effect, it was a solid second quarter, contributing to a strong first half for Novartis. On Slide 20, you can see the components of our top line performance, which looks very familiar in the second quarter and the first half. In the second quarter, we delivered 8% volume growth, and it more than offset the 5% impact from generic competition. This generic impact by the way was higher than it was in the first quarter, mainly due to some major generics. Price was slightly negative, but minus 1%, mostly due to enoxaparin driven price declines in Sandoz compared to the previous year, and Fougera contributed plus 1%, which brings us to our robust, underlying sales growth of 8% in the second quarter. This is at the upper end of the guidance we issued in January and which we said that underlying FX growth in 2013 would be at least in the mid-single digits. As we are seeing the building blocks of our topline results, let me explain currency on Slide…

Thank you, Harry. Our results this quarter further confirmed our strategy to replace our old legacy brands such as Diovan and Zometa is working as we delivered 10% underlying volume growth. Those products were clearly the engine for the $3 billion in sales now representing 37% of the total, up 26% from the previous period. Turning to the next page, we see that after generic offsets, the division delivered a net topline growth of 1% in constant currency. Looking at our core operating income margin, we further capture productivity saving that we use to further contain its decline as we absorb the impact of generic Diovan HCT and begin the prep for several very exciting launches, including QVA, LDK, Serelaxin and others. Turning now to page 33. You see that emerging market sales growth was quite robust in line with our strategy to further build our presence in some of these markets, based not just on old products as some of our competitors are doing but also new product launches which we believe will provide sustainable growth well into the future in these regions. On page 34 we give you a snapshot look at the dynamic that we are experiencing in China. And you see there that we are outpacing multinational growth to essentially mid last year with 21% sales growth over the quarter. Looking forward we expect to continue to beat the market, the multinational market in China. On page 35 you will see a familiar slide. This is just a reminder of our strong growth platform. Products that we believe are either blockbuster today are products that we believe have blockbuster potential with exclusivity until 2017 and beyond. All products reported very strong double-digit with the one exception of Lucentis, which I will describe to you now on…

Okay. I just want to close by reinforcing our strategic priorities. In the second quarter we further strengthened our pipeline in terms of innovation and we expect that to continue. We accelerated our growth by driving our new launches in particularly emerging markets. And we made progress in productivity which is helping us offset generic erosion and this is an important piece of what we’re doing. So with that, I’d like to close and then now open the call for questions.

(Operator Instructions). We can take our first question from Matthew Weston of Credit Suisse. Please go ahead, your line is open.

Three if I could, the first two on products. I have to say I’m a little bit confused with the pricing comment on Lucentis. So based on your comments on volume in a minus 3% constant currency revenue development, I’d suggest somewhere around 20% price reduction. If I recall, DME and RVA were both approved in 2011. I know that reimbursement discussions can take some time, but it would suggest that there were problems or there have been big price cuts in markets which have huge influence on the total ex-US sales. So can you give us a little bit more detail in terms of any large markets and the magnitude of some of the reimbursement reductions or the price reductions that you have had to give to get those two segments reduced or is it that more of that 20% estimate is to do with IIaris' entry and reimbursement issues you have had to give up there. One comment that you make on Gilenya is around the royalty impact on gross margin. Can you explain what's happening with Gilenya royalties? Is there some sales milestone that led to a step up in what you are paying away or are you anticipating that you will reach your sales milestone by end of year which will require a step up in royalty pay away. And then the final question is a bigger picture one for Joe. China, clearly a very important driver for the industry, but particularly on today's results for Novartis, given the problems that one of your competitors has in that market, how confident are you that your compliance structure in China is sufficient to ensure that the sales that you are delivering are being achieved correctly?

Tim, you want to take the first two?

Yeah. So, your overcall calculation on Lucentis while slightly high is not that far off. Remember that Lucentis is heavily concentrated in just a few markets, and these are price sensitive markets around the world. We are not, for example, in the U.S. market. The RVO and DME indications, the reimbursement discussions can be fairly protracted. The other thing is the ongoing pressure which we talked about in the past on price due to Avastin, which can be used off-label at a much lower cost, and the general price cuts that we see across all products that occur within Europe. We believe these price reductions or recent order of magnitude price reductions is really a one-time effect. It actually started in the back half of last year and it continued through the first two quarters of this year. This category will be under constant price pressure, but it should go back to more normal levels as we go forward. Regarding Gilenya, there are no milestones paid. The royalties are what you would expect for a product of this type. Simply what's happening here is that as Gilenya becomes a bigger percentage of the portfolio, then obviously we're paying more absolute dollars in terms of royalty payments.

Matt, regarding China, you are right, it is an important growth driver for the company. And it's not just pharma, it's across all divisions. Alcon has a very important and growing business there. The way that I think about China is the fact that the market is growing double-digit and will continue to grow double-digit, and it's because of the government's commitment to expand access to rural Chinese, and this is driving -- as far as we see, this is going to drive double-digit growth. So, definitely the question is, what is the expectation for Novartis? My expectation is that whatever division we are operating in that we grow sales ahead of that market growth, whatever it is. So if the market is growing 15%, we should be able to grow 20% or more in an individual division. Now in terms of compliance. Obviously we have spent a lot of time and money training from a compliance standpoint. And this has been a particular area of focus over the last 24 months. As always, we have -- we say this all the time that we have thousands of employees and whenever -- no matter how much training you do, there could always be areas of bad behavior. As soon as we find that bad behavior, we root it out and we act on it, and that we would not be any different in China than we would be in any part of the world. So I am confident that as long as the markets in China continue to grow like they are growing, we are going to continue to see growth, maybe not 25% every quarter, but my expectation is we will be ahead of market. Operator, are there other questions?

We can take our next question which comes from Richard Vosser of JPMorgan. Please go ahead.

Hi. It’s Richard Vosser from JPMorgan. A couple of product ones and a couple of vaccine ones, please. Just on Glivec, it seemed to have a very good performance in the US this quarter, so just wondering whether there’s any stocking there. And ex-US seems to be impacted by generics. Just your perspective on the news that China is granting a generic of Glivec as well and the further impact from that. Secondly, on Afinitor, just quarter on quarter, the growth appears a little bit slower. Obviously, year-on-year is very, very good. Just wondering how the penetration into the breast cancer indication is going, whether that seems to be slowing now or whether there’s a lot of room to grow. And then on the vaccines, just as we go into the northern hemisphere flu season and you’re starting to think about the US, sending your shipment to the US, whether you’re seeing any impacts from not having a quadrivalent vaccine for this season. Any perspective there given your competitors both have quadrivalent vaccines? And then just on Bexsero, we obviously know that there’s a decision coming very soon in the next couple of weeks in the UK for putting on to the vaccination schedule. Just wondering what’s happening around the rest of Europe, whether those sort of decisions are being taken, whether those decisions are upcoming in the coming quarters as well. Thanks very much.

Starting with Glivec, , so the market has done actually better than we would have anticipated, and it’s helping to build the brand. We’ve also seen some one-time clinical trial orders as companies do head to head trials versus the product, although relatively small. The other thing that’s interesting and it’s very early to make anything of it, but if you look at just for example some of the Eastern European markets where there are generics now, the market is not switching to the generic as fast as we would have expected, so this is giving us a little bit of a boost up on Glivec. Regarding Afinitor, we’re happy with this growth. It has slowed, as you said, a bit in the U.S. We penetrated well under 50% of the top locations, so there will be further growth. What you’re seeing happen is the average patient stays on drug around eight or nine months. So you’re seeing that very first bolus of patients that we’ve got sort of reach the end of their therapy. So while we’re continuing to get new patient stats, you get this effect will be flattened out for a little while in the US, and then we go back to growth. Ex-US, the growth is quite robust. We’re still working through reimbursement, and we really just got started with the launches.

On flu, we don’t see any impact on (inaudible) on our demand which is more or less unchanged from last year. On Bexsero, there are, of course, discussions ongoing with other governments outside of the UK. We will start shipping to some countries for the private market, but I think until we see a public (inaudible) starting in some of the markets, it’s more likely going to be 2014, however.

Our next question comes from Tim Anderson of Sanford Bernstein. Please go ahead.

A few questions. First is on Gilenya's growth prospects ex-US which you say is unappreciated. Tecfidera has not received a data exclusivity in Europe and there’s been some speculation that they may not even launch in Europe because of this to protect their existing MS franchise that naturally be good for Gilenya. What are your expectations on whether they’ll get data exclusivity? And are you fully expecting that they will launch in Europe? On Serelaxin, which you’ve received breakthrough therapy designation, do you also expect that the product will get the shorter priority review designation too? Have you asked for it and do you expect to get it? And the last question I’m pretty sure I know the answer to this, but given the fact that much of the pressure from Diovan generics will be pushed into 2014, can you at least confirm that 2014 will be the year that returns to positive revenue and operating income growth? In a couple of cases with other companies like Glaxo and Sanofi we’ve seen a return to growth period pushed a little bit further out into the future than what investors were initially expecting.

Yeah. So the first question was around Tecfidera really, ex- U.S. Obviously we do not know what the discussions between Biogen and the European Union may or may not be. For our planning purposes we assume that we are going to have a competitor and we are going to launch and certainly the forecast that we have given for the product assumes a launch. Now if they don’t launch or their launch is delayed, I mean that would be a positive thing for us to be growing out much more, that I can say. In terms of Seralaxin, we did get breakthrough therapy designation. It will be a standard review and the reason is very clear. This is a new approach to therapy. As you recall from the Phase 3 clinical trial, that was one trial. And while we hit the primary endpoint in terms of essential ability to [greet], that improvement was modest. And the real big benefit for the product is in terms of the mortality benefit. But that was not the primary or secondary endpoint of the trial it was safety endpoint. So given all that, the agency had said they wanted to do a very slow, thoughtful review and get the endpoints they need to make the right decisions. In our opinions the discussions with the agencies are going very well and ultimately the timing will be the timing of whatever they decide.

Okay. And then Tim regarding the outlook. If you remember in January I said that as a group we expect for '14 and '15, a single digit sales growth at least and core operating income that is growing ahead of sales. As we look at the underlying business today and think about what that means, we don’t see any real change. So even under worst case scenario of let's say Diovan mono coming right at the beginning of 2014 where we got the full benefit this year and you would have to take it out of next year, we still see return to growth both on the top line and the bottom line. So we will give you a better update as we get closer to the end of the year.

Our next question comes from Florent Cespedes of Exane BNP Paribas. Please go ahead.

First for Kevin on Alcon. Could you give us more color on why you experienced some relief in Q2 and is there a trend here? Should we see Q3 and Q4 as robust as Q2 and not as soft as Q1 or Q3 last year? Second question will be for Jeff, Sandoz. Could we have more details on the countries where you have experienced a main pricing pressure and could you remind us what could be the growth drivers for this division going forward? And the last question on Serelaxin for Tim. Could we have some color on why you have decided to enroll more than 6000 patients in the clinical trial as in the previous one you already showed a mortality benefit with much lower number of patients even if cost was not the primary endpoint. And do you believe that we could have some results before 2016 which is the official timing we could see in the clinical trial website? And could you remind us when you will have the first interim analysis on this trial. Thank you.

Okay. Kevin, Alcon.

Starting with Q2, we talked earlier that the growth really accelerated in surgical area and that’s primarily driven by two things. One is improvement in terms of cataract procedures and we got the ability to look at the market through the use of our disposables on our machines. So we saw improvement in Q2 over Q1 level. We also saw market share growth on IOLs and very positive performance on Toric IOLs. And then secondly I would point to looking at our Asia market we got off to a relatively slow start in Q1 but we had very robust growth, 16% in Q2. So then when you think about the balance of the year, it's going to be somewhat dependent upon procedure growth continuing. But this has been a trend that we have seen overtime. We would still see procedures year-to-date in the 3% to 4% range which is a little lower than what we have seen. So we are expecting that to continue. And then secondly, we have got very positive product launches in the second half of the year across all three of our businesses. Jeff?

So we’ve seen 12% price erosion year to date and over 5 percentage points of that are from Enoxaparin alone in the US which is well over $200 million impact year to date. That means that the underlying price erosion has been the range that normally is usually in high single digits. So it’s a little less than that, around 7%, 6.5%, 7%. In terms of specific countries where we see price erosion, I would say it’s really year specific in Europe. It depends on who take price cuts. We saw 10% price cuts in Switzerland this year. Spain has been hit hard by (inaudible) which has gone through a tendering system. So that’s caused massive double digit price erosion in that market. In other years we’ve seen it in Italy, in France and elsewhere. Two other markets that I’d say where price erosion is a bit higher than average would be Australia and Canada which were both impacted by higher competition and higher gross to net spreads in terms of price erosion.

And Tim, on Serelaxin trial?

As David mentioned earlier, the RELAX-AHF trials are already completed. We had about 1,200 patients show 37% reduction in cardiovascular mortality. And the design of RELAX-AHF2 took this into account and as well building in an ability to test smaller effect slides. So we want to have confidence that it’s clinically meaningful and will deliver the results we want, but also factoring in that 37% may or may not be replicated. It could be less than that, but remain highly clinically meaningful. So we designed the trial with statistical input and as well as input from the external experts. That’s what drove the sample size up to around 6,000. And we’re confident that we can recruit this trial fairly quickly. You can see that the placeholders for the estimate of the read out in mid-2016 and we actually expect that they go a little faster than that, but that’s our current placeholder based on estimates for recruitment. As far as interims, we don’t comment on interim analysis until after we’ve performed well.

Our next question comes from Andrew Baum of Citi. Please go ahead. Your line is open.

Two questions for Joe and one for David or Alessandro. Joe, do you think the current share price accurately reflects the intrinsic value of the company’s current and future assets? If it’s not, what are some of the actions you’re proposing to remedy this? And then second, am I right in understanding that despite the consulting contract, Dr. Vasella will have no significant role in shaping the future strategy of the group? And then finally to David or Alessandro, your pipeline page shows your CART-19 filing as being in 2016 proposed. What are the potential for materially accelerating the timeline for this product? Thank you.

Andrew, the first regarding share price. I don’t want to comment on share price, but just look at our PE multiple and the fact that it’s in line with the peer average in Europe. And you look at our innovation pipeline and what’s coming, obviously I would believe that we should have a premium versus that PE multiple that it’s in line. If you look at what happens to companies as they move through their patent exploration period like we are moving to Diovan, there tends to be that period where people are still waiting to see what the company is going to look like as we exit that. So I think -- my own belief is that this is an issue that if we just continue to execute well, that this is an issue that will take care of itself if our innovation pipeline continues to deliver. Regarding the contract, the consulting contract is a minimum of 10 days. I would like Dan Vasella to continue his mentoring programs which have been very impactful for a lot of our junior people around the world. He ran the company for 11 years and showed a lot of good leadership, knowledge and ability and people get a lot out of this. So I’ve asked him to continue to do that. But beyond that obviously there would not be any involvement because as you read from the press release, he will not be attending the board meetings nor getting the board minutes.

Question was about (Inaudible).

Yes.

Andrew, as you know there is a potentially paradigm change in therapy where we modify patients T-cell and then that therapy is then -- those modified T-cells are injected into the patients to treat diseases such as ALL, CLL and potentially other hematologic and even solid tumors. We have limited data so far, but as you know the results have been really very, very positive. The filing date in the chart as we have pointed out is on the concerned website. Clearly, the results would hold up in the clinical trial that we are about to start. And assuming that production can come online in a reasonable period of time because this is not a pill or a standard kind of injection. It is possible that the dates could come forward, but at this point I can't tell you that with any uncertainty so I would rather not move the chart, or move the position on the chart to be more exact.

Our next question comes from Graham Parry of Bank of America Merrill Lynch. Please go ahead.

And first on for Harry on guidance. You are pointing at the moment with FX to an EBIT decline of about 6% for 2013. Consensus is currently modeling about 2.5%. And when you go through your models, what do you think is accounting for that difference. Is it just the event timing or is it perhaps profitability of the loss of Diovan as well. And second on Lucentis, if you could give us a bit more detail just on volume and price by region, Europe, Japan and other, so we can really understand where you are seeing the volume up less than the pricing negatives. And then thirdly, on Gilenya, you commented on the first quarter call there was some inventory stock in with underlying cells running at about 5% quarter-on-quarter in the U.S. Did that continue into second quarter? Are we looking at a clean underlying rate here now? And then final question on China. Just to take that earlier question further, when was the last audit that you conducted in China and are you aware of any investigation into Novartis practices in China currently by any of the authority? Thank you.

Okay, Harry, starting with guidance.

Thanks, Graham. I will not comment on the content and its comparisons but as you say, FX, if the yen and other major currencies stay as they are today, we will have [liquidity] available for 4% brought on by impact. And then as I mentioned before, we have few elements, moving parts in the second half of the year, one is we have the [schedules]. And again that’s a placeholder assumption, some Diovan mono generics, later this year and then there will be increase investment levels for pre-launch and pipeline pharma as well as the Alcon launches.

David, on Lucentis and Gilenya?

So Lucentis, I must say I am not going to go country by country for this product and going region by region doesn’t really help because sales are so concentrated in just a few markets. Regarding Gilenya, inventories are approximately normal now in the U.S. So I think you are getting a good feel for what the product can do there.

And then Graham just regarding China, as with many companies we have a full compliance organization in China. We continuously audit activity in terms of just the ordinary course of business, and we have not been contacted by the authorities on the matters of one of our competitors that has been in the news recently.

Our next question comes from Peter Verdult of Morgan Stanley. Please go ahead.

Just a question for Joe or Harry and a few for David around the Serelaxin. Just Joe or Harry, on the Diovan, so this 100 million monthly windfall. How should we think about the balance between reinvestment and what's being allowed to flow it through straight to the bottom line. Just if we were use to an average of 50% reinvestment rates, just wanted your help in understanding where you are allocating the extra resource versus plans made at the start of the year. And then David on Serelaxin and also pharma R&D expand actually. Given the pipeline success you are calling out at Novartis, I mean you got a $7 billion run rate in terms of R&D budget, in absolute dollar spend terms, how should we be thinking how that trends versus your expectations self-growth beyond 2014? I want to get a handle as to whether we should assume it will have to grow where you could do more with the same. And then specific questions on Serelaxin. Were there any regional variations in the endpoints of the data that you produced for the AHF trial? I’m only asking that because I see that less than 10% of the patients were enrolled in the US and less than 20 from Europe. Just want to make sure there’s no difference among the regional subgroups. And then lastly, just squaring the circle, we saw a maternity benefit. It wasn’t an endpoint, but there was no impact on hospital readmission rate. So want to know how you’re squaring that. Thanks.

Peter, regarding the first question on Diovan, I think we said back in January that we did have the assumption that because we were in mid-January or late January that we would get something for Diovan this year. So relative to what we were targeting, there is a significant increase and sales are obviously dropping. And I wouldn’t think about reinvestment as any material number, but you also will have to see that we are executing a number of launches. We’ve got the Serelaxin breakthrough therapy designation and the filing made us say that we must invest now to get ready for Serelaxin. So there is a heavier investment plan in the back half of the year, not just on pharma but also Alcon because of the new product launches. So not necessarily directly tied to that, but it’s certainly not anywhere near a 50% reinvestment rate. I would just think about the benefit of dropping to the bottom line. As Harry said, we’re still assuming in the outlook that we’ve given that it goes. We’ve said it’s not going to go through the third quarter. We think that’s relatively safe. Nobody knows. So just as a placeholder we’ve put it in I guess I would say sometime not in the third quarter but before the end of the year. So the extent that it doesn’t come, there’s upside. So that’s the way that I would think about the Diovan situation.

I think the next question was less about Serelaxin and more just about R&D spend levels. You have the typical quandary in this business, right? The more successful we are in development then the more opportunities we have to spend because with all these additional clinical trials with Phase 4 programs there’s indication expansion and the like. So as we see our R&D spend this year is trending up. In order to give guidance beyond 2014 which is your question would be extremely difficult for me to do now and I’m just going to refrain from doing that. What I want to say is we constantly look at priorities in our development portfolio, and generally we’re looking at multiple productivity initiatives. And at the end of the day we’ll make a call and we’ll try as we do usually at full year results we’ll try to give you some kind of feel for where we’re going. And then there was a number of Serelaxin questions. Do you want to try them, Tim?

So I think you had a question about the regional differences. We did analyze the databases in clustering countries with similar geographies as well as standards of care and didn’t see any major differences in the results. The other question related to the re-hospitalization because one of the influence was (inaudible) 60. And that’s a complex endpoint because it relates not only to out of hospital but also survival. We did see a benefit in survival, but there were also patients were tending to be -- tend to be more re-hospitalizations than expected. And it’s a complex analysis of data that has led us to a couple of potential explanations. One is that if you survive the initial hospitalization due to a benefit from Serelaxin, you may have a higher propensity to be re-hospitalized in the next 60 days. So that’s one. The second is that there appears to be an imbalance in the numbers of patient subjects in the Serelaxin line who had hospitalization for acute heart failure in the prior year. That also puts you in a greater risk category for being re-hosptialized. And so those two factors may have explained that particular endpoint not being met, but suffice it to say that we are looking at the data as well as the design of RELAX-AHF2 to make sure that we don’t have for example imbalances for any of them in the next trial.

Our next question comes from Seamus Fernandez of Leerink. Please go ahead.

I have several questions with regard to the generics business and also ophthalmic business. In terms of the recent guidance that was provided with regard to cyclosporine ophthalmic emulsion, I was hoping either Jeff or Kevin could provide their thoughts on FDA's guidance there and the challenges associated with making a product like that. Incrementally, can you talk a little bit about your blow fill and seal manufacturing capabilities and the general appeal of ophthalmic generics for either Sandoz or Falcon division? And what your presence is there? And the lastly, any updates on EU filings in the respiratory space and if you could update us on your thoughts in terms of either timing or your expectations for the FDA's anticipated respiratory generic guidance and if you continue to plan for an ANDA, a direct substitution ANDA going forward?

Okay, Jeff.

So do you want to take the cyclosporine emulsion FDA guidance, Kevin, first, and then I can comment on Falcon?

I will give it a try. Cleary, Restasis is an important product in terms of sales contribution. It's the only approved product for therapeutic dry eye. The interpretation of the information on the process for approval basically gives clarity to the approach. I think most of you probably recognize that the original approval in terms of being able to have replicated studies to show impact on dry eye has been a challenge for the entire industry. And then in terms of blow fill and seal, clearly we have got capability with a dedicated facility. We have got primarily dry eye products or artificial tears that are consuming that capacity today.

In terms of Sandoz, the Falcon business that you probably know, Seamus, was integrated as part of the merger with Alcon into Sandoz and Sandoz has the number one position globally in generic ophthalmics in addition to our similar positions in injectables and dermal and biosimilars to cap, round out our differentiated offer. That business is growing nicely for us. It's accelerated significantly and it's growing up over 20%. We continue to see it as a hard to penetrate category because these products have lot higher barriers to entry. Clearly the guidance on Restasis gives more visibility to generic companies like us to look at assets like Allergen's and of course that you can expect to see with that or has been with that for some time. But I don’t comment on what we are developing in our future pipeline. In terms of your last question on respiratory filings, I am not going to go off of what I have said in the past, which is we really don’t give much guidance here. We continue to work with both European and U.S. regulators on our respiratory pipeline which we feel very good about. The pathway for respiratory products in the U.S. and EU could be even clearer. We feel if you look at the requirements for a 505-J for a combination (inaudible) COPD drugs in the U.S. We do believe an ANDA approach is possible. It is very difficult to do it but we do believe that this is a fully substitutable approach as possible for the future and we continue to pursue our pipeline accordingly.

Our next question comes from Michael Leuchten of Barclays. Please go ahead your line is open.

Two questions please. One for Joe. Just because you have called out the emerging markets growth for the group at 11% constant exchange rate, the pharma division didn’t quite grow as fast. So I am just wondering, what the delta is? Which other division has contributed that margin to swing the overall business to 11%. And then related to that, you have called out China and other regions where the growth was substantially higher, so which countries are currently not contributing to the growth to get the average down to 11% for the business. And then a question for Kevin, for your glaucoma business, that was down 2% in Q2, adjusted for exchange rates. I thought we were going to look at this in terms of a portfolio that can continue to grow despite the entry of generics, yet we do see another quarter where we see a negative growth rate. Does UV still hold? Are we going to see growth despite generics is that continuity -- is that going to see a drive going forward?

Regarding the first question on the growth for the group of 11%, you’re right in that pharma was about 8%, but Alcon was double digit, Sandoz was double digit, Vaccines was double digit. So the rest of them actually pulled up the total to about 11%. When you look across geographies in specific countries, one of the areas that was a drag on EGM and it’s a big market for us is Brazil. There was entry of Glevek generic in Brazil as well Diovan and that has brought the total pharma numbers down. As well as if you look across the markets, you’ve got some markets that are going well, some markets that are not, but Brazil is really the standout for us that once we get out from under the Glevek piece that will continue to accelerate up.

In terms of glaucoma, you're right. We did see roughly 2% decline in the quarter. What we’re going through in the US is basically the competitive pressures from the gold standard with Valatan going off patent. We continue to see positive growth of the combination products outside of the US. And then as Joe highlighted, we just put the pipeline in. so relatively small sales in Q2 for Simbrinza. So literally we’re going to continue to promote the combination products and then launch Simbrinza and we’re going to be in that range of being flat or up in terms of our glaucoma business.

Our next question comes from Andrew (inaudible). Please go ahead sir.

David, could you quickly repeat the comments -- I missed the one on Afinitor with regards to why there’s not much growth quarter on quarter and which of the franchises, either renal cell or (inaudible) or breast cancer is responsible for the slowdown. The marketing and the sales line in pharma is up, not down somehow. I’m still trying to get my arms around why does the Diovan lingering on does not give you more margin progression? And then lastly one for Harry. John used to make the comment on buybacks basically. What is the hierarchy or the level of importance as payback debt, acquisitions and then buyback. Harry, do you intend to follow in those steps and keep that type of hierarchy of usage of capital? Thank you.

Regarding Afinitor, I think the question last time was mostly focused on the slow growth in the US quarter over quarter. And as I explained, there is plenty of room for future growth, particularly in breast cancer. Less than 50% of those patients of that market have been treated. We had a very fast start which meant a large come out early. We’re now rolling off therapy. So while we’re still getting new patients start to get -- we expect a period of flatness before we return to growth. Our forecasts for Afinitor are intact and we feel good about the brand. The M&S story is pretty clear. Despite all the productivity issue, yes we’re spending because we have a very exciting launch portfolio and we are making sure we spend on the things that really matter. So these new product launches take off in a good way and when you get breakthrough therapy designations and you have other things that are coming forward, that means there are pre-launch slots and that’s what we’re seeing.

Our capital allocation and capital strategy is unchanged. Number one is certainly investing in the important areas of business with attractive return above our cost of capital and other rates. It’s easier to see ROI and cash revenue units. Second, ever growing strong dividends and thirdly, make sure we mitigate the dilutive impact of employee qualification programs. And as you have seen, we have already bought, repurchased about 30 million of shares this base. And depending on market conditions, we will continue to mitigate the 30 million of issued shares to which many employees exercised the option earlier this year.

Our next question comes from (inaudible). Please go ahead.

Two remaining questions on my side. Just coming back to Lucentis. I just wanted to be sure that you still feel confident with your expectations for 2017, meaning that consensus was standing at 2.7 billion and you felt it was really too conservative. So if you could just give us an update on that. And then on Sandoz, if you could just give me again the organic growth if you exclude Fougera. And then also on Sandoz, now that the Diovan monotherapy generic has not been launched, I mean you were guiding for mid to low single digit growth. So are we going to be at the low side for Sandoz and what would happen if the Diovan mono will only be up in 2014, what would be the guidance? Thank you.

Yes, for Lucentis we remain bullish even if there is essentially a slowdown in the short run but if you take the long view which you talked about, we feel that we can deliver on those expectations.

Yeah. So for Sandoz growth excluding Fougera, basically what you are seeing is that the Fougera growth basically a little more than offsets the Enoxaparin decline which explains why in Q2 we had flat sales in the U.S. If you look year-to-date, U.S. sales are up 2% in basically flat market. Canadian sales are down. German sales are also up 2% in a flat market and then we are seeing double-digit growth for a third year in a row in Western Europe, double the market at 13%. Central and Eastern Europe 13%. High teens in both Middle East and Africa and Latin America. And now Australia has dragged our Asia Pacific growth down to about 9%. From the guidance perspective what I can say is that I confirm, we confirm our guidance of mid to high single digit growth. But as Harry said, this assumes a Diovan mono authorized generic launch later this year. I think that’s probably all I should say.

Okay. I think we have time for one final question.

Our next question comes from Steve Scala of Cowen. Please go ahead.

I have three questions. What is Sandoz's view on when a biosimilar Enbrel could launch in the U.S. Secondly, why was Jakavi down quarter-over-quarter. And then thirdly, what is your view of the Pfizer meningitis B vaccine clinical trials targeting adolescents and young adults. Why is that population in advantage or disadvantage relative to the targeting that Novartis has done with Bexsero.

Yes, we don’t comment on timing of future launches. What I can say is that we will seek to confirm bio-similarity of our biosimilar of Enbrel in patients with psoriasis and seek approval for all approved indications. And we have designed the clinical program in close consultation with both the European and U.S. authorities using a combination of analytical, preclinical and clinical data necessary to give out a full label. And we are fully committed to bring this to market as soon as we can.

So the Jakavi launch remains. In fact it's actually doing better than we expected. What you are seeing is actually some onetime event. I think that occurred actually mostly in the first quarter so the comparison was difficult.

And on Bexsero, Pfizer's meningitis?

Yeah, I don’t want to comment on Pfizer's product. What I would say is that our [meningitis] therapy is approved from the age of two months all the way up to adults. And we believe it's very important that, especially infants and toddlers and vaccinated. This is the most vulnerable age group where the disease burden is the highest and direct protection of the infants we think is very practical part of the health campaign.

Okay. I would like to thank everybody for tuning in and we look forward to updating you in Q3.

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