Novartis AG (NVS) Q4 2017 Earnings Report, Transcript and Summary

Good morning, and good afternoon, and welcome to the Novartis Q4 and full-year 2017 Results Release Conference Call and Live 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 will be 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.

Good afternoon everybody and welcome. To start-off, I would like Samir to read the Safe Harbor statement. Samir.

Good afternoon everybody. The information presented today 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 U.S. Securities and Exchange Commission for a description of some of these factors.

Thanks, Samir. Okay. Since this is my last quarterly earnings call as CEO of Novartis, I’m going to have the bulk of the presentation presented by Harry Kirsch, who you know, our CFO, he is going to cover 2017 financial performance. Paul Hudson, our head of Pharma, is going to give us more detail on Cosentyx and Entresto and then Vas our incoming CEO is going to outline his vision and priorities for Novartis going forward. But first, I just want to share my thoughts on slide number 4. You would have seen from the press release that we can say 2017 was a good year for the Company, we grew sales in constant currency despite the patent expiration of Glivec, we had a great year in terms of innovation, we executed well on the growth drivers and returned the Alcon business to growth and at the same time, we continued to strengthen the Company by implementing the new operating model. So as I come to the end of my time as CEO, I’m leaving confident that the Company is in good hands. Vas and I have worked very closely over the last few months, planning and preparing for this transition and the next phase of this Company is all about executing on the growth potential. And I know that Vas and the executive committee will be focused on bringing the pipeline to its full potential. So now I would like to turn it over to Harry to talk about the 2017 results in detail.

Thank you, Joe. Good morning, good afternoon everyone. As usual, my comments refer to growth rates in constant currencies and compared to prior year unless otherwise noted. On Slide 6, I want to start with the quick comparison between the guidance we gave January last year and the final results. As you can see, we came in above or at the upper end of our guidance. Full-year sales were up 2% and core operating income was in line with prior year despite 2017 being our second year of Glivec generic erosion. Turning to Slide Seven. We show the fourth quarter and full-year results. On the left side you can see that we have very good performance in fourth quarter. Net sales grew 2% and core operating income growth accelerated to plus 5%. In the full-year, sales grew plus 2% as strong performance of our growth drivers including Cosentyx and Entresto more than offset Glivec generic erosion. Core operating income was in line with prior year as sales growth and productivity fully offset generic erosion growth investment. Operating income grew 7% including lower amortization, net income grew 12% driven by higher income from associated companies. Core EPS was $4.86 growing 3% including the benefit from the share buyback program. On free cash flow, we have delivered a solid full-year growth of plus 10% to $10.4 billion. Now moving on to Slide Number Eight. These are the key brands as you know in innovative medicines driving our top-line performance. As expected, the creative contributions came from Cosentyx and Entresto and Paul will provide more details on those later. I want to point out that Promacta, Tafinlar Mekinist and Jakavi continue to grow strongly sales, increasing around 30%. Kisqali was launched during 2017 and contributed full-year sales of $76 million. As a result, total oncology business unit sales excluding Glivec were up 10% in the full-year and 13% in fourth quarter. Now let's turn to the margins on Slide Number 9. As you can see, all divisions grew core operating income in fourth quarter, resulting in a margin improvement to 25% for the group. Innovative medicine sales grew 4% leading to 9% growth in core operating income, core ROS increased to 30.5% driving the overall group margin performance. Sandoz sales declined 4%, mainly due to the industry wide pricing pressure in U.S. However, core operating income grew plus 1% as the sales decline was offset by continued strong gross margin improvement and gains from the divestment of small [indiscernible] and non-strategic assets. Core ROS increased to 20.9%. Alcon sales grew 6% in the fourth quarter, driving 36% growth in core operating income. Core ROS was 14.1%, o note in fourth quarter stock and trade movements accounted to approximately one point of Alcon sales growth so the underlying CC sales growth is about 5% in fourth quarter in line with the underlying growth in third quarter. On Slide 10. You see the Alcon quarterly results throughout 2017. For the full-year, sales grew 4% and core operating income grew 5%. Importantly, Alcon grew sales in every quarter, based on the actions taken by Mike and his team to fix the basics, improve operations and customer relations. As a result of this, surgical grew 5% and Vision Care grew 3% in the year. And with the continued progress of the turnaround in Alcon, mixed bag continued phase growth and improved margins in 2018. Slide 11, shows our strong free cash flow of $10.4 billion 2017 up 10% versus prior year, this was mainly driven by a favorable working capital, lower legal settlement payments and lower CapEx. On Slide 12, you see our improving CapEx trend over the past five years. CapEx was high in 2013 through 2015 as we completed our new campuses in [Boston] (Ph) and Shanghai. In 2017 we continue to prioritize our investments in manufacturing projects. On Slide 13, you can see the net debt, stood at $19 billion at the end of the year. the increase was mainly driven by the 6.5 billion annual dividend payments, net share repurchases of 5.2 billion, mostly offsets by a $10.4 billion of free cash flow in 2017. On Slide 14, we proposed dividends of 2.80 per share, this is in line with our policy, to have strong and growing dividend in Swiss Francs. It’s an increase of 2% in Swiss Francs and 6% U.S. dollar. In terms of [payout ratio] (ph), this dividend represents 87% of our net income and 64% of our free cash flow. Slide 15, shows our full-year guidance for 2018. We expect Group sales to grow low to mid-single digit. For Innovative Medicines division, we expect sales to grow mid-single digit, driven by a continued uptick of our growth drivers. For Sandoz, we expect sales to be broadly in line to a slight decline versus 2017 due to continued industry wide pricing pressures, we assume in U.S. For Alcon, we expect sales to grow low to mid-single digit, we are pleased with the 2017 returns to growth and look forward to another strong year, as the Alcon team completes the turnaround. The transfer of the OTC products into Alcon will not have a material impact on 2018 top-line growth, but will increase Alcon’s margins. We will issue updated segment financials reflecting the new structure towards the end of quarter one. For Group core operating income we expect growth to be in the range of mid to high-single digit. On Slide 16, let me briefly comments on the expected half one and half two core operating income dynamics. We expect our Innovative Medicines growth drivers to deliver an increasing contribution throughout the year. Of course, Alcon is also expected to be a growth contributor, but we also expect Sandoz U.S. price pressure to continue, which likely resides in Sandoz sales decline in half one. In half one, we also expect a stronger impact from Glivec generic erosion the tail end of it and investments behind oncology launches. Therefore we expect core operating income in quarter one, to be broadly in line to a low-single digit increase versus prior year. In half two, we expect stronger core operating income growth which will benefit from expected increased contribution of innovative medicines launches and new launches at Sandoz. On Slide 17, I would like to add some perspective on other key elements of our expected bottom line performance in 2018 beyond core operating income. We expect core net financial expenses to be about 100 million higher, mainly due to the higher interest costs including financing the AAA acquisition and to the full-year effect of the bonds we issued for the 2017 share buyback program. On core tax, we expect a slight positive effect from U.S. Tax Reform but how positive is not yet clear as the details and interpretation of the law still has to be finalized with the IRS. We also expect a shift of profit mix to higher tax jurisdiction and as a result, the core tax rate could stay broadly in line with 2017 or increase slightly to around 16%. We will update you with first quarter results on where we think we will be for the full-year on the tax. On Slide 18, you see how currencies would impact our results if mid-January rates prevail for the remainder of 2018. Due to the weakening U.S. dollar mainly versus Euro, the full-year currency impact on sales would be plus 3%, the full-year impact on core operating income would be plus 4%. For first quarter, the currency impact would be plus 5% on sales and plus 6% on core operating income. We will continue to publish every month the expected currency impact on our website and with that, I will turn it over to Paul.

Thank you Harry and good afternoon, good morning to everybody. It gives me great pleasure to share some of the highlights from the pharma business, Entresto surpassed the $500 million mark in 2017 delivering on our promise for patients and indeed for the business. Q4 recorded a strongest quarter-on-quarter growth this year, plus 43% worldwide with a full-year growth of over 195%. Performance is fueled by continued momentum in progress in excess and uptick ex-U.S. as well, were now launched in over 60 countries just France to come. Now we won’t guide to a specific number this year. I'm very pleased with our current trajectory and it's probably worth saying that we have seen and learnt the Q2 and Q4 the areas where we get our biggest volume upticks, so sign posting at 2018 is going to be important to establish what we could actually achieve this year. Next Slide, thank you. As the underlying dynamics in the U.S. have taken a real positive trajectory, I have put on here the January number plus a couple of data points, 22,000 on TRx. We broke the 20,000 in December for the first time. We sort of predict that this would happen, we said that our peak productivity per sales person would really reach optimum impact to November, December, indeed that has happened exactly as we hoped. We are picking up over 640 new writers in the U.S. every week, over 55,000 physicians have been prescribed Entresto and although Cardiology remains the bulk of the prescribing, it is fair to say PCP adoption is accelerating. The underlying access situation has also improved as well, I think I mean I regularly get questions on this. Our coverage in [Med D] (Ph) is up to 93%, our coverage in commercial is at 70% and importantly no PA restrictions and Med D is 60% and no PA, and 48% in commercial. We will improve that slightly in Med D in the first quarter of this year. Looking longer term and I said this time last year that we would try and give some sense of perspective about how big Entresto could be when we had exited Q4 of 2017. And whilst delighted with the performance we can now see a path for reduced ejection fractions that would take this somewhere beyond $3 billion before LOE. Now on this chart you can see we tried to dimension preserved ejection fraction in relation to reduced ejection fraction whilst no real credible medical treatment in preserved ejection fraction, we will get our final readout in the summer of next year. We think with some good education, this is going to provide not only a great benefit to patients in HFpEF, but also have a positive impact on reduced ejection fraction patients. What does that mean ultimately? Well we think it means that we will be somewhere before LOE a $4 billion to $5 billion at peak medicine in Entresto. And importantly, we expect Entresto to be margin accretive from the very beginning of 2019. Turning to Cosentyx, now Cosentyx itself has had also a fantastic 2017, we have seen new entrants launch but we have seen ourselves become a multi blockbuster in the full-year. Q4 sales of 650 million which is 11% quarter-on-quarter on growth, in fact we have seen growth in all indications in all geographies. Our ex-U.S. performance in fact Q4 results are annualizing now to billion dollars on their own. Now with new entrance we still continue that great performance, so our NBRx leadership out of all of the new entrants in Q4 has been maintained, despite [indiscernible], in fact our NBRx growth through that period is the leader amongst all of the medicines. Outside of psoriasis in spondyloarthropathy, we continue to maintain market leadership against Humira and Enbrel in AS and PsA which is a huge statement of the clinical benefits of this medicine. 2018 is an important year, clearly with [indiscernible] end of the year and we have been very thoughtful again about our rebating at the beginning of 2018. Our access is in very good shape in fact for 2018 and we recognize what an important year it is to decide who come through this year in great shape, because after that most of the innovation is in the market and our opportunity to grow through the next half decade is in play. Let me give you some sense of perspective on my last slide, around dimensionalizing the opportunity for Cosentyx. We get continually asked questions and mainly around psoriasis, and we have tried to share over the last year how big an opportunity PsA, AS and indeed in the future Non-Radiographic Axial SpA is. The number of PsA system treated patients is bigger than that in PsA. The number of AS patients is almost the same size if not slightly bigger than PsA and you know I think that the - 2017 have a greater degree of efficacy in AS and PsA in Non-Radiographic Axial SpA, what that does is set us up in the very strong position for our performance over the long-term in these indications. Importantly though in psoriasis, we still make a breakthrough, we have landmark five-year data, we have head-to-head studies, most recently the Clarity studies versus Stelara and we feel strongly positioned because the efficacy bar has now been set and probably doesn’t need to go any higher, we feel well positioned to win and to at least preserve and grow share in psoriasis. Right across the indications, we have already deployed in dermatology and rheumatology, so the need to add more investments becomes less and which is a great opportunity for us given that our overall expectation, is that we can become a blockbuster in each of these indications separately. So in coming to conclusion, we are delighted with the progress with Entresto with Cosentyx, I think it’s a great statement of our ability to commercialize on the great science from the Company. I will hand it to Vas.

Great. Thanks very much Paul and thanks everyone for joining the call. As I come into the CEO role, I would like to share some of my initial reflections on the future directions of Novartis. Over the past five months I have been getting external perspectives on the Company, meeting with investors, meeting with external stakeholders, as well as meeting with our own internal associates and really trying to develop a strong perspective on the Company, informed by many years here, but also trying to take an outsiders' view. You know my thinking will continue to evolve and I look forward to keeping you updated over the coming months and years, but I wanted to share some of my initial thoughts. Now if you go to the next slide, as you all know, we face a dynamics and complex external environment. When you look at the opportunities for a Company like Novartis, there are high unmet needs that remain with many people around the world not living to their full healthy life expectancy. We have many new therapeutic modalities and platforms that are coming forward as we demonstrated with our work Kymriah and Cell Therapy and I think there are many more to come. The increasing demand for curative therapy is in improvements in quality of life and we are clearly in the midst of a data and digital revolution in pharmaceuticals, but also across multiple industries. But we also face challenges that you are also all well aware of increasing competition, rising and more difficult Standard of Care [indiscernible], increasing payor and pricing pressure, and an industry reputation which we need to continue to strive to improve. No when I reflect on where Novartis stand with respect to these opportunities and challenges, I sincerely believe we are well positioned for the future, we have global scale, we have innovation power, we have world-class talent and we have really increased our capability in data and digital which I think will power us into the future. So if you go into the next slide, our aspiration as a leadership team is to lead for the long-term. From a strategic perspective that means continuing to lead as an innovator of transformative therapies, be a leader in data and digital, be a productivity leader in building a lean and agile organization that can confront the challenges that we will face, and a leader in attracting and retaining the best talent in the industry. From a financial standpoint and for our shareholders, we want to drive solid and sustainable top-line growth, drive ongoing core margin expansion, deliver solid cash flow and keep improving our return on capital employee. Now moving to the next slide, when you think of all of that in perspective, if you go back to the 1920s, Novartis was a medicinal chemistry and industrial Company, and for most of our history [indiscernible] intended this was the core of the Company. In 1996 with the formation of Novartis through 2009, we became a diversified healthcare group spanning in number of different sectors in healthcare. Now under Joe's leadership we've undertaken a portfolio transformation, where we really focus the Company in three leading businesses, Sandoz, Alcon and Innovative Medicines. Now as I look into the future and look at a more complex environment an environment that's going to be increasingly competitive with rapidly changing technologies. I believe we have to focus the Company as a focused medicines company powered by data science and digital technologies. This will allow us to allocate our capital to where our core capabilities are, we will continue of course to evaluate as relevant adjacencies make sense, but we really want to focus on investment in our core. Now when you go the next slide, as you look to the future, there will be five priorities we will be driving across Novartis for the years to come. First is increased focus on operational execution to ensure launch excellence, high levels of productivity and keep driving that margin improvement. Second is to pivot even harder to breakthrough innovation, access will also remain important with our Sandoz division, but we need to pivot to high-end transformative innovation. Be a data and digital leader, rebuild built trust with society, insist our culture to a more inspired empowered and unbureaucratic organization. I also have four specific goals over the next five-year related to our longer term financial performance, and I wanted to discuss those with all of you today. So if you go to Slide 30, when we look out over next five-year, I believe we are well positioned to drive dynamic sales growth. When you look off of our 2017 base, we will have the generic impact of Glivec, Afinitor and the tail end of Glivec. But as Paul nicely outlined, when you move to the next bar, Cosentyx and Entresto are growing well, in addition we have multiple potential blockbuster launches coming through the portfolio in the next three years and when you look across that portfolio I think there are exciting medicine like BAF, RTH amongst others. In addition our Onco growth drivers continue to perform well, as Harry mentioned, excluding Glivec, we achieved over 10% growth in our oncology business, Kisqali, Kymriah and Rydapt are our key growth drivers for us that we believe will continue to help us deliver on our growth trajectory. And finally with the leading Biosimilars portfolio in the industry and Alcon returning to growth, both Sandoz and Alcon will also contribute to this growth dynamic. Now moving to Slide 31, we are also committed to expanding our margins, if you take the Innovative Medicines specifically, our full-year 2017 margins were around 31.3%. We know our relevant industry peers are indeed mid-30s in terms of their core operating margins per our own estimate. Now we believe, we can be in this range by accelerating our key growth drivers, continuing to be aggressive with resource allocation and productivity across our commercial units and with the new operating model we have set up to drive synergies across Novartis Technical Operations, NBS and Drug Development. Now this will of course be offset by the challenges of generic entries, as well as the need to invest in our potential blockbusters, but our ability to drive core margin improvement will be a key priority for us, as leadership team and for myself as CEO. And then moving to Slide 32. When you think about our innovation power, our ability to keep reinventing our pipeline is absolute critical for our long-term success, we have demonstrated over the recent years that we have leading industry pipeline productivity, we have limited binary risk throughout our portfolio where we can counteract the challenge in [indiscernible] with performance in another. When you look at some of the highlights on this slide, 21 breakthrough therapy designations, 90 NMEs in the clinic, we think our innovation engine is strong. Lastly on the longer term perspective, I wanted to turn to capital allocation. Now Novartis has been very disciplined in capital allocation under Joe and we are palling to continue that with our four key priorities, investing in our organic business, growing our annual dividend in Swiss Franc, pursuing value creating bolt-on acquisitions and continue to have a focus on looking at acquisitions that are true bolt-ons, where we believe will bring a new technologies and capabilities into our core areas of the Company and then share buybacks when appropriate. An external analysis on this right hand side of this slide, show the kind of discipline that we have had. When you look at R&D as an investment decision of our cash, you could see that we have consistently invested over the last five years, 35% of our cash into R&D. We have a solid investment in CapEx with 15% and bolt-on M&A at 15% and then we have returned 35% of that cash to shareholders in the form of share buybacks and dividends and we want to continue to maintain that kind of capital discipline. So moving to the next slide, I would like to turn to 2018 as well as wrap up and give you some perspectives on how we see this year unfolding. So moving to the Slide 35. 2018 is our return to growth and it's going to build the foundation for the future of the Company. We have multiple priorities across each of the five areas that I described earlier, and they all will enable us to deliver the financial outlook that Harry provided. I would like to go into a few of these in more detail. So turning to Slide 36. In operational execution, our core priority is going to be to continue to drive our key launch growth drivers. With Cosentyx, we want to maintain our competitive hedge in psoriasis as well as grow our penetration SpA as Paul has nicely outlined. With Entresto we want to keep the momentum going we had in the U.S. and drive further uptick in Europe and around the world. And then finally in oncology where we have a broad portfolio, our goal will be to continue to maximize our GSK acquired brands as well as our launch brands. Now with Kisqali, we did have a slower start than we have hoped, but we continue to believe with the MONALEESA-7 data coming out positive as well as the upcoming MONALEESA-3 readout, as well as our launches now across European marketplace that we can continue to drive Kisqali towards a blockbuster medicine. With Kymriah we will add our DLBCL launch when approved in the U.S. and Europe and with the write up we have the potential to transform the care of AML patients. Overall, we believe in oncology we have the opportunity to continue to drive dynamic growth in one of our most important segments. Moving to Slide 37, as well an operational execution, it’s going to be critical for us given the challenging environment we are in to deliver on our upcoming blockbuster launches. You can see that across the next two years, we have six major launches as well as six more potential significant launches in 2020. Our ability to deliver through the registration process, prepare these launches and execute on them flawlessly is core to our executive team's goals and we will continue to provide you update as we progress in preparing for these important medicines. Now on Slide 38, we are also progressing on the portfolio review of the Alcon as well as accelerating our review and focus in Sandoz and focusing on a differentiated portfolio. With respect to Alcon, our management's focus on completing the turnaround as you saw nicely in the performance in fourth quarter. We are making progress towards the capital market exit with dedicated teams working towards that. But there is no change on the timing of a potential action, we continue to guide towards the potential action in the first half of 2019. Now with respect to Sandoz, we have a very strong global Sandoz business and its growing well outside the United States as well as the leading Biosimilars portfolio. But we are facing challenges given the U.S. [indiscernible] industry wide pricing pressure in the United States. We will plan to continue to reshape our U.S. business with a focus on more complex product and that will include looking at how to best shape that portfolio for us to be successful in the future and we will continue to keep you updated as those decisions evolve. On Slide 39, finally in operational execution, our goal will be to continue to drive the cost savings that we have outlined in the past to deliver over $1 billion savings in Novartis Technical Operation, drive flat across the Novartis Business Services and keep our R&D spend in the 20% range enabled by increasing scale and better digital technology. So moving to Innovation, there is a few additional updates I wanted to provide to the group. So on 2017 as Joe outlined, we had a real landmark year, 16 key approvals, 16 key submissions, 6 breakthrough therapy designation and importantly a rebuilt interface between research and development that allowed 14 new projects to transition into the mid-stage portfolio. Now turning to Slide 41, what we expect in 2018, is 15 key approvals and 15 key submission, highlighted by a couple of big ones. Now Aimovig our migraine prevention medicine is on-track for approvals in both U.S. and Europe and we have recently released additional data from a trial called Liberty which demonstrated Aimovig’s effectiveness in patients who had failed two to four prior lines of therapy. We believe that’s a unique data and it will be compelling and payors to enable and build an excellent launch for Aimovig. We also have Kymriah, which continues to progress as well in DLBCL in U.S. and Europe. And two key submissions that I would want to particularly highlight, RTH258 is on-track for a submission in Q4 of this year, we have initiated the bridging study which we have previously outlined and BAF312 is on-track as well for filing in the first half of 2018. So moving to Slide 42. One of the other areas, I wanted to provide an update on is on the IO portfolio. So when you look at the IO portfolio, we are a leader in CAR-T and I think you are well aware of that and we continue to expand our CD19 CAR-T presence across a range of B-cell malignancies and we will be starting a range of pivotal studies in the coming months across those various indication. We also continue to progress our CAR-T programs in solid tumors, so of course the sign is more challenging. But now in our IO, IO combination and other efforts within immune-oncology as we have previously outlined, we have in-licensed 19 second generation IO agents and we are now in a position to say that we are initiating as we have previously outlined our trials with canakinumab in the non-small cell lung cancer adjuvant in metastatic settings. Our Phase III is ongoing with PDR001 our anti-PD1 with Mekinist and Tafinlar in melanoma. But we will be initiating late stage studies in three combinations programs with our anti-PD1, one with INC280, our C MED inhibitor in non-small cell lung cancer, the second with our anti-LAG antibody LAG525 in triple negative breast cancer and finally our PD1 plus our identity receptor antagonist in non-small cell lung cancer. So we will look forward to providing additional data on the performance of these agents in upcoming medical conferences, over the course of this year. Finally on innovation, on Slide 43. We continue to have strong progress in our mid phase pipeline, just wanted to briefly highlight we have a range of readouts in both Phase II, Phase II readouts as well as Phase III initiation, continuing to build the mid-stage pipeline that will enable us to drive future growth and be happy to answer questions regarding this in the Q&A. Slide 44, we announced two recent deals, which I wanted to make sure everyone is aware of with the acquisition of Advance Accelerator applications which we completed this week, it brings into the portfolio near-term launch and Lutathera which is already now approved in Europe and we are expecting an approval in the U.S. in the near-term and that also brings into the portfolio potential therapies in prostate cancer, gastric cancer amongst others solid tumors. And we also announced a partnership with Biocon and Biosimilars and this partnership enables us to broaden our portfolio of the next wave of Biosimilars enabling us to share development cost should also expand our commercial footprint and as I previously stated, we will continue to look at the partnership in bolt-on opportunities. So on the last three points, just to briefly highlight, in data and digital we continue to make good progress in our ability to build core digital capabilities in our R&D operations and our commercial operations and our technical operations, this will be critical for us to drive further productivity gains, but also enabling us to find new patient populations, new medicines and we believe drive innovation in the Company into the future. Now on Slide 46, one of the important priorities for me and us will be to rebuild trust with society. We as a Company want to hold ourselves to the highest standards in terms of our values, our quality, our compliance. We want to be a leader in delivering value based healthcare to healthcare systems and continuing to work to expand coverage of our medicines in the underserved populations. And this will be something we will continue to focus on and we believe it will be important for investors to consider when looking at a company like Novartis. Lastly, I want to just turn to brief comment on culture. Culture is what is the DNA of any company of our size with the legacy that we have and to increasingly recognize the culture is a factor that can make the difference between a very high performing organization in a mediocre one. Now in Novartis, we have high levels of engagement, great collaboration, strong commitment to our core purpose and values. We believe we now have an opportunity to focus on culture to drive more inspired and powered culture eliminating bureaucracy to enable the best ideas to come forward. Entering into world where we have to attract the next generation of talent, getting this cultural transformation in place is going to be also a priority. I would like to close just on one last comment before the closing slide. On recent appointment we brought on Liz Barrett as the CEO of Novartis Oncology. We are thrilled to have her onboard, she has 20 years of oncology experience across the range of geographies. She will be succeeding Bruno Strigini who we thank for his excellent contributions to the Company and we will look forward to introducing Liz to all of you in upcoming interactions. So to close, we are incredibly excited about the future of Novartis. We are focusing Novartis as a medicines company powered by data and digital. We are entering in next growth phase with the full pipeline to sustain growth into the future and we are transforming our productivity culture and reputation and we look forward to continuing to demonstrate to you the performance of the Company in the quarters to come. So with that, I will hand it back to Joe for the Q&A.

Thanks Vas. Okay, we are ready for any questions that you have.

Thank you. [Operator Instructions]. The first question comes from the line of Vincent Meunier from Morgan Stanley. Please go ahead.

Hello, thank you for taking my questions. The first one is on corporate and get allocation. I mean you said earlier today that the stake in consumer is attractive. So how should we read this? Does it mean that it has reached the right valuation point, or does it mean you still see upside in terms of generation of synergies? And I mean to put it more simple, what will the rationale for keeping a stake in consumer, given the clear picture you just described dominated by transformative innovation in data driven medicine et cetera. Second question is on Innovative Medicine. Could you make comments on your ability to sustain your operating margins? And even maybe improve the margins further going through the wave of patent expires in the coupe of years? And lastly on Sandoz, the pricing pressure and the commoditization of the U.S. generates has worsened. Despite the improvement of core margins, so what should we expect now any stabilization or further improvement for the top-line? And to which extent can you continue to maintain the profitability at this level? Thank you.

Thanks for the question Vincent. So on capital allocation and the GSK stake. The GSK stake is the financial stake for us where we put these two businesses together with an expectation we would drive synergies and we have a clear strategic plan we have agreed on with the leadership of consumer group at GSK. Now what we see going forward there is an opportunity to fully realize the value of that stake as the business plan is executed, so we are continuing to monitor that, but we want to of course think about our timing of when we might exit that stake based on a value creating situation and we think that’s not the [indiscernible] so it would be some more time before we think our value is fully realized.

Hello Vincent, so on the innovative medicines margin, we absolutely think its sustainable and the improvement also are sustainable, you saw on the slide from us, that we actually expect over next years to grow the industry, to improve the industry benchmark and I think we have several levers actually Vas laid them also, one of them is of course over next couple of years less generic exposure, then to growth drivers that Paul with Cosentyx, Entresto laid out and the whole oncology portfolio outside of [indiscernible] and then of course all other productivity initiatives we have driven and which we continue to drive, you know the majority of the technical operations savings up to date is not yet achieved, so on a very good way, we actually slightly ahead on that program but still a lot to come, so I believe both on the top-line, on the productivity programs we have a lot of margins improvement potential for the future.

I believe it’s a question on Sandoz, so there is a few points that’s what I’m going to through them. We anticipate in 2018, the pricing pressure in the U.S. market to continue and beyond that we start to see that our portfolio mix starts to play a role as we move the portfolio far more towards the Biosimilars which we have coming through in the differentiator especially IT products. Obviously we filed a number of Biosimilars in the U.S and we will start to see those coming through, it’s more of a question of timing. Going on to core margin, I mean to talk about gross margin, you have seen gross margin improve throughout the quarter this year and that comes down to the strategy we have been executing around geographical focus and portfolio product mix, and we will be focusing on the geographies which we think will drive long-term profitable growth and making sure that our portfolio mix can also do that. And that’s why that has continued to improve and we are continue to executing that strategy and obviously with the Biosimilars coming through we are confident that that can happen. So I think hopefully that answer your question. I think the one of them that was the top-line growth, obviously we forecasted a flat to slight decline and that’s taken into account the fact that we got a good businesses - that ex-U.S. is growing in 2017 and we continue that growth in 2018. But the pricing pressure in the U.S. is something that’s holding back that growth and although we have the Biosimilars coming through which is a very exciting portfolio both in Europe and the U.S. it’s really the timing of that and the impact that can have on the top-line for 2018. So hopefully that answers your question.

Okay next question please.

The next question is from the line of Jeff Holford, calling from Jefferies. Please go ahead.

Hi. Thanks very much everyone for taking my questions. So just I wonder you can elaborate a little more on when Novartis has an edge on data and digital, are these skills and capabilities internal or external and how and when we will see this manifest in terms of R&D, productivity and margin. It is true machine learning to discover drugs and targets, use of block chain to increase clinical trial efficiency or are those things still avail. And second just on Sandoz and the generics business. I wonder if you can give us a bit more color on your thoughts on the future of that business. And if you could potentially give us a score zero to 10 that likely to ever separating that, that would be interesting I think. And then just last before, on Entresto and Cosentyx. When do you think we are going to reach the point of true stabilization both on net pricing particularly in the U.S. for both products now to access both seems to have improved and pretty good. Thank you.

Thanks Jeff. So on data and digital, as Joe previously announced, we have now a global head of digital medicine that is reporting to the CEO, who will reporting to me, Bertrand Bodson and he comes from, actually the tech sectors, he has worked in Amazon, he has worked in retail, he brings a very different mindset to thinking about technology, and the technology can impact the business like ours. I would say there is three levels of how we are thinking about embedding data and digital. So first is automation and how we can bring automation into all elements of the business to drive productivity. And there we are really making concrete progress. Whether that’s automating our safety case processing, automating our data management, automating our approach to supply chain, automating many of our FRA and other elements within our financial work. This automation should overtime deliver real productivity gains in the Company. The second is how can we use this technology to help us make better decisions and there as well, we've rolled out a couple of platforms. One within Global Drug Development to help us to choose clinical trial sites, to optimize our patient enrollment patterns and to figure out when we need to intervene on studies. We've also got a as you saw on the slide, a digital Core tech that - which is looking to help us better tie a target to - or try and identify the right target and identify the right molecule using these kinds of technologies and maybe not some of the older technologies we have historically used. The biggest opportunity where we are still in the early stage is to use deep learning and artificial intelligence to identify completely new indications, completely new medicines. And there, we are investing we have a series of partnerships with external companies, we have partnerships as well with the number of universities. And that's an area of investment, in the longer term, if we can use the power of data to find new drug that are more high efficacy, find patient population that are going to respond better that's going to drive tremendous value for the Company and value to society. So I would say we are in the early days, but we've made substantial progress. And stay tuned for us to make more concrete progress and give you real concrete outcomes. Now with respect to Sandoz. Sandoz is a $10 billion global business that is attractive that has many different good highly performing elements. So first, I think in Biosimilars we are leader, we have double-digit Biosimilars growth with over $1 billion in sales, a broad portfolio, more and more launch is coming. So quite pleased with how we are progressing in Biosimilars. And then similarly when you look at our hard to make generics business, our work in injectable, inhalable et cetera, I think this is also a very strong performance that we've seen around the world. Also when you look at Retail Generics outside of the United States. Depending on the geography, but overall, we have had great performance over the recent years in our retail generics business. And that's ties in as well to the fact that we have a big tail of established medicines as well in any as we do like any pharmaceutical company both in pharmaceutical and oncology. So there is a clear fit and synergy there. I mean right now our energy is focused primarily of looking at the U.S. oral solids business where it is a discrete business, it's a unique situation. There are significant pricing declines. At least in the medium term, we don't see a shift to that situation. So we are assessing how best to optimize that given that dynamic.

And Paul in pricing.

Hey Jeff thanks for the question. I answer it maybe relating to the U.S. end market. I mentioned earlier that Entresto will take the benefit of some small adjustments, just to remove a few more PAs, whilst we think the national picture is in good shape, just one or two plans that we want to just make sure that we give the patient a best shot in getting the medicine. As we feel good about that also Cosentyx and also the 2018 is quite an important year between the two new entrants already here and one more to come. We felt it was important to be thoughtful not rash, but to make sure that we had a strong position for 2018. The market will settle down up to 2018, we hope certain in terms of share and then we will get to decide how quickly price settles down to. So I think Entresto, I think some stability now really going forward, I think Cosentyx probably another year before we really see it settle, but we are pleased with our position.

Next question please.

Thank you very much.

Thank you. The next question is from the line of Tim Anderson, calling from Bernstein. Please go ahead.

Thank you, high level question for Vas. So as a new CEO I’m sure you are focused on making sure that nothing really goes wrong, but when you look ahead in 2018, can you just identify for us what you think could be the couple of biggest challenges that maybe make you worried, is it something like the Cosentyx trajectory, is it making progress on certain pipeline products, what would be the two to three things that are the greatest risk in your opinion in 2018? And second question goes back to Sandoz, you had mentioned Biosimilars an important driver today, year-on-year growth I think quarterly sales were about 300 million, but when are we going to really see that start to blossom in the numbers with Sandoz, is that the sort of the thing that we will see sharp acceleration in 2019, is that more likely 2020 and is there any way for you to kin of just put the stake in the San and quantify how many billings that new revenues this could bring into the Sandoz PNL over the course of let’s say five years and we are talking a couple billion are we talking five billion, anything like that?

Okay, great thanks Tim. In terms of what I would say the big risks are for 2018, I had outlined three that are top of mind for me. One we have a couple of binary events within our Sandoz portfolio that we need to go our way, and we are going to be watching them carefully, one is the timing of Copaxone 40 and then the other is the timing of the Advair generics approval and I think these are things were difficult to predict, we have done all of the right things, I’m confident that our team is approaching this in the best possible way, but these are just items that are difficult to predict and has some volatility in the system. The second is going to be returning to Kisqali, we need Kisqali to continue to perform towards where we have hoped. I think the combination of the MONALEESA-3 the MONALEESA-7 data as well as the fact that we are not as far behind Pfizer in Europe, should enable us to get pickup on Kisqali, but that’s something we are watching closely. I hope that in totality when you look at Rydapt, Kisqali and Kymriah that those can really enable our oncology division to drive growth, the growth that we all hope for and expect from a business like that. So I think those would be the big two on the top-line. I think on the pipeline and the key is for us to deliver on RTH and BAF in terms of filling timelines so these are important medicine, we are on-track, we feel good about where we are but these are the two I think we are going to we going to have to deliver on. Now in terms of Sandoz, to give my perspective on Biosimilars. We've invested and built a broad portfolio. I think in Europe it's really a tail of two worlds. In Europe, we are seeing very strong uptick, we are seeing an organization that's able to launch Biosimilars with great success across multiple geographies. We are going to be launching more over the course of this year as Richard can highlight. And then in the U.S., we have a dynamic where we know eventually there is going to be a significant uptick for these medicines. It's a healthcare system that disparately need Biosimilars to be successful, to create fiscal space for new medicines, payors, the FDA, HSS are all on the side of Biosimilars. We know we do have to overcome first these complexity of the patent hurdles in the U.S. and we have to overcome the complexity of the payor dynamic in the U.S. but we are fully aware of that. We are confident we can do it. I think it's not a matter of if, it's a matter of when? And then we would continue to expect Biosimilars to be a multi-billion business for us. Richard, any other additional thoughts?

I think you have summed it out really well Vas. I think the way I look at it is similarly say, it's not an if but it’s a when. And if you look at the pipeline that we filed [indiscernible] they progressed. And that's all coming in the not too distinct future both the Europe and U.S. which is the largest market. But I think we set ourselves really well. And we've showed we can execute despite some of the challenging unknown environments, we can pivot well. So I think we are set for the medium term. It's a timing issue in the U.S. that we got to manage carefully.

Next question please?

The next question is from the line of Richard Vosser calling from JPMorgan. Please go ahead.

Hi, Richard Vosser from JPMorgan. Thanks for taking my questions. Just couple of questions on Sandoz. So some change you have taken into 2018 on generics Advair and Glatopa. What contribution you have in the guidance for Sandoz? Then just going back to the Biocon deal, Could you go into a bit more detail around the rationale for that deal and that's driven by gaining new products. I would have thought commercially Novartis would had more presence than Biocon. So I know you mentioned commercial, but that seem to lesser effect. I'm just wondering whether it signifies the thought that the opportunity in Biosimilars might be less attractive perhaps there is more competition. Secondly on Alcon. Could you just talk about the inventory sale where you had benefitting the last few quarters? Should we think about this reversing or is this an ongoing sale for the new material IOLs. And then just finally on PARAGON. You sounded quite bullish on the PARAGON trial. So just some thoughts on what is behind that? Do you have increased confidence in the interim readout or in the trial overall? Thanks very much.

Richard?

Thanks for the question Richard. So on assumptions on the Advair 40 milligram Copaxone. So the assumption for Copaxone 40 milligrams is that we aligned with [indiscernible] on this. So we will launch in the second half of the year, so that a time that we have around that, obviously we are working closely with the FDA and our manufacturing partner Pfizer to make that happen. On Advair, we are forecasting that we will launch that year into a competitive market. So that's the second assumption you asked for. On the Biocon deal and the rationale behind that, to build on more as Vas said in his presentation. We are currently the number one Biosimilars company in the world. We have stayed the number one Biosimilars company in the world. We believe having a broad and significant portfolio is important to do that and as much as we have the largest portfolio now and we currently are developing products to increase that, we also see the rationale and the benefit of finding with a company like us and to make sure we have a more extensive portfolio. I think that’s the rationale behind the Biocon deal.

So just the inventory position, with respect to what Harry said earlier on, is now 1% of net sales in Q4, so that was a underlying 5%. As we go forward it’s tough to predict the different shifts et cetera, so one thing can offset the other. So, I won’t predict things moving forward, but I will say as what I say in the last call, which was the most of the inventory adjustments took place in 2016 relative to our surgical business in the Asia market. Again, there is lot of offsets going back and forth.

And then on Entresto, the things we have always highlighted about the PARAGON study is it’s our unique end point that we have taken repeat hospitalization, we have really learned from all of the past failed trials within preserved ejection heart failure. Now the interim readout in 2018 is just about its an interim readout, I think the reduced ejection fraction study was a very unique situation where we had an astonishing P value which enabled the study to be stopped earlier. I think in this case, because it’s going to be likely an endpoint driven less by death and more by hospitalization, repeat hospitalizations we are going to need all of the end points in order to demonstrate efficiency, so that’s why I think the interim readout will be useful, but we really would still guide to a mid 2019 firm readout on the study and in terms of the opportunity.

So Richard as Vas has outlined was there is something specific that’s getting us more excited or less, we will just go through the normal results. The only thing I would add is, in terms of executing with that indication, I think that’s where much more confident we have been previously. You have to remember by the middle of 20 or early 20, when we would be campaigning we are on working knowledge of cardiology community, the patient population, things that are really an absolutely critically high level. So we think we can do more with it when we get it than we thought previously, and I think that’s why we are excited about it and after all, there is no medical treatment and we are the only real credible alternative in this space.

Next question please.

The next question is from the line of Andrew Baum, calling from Citi. Please go ahead.

Good morning, three questions please. First, I know you have an SGLT-1-2 inhibitor in Phase II, a 1,000 patient program, should fairly substantial. Could you just help us to characterize the profile of this molecule versus the existing SGLT-1-2 inhibitors, both in terms of weight loss, nausea and I’m assuming you would be able to do start as earlier as beginning in that year. Then finally, is there any risk to your Entresto outlook from the established SLGT-2 inhibitors, given the anticipated data? Second, could you comment at all, on whether you have seen any [indiscernible] responses with your sting agonist in combination with your PT-1 you have been dosing it for a while now in combination. And then finally for [indiscernible] and I may have missed this which I apologize. [indiscernible] as CEO, who takes the head of development slot? Thank you.

On the SGLT-1-2, so this is a unique drug that target equally SGLT-1 and 2. The SGLT-1 is I expressed on the gut where the SGLT-2 expressed in the kidney both transporters are involved with glucose transport into the intercellular space. So what we saw in a Phase II study, Phase IIa study with this medicine is a significant weight loss over a relatively short period of time of 12 weeks. So we saw a extrapolated value that would indicate we could get to 15% to 20% weight loss for out at one year. So what we've done as we've enrolled a Phase IIb study which is one of our fastest enrolling studies so that I can recall. That's now fully enrolled and we are now waiting for the Phase IIb results. And we should have that results over the course of this year. And then if it was positive, we would then look to move it forward in the Phase III trial that could start at the end of this year or early next year. Overall the side effect profile is good, and one of the things we are looking at is to mitigate any of the mild diarrhea with split dosing in that Phase IIb study. Now with respect to the sting agonist plus PDR001 and the [indiscernible] effect. I don't believe we've publicly disclosed anything further. I think our partner Aduro Biotech will plan to disclose more about the sting molecules performance soon. So I would prefer not to comment on that at this time. And in terms of VDV, we've named a interim head administrator, Rob Kowalski. He's a Pharm D, he's our Global Head of Regulatory Affairs. He's been on global head of regulatory affairs now for over six years, one of the most well respected people in the space. He knows all of the key regulators, he knows all of our key programs. So he will be continuing to guide this shift as we get, as we complete search for our successor.

Thanks Paul. Risk for Entresto?

So my understanding SGLT2 studies are on top of standard of care in the heart failure. So we wouldn't expect anything other than that.

Next question please.

The next question is from the line of Graham Parry calling in from Bank of America. Please go ahead.

Great, thanks for taking my questions. So and Vas going back to slide 30 and 31. I wondered if you could help to quantify the sales upside that you are expecting by 2022. And just confirm the relative proportions and I’m afraid [indiscernible] proportionally expecting about half of your incremental growth to come from Cosentyx, Entresto and you launched about a third from oncology. But could you just confirm that really is that representative? And secondly on pharma margins. When you are talking about industry margins in the mid-30s. is that a target or an ambition? And what absolute operating cost progression that you are expecting to see to get of outsourcing levels? So are you thinking flat, are you thinking inflationary growth and then the rest coming from top-line leverage? And do you expect to grow margins each year through Gilenya and Afinitor patent expiries in the pharma business? And then thirdly, could you help us understand how to read the lack of renewal of the $5 billion buyback this year in terms of your appetite for M&A? Thank you.

Thanks, Graham. So we've figured everyone would be taking out their rulers on slide 30. But I think it would be, it's not our intension to provide specific guidance when you look across those next five years. It only indicate we believe we can deliver solid growth over that period of time. And we will of course to continue to keep you updated. I would say proportionately, we do believe the key growth drivers will be Cosentyx and Entresto and the launches as the number one growth driver in the Company followed by the growth of existing Onco and recently launched portfolio. So I think the relative contributions are accurately depicted because these are based on our own current forecasted the graph is based on our own forecast of our outlook. Now in terms of the margin, I will take a stab at it and then Harry can add. When we look at this mid-30s, I mean this for us is a goal to get to the mid-30s and we believe we can deliver a margin improvement between now in 2020 and that’s what we previously stated and we continue to stick to that aspiration to deliver consistent margin improvements now and 2020. Now the way we do that is impart we get through some of the pattern expertise particularly Glivec, we have strong growth in terms of our key growth drivers which now are getting to be accretive as Paul mentioned, as well as continuing to drive strong productivity measures and resource allocations, as Paul outlined. Harry?

I think it will be also a combination of very accretive top-line growth, as you know many of our growth drivers are our own products, or fully acquired, so there is no royalty product are very limited. While the generic erosion for some Gilenya has a royalty on it, so we are also from a gross margin standpoint thinks some good opportunity and overall a combination of safe uptick and good cost management and all the productivity initiatives that we have setup for the Company. So I think therefore we are well established for sales growth for the five years as well as margin growth in the year. As you know 2020 from the sales growth standpoint, will be a little bit [indiscernible] with Gilenya U.S but we believe with our growth drivers we will also get through that. On the buyback, so we have completed our up to five billion share buyback program in 2017. Under that program we bought back 4.5 billion, we did buy another 700 million worth of shares back from employee participation programs as we have an ongoing commitment to always avoid any dilution from employee participation programs and then - AAA - bolt-on acquisition to be finance, we simply adjust our capital allocation priorities and we don’t finished a five billion so to say, but we stop at 4.5 billion in 2017.

And Whilst I think Graham’s question is also about your appetite on M&A, does this signal a higher appetite for M&A?

We continue to have the focus on bolt-on acquisitions like AAA that build into our core therapeutic areas and then bringing new capabilities into the company, so we are actively and continually looking at those kinds of opportunities. I think as you all know evaluations and this sector continue to be quite high as we rolling for two things, where we are clear we can create value for the company and our shareholders, but none the less that is the focus.

Next question please.

The next question is from the line of Florent Cespedes from Société Générale. Please go ahead.

Good afternoon, gentlemen. Thank you very much for taking my questions. Three quick ones. First, for Paul on Cosentyx. You explain that the products enjoys a strong potential beyond psoriasis, but could you give us an idea of the current sales breakdown by indications? And the second question on immune-oncology, could you have some color on when we will has more visibility on the program and in other words when we should as meaningful clinical results also early stage could be good to have such a date? The last question on Sandoz, you explained that you want to focus your company on a more differentiated portfolio. But could you share with us what is the proportion of your business which is coming from a difficult to make products value added drug beyond the biopharma sales that you discussed? Thank you.

Florent thanks for your question. We don't disclose the sales by indication geography. But I can tell you we are growing in all indications in all geographies. I think one point that you know specifically from the publicly available datasets I mentioned it earlier is our performance in bundle our property PSA and AS in the U.S. And it does get a little bit of level, but to be a market leader on new patients in the U.S. against Humira and Enbrel. That gives you some indication about our ability to execute particularly in the indications outside of psoriasis. And we do extraordinarily well in psoriasis too.

Yes in terms of the IO results, we will expect to release those results in the upcoming medical congresses. I mean we would target ideally ASCO but it might be at other congresses later in the year. So you will be hearing the results from the three combination studies in that conference.

And Richard?

So to give you an idea of the makeup of the business. I think all [indiscernible] sensor of the business occupied. So we've got so as Vas pointed out, we have which is a Biosimilars business which is over $1 billion. Now, we have a significant OCC business, and we have a branded generics business which is a business which we promote. Which in itself it and it differentiated a partner from how we create brands. And those are significant aspects of our business. I think when you look at the U.S., our exposures to more of the commoditized business I think Vas and Joe have already highlighted is around $1.5 billion where we seeing commoditized pricing pressure. But as I said earlier, we are aiming to move that business with the margins of our Biosimilars significantly away from that portfolio make up as well as we will be introducing products that could go through 505 (b) (2) pathway, which by definition will also have a level of differentiation.

Next question please.

The next question is from the line of Steve Skala from Cowen. Please go ahead.

Many thanks. I have a few questions. First on generic Advair, if it were approved tomorrow, would you be ready to launch in the U.S.? what proportion of demand could you satisfy and you mentioned it would be a competitive market. Are you implying you expect other generics, so that's the first question? Second, Vas, you did mentioned the [indiscernible] stake at least I didn't hear. You mentioned any updated thoughts. And then lastly on Entresto, Harry you mentioned Q4 adjustments. Would you please quantify, thank you.

Okay. So we don’t actually give guidance on one way of the launch and some assumptions around possibilities. What we anticipate is that we are launching this year into a competitive environment. We anticipate other people will come to the market with Advair just based on other communications from other companies with that product. And that's how we've assessed and model ourselves for 2018.

On the road there is no change. I mean it continues to be something we view as a strategic space but we continue to evaluate on an ongoing basis. And as soon as there is a change in our perspective, we will first let everybody know.

So Steve, actually I didn't mention anything on Entresto. But just to also make it clear there were no adjustments. So there is just pure demand. Also no stock and trade movements or anything.

Okay, next question please?

The next question is from the line of Matt Weston calling from Credit Suisse. Please go ahead.

Thank you very much. Two questions if I can. The first on Cosentyx, you highlighted how important access on growth this year. The one that we had noticed is one changed a number of healthcare plans which is kicked in that manufacturers co-pay assistants will no longer be allowed to contribute to a patient deductible, and I guess that question is how you expect that to impact growth, not only of Cosentyx but in the whole of specialty technically going forward given how significant that is to the pharma industry. And then the second question, on Entresto Paul, I know that in 4Q the release highlights that you launched in China, in terms of the underlying and in terms of the growth we saw in revenue in 4Q can you walk us through how much of that was underlying patient demands versus [China filling] (Ph)? Thank you.

Thank you Matthew. To look at Cosentyx and the first one is, yes I do you think access is important for 2018, like is said this next 12 months has all the major players in the market. So we want to come out this year in a strong position, in terms of preferred by dermatologist, rheumatologist, with a great access. So we have made great progress there. I think you are referring to the cumulata that is a sort of emerging trend in the United States, just the first initial observation on that, the affordability and co-pay, we put into health patients in the United States, is for patients, the biggest loser in any change across this sort of pharmacy benefit design would be the patients in this situation is causing a lot of confusion. It’s an industry wide phenomenon and it would affect everybody give or take where their medicine is in the benefit design more or less and we have picked it up, we understand what the implications are, we currently consider all scenarios, we are comfortable with where we set, the industry has picked it up and really the biggest loser in the short-term is the patient and that’s not a good situation for anybody.

Entresto China.

Yes, Entresto China, so we did get approved in China, whilst we are not reimbursed the team has done rather excellent job, we have 2,000 patients approximately that have been initiated drug in the few months since launch and that is meant that we have about $4 million worth of a demand pulls inventory. There are no non demand generated, stocking folks and in fact if you look at December outturn from an industry perspective is consistent with all previous months and the December before that, so we feel very good about the underlying demand of interest there.

Next question please.

Next is Michael Leuchten from UBS. Please go ahead.

Thank you for taking my question. If I could ask about the value of the volume both for U.S Entresto and U.S. Cosentyx. I’m looking at the quarterly sequential development here, where we have seem to have seen a soft spot in Q2, Q3 for Entresto and I know there is strong uptick of to the value to volume in Q4, where as for Cosentyx we sort of seen a slide throughout the year. So could you comment on channel mix, could you comment on rebate adjustments, could you try to explain what fluctuations in those two products, what’s driving that? Thank you.

So I mentioned in presentation that what we have learned in the last year to two years is where the demand to bring in - the appetite to bring in chronic patients to consider themselves well controlled but, we see during the summer, just a staffing and cardiology staffing point, but bringing them and reviewing in tried some patients slows down on the chronic med, probably just thought to be but isn’t well controlled. So that sort of slowdown as we came out of Q3. It's a phenomena you see with new entrance with kind a uses particularly in cardiovascular. The step up in Q3 is really just about our ability to execute and all the times going to no least productivity from the sales force. And Cosentyx is interesting again, remember we said at the beginning of the last year that we do some thoughtful rebating. We have to grow volume throughout remainder of the year, because that's what rebating make sense because you have got the access. And we've done that also this year that's what we intend to do that this year. [indiscernible] free drug programs got rolled in the second part of the year. And the patients that were on that they were supporting then became part of the overall which of course has a small impact on the value of TRx. But we are really pleased and the evolution the value is exactly as we predicted.

Next question please?

Next question is from the line of Kerry Holford calling from Exane. Please go ahead.

Thank you. Just a couple of questions remaining please. So the questions so Harry just looking at the disposal gains and the amount of sales that were booked in Q4. That sale within core earnings. I wondered if you could quantify those in fact these amounts from GSK. And the [indiscernible] proposal gains, please. And then quickly on Glivec and Cigna. I think Glivec was little stronger and Cigna was little weaker than we had anticipated in Q4. Just little to understand whether there were any unusual items within the mix or any rebate that are sort of across PLS. Thank you.

Yes thank you Kerry for the questions. So first, the GSK milestone is a $450 million milestone. And any gain or loss above $25 million of onetime was core adjusted. So that was one of the reasons why operating gross earning has a co-op inc. The gain that we'd recorded on that milestone was net of what we had already in the books as the contingent receivable so it was in the $340 million range, but again core adjustment. Adjusted out. And the disposal gains, overall as I mentioned, some that have small tail and strategic non-strategic assets. So as we have some time financial impairments or legal settlements on the negative side or the one we have small positive, we don't co-adjust do not make it complicated. So it's about $25 million we do core adjust. And when you compare year-over-year it's a $25 million basic gain which is five points of the core operating and growth of Sandoz. When you look at the year, by the way, I also ask to look at the core operating income for the other income expense for the company is no change on the full-year basis and also quarter four over quarter four there is nothing. We have some small divestment gains, which is in core adjusting at sense more negative which we didn't co-adjust on a corporate level.

So on Cigna, we continue to see some good growth with the high-single digit growth. We launched the - we have basically - book in Europe and the U.S. with the TSR limitation. And we don't see a change in the dynamics between Cigna and Glivec.

Next question please?

The next question is from the line of Seamus Fernandez from Leerink. Please go ahead

Hi thanks very much for the question. So, really the question is around immune-oncology and some of the progress that we are seeing now as well as the research portfolio advances in lung cancer. Vas, can you just give us a general sense of what you have learned about the mechanism of action for ACZ that has the company moving forward so aggressively with a costly program there, I have to assume that you are learning quite a bit about the mechanism of action to drive that forward, so just love to know, when we might learn more about that? Second, there are three programs that are listed on one of your slide that’s advancing into different settings from Phase I to Phase II LAG, with triple negative breast cancer, the MET program with the PD-1 combination in lung and then your identity in receptor product as well. I guess what I’m trying to understand is when I look at value creation at least investor related value creation this probably a limited number of assets that have gained significantly, one, and particular being a pegylated IO-2 that has gained a lot of investor attention. Your company knows IL-2 very well, you knows IOL. Can you just help us understand how we should think about perhaps those data relative to the kind of metrics that are bringing you forward into Phase II? Thanks so much.

So first is general perspectives on IO, I think we take a step back, you see that the only agents we have seen with significant efficiency in getting towards patients are the CAR therapies anti-PD-1 and anti-PCO. Across the broad spectrum of other agents, a lot of activity historic levels of activity over the 1,000 trials but in terms of actual hard data that suggest that there is going to be a significant breakthrough, it’s still limited and so I think that is the overall context that we had to take when looking at IO. So we hold a very high bar, when we look at all these programs, we don’t feel like we want to rush in and just chase small signals, we are really looking for something compelling before we take into later stages of development. So if you take these, the questions in turn, with [indiscernible] what we have been able to do in addition to looking at preclinical work that is quite extensive and this part of the reason both FDA and EMA feel comfortable with us going forward. We have been saturating tumor DNA work on all on the cancer - the patients who had cancer and of course that the cancer study, so understand better their profile, what with their potential stage disease who does the drug acts on these patients. So it’s based on that understanding we are moving forward in the adjuvant study and in the second line where we feel clear on our path forward, in the first line we are going to have to carefully think about what is the best study design in light of the Keytruda recent data and that something we are reflecting, so I think we will keep you updated as we think through the first line file design. Now when you think about second generation IO program that - you mentioned we have seen evidence, early evidence efficacy in the clinic which is why we take those into later phases. When we look at data, such as the pegylated IL-2 as well as the IDO which is of course out there, we are very interested to see again with control on data when there is a PD-1 mono arm, is there an effect, - what is the incremental effect of the added agent, and that’s something we have to just all carefully look at. The agents we have taken forward here we have tried to be rigorous we are trying to look at is that PD-1 alone or is this really a combination of that’s. of course we can answer definitively from small studies but that’s on the back of my mind as I look at all these programs, given the variability in the patient profile, variability in the biomarker profile without good control arms it's always difficult to really ascertain what is the additive benefit of the new medicine.

I think we have time for one final question.

The last question is from the line of Marietta Miemietz from Primavenue. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. I have one clinical question on your eGFR blocker Nazartinib. Can you share the design of the Phase III trial with us that will be the basis of your 2020 submission in lung cancer. And maybe speak about positioning more broadly, how you actually been able to find any Phase III trials on clinical trials. And it looks like you are still playing around with also this different combos. So I wasn't quite sure what you make up your pipeline chart there? And then a commercial question on Kymriah. In the press release, you spoke about the progress you are making with the treatment centers. Can you just give us a little more color on the characteristics of the centers that do and don't get certified i.e., what are the triggers are getting certified or what are the reasons for holding off on certification. And is there actually much overlap between centers that get certified for Kymriah and those that get certified for [indiscernible] on the grounds that once you have the expertise and infrastructure in place, you may as well go for both or is it just more economic for the centers to just go for one and operate on the assumption that sooner or later. Both drugs will be licensed for similar indications. And then finally, I just wanted to clarify with Harry on core tax rate. The one off effects that you mentioned in your press release that effect at the reported tax rate. Have they also been included in your core tax rate. And if you what would the core tax rate have been in 2017 without these? And that brings me on to the core tax rate for 2018. I'm actually very surprised to hear it may go up. My math the U.S. tax reform could give you a boost of five percentage points or so at the group level. And I appreciate some of that may not materialize and you have incomplete visibility. But your guidance really suggests the massive increase in the underlying tax rate even though it doesn't seem that the shift of your product mix to high tax jurisdictions is more pronounced this year than in the past. So you just being conservative and don't want to guide for let's say a low teens rate until that settled from U.S. reform. Or is your base case really that mixed effects largely wiped out the benefits from U.S. reform. And if so, should we expect your tax rate to keep on creeping up over the coming years and ultimately moving to let's say the 20s. Thank you very much.

Yes let's start with tax. Because that's a big question. Go ahead.

Yes. Now thank you very much Marietta. So first of all we have one adjustment I think you refer maybe to that because of U.S. tax rate where we have to assess our deferred tax assets and liabilities that's a $61 million tax expense. Very much lower than some of the other U.S. based companies, who have billions, because have a very different structure IP and headquarter in Switzerland. Very limited not really earnings not repatriated. So all of that very limited and that is not in the core tax rate, because of the one off. And in terms of our - we don't want to quantify what we think as the range of potential U.S. tax benefit. It's certainly not up to the number, you mentioned it's a smaller benefit that we see. But as I mentioned, many details have to be first clarified with the IRS before we can be hear more specific. And that's why, we guide to either it's in line with what we have or 16%, over the years, I see a range all between 15% and 17%. And the tax it’s very hard to predict, but I don’t see that is what go outside of that range.

Bruno on Kymriah.

So 33 centers have been range certified and about 25 of them are fully operational, fully operational means that there is a contractor in place and we are very pleased with the launch half time as well as even the small population in the - is probably 30 centers and we are therefore there about today. In terms of certification, is very product specific and therefore we now going for certification of the size to offer that’s while the competition has to do exactly the same. Now I can’t comment on what the centers each and every centers will do in terms of certifying different products of -.

And overlap, we are seeing a high level of overlap.

Not really enough.

And then finally on the eGFR, we have a third generation eGFR I think as many of you know the eGFR landscape has been shifting now given some of the recent challenges for some of the players in this space, our core goal in pursuing a third generation eGFR is either in combination with INC280, our cMET inhibitor which is one of the primary resistance mechanisms to third generation TKI. So the eGFR study we will get posted when and do course but I think our overall strategy is to assess till we get differential efficiency with the combination with INC280.

Thank you very much.

Thank you all very much for joining the call, a big thank you to Joe, this is Joe’s last conference call, we are grateful for all that he has done for the company and look wish him well in all his future endeavors. I look forward to speaking you at our next quarterly call and continuing the dialogue on how we drive Novartis into the future. So thanks very much.

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