Good morning, good afternoon and welcome to the Novartis Q1 2019 Results Release Conference Call and Live Audio Webcast. Please note that during the presentation, all participants will be in a listen-only mode and that 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. Samir Shah, Global Head of Investor Relations. Please go ahead, sir.

Good afternoon and good morning everybody. Thank you for participating in the webcast today. Before we start, I just wanted to read you the Safe Harbor statement. 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. And just one other additional point for you for today, if I could please request that you limit yourself to two questions at any one time and if we have additional time at the end of the call, we could provide time for additional question or two at the end. And with that, I will hand across to Vas.

Thank you, Samir, and thanks everyone for joining today’s conference call. Here in the Basel, I have with me Shannon Klinger, our Legal Counsel; Susanne Schaffert, the CEO of Novartis Oncology; Paul Hudson, the CEO of Novartis Pharmaceuticals; John Tsai, our Head of Global Drug Development; and Harry Kirsch, our Chief Financial Officer. And as you saw with today’s announcement, Novartis is off to a strong start in 2019 if we move to Slide 4. We had strong operational performance with sales growing at 7%, core operating income growing at 18% and our core margin expanding by 2.6% allowing us to raise our core OpInc guidance and Harry will go through that in more detail in his presentation. We also achieved major innovation milestones in the quarter, including the approval of Mayzent in secondary progressive MS as well as the Zolgensma STR1VE interim analysis both of which I will go through in a bit more detail. And lastly and importantly, we continued our transformation to a focused medicines company powered by data science in advanced therapy platform. We completed [Technical Difficulty]. We have also announced we will complete our $5 billion share buyback over the course of 2019. And lastly, we have confirmed that we will continue a strong and growing dividend to be paid in 2019 – we paid in 2019 of CHF2.85 and that dividend trend will remain unchanged post the Alcon spin. Now, moving to Slide 5, we are starting to deliver operating [Technical Difficulty] in Innovative Medicines in line with what we have told you. We are committed to generating a margin in the mid-30% range by 2022 and this quarter we showed that we are on track to get there with a core margin of 33.3%. This margin expansion was driven primarily by [Technical Difficulty]…

Alright. Thank you, Vas. Good morning and good afternoon everyone. Please note that my comments reflect the results of continuing operations and growth rates in constant currencies, unless I note otherwise. To assist with your modeling, the 2018 and 2017 results from continuing operations are now available on our website. So Slide 22 shows the summary of our strong quarter one continuing operations performance, which excludes the Alcon business. Sales grew plus 7%, mainly driven by the continued excellent momentum from all of our key growth drivers, including Cosentyx, Entresto and Lutathera, as well as growth from Promacta, Kisqali, Kymriah and Taf/Mek. Also Lucentis, Xolair and Ilaris grew double digits, even established medicines, like Galvus, Diovan, Exforge contributed to growth. Overall, in quarter one we saw excellent execution by our pharma and oncology teams, driving significant sales growth of our large products and a vast majority of our 15 in-market blockbusters. Core operating income grew plus 18%. This was clearly driven by good sales momentum. In addition, we see our productivity programs kicking in, driving up gross margin and driving down total function cost as a percent of sales. As a result, sales growth and productivity programs more than offset increased investments, including pre-launch investments for Zolgensma. Operating income and net income grew 4% impacted by a net impairment charge and lower divestment gains this year versus prior year. Free cash flow was $1.9 billion, broadly in line with prior year. Please recall that quarter one 2018 had a onetime sales milestone receipt of $0.4 billion. On Slide 23, you see the resulting core margin expansion in quarter one of 260 basis points for both Innovative Medicines and continuing operations. Let me briefly comment on two of our major productivity programs, Novartis technical operations transformation and resulting manufacturing efficiencies as…

Thank you, Harry. So, appreciate the great interest in the company. We’ve had an outstanding, I think, start to the year. And we look forward to answering your questions. So, operator, we can open the line for questions.

[Operator Instructions] And your first question comes from the line of Graham Parry of Bank of America.

Right, thanks for taking my questions. So, I’ve got one on Gilenya and then one on Zolgensma. So firstly, on Gilenya, could you just remind us where you are in your arbitration negotiations with Mitsubishi in terms of Gilenya royalties? I see they stopped booking their royalties overnight pending the outcome of arbitration. So, can you confirm, are you continuing to book royalties in your numbers? And what assumption on royalty post the August composition of matter patent expiry is baked into your guidance currently? And then secondly on Zolgensma, could you give us an update on the label expectations beyond the START and STR1VE populations that you were alluding to on the fourth quarter call? And on the second death, your slide doesn’t mention the neurological complications that were referred to in the media statements. So, could you elaborate on these, why you think the investigator determined that respiratory infection could possibly be treatment related and the expected timing of autopsy results and DSMB final determination on whether this was a drug-related death or not? Thank you.

Great. So, I’ll actually start on the Zolgensma topic on the safety, and then I’ll hand it to the colleagues to take Gilenya and then also the Zolgensma labeling. So, this is a situation where we had a disseminated sepsis. And in sepsis, you typically have neurological complications. And so, the neurological complications, to our estimation, related to the sepsis. I think the only question here is the administration of an AAV therapy in the context of an infection lead to an exacerbation of the infection. In this case, I think we have advised all physicians going forward to ensure that there’s appropriate steroid administration and ensure that all the supportive care is given. But I think that, one, the read across to the platform technology is not, in our view, appropriate. I mean this is really about when you provide a therapy in the context of a very complex sepsis situation, you can exacerbate the overall care. And so that’s why the regulators were unconcerned. That’s why the DSMB was unconcerned. We’ll complete the autopsy results shortly and, of course, finalize the assessment. But I think the key thing to note is regulators, DSMB, clinical trials all on track, no change and no change for our expectations on timing of approval. Now with respect to Gilenya, Mitsubishi, I’ll give it to Paul. Paul?

Yes, thank you, Graham, for the question. So just to remind everybody that our full year core operating income guidance reflects the current contractual terms with Mitsubishi, so no additional change there.

And then John – or John or Paul in terms of the Zolgensma labeling?

Yes. In terms of Zolgensma labeling, Graham, as you know, we are studying this in a variety of SMA types, including type 1, 2 and 3 and we have four studies ongoing. What I would say is that the discussions with the FDA and other regulatory agencies are going well and we are continuing to advance as we have these conversations.

And we can provide of course further updates once we see the final labeling from the FDA. Thanks, Graham. So next question please. Okay, go ahead. Next question.

Okay. And your next question comes from the line of Andrew Baum of Citi. Please go ahead.

Thank you. Couple of questions. First for Vas, if I remember correctly, you gave upper end of a value-based reimbursement for Zolgensma at $5 million per patient. Does the data from the further follow-up of STR1VE still support that analysis? And then the second question again to Vas, perhaps you could talk us through how you see Novartis’ role as a cell therapy player. Arguably, the outlook is getting better from a U.S. perspective given the national coverage determination, greater tech related add-on payment, but your pipeline seems to still focus only and very much on CD19. Should we expect additional business development for novel antibody constructs expanding into PCR as some of your competitors have done or are you following a different strategy for cell therapy here? Thank you.

Thank you, Andrew. So first one on Zolgensma, I think it’s been well published through the various reports from ICER, out of $500,000 per quali cut-off, the medicine is cost effective in the range of $4 million to $5 million and at $150,000 quali cut-off, it’s cost effective at a range of $1.5 million. And so that’s the range that we are looking at. We don’t believe any of the clinical data that we saw in the STR1VE study changes our assessment. It’s completely consistent with the overall performance we’ve seen. And I think, as ICER noted in their report, they recommend we should price lower than $4 million to $5 million based on their final report. We take that as useful information. And of course, we’ll announce our final price in due course, but that hopefully gives you some of the boundaries. Now in terms of cell therapies, we believe, fundamentally, along with AAV9 gene therapy and radioligand therapy, having the capability to do ex vivo cell therapy is going to be critical for our long-term ability to generate new medicines and continue to be a leader as a focused medicines company. That’s why we started with CD19 CAR-T. Our initial focus in cancer will continue to be on B-cell therapies. You saw we did an investment in a company called Poseida Therapeutics for an additional BCMA option. We are continuing to build out our own portfolio internally of next generation as well as bispecific programs within the space of targeting B-cell cancers. So that’s one thrust. Alongside that, we continue to look at using ex vivo cell therapies in a range of other condition, whether it’s in next-generation technologies for hematology, looking at other therapeutic areas. And that’s part of the reason we built out the global manufacturing base that we have, with a manufacturing center now in the United States, 3 manufacturing centers in Europe, a manufacturing center in China and a manufacturing center in Japan as well as lentiviral production capability, both in-house and external, that we’re building. We believe then we would be the logical company to be able to scale ex vivo cell therapies across a range of indications. So we will continue to look externally, but we also, through both our internal pipeline, our alliance with Xencor, our alliance with CRISPR technologies – CRISPR companies, we are also working on our internal portfolio as well. Thank you, Andrew. Next question?

Thank you. And your next question comes from the line of Tim Anderson of the Wolfe Research. Please go ahead.

Thank you. Kind of a question across the pipeline, which is Slide 11, you described major launches planned through 2021 and you showed 13 different medicines. If we ignore the 3 already approved products, Cosentyx, Entresto and Mayzent, can you kind of pick out the top 3 that you think have the biggest sales potential, assuming that data comes out favorably? You have got products like Zolgensma, RTH, fevipiprant, SAG101 and others. You have a very full pipeline, but it would help narrow down the focus for investors of what could matter most. And then RTH258, a quick question, relative to last quarter’s update, it looks like the timeline for filing DME and RVO each got pushed out by 1 year and I am wondering what drove that?

So, in terms of the – thanks Tim for the questions. In terms of the three top, we are excited of course Tim by the whole range of products that we have. But I would say, of course, Zolgensma is absolutely critical and one we believe has significant potential across the range of SMA indications as a truly foundational therapy for SMA. Clearly, RTH258 is something where we believe we can build our next generation technology beyond Lucentis, also with the U.S. possibility to really drive significant potential in this space. And then I think the big upside wildcard we have is QAW039 where we could be the first oral medicine in a range, a large type population positioned before biologics in patients with severe asthma who if you look at the numbers patients who had already on triple inhale therapy but still not adequately controlled who are still not our biologic, I mean this is a very large patient population that we could be a major medicine if ultimately successful. Those are three, but again I think all of them are quite exciting. And then I would note as well we will continue to provide more transparency and meet the management and other settings on the next wave of innovation we have with over 25 potential blockbusters in late stage development. Now in terms of RTH258, John?

Yes. So for Brolucizumab, the way that we capture these on timelines often is year-by-year. So what you see perhaps is a shift from 2019 to 2020 per se, but it’s actually not a full year in terms delay often these are quarters. And in terms of the DMO study there were just some discussions with the regulatory agency for us to be able to begin recruitment of that trial, so that was a slight delay of about one quarter and also for the RBO study it was a similar situation for us. So really these are not slippage in terms of 1 year, but just a quarter in terms of logistics.

Thanks John. Thanks and next question.

Thank you. And your next question comes from the line of Matthew Weston of Credit Suisse. Please go ahead.

Thank you very much. Two SMA questions if I can please, we have already had a question about price and I fully understand that you are not going to comment, but one other thing that’s very important for our models is when the income is actually going to come in for each patient and I note with interest the comment that you had a high interest in innovative contracting methods on your Slide 17, so that’s I would be very interested if you could just set out in broad brush strokes what those innovative contracts could look like in terms of revenue recognition as a proportion of the total cost per patient in year one versus later subsequent payment. And then secondly, I also note in clinical timelines in the press release your oral splice inhibitor, LMI moved forward a couple of years in terms of filing to 2022, could you let us know what in terms of data has led you to bring that forward and such that you are now seeing in a much more reasonable timeframe? Thank you.

Great. Thank you, Matthew. So Paul, why don’t you start?

Yes. So look, we have done a lot of research about pricing and we have really been listening very actively. The vast majority just to be clear would prefer to pay upfront. It’s very much a budget allocation process and the phasing process. So and we will be prepared for that. But there are a group of payers that prefer to pay over time and spread the cost and we will allow that I think up to 5 years in terms of return, that’s from revenue recognition Harry?

Yes. So Matthew what we basically talked here about is the end of what is the pattern of the cash coming in, in case we would be collecting would be over a payment after 3, 4, 5 years. So the cash may be delayed. We could still choose about is there a financing company in between. We will see whatever is the MPV optimal way of doing that. But in terms of sales recognition, I would expect as IFRS asked for sales – revenue recognition, I’m virtually certain. And we would probably book the majority of the sales once the respective conditions are fulfilled. And then in case the performance condition were reached based on the clinical trials and then read about evidence, we may have a small rebate that we book as we recognize the sales. So sales, I would expect to come quite quickly with the patients. And then on the cash side depends upon what revenue model we implement here.

And then John, in terms of LMI.

In terms of LMI, as you know, Matthew, we believe that Zolgensma is the foundational therapy for patients with SMA. At the same time, given the severity of the disease, we also want to explore all opportunities for these babies to continue and improve. We currently have a dose-ranging study that’s ongoing for LMI and that’s continuing to move forward. Based on those results, I think we will advance in terms of how we would register this product moving forward and we will have further understanding as we get these results.

Thanks, John. Thanks for the questions, Matthew. Next question.

Thank you. And your next question comes from the line of Richard Parkes of Deutsche Bank. Please go ahead.

Hi, thank you very much for taking my questions. I’ve got a couple of product questions as well. Firstly, again, just on SMA, we’re obviously looking forward to the data and on SMA Type 2 patients. Obviously, there’s a large prevalent patient pool there. I’m just wondering how you think about penetrating that. I realize the AAV9 antibody exclusion is minimal for the infant population, but could help could you help us understand what proportion of Type 2, Type 3 patients might be eligible based on this and any other eligibility criteria and how much manufacturing capacity might be limiting to your ability to address that need? So that’s the first question. Second question is on siponimod. Given the subsequent approval of MAVENCLAD with a label encompassing active SPMS, I’m wondering how you feel this impacts the drug’s differentiation. And is, there any risks that other highly active MS drugs could get labeled up if they specifically call out activity in that patient population? Thanks very much.

Turning to Paul, both for you.

Yes. Thanks, Richard, for the questions. We’re looking forward to AAN. Just to remind everybody, there’s a lot of data that will be shared at AAN. There’s the more than the additional 12-month follow-up on START. But with the additional 3 months’ data on STR1VE, we’ll have first presentation. Some of the data on SPR1NT. And then of course, an early look at the strong data presentation of that. And I think that’s where you’re heading with the intrathecal formulation and the potential to go after, if you like, older patients. There’s just a couple of important things to realize. I think Vas made it upfront in this presentation about the neutralizing antibodies and the effect, whether a patient could be treated at all. We see the large majority of patients suitable for treatment. Some of it will be weight based and some of it will be approached either IV or IT. But we feel very confident that there is a large patient population that we will be eligible for. A lot will depend on the label and where we net out but feeling very good about that. And we’ll have an investor call on May 8. I think that was mentioned. As for siponimod, again, Vas mentioned upfront, we’re the only successfully studied medicine in secondary progressive MS, so that’s quite a big deal. And whilst others may claim an overall ability to be indicated for active SPMS, it really is about being studied for it having the opportunity to meet a couple of opinion leaders last week very fresh after launch, who threw that point back at me. They’re most interested in the drug with evidence in this patient population, not just getting the additional indication, but being proven in that patient population. I’d rather not comment on MAVENCLAD, but I think the label sort of will help you understand why we think siponimod is really the right option for the broader patient population.

Thanks, Paul. I think the other element to keep in mind is even with the presence of AAV antibodies, there has to be neutralizing against the AAV9 subtype to really preclude our ability to use the therapy. That’s the other thing to keep in mind as you look watch this space. Thanks Richard. Next question.

Thank you. And your next question comes from the line of Keyur Parekh of Goldman Sachs. Please go ahead.

Good afternoon. Two questions, please, one on SME and the second on margins. First on SMA. Vas, I know there have been a couple of questions asked about [Technical Difficulty]

Go ahead, Keyur. Why don’t you start again? You had a question on SMA?

Yes. And the second one, on margins, just on SMA, I know there have been a couple of questions asked about the kind of the breadth of the label. But can you share with us what ongoing data set the agency has had a preview to look at beyond Type 1? And how comfortable do you still feel about a broad label beyond Type 1? And secondly, on margins, very impressive kind of pharma margins this quarter. Can you tell us what you’re doing differently? And why this may not be sustainable as we think kind of beyond 2019?

Great. Thanks, Keyur. I think on SMA, as we noted earlier, we’re in discussions with the agency regarding the final labeling and prefer not to comment on the breadth of the label as we’re in the midst of those discussions. But I think, as you know, in the START study, we had remarkable results. And I think in the STR1VE study as well, again very strong results. And I think all of that is forming the basis of how well the FDA is ultimately looking at the therapy. In terms of the margins, I am very pleased with our performance and I think there is again two key drivers for this. One is the strong sales performance of our growth drivers Cosentyx, Entresto, now are fully invested in. And so the sales growth is falling to that – to the bottom line the strong cost discipline in innovative medicines that the gross margin is falling through to the bottom. We see that also in oncology where we see the upside performance in some of our key growth drivers again gross margin following through. But I think also what you are seeing now is our renewed commitment and very clear commitment to productivity. We have stated multiple times we are serious now as a company about productivity both in Novartis technical operations and Novartis business services. We had very strong COGS performance in Novartis technical operations. And we have really taken on an ambitious productivity program in that organization. And similarly in Novartis business services again we have brought I think an outstanding leadership team with executives from outside the pharmaceuticals industry who really know how to build a world class business service organization that would be competitive with business service organizations in any industry, that’s the benchmark. And we are starting to see that productivity now start to also flow through the P&L. Now, of course we aspire to continue the momentum, but as Harry said we need to of course be judicious when we think about some of the potential patent expiries and competition we face particularly in oncology with respect to Afinitor and Exjade. And I think we will see how it goes and of we want to of course outperform if we can, but we will continue the momentum from here. Any other questions? Okay, good, so we will move to the next question. Thank you.

Thank you. And your next question comes from the line of Richard Vosser of JPMorgan. Please go ahead.

Hi. Thanks for taking my questions. First question, just you mentioned on the established medicines business, Diovan and Exforge potentially having extra competitive, perhaps you could talk more broadly about the sustainability and price pressure potential that you might see in China, obviously volume potential going really well, but just thoughts on that sustainability a little bit more detail there would be great. And then second question just on the oral solids business within Sandoz, just to pin down give us a little bit of help with the continued business, when exactly we should think of that closing and when we should have that coming out of sales and profit for this year? Thanks very much.

Great. On China, Paul – established medicines dive in…?

Yes. So on the established medicines, we are really pleased with how it’s come together to be honest and we have been much more efficient about support of the medicines, digital other things, been a bit leaner to reinvest in growth drivers and that’s been very sensible. Price pressures have been not unexpected and again well managed and predicted, so reasonable. The real excitement just coming out of China and what we are doing and how we are putting the business together, Vas mentioned the potential for Entresto to be a significant medicine, already the best primary care launch of an oral medicine in the last two decades. We got Lucentis growing at a significant rate, got Cosentyx approval. We get reimbursed next year, Entresto reimburse later this. The investments over the last 2 years or 3 years are starting to pay back. And we shared at meet the management I think last year, the real one to watch for us in terms of the growing geography is going to be China and we are really pretty well set. Even if there is price pressure focus has been around volume and growing even in innovative medicines and we think we are set up very well to do that.

And just to build on Paul’s comments, in China broadly we see three key trends. The first key trend is there is the effort to tender the established medicines which in the case Diovan and Gleevec of course will be to additional pressures. But that’s going to free up $30 billion we estimate of money that can be reinvested in innovation. Combine that in a moment and time with the China FDA is becoming really world leading in terms of its policy is allowing international studies to be done in China directly, more rapidly approving medicines. And then a more regular reimbursement environment predictable reimbursement environment, our strategy in China is to pivot new launches. And Paul and Susanne’s organizations are very much focused on driving new launches to enable us to double our China business over the coming 5 years and that’s something we want to keep you updated on over the coming years. Great. Thanks Richard…

So on oral solids, so the – to be divested product portfolio to our vendor. So, Richard, we continue to expect that divestment will be completed during 2019. Now it’s, of course, pending closing conditions, including some regulatory approvals. We are not in control of that because our vendor is leading this. And from a forecast assumption, that will continue to take quarter three. But of course, we cannot be certain about that, but I think that’s a good forecast assumption. And what we also will do once the divestment is completed, we would provide then pro forma financials for the continuing operations, which would exclude that to be divested business for ‘18 and ‘19. So, it’s easier for everybody to model.

Hey thanks. There is a next question operator.

Thank you. Your next question comes from the line of Florent Cespedes of Societe Generale. Please go ahead.

Good afternoon gentlemen thank you very much for taking my questions. Two non-SMA related questions. First for Susanne on the Kisqali. The performance this quarter seems to be a bit better. So, could you please elaborate on that, if you a kind of trend or any reason to explain this? And my second question is for Paul on Tasigna. The sales performance on the other on this product this quarter is a bit softer. It’s a mature product, but could you elaborate a bit or give any reason for that? Do you see a trend behind that? Thank you very much.

Thanks, Florent. So, both Kisqali and Tasigna, Susanne?

Thank you. Thank you, Florent, for the question. So Kisqali, we had a very good quarter, very pleased. We said it could reach $91 million and we really see gaining momentum. And that is driven mostly by the expansion of indications into premenopausal settings and into the combination with fulvestrant. And that makes us the CDK 4/6 as the broadest data set in first line. So outside U.S., we see very strong growth driven by further penetration. But also, in the U.S., we see very good momentum the last week. So, as we always said, Kisqali remains a very important growth driver for Novartis Oncology, and we are confident that this product has the potential to reach blockbuster status. Regarding Tasigna, so Tasigna had a few soft months. And I think as we also said last quarter, we have a very focused action plan to differentiate Tasigna in terms of efficacy and broader and deeper response, and we are confident that we can return to modest growth by the second half of the year.

Right. Thank you, Susanne and thank you Florent for the questions. Next question operator

Thank you. Your next question comes from the line of Peter Welford of Jefferies. Please go ahead.

Hi it’s Peter Welford, Jefferies. Two questions, please. Firstly, on the Sandoz business, I noticed that the Biopharmaceuticals sales has been perhaps a little weak this quarter. Any sort of insight on the growth trajectory for those and whether or not we should anticipate an uptick during the course of the year? And perhaps comment there on what you’re seeing in the underlying markets there. And then secondly, on Lutathera, possible to give us the U.S. sales perhaps this quarter, all the ex U.S. split? And also, any commentary on the types of patients you’re typically treating, if you get NEP patients? Or are you seeing update uptake, sorry, in a broad range of NEP patients? Thank you.

Thanks for the question. On Sandoz Biopharmaceuticals, globally, we saw very strong growth really driven by Europe. And Europe is performing well with the recent launches of Rixathon, our rituximab biosimilar; and Erelzi, our etanercept biosimilar. And we’re also now preparing for what we hope is an approval of our pegfilgrastim biosimilar relatively soon to build on what I think is arguably the broadest portfolio of biosimilars in the market. Any softness we’ve seen in the U.S., where we’ve had seen additional competition both on Glatopa, our Copaxone generic, as well as on Filgrastim, where we have additional entrants coming into that product line. Key for us in the United States will be continued launches. So, we are on track now with pegfilgrastim, and I think that will enable us hopefully to have a potential approval depending on how FDA finds the resubmitted data. That’s a 6-month clock from our resubmission as it was a CRL. As well as, of course, we have the outstanding situation with Erelzi in the United States as well as then upcoming future filings and launches. I think now the key for us in the U.S. will be to replenish the biosimilars portfolio. And with respect to Lutathera, Susanne?

Yes. Vas, as you highlighted, we were very pleased with the performance with Lutathera reaching more 100 million and to your question about say confirm it’s the vast majority coming from the U.S. where we would really see great momentum. We have now more than 125 centers using the treatment treating more than 2,000 patients. And what we also see now, first, it’s coming from Europe, so vast majority coming from the U.S. and some sales coming from Europe. Then you asked about patients. So it’s neuroendocrine tumors, and it’s mostly second-line patients that see some progress. So as you remember, the results from meta study really showed tremendous, tremendous impact on progression-free survival and overall survival in this setting. And this is where the majority of the patients come from.

Thank you, Susanne. Thanks Paul for the questions. Next question, operator?

Thank you. Your next question comes from the line of Seamus Fernandez of Guggenheim. Please go ahead.

Thanks for the question. So I was hoping that we can talk a little bit incremental margins and a couple of opportunities, first off, incremental margins that we can sort of think about reading into the underlying core P&L for Zolgensma, despite obviously cash flows dynamics from some of the payer agreements notwithstanding, but just hoping to better understand the kind of incremental margins and the contribution that this can make to the margins going forward, as well with Zolgensma can you just help us understand that the challenge is that the company might face for patients who are already on drugs like Spinraza and how that – how you will deal with that within the context of the payer environment. And then the second question is on RTH, again incremental margins there I think I recall Vas you talked about some challenges with manufacturing with RTH and getting that to kind of consistent pharmaceutical margins for an antibody product, can you just update us on that and it seems like there is also a heavy royalty burden that we should be thinking about with Lucentis relatively to that that certainly RTH could be a positive contributor there? Thanks so much.

So first on margins with respect to Zolgensma, thanks Seamus, for the questions I heard.

Yes. I would say actually I can almost take them a bit together because these are on the end different price levels, different price populations, but in terms of cost of goods and royalty burden and on quite high margin products. There are some royalties on Zolgensma, but very focused as you can imagine marketing and sales effort, so very high margins expected on Zolgensma. Same growth is true for RTH with a slightly different mix. Of course there is a bit more marketing and sales but even when you look at Lucentis like footprint, it’s quite focused and the specialty and focused center market. So both of these products I would expect to significantly contribute after launch period to our margin not only to sales, but margin process and cash flows.

Paul on Zolgensma?

So we are aware that it’s going to be one of those things that it’s being discussed. And it will be very much the payers to decide how they handle up, but from our perspective and we have worked through the MAC program to try and make sure that it is an option for patients. So it will be very much case by case, but I think we will – we are very open to allowing it...

So then lastly on RTH manufacturing, one of the things I would want to clarify is our filing now involves the updated manufacturing process. You recall that we had a delay in RTH because we needed update the manufacturing process, we completed that, we have completed the bridging studies, so the margins – cost of goods with respect RTH and our competitors was we would expect for any of our biologic products. Thanks Seamus. Next question operator?

Thank you. Your next question comes from the line of Mark Purcell of Morgan Stanley. Please go ahead.

Yes. It’s Mark Purcell from Morgan Stanley. Thank you so much for taking my questions. A couple of follow-ups on Zolgensma and then just firstly on Sandostatin LAR, you said you are keeping an eye on the generic situation there. So can you help us understand the developments you are watching and what we should expect in terms of the competitive dynamics going forward? And then going back to Zolgensma, some really encouraging pre-launch prep that you have described very clearly on Slide 17, in relation to previous studies, in terms of combination, so are you going to do any combination trials yourselves in patients who are also going to be treated with Spinraza? And in terms of patients who already received Spinraza or already received Zolgensma and then have followed up with a Spinraza therapy on top, can you help us understand the reasons why these children are using both drugs together as opposed to just Zolgensma as a single therapy? And then there was an earlier question on manufacturing. Can you help us understand the current manufacturing footprint, the capacity you have in terms of treatment patient numbers in terms of the IV? And as you move to intrathecal, how that sort of addressable patient population is going to change? And if we should expect any potential changes in terms of safety and efficacy, given you’re moving from a systemic IV product to something that may have less systemic exposure?

Thank you, Mark, for the questions. So, first on the Sandostatin LAR, Susanne?

So, on Sandostatin LAR, the situation has not changed, but as Harry mentioned, we are monitoring closely. The situation is that we’re aware of one company that has initiated regulatory procedures in Europe, and we assume the same to be the case in the U.S., but no change at the moment, but we are monitoring closely.

So, in respect to Zolgensma combination trials, manufacturing capacity, etcetera, Paul?

So, on the combination trials, I think we’ve mentioned this before, but it’s probably worth repeating. Where there was evidence of patients getting both, it’s where patients have gone into the study, desperately ill children into a study with Zolgensma. And of course, the parents wanted to give whatever they could on top. And I think that’s understandable because it was still an investigational compound at that point. I think now the question the whole conversation has moved very separately to how do we move patients from Spinraza to Zolgensma? And we’re collecting the data to do that and showing it where we can. So, we feel confident that we’ll be able to help physicians and payers understand that as we go. There is also, by the way, an appetite from payers to make that switch. So, we’ll see where we get to. In terms of manufacturing, a general manufacturing update, Vas mentioned the 1 million square feet. We were already set up before we took on the Colorado facility to match what we think will be the demand over the next year or so. We took the opportunity to take on a high-tech facility, a biologics GMP-approved facility to make sure that as we go further into the prevalent population, if there’s an unprecedented level in the 2s and 3s, we can cover that, too. So, we have more than enough capacity to deal with what we think could be an unprecedented demand.

Thank you, Paul. And thanks, Mark, for the question. I’d maybe also want to highlight that again, we’ll present additional long-term follow-up data from the START study, but we are seeing continued sustained efficacy in the patients that we’ve described to you the past. And any patient who chooses to add on a therapy, as Paul said, it’s purely out of the patient’s decision or parents’ decision, not because of anything with respect to Zolgensma in our view. Next question operator.

Thank you. Your next question comes from the line of Steve Scala of Cowen. Please go ahead.

Thank you. First, on the psoriasis market, is there anything you would like to highlight in the risankizumab label or price that represents a competitive advantage for Cosentyx? And Vas, when you were speaking about the ARROW trial, you mentioned rapid onset. Is that likely to be the sole point of differentiation versus the IL-23s in psoriasis? And then secondly, on the Gilenya royalty question, to clarify, what is now assumed in the revised operating income guidance? Is a lower royalty to Mitsubishi assumed, so operating income guidance might have to come down if the lower royalty doesn’t happen? Or is the current royalty assumed so operating income guidance might have to move higher if the lower royalty is realized? Thank you.

So first off, so thanks, Steve for the questions on psoriasis, risankizumab and the ARROW study. Paul?

So, another IL-23 entered the market. We feel that we are that the market is well served with the medicines it has already. We think that a skin-only approach is part of it. You’ve seen from the data Vas showed on NBRx. Although NBRx is volatile, it does show you what position we’ve taken as one of the leading, if not of the leading, new medicine in the psoriasis space. Our growth in psoriasis is above-market continuously. So, we don’t think there’s anything clinically to be gained from risankizumab entering the market at all, but we do expect AbbVie and their heritage and their presence in the market and what that could mean. We think that more than skin is needed to be treated. And we’ve seen from TREMFYA we know how to handle an IL-23 in general terms. In terms of Gilenya, do you want me to.

It was the ARROW study.

I’m sorry, the ARROW study. We said when we took the study on, we wanted to advance the understanding the mechanistic understanding for the community. We think there is a lot more to psoriasis, and we think that’s why the IL-17 mechanism is going to be absolutely critical. And I think we’ll get the readout towards the end of the year from recollection, and we’re looking forward to adding that and helping with the debate. You’ve seen from our performance and our growth in quarter one versus quarter one last year, we’re in a very good place and we’ve taken some very sensible decisions on where we feel that our NBRx growth is showing, that we’ve made some good choices.

And before I move to Gilenya, maybe just a few other quick points on Cosentyx. I mean, I think the key we need to keep reminding colleagues on the phone is that IL-17A, we’ve demonstrated through the data we have on all of the additional manifestations of psoriasis, whether it’s palmoplantar, whether it’s nail, whether it’s scalp, that IL-17A seems to be really a preferred therapy from the data we’ve generated to date in treating these hard-to-treat psoriasis patients. In addition, we know that the IL-12/23 has not been successful to date in ankylosing spondylitis, particularly with respect to some of the elements in the joint. So again, IL-17A proves itself to be really a differentiating medicine in ankylosing spondylitis, and then we also believe in psoriatic arthritis, particularly with respect to enthesitis, which is the inflammation of some of the insertion points in the joints. So, there are multiple points of differentiation that go beyond speed of onset, which we also think we’ve demonstrated as well. Now with respect to the Gilenya royalty, Harry?

We cannot really add much to what Paul has said here. So, we reflect the current contractual terms. And I would not expect the guidance to change one or the other direction anyway. So, we just – that’s what we can say and unfortunately not more.

Thank you. Your next question comes from the line of Simon Baker of Redburn. Please go ahead.

Thank you for taking my questions. Two, please. Firstly, I wonder if you could give us an update on the expected timing and potential remedies in your litigation with Amgen with respect to the Aimovig co-promotion. And secondly, now that you’ve completed the dividend in kind distribution of Alcon to Novartis shareholders, I was wondering if in principle, the same can be done with the Roche shareholding that you have. Thanks so much.

Yes. So, first on the Amgen case, I’ll hand it over to Paul. Paul.

So just one sentence or two before I get to the case itself, we are delighted with the progress we’re making with Aimovig, and we’re thrilled with what we’re doing for patients. It’s a huge unmet need, and we don’t blink. That is business as usual for us. And we go on to get reimbursement and approvals across Europe and the rest of the world. As for the legal dispute, well, we’re very confident in the strength of our legal position. One thing you may be interested to hear is that we in fact, the U.S. agreement does not even contain the clause on which Amgen relies as a basis for its termination, so we feel very good about where we’re positioned. But above all, and this happens between big companies occasionally, but above all, it’s business as usual with migraine and migraine patients and Aimovig.

And with respect to the Roche, there’s no change in our position. It continues to be a financial state with a strategic component. And the next question operator.

Thank you. Your next question comes from the line of Laura Sutcliffe of UBS. Please go ahead.

Hello, thank you and two questions, please. One on Zolgensma and then a follow-up on margin. On Zolgensma, if I read the slides from your conference presentation last week correctly, there were noticeably more adverse events in STR1VE than there were in your earlier study. As far as I understand, the product that was used in STR1VE was commercially produced, whereas the one for the earlier study was not. Is that a potential source of the difference? And if not, where do you think it could come from? And secondly, on margins. Could you just outline some of the pushes and pulls you expect on your gross margin in Innovative Medicines specifically throughout the rest of 2019? Thank you.

Yes. On the first question, on Zolgensma, I’ll hand it to Paul. Paul?

So yes, an interesting question. I mean we don’t see any difference, in fact, and we performed extensive analytical and clinical comparability studies. So, we think any difference at all is in the baseline characteristics of the patients. So, let’s also be clear. The improvement made by the children is significant on CHOP INTEND, etcetera. So, we feel very good about the results and look forward to sharing more and across more studies at AAN.

Yes. So, I think we don’t see the safety difference that I assume our competitors are feeding. So, on the margins?

Yes. The gross margins, pushes and pulls. I mean, of course, we have on the one hand always mix. It’s very important. As you know, some of our products are most of our products are quite high-margin products, so high gross margins. A few are lower. On the other hand, we see that the key growth drivers have quite high margin. So, Afinitor, Exjade and the tail end of Gleevec, of course, are also very high margin. So, I would say from that standpoint, the mix probably neutralizes as we expect a bit more generic impact in the future quarters. And then we have the whole technical operations transformation plan. That already has contributed, but we expect that to continue. So, a bit hard to completely predict, but I would say that we have made good gross margin improvements, and we don’t and if you take everything together, we probably expect roughly the same gross margin year-over-year.

Great thanks Harry and thanks for the questions. Next question operator.

Thank you. Your next question comes from the line of Kerry Holford of Exane. Please go ahead.

Thank you. Two questions, please, for me. Firstly, on Entresto. I wonder if you could just comment on the U.S. growth in the quarter, with [indiscernible]. How sustainable is that going forward when you talk about the underlying volume demand versus price contribution in the quarter with this destocking in Q1? And also, I wonder whether this drug also has been a beneficiary of the generics supply shortage in the U.S. Secondly, on MS. Can you quantify [indiscernible] was destocking for Gilenya in Q1? Can you quantify that? And also talk about the underlying demand for that product and talk about the relative positioning of Mayzent versus Gilenya, are you yet at a position where you’re talking about negotiations’ access, needing to of high rebates on Gilenya perhaps in exchange for access in Mayzent? Thank you.

So, Paul, both for you, Entresto and then Gilenya and Mayzent.

It sounded a bit more like 2 more than 2 questions, but I’m going to give some fast answers. Entresto’s performance has been fantastic. We’re now starting to see the fruits of all the effort we put in. We saw the PIONEER data kick on. And so, we’ve seen the hospital initiation data set complete, so feeling good about that. Will it continue? We believe it does continue, and we believe that PARAGON readout is going to be the next sort of accelerator if the results are good. But we know confidence is high and we know that Entresto becoming standard of care in many settings is really an important position for us. For Gilenya, the comments around there is definitely some destocking, and there was, of course, as I mentioned, in Q1 last year, there was some stocking. So, the like-for-like comparison would have been very close to consensus, I think, without the inventory moves. Underlying demand is solid, frankly, so no issue there. As for Mayzent, 50% to 80% of patients progress and I refer to some opinion leaders I spoke to last week. They know that, and they’ve now had an opportunity to have a specifically proven medicine in that group. They look at Mayzent’s position as taking all-comers who are progressing, not specifically Gilenya. So, we’ll continue as we do as we go on to identify this patient population, but we feel confident as we begin to educate and communicate that we’ll be in a very good place with Mayzent right across all medicines for the switch potential. Thanks, Paul. Thanks, Terry for the questions. Next question, operator.

Your next question comes from the line of Emmanuel Papadakis of Barclays. Please go ahead.

Thanks for taking the question. Maybe one for Harry on buybacks, you reiterated several times you are going to complete the $5 billion by the end of this calendar year. You are very light in Q1, is there any particular reason why you have left that phasing heavily skewed through the remainder of the year? And is there any particular things we should think about for modeling perspective in terms of the phase of distribution over the remainder of this year? Second, a couple of quick follow-ups, Kymriah, you have referenced in the report discussions with the FDA aiming to change the specifications in the U.S., if you could just elaborate on that? I think it’s fair to say you are continuing to lag your key competitor in that space. So, any color in terms of how that may change and when would be helpful? And then just a quick follow-up BYL, you alluded to 80% payer coverage. I assumed that was for the drug itself. Just a bit more color in terms of the diagnostic payment, test cost coverage, etcetera, would also be very helpful? Thank you.

So first, Harry on buybacks?

Yes, thank you. So on the share buyback, I mean as you can imagine, level of share price is one key input into that activity and we also were quite optimistic that the Alcon spin would happen in April. So, I think the timing of the majority of the share buyback after the Alcon spin is probably a good one. And that’s why as of tomorrow. We will already start again and restart that share buyback program and we are quite optimistic that we will finish it by the end of the year.

Yes. We want to maximize the number of shares we can of course take that out of circulation for the benefit of Novartis shareholders. Susanne, both on Kymriah and BYL?

Yes. Thank you for the questions. So, on Kymriah, I think when you look over the last 6 months, we made quite good progress in terms of building our manufacturing footprint. We recently got FDA approval to increase manufacturing capacity. We got in addition approval from health authorities outside the U.S., namely EU, Switzerland, Australia, Japan and Canada to widen the commercial specification in line with the clinical product. FDA has not yet approved our prior approval supplement application citing insufficient information to widen Kymriah’s commercial specification. So, we are obviously disappointed by this decision and we are working closely with FDA to find a way forward. We also plan to collect additional data and we update you as soon as we have more clarity.

On the BYL diagnostic?

Yes. In terms of BYL, as Vas mentioned, we are quite excited about the launch and we plan to launch together with a companion diagnostic provided by Qiagen and we work very closely with Qiagen to allow broad coverage and also reimbursement for the tests. Thank you, Emmanuel. So next question, operator.

Thank you. Your next question comes from the line of Marietta Miemietz of Primavenue. Please go ahead.

Yes, thanks for taking my questions. A couple of financial questions please for Harry first. You hinted at a guidance upgrade if the pipeline delivers according to plan. So could you just share with us some of the major news flow items that have been excluded from the current guidance? And also, could you please quantify any dis-synergies from the Alcon spin-off that could weigh on margins from Q2 onwards and for how long they are expected to persist? And then a couple of product questions please, coming back to Kymriah in the U.S., just trying to get a little bit more detail there, is the situation that the FDA has simply not yet made up its mind whether the specs can be changed at all or have they sort of indicated that they are willing to meet you halfway, but you are still working to show that you can get the number of viable cells up to the proposed new threshold? And can you maybe just also elaborate a little bit on the current impact on your U.S. business in terms of sales, in terms of taking on new commercial patients, what your capacity is and if clinical trials are continuing as planned? And then finally, sorry to come back to the Zolgensma safety issue, but I mean I was quite surprised actually by the panic that was sparked by that second death, because I would assume that also the respiratory issues can actually arise as a complication of the disease itself. So it would just be really, really helpful if you could help us understand in very general terms any potential mechanism by which Zolgensma could theoretically even contribute to respiratory infections and how that can be ruled out in an autopsy? Is this really all about sort of that tiny risk of the vector recombining with other viruses and do you actually have any data in patients or in vitro whatever to see whether and how that actually happens? So any color there would be very helpful. Thank you very much.

Yes. Thanks, Marietta. So I will take the third question first. With respect to Zolgensma, no, there is no mechanistic reason and this is primarily a situation where when you give an AAV therapy, you do trigger and enhance stimulation of the immune system. If you did that in the context of sepsis, you can of course exacerbate potentially the sepsis. There is no preclusion criteria for an infection, because we want to maximize the number of children treated. So, this is a situation where we administer to therapy. I think the key is you need to give steroids at an appropriate time with respect to when AAV is administered. That’s the absolute key in terms of managing a situation like this where a patient has multiple potential infectious agents already affecting them and we want to minimize the impact the AAV might have on the clinical course of the patient. Again, I would say this is not a platform question, this is more about when you give a therapy like this in the context of a very potent immune response to an existing infection, you can of course have consequences to that, which would be the case for any medicine that you give in this setting. So with respect to...

Just to follow-up on that, how can you actually then rule out on the autopsy that the medicine contributed anything, because you can never know whether it was a too strong immune response that killed the patient and whether the drug contributed at all. So I am just a little bit confused how...

So the good news is we have regulators who make these decisions. And fortunately, we have independent DSMBs and regulators who have all already said there is no necessary changes to the trial protocol, no changes to the clinical program and no changes to the overall approval timeline. So, I think I leave it in the hands of the very capable independent organizations that make these assessments. I will of course provide the data with respect to the autopsy to the relevant agencies and we look forward to completing the regulatory timelines towards an approval. Now, with respect to the guidance upgrade, Harry?

Yes. So as you have seen, we had a very strong quarter one, 7% sales growth, Innovative Medicines, 10% sales growth, core operating income growth would come to 18%. And with that of course you have to see okay, how is rest of the year going, such a strong start, some people even mentioned maybe there should be more upgrades. Anyway, I think strong start. On the other hand, we should never get ahead of ourselves. Clearly, on the bottom line, we see the potential for the upgrades that we have given. In terms of some of the pushes and pulls, clearly, we have to see what are the labels we get, some are very important medicines, that where we expect approvals over the next quarters. That’s on the one hand. On the other hand, we have to see also how fast is there a generic erosion on Afinitor and Exjade, for example, or Exforge in Europe, a smaller product, and is there anything on Sandostatin LAR. So, those are some of the pushes and pulls. We just cast them already. So, I think we have given a good, prudent guidance. On the other hand, this is also a quarter where we expect to have the least generic exposure. So, I think we are well set with this. And then we will see how quarter two evolves and quarter three and then I think we are in a very good situation to give an updated guidance if necessary.

On the interest of time, I think we are going to have to go to the last two questions on the line. We will get back to you, Marietta, on your other questions. So then on the next question, operator.

Thank you. And your next question comes from the line of Vincent Chen of Bernstein. Please go ahead.

Great. Thank you very much for taking the questions. I was wondering if you could just help us quickly dimensionalize what types of data we should expect to see at AAN for the Zolgensma intrathecal STRONG study specifically. Should we expect to see data on achievement of motor milestones or is it more reasonable to expect that the focus will be on initial data on patient trajectory on motor function scale than safety given the relatively early stage of the study?

So, Paul, on the AAN data readouts?

So you said upfront what you expect to see, I told you a little bit earlier, I think [indiscernible] another year, STR1VE an additional 3 months of data, SPRINT plus presentation of the data in the recent traumatic population. The STRONG, which you mentioned, again, you will see some reflection on dosing. It will have some feedback on dosing in the low to mid dose. And I think we will see some feedback on scanning and support for greater than 2 seconds [indiscernible], so you will start to see the benefit and see some of the evidence of that in type 2.

Great. Next question. We have time for one more. Okay, so one more question, operator.

Yes. Your next question comes from the line of Andrew Baum of Citi. Please go ahead.

Hi, just a follow-up in relation to RTH, please. The conversations we have with ophthalmologists is concern about taking up fridge storage space given the limitation of only having an initial approval for AMD. Conversely, continuing with Lucentis or Eylea that has obviously multiple approvals. To what extent, do you think that’s going to limit the adoption until you actually have that GME in hand? And then very quickly if I could, on rebate reform, do you anticipate it will be enforced for January 1 of next year and do you want to comment on the impact you think it will have on realized pricing for those products affected within your portfolio?

Great. Thanks, Andrew. So on RTH, Paul?

So, of course, yes, fridge storage space is something to consider. You maybe interested to know it’s part of world class preparation. We spent a lot of time looking at specifically at this and observing workflow to try and make sure we know. We think having a Q12 without any sacrifice in visual acuity, that’s what we hope for in our label and that is we think worthy of fridge space and so much more. Yes, the other indications require the medicines. Most retina specialists have 1 plus, so we believe that we will have earned our right for the right amount of shelf space if you like. And for everybody that we have spoken to, they feel strongly that our interval and our fluid resolution is compelling enough to demand capacity in their own office environment.

And I will go back to rebate reform. It’s difficult to judge the exact timing of the administration’s proposal to be implemented. We support, along with many of our industry peers, the removal of rebates in Medicare Part D. We believe this will achieve the goal of reducing patient out-of-pocket at the pharmacy counter. It’s difficult for us to judge the exact impact until we know the details of how this will all transpire, but we certainly would expect given our overall portfolio’s relatively low exposure to the U.S. payer environment – government payer environment, not significant effects on our overall portfolio. I think we have one more question from Tim Anderson. So Tim, please go ahead.

One moment please. Tim, your line is open. Please go ahead.

No, okay. So we may have lost him. Okay, thank you very much. So with that, thanks again for your interest in the company, strong Q1. We are looking forward to continue to deliver momentum over the course of the year and we will continue to keep you updated as we progress. Thanks for joining the call.

Thank you ladies and gentlemen. That does complete your conference for today. Thank you for participating, and you may now disconnect.