Good morning, and good afternoon, and welcome to the Novartis Q3 2019 Results Release Conference Call and Live Audio Webcast. [Operator Instructions] 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. Samir Shah, Global Head of Investor Relations. Please go ahead, sir.

Thank you very much,. And good morning and good afternoon, everybody. Thank you so much for taking the time to join us for the investor call. Before we start, I'll just read to 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 with that, I'll hand across to Vas.

Thank you, Samir. And thanks, everyone, for joining today's conference call. As you saw earlier today, we announced what I think are really excellent results demonstrating the strong operational performance happening at Novartis, our continued progress on our innovation as well as continuing to drive our strategic priorities, which we believe will drive sustainable long-term top and bottom line growth. When you go to slide - the first slide, Slide 4, just to give a little more color on what you all saw earlier today. We had double-digit top and bottom line growth in the quarter. Sales were up 13%, core operating income up 18% and core margin up 1.4%. Harry will go through these numbers in more detail along with describing in a bit more detail as well our guidance increase where we increased both sales and core operating income guidance for the year. Equally as important, we had strong innovation performance in the quarter. When you look at it, we're on - we are on track to potentially have 4 or potentially 5 new molecular entities approved in the United States, which really shows the kind of innovation power we have in the company. Beovu was launched in the U.S., ofatumumab, of course, compelling efficacy in RMS and then a number of other key milestones, many of which we'll go through over the course of this call. So turning to the next slide. One of the most important trends we want to start highlighting is how our key growth drivers are increasingly contributing to our overall sales performance. When you look at Innovative Medicines sales 9 months to date in 2019, we've grown now to have 28% of our sales coming from our key growth drivers. And many of these key growth drivers have very strong underlying dynamics,…

Thank you, Vas. Good morning, good afternoon, everyone. As always, my comments refer to the results of the continuing operations and growth rates in constant currencies, unless I note otherwise. So on Slide 23, you see the summary of our quarter 3 and first 9 months continuing operations performance. As Vas said, our quarter 3 performance was excellent with double-digit sales growth driving core operating income and strong cash flow of $4 billion. Sales grew 13%, mainly driven by continued momentum of key growth drivers, as Vas laid out. We also benefited from the first full quarter of the strong launch of Zolgensma and Piqray as well as the acquisition of Xiidra. Core operating income grew 18%, mainly driven by sales and also productivity program impact. You see a similar pattern on year-to-date results. Year-to-date sales growth of 9% drove core operating income growth of 18% and resulting in free cash flow of $9.4 billion in the first 9 months. On Slide 24, we have laid out the first 9 months and quarter 3 core margin by division. Continuing operations margin improved by 1.4 percentage points in the quarter and 2.4 percentage points year-to-date. In Innovative Medicines, strong quarter 3 sales growth of 15% enabled core margin improvement to 34% of sales. Sandoz had a particularly strong quarter with 5% sales growth and 18% core operating income growth, resulting in a core margin of almost 25%. The growth in Sandoz was mainly driven by Biopharmaceuticals growing 27% as well as productivity from the ongoing transformation programs falling through to the bottom line. Additionally, quarter 3 at Sandoz was hedged by, first, 3 first-to-file retail launches in the U.S. and a favorable onetime Medicaid revenue deduction adjustment in the quarter. Overall, year-to-date, you see very strong margin expansions in both divisions,…

Thank you, Harry. So just in summary, when you look at the last slide, we continue to see tremendous momentum overall in the company; whether you look at the sales and operating [Technical Difficulty] … very good about where we are. And I think we look forward to taking your questions. So with that, I will hand it back to Samir.

Operator, we'll be open for Q&A. [Operator Instructions]

Our first question comes from the line of Graham Parry from Bank of America.

So firstly, on Zolgensma, you talked through some of the moving parts and the potential drivers into next year, but I was wondering if you could express any level of comfort with the consensus number of $1.2 billion at the moment, which would seem to assume either very high penetration into the incident patient population or quite a lot of prevalent patients being accessed through the course of the year. So is there enough prevalent penetration left after your bolus to get you to that number? And then secondly on Gilenya, it looks like you've settled that with Mylan looking at the court dockets and the stay there. Could you give us any kind of feel for what sort of time frame that would be coming into the market and whether you would expect to be seeking similar settlements with the other generic filers given the rather positive comments in the preliminary injunction from the judge?

Thanks, Graham. First, on Zolgensma, as I explained on the dynamics, I think the key drivers here are going to be the continued penetration in the incident population where our goal will be, in the United States, to achieve very high coverage of incident patients, both in newborn screening or those identified later on after newborn screening to continue to drive switches. And it's important to note that while we have covered a portion of the prevalent patients to date, because we haven't reached the highest levels of coverage within the incident population, there will continue to be opportunities for switches for Zolgensma, we expect, in the coming year. And that's the second source of the business. The third will be the global launch, which we hope to achieve in -- to enable us to go into Europe and other markets. You'll, I think, likely note from the competitor sales as well, there are substantial sales opportunities outside the United States. We continue to prepare and develop those markets. I think our ability to launch in Europe, the Middle East, eventually in Latin America and Asia, will provide an important opportunity for Zolgensma IV. And then lastly, of course, once we clarify the final filing and time lines, we'll provide further guidance on the intrathecal formulation and when we would expect that launched. So overall, I think a lot of catalysts coming for Zolgensma, a lot of positive momentum and energy around the data, a lot of interest from the physician and patient communities around the world. So we are confident in our longer-term outlook for this medicine. Now with respect to Gilenya. With respect to the recent court injunction, which now covers all generic manufacturers, I think that's what you're referring to, when you look at any potential settlements, we're not disclosing any detail of those settlements. Those discussions, of course, are ongoing. But just to remind everyone, we would expect at some point next year a ruling from the District Court -- or the start of a trial with the District Court, which will be important as well as the ruling on the appeal of the IPR ruling. Those are the next milestones with respect to Gilenya, but we feel very confident with our position, given the language used in the initial IPR ruling, the strength of our recent restraining order that was put in place. And so I think overall, we feel good about where we are in this process.

Our next question comes from the line of Peter Welford from Jefferies.

Firstly, just with regards to Zolgensma, I guess, following up in terms of the commentary that 4Q will be broadly in line, I guess given that you've seen a roughly similar split of incident versus prevalent patients, if I understand right, in the third quarter, presumably, with still quite a large prevalent population of less than 2 years old left to be treated in the U.S. So I guess I'm just curious what is it at the moment that's the main factor to getting those patients on drug, given the broad access that you seem to have secured? And can you help us think about perhaps how we should think about that access improving during the course of 2020? And then just moving on to Piqray. Obviously, a pretty impressive second quarter sales number there. I wonder if you can just talk about the testing rates that you're seeing at the moment and give us some sort of idea in terms of, I guess, the coverage and the type of patients you're getting on Piqray at the moment, whether those patients are sort of last line or whether you're seeing earlier use driven by positive companion diagnostic tests?

Thanks for the question, Peter. So on Zolgensma, in terms of the -- you're correct. We continue to have a prevalent population available to us. And because again, we are still climbing in our coverage of the incident population, every time we don't capture an incident patient, they become part of a prevalent pool that remains available to us for a period of time. So that dynamic, we think, will continue for some period until we achieve our goals of having very high coverage of the incident population. Now in terms of the dynamics on the prevalent population in switches, there's a combination of factors. I think, one, it's just continuing to work on the access environment, particularly in Medicaid. We're at 30%. Our goal is to increase that now over the course of next year, and that should enable us hopefully to be even more successful in the prevalent population. Second is to continue the journey on patient and physician education, particularly around our long-term data. I think the only reasons we hear any reluctance to make the switch is because typically right now insurers are not covering both medicines. So if you make the switch, you are making the switch on to the gene therapy. And so continuing to educate physicians and patients on it, but we're seeing, I think, very strong uptake with respect to that as well. I think those are the 2 key dynamics, access and the continuing patient advocacy and education. And now in terms of the access dynamics, as I think I've already described, we have very good coverage in the private. Public should climb, and our focus right now is to continue to push the uptake of newborn screening. Piqray, I'll hand it over to Susanne.

Thank you, Vas. Thank you, Peter, for the questions. Actually, we're very excited about our launch in Piqray. As you know, these patients that have a PIK3CA mutation usually have a very poor prognosis. So we see very high interest, a very positive feedback from physicians. We have reached 49 million year-to-date and have more than 1,000 patients that receive Piqray now. In terms of coverage, we see very broad coverage for the treatment but also for the testing. As you know, Piqray as treatment but also PIK3CA testing is covered in the NCNN (sic) [NCCN] guidelines. And we are very pleased also with the uptake of the testing rates. Specific to your question, what patients are currently treated on Piqray? Well, there might be a few patients that are in later line. But as you know, this is metastatic breast cancer patients with poor prognosis, so we expect that the majority of patients come really from second-line treatment. And we expect continued demand and are very pleased with the performance so far.

Thank you, Susanne. And we're very excited about taking Piqray into additional indications over time as well.

Our next question comes from the line of Keyur Parekh from Goldman Sachs.

Two questions, please. One, Vas, as you talk about the momentum for the business into the 9 months of this year, can you help us think about how do you see that momentum developing into 2020? What might be things that might accelerate versus what might be things that might pull you back into next year? That's question number one. A - Vasant Narasimhan Thank you, Keyur. So on 2019 versus 2020 dynamics, as Harry described some of the dynamics for Q4, I think you'll have a similar set of factors that will impact us in 2020. On the one hand, you're going to see our launches, we'll continue to drive with great energy and as well as our growth drivers. We'll continue the strong productivity programs, where our goal has been to deliver $2 billion in absolute savings across NTO, our manufacturing as well as procurement as well as Business Services. But at the same time, we have in oncology a set of potential generics or generics that have already of course launched, primarily Afinitor, Exjade -- Exjade, Jadenu, I think are the ones highest on our mind. So I think we'll just have to see how those dynamics play out, but we think we'll set up well for a strong 2020 as well and we look forward to providing full year guidance in January. Thank you, Keyur. So on 2019 versus 2020 dynamics, as Harry described some of the dynamics for Q4, I think you'll have a similar set of factors that will impact us in 2020. On the one hand, you're going to see our launches, we'll continue to drive with great energy and as well as our growth drivers. We'll continue the strong productivity programs, where our goal has been to deliver $2 billion in absolute savings across NTO, our manufacturing as well as procurement as well as Business Services. But at the same time, we have in oncology a set of potential generics or generics that have already of course launched, primarily Afinitor, Exjade -- Exjade, Jadenu, I think are the ones highest on our mind. So I think we'll just have to see how those dynamics play out, but we think we'll set up well for a strong 2020 as well and we look forward to providing full year guidance in January.

Our next question comes from the line of Andrew Baum from Citigroup. Q - Andrew Baum I'm not sure if John Tsai is on the line, but I'd be curious as to his view both yourselves with Entresto and Biogen with aducanumab are filing date on subgroups from 2 trials which failed to hit their primary endpoint; in the context of some recent comments from Bob Temple. Should we be thinking of this as the beginning of a new paradigm in willingness of the FDA to go further with subgroup analysis that they may have done previously in terms of trials which failed to meet? And then second, on Cosentyx, looking at the IQVIA data, the drug seems to have stalled in terms of both NRx and TRx approximately since launch the launch of Skyrizi. Is it some issue with sampling here? Or is there something else going on which should explain the paradoxical outlook? A - Vasant Narasimhan Yes. Thank you, Andrew. So on Entresto, John? A - John Tsai Yes. Thanks for the question, Andrew. I think it's very insightful you picked up some of the deliberations from Bob Temple. I think, one, when we look at Entresto and the results, obviously, we talked about the heart failure with preserved ejection fraction population that currently has no treatment. So given that's the underlying basis, we are having discussions with the agency, and they have expressed interest in seeing the results. So we'll have continued dialogue with them in terms of the best way to move forward. And we'll submit those before the end of the year. That's the approach we'll take for Entresto. A - Vasant Narasimhan And if I could just add, I think one important element -- I can't comment on the other filing you mentioned,…

Yes. And if I could just highlight again, we've looked -- I think tried to look as carefully as we can about the dynamics. And when we look at the NBRx data and the TRx data across -- in dermatology, we feel very good about the trends that we're seeing. And we'll look forward to continuing to demonstrate that in quarter 4 and then into 2020.

Our next question comes from the line of Eric Le Berrigaud from Bryan Garnier.

First question is about amortizations of intangible in pharma. There are some significant swings here. In the third quarter, it was significantly up. Going forward, what should we expect? Is it the first sign of AveXis of a full quarter being fully amortized? And so should we expect $700 million to $750 million per quarter to persist over the coming quarters? And the second question is about Entresto. My understanding is that in the U.S., you suffered from some negative inventory movements. Could you quantify that for the second quarter and Maybe give some explanation whether it corresponds to any price increase or some rebate discounts in anticipation for that or these kind of things?

Thank you, Eric. On amortization of intangibles, Harry?

Yes. Eric, so amortization of intangibles, of course, what you see is the acquired medicines, so to say, to increase the amortization piece according to the expected [remaining] patent life that we assume in the accounting according to IFRS. So we have AveXis and we have Xiidra coming in which added, of course, then to the amortization. So that's the level of amortization I would expect going forward. Of course, always pending potential M&A actions, all right, which then would add to it. And of course, over time some of the older assets would come off, but that's right now roughly the level that we see also going forward.

Thanks, Harry. And then on Entresto dynamics, Marie-France? A - Marie-France Tschudin So we have seen some seasonal effect in Q3, but this is completely in line with previous years. We'll always see some stock and trade fluctuations and we have seen some revenue reduction true-ups in Q3. However, if we look at demand, it's really strong. Our TRxs are up 50% year-over-year. We are expecting a really strong Q4 and we're comfortable with our full year consensus. A - Vasant Narasimhan And maybe, Harry, you want to just dimensionalize -- I know this a question on inventory risk revenue deduction?

Yes. It's roughly half-half. Also, in the inventory, I just want to reassure you, this is sometimes 1 or 2 days of inventory to talk here. Overall, there's hardly any fluctuation on the company or the key brands that would be any cause of concern as one of our key control as you know, each quarter, each month to ensure that we see overall sales in line with demand. So when a couple of sites come together with a bit of revenue reduction and maybe 1 or 2 days less stock in trade, that month you have a bit of an effect, especially as we also have in quarter 3 always a bit lower new script on Entresto. So nothing to be concerned about. Very strong underlying demand.

Our next question comes from the line of Matthew Weston from Credit Suisse. Q - Matthew Weston Two questions, if I can. The first is on Zolgensma and the strong data. Vas, I think you said that after we'd seen the second dose you would discuss with FDA whether that was sufficient for filing or whether or not we had to wait for the highest-dose data. I wonder whether those conversations have now been had post-World Muscle and what the decision was between waiting for that third dose? And then secondly, a question around share buybacks. Clearly, the cash flow remains extraordinarily strong with a very strong earnings growth at the business. Obviously, the outcome -- or the program associated with limiting the dilution of Alcon is now complete. But I wondered philosophically how you felt about further additional share buybacks. And then if I can cheat a quick third one, Harry. A feature of Q2 was writing back prelaunch inventory and had a very meaningful impact on margins. I wondered if we were going to see something similar with Beovu in 4Q? A - Vasant Narasimhan Thank you, Matthew. So first on Zolgensma, we submitted the data to FDA with respect to the first 2 doses that we presented at WMS. And we still have not had the conversation yet with the FDA. As soon as we have that conversation and can clarify the filing approach, we'll provide that. And I would say as well, we are making progress as well on the high-dose if it is in fact, needed. But our position is that we have data needed and we'll hopefully have that conversation with FDA in a positive way. With respect to share buybacks, Harry?

Thank you, Matthew. And also for noting the strong free cash flow we have which is always of course a key focus area for us and we are doing quite well. Always improvement areas of course, but wonderful $9.4 billion, the first 9 months, so going well there. And overall, share buybacks, I continue -- we continue to see share buybacks as part of our capital allocation priorities, but it's also #4. So after we have completed this one, the $5 billion the we announced last year in June, we completed in quarter 3, we of course continue to look at our capital overall. And just to remind everybody on the phone, after the first priority being organic investment, the second we have strong and growing dividend and third being bolt-on up to basically 5% of our market cap before us is share buyback. And so we will continue to evaluate this as we go forward. In case, we would have specific share buyback program to lower the underlying share count, we would make an announcement publicly. We have an ongoing commitment to mitigate any diluting effects from our employee participation programs, so you will see ongoing some share buybacks as we buy back employee shares. So let's see. We'll continue to be part of the future capital allocation priorities, but it's #4. And we would always announce when we do a specifically one. A - Vasant Narasimhan And Harry inventory movements on Beovu?

So this is the launch provision as we prior to approval write off any launch inventory according to prudent IFRS accounting rules there will be some, but I don't see this -- that this would impact as you have seen before. So usually, our prelaunch inventory, the cost of goods are quite low. And therefore, you don't see these effects and they level out over years. A - Vasant Narasimhan Maybe I'll take the opportunity, Marie-France, do you want to provide some color of the conversation you had Beovu at AAO and some of the excitement that you saw on the product? Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals 34 So we're very thrilled about the feedback we got at AAO, we spent some time there and obviously met with some of the top retina specialists in the U.S. I mean what we're hearing from physicians is they really make their decisions on the ability of a medicine to dry better on the dosing interval, on the safety and on the cost. And what we know with Beovu is that we really believe we've got a product that can deliver on these 4 dimensions, providing greater fluid resolution, longer intervals for patients, uncompromised safety. And definitely, what we've heard from AAO is that physicians were very impressed in how we priced the product. We really got great feedback. They're excited to use Beovu and want to treat patients quickly. A lot of them described Beovu -- and I'll just use a quote as a "generational leap." So we're very excited. We believe Beovu will be a major player in the wet AMD space and beyond. Vasant Narasimhan, Novartis AG - CEO 35 Thank you Marie-France. So we'll keep working to demonstrate that in the coming quarters. Operator 36…