Novartis AG (NVS)

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Novartis AG (NVS)
Q2 2007 Earnings Call
July 17, 2007 8:00 am ET


Raymund Breu - CFO
Richard Jarvis - IR
Thomas Ebeling - CEO of Pharma
Joerg Reinhardt - CEO Novartis Vaccines and Diagnostics
Andreas Rummelt - CEO Sandoz
Alex Gorsky - Head of North America Pharma
David Epstein - CEO Novartis Oncology
James Shannon - Head of Pharma Development


Andrew Baum - Morgan Stanley
Alexandra Hauber - Bear Stearns
Chris Schott - Banc of America Securities
Graham Parry - Merrill Lynch
Andrew Weiss - Bank Vontobel
John Murphy - Goldman Sachs
Mario Corso - Summer Street Research
Karl-Heinz Koch - Bank Vontobel
Marcel Brand - Cheuvreux
Jo Walton - Lehman Brothers
Michael Leacock - ABN AMRO
Jaime Ruben - Morgan Stanley
Steve Scala - Cowen & Company
Mark Purcell - Deutsche Bank



Good morning and good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Novartis First Half Results 2007 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions).

At this time I would like to turn the conference over to Mr. Raymund Breu. Please go ahead sir.

Raymund Breu

Thank you. Good morning and good afternoon. On behalf of Novartis I, welcome you to this conference call on the second quarter and the first half of 2007. With myself on the conference call, we have Thomas Ebeling, the CEO of Pharma, Joerg Reinhardt, the CEO of Novartis Vaccines and Diagnostics, Andreas Rummelt, the CEO of Sandoz, Joe Jimenez, the CEO of Consumer Health, Alex Gorsky, the head of our North America Pharma Business and David Epstein, the CEO of Novartis Oncology. And in additional, we have a fairly large team from investor relations supporting us.

Before we go into our presentation, I would like to ask Richard Jarvis from Investor Relations to read an important message.


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Richard Jarvis

Thank you. The information presented in this conference call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the Securities and Exchange Commission for a description of some of these factors. Thank you.

Raymund Breu

I would now like to start a short summary and analysis of our performance in the first half. We are referring to the slides that are available on the internet and that you probably have in front of you. I'm starting right away with slide number five.

You can see that the group has achieved strong results in the first six months of 2007. We had double-digit growth rates in sales and in operating income and net incomes of 14%, 10% and 14%. We have achieved a good performance in Pharmaceuticals, I have to say outside General Medicines in the US, which was impacted by the Zelnorm suspension and the Lotrel generics, and we had seen very dynamic growth in Vaccines and Diagnostics and Sandoz, as well as solid growth in consumer health.

On slide 6, we showed the same numbers, on a continuing basis that means excluding, nutrition and a Santé Medical Nutrition and Gerber. The growth rates of 15%, 13%, and 17% for sales operating income and net income are even slightly higher than for the entire group, the number of associates increased only at 9%.

On slide 7, you can see that for the continuing group, net sales increased 11% in local currencies driven by Sandoz up 13%, Vaccines up 39% on a comparable basis and supported by Pharma, which increased 9%. Consumer Health on a comparable continuing basis was up 6% in local currencies.

In US Dollars, the numbers are approximately 3 to 6 percentage points higher, as the currencies against the US dollar in general have appreciated.

On slide 8, we see that the group operating income on continuing basis increased 13% in dollars and was driven mainly by Sandoz and by Pharmaceuticals. In Sandoz we see a good performance despite strong investment in a research and development and marketing and selling. And in Sandoz the performance is driven by volume and productivity gains that have been achieved.

Slide 9, the operating margins for Sandoz has increased by one percentage point and Pharma has almost maintained at the high level despite the Zelnorm and Lotrel impact. The group operating margin was reduced by 0.4%.

And on slide 10, we give an analysis of the contributing factors. We had positive elements: Other revenues increased the margin by 0.7% due to a strong contribution from Vaccines and Diagnostics, and these also include an $83 million exceptionally coming from settlements that we've achieved in this division.

Also positive was the development in other income and expense, as the comparable period in 2006 included the one-time restructuring cost in the Pharma and Vaccines businesses related to the acquisition of Chiron.

On the negative side, cost of goods sold reduced the margin by 0.9%. This is largely a mix-effect as Vaccines and Sandoz now take a larger share of their business, and their cost of goods traditionally is higher than Pharma or Consumer Health.

Another negative development was in research and development, where the margin was reduced by 1.7%. This is only negative in accounting terms. Obviously, there is a significant larger investment in late-stage trials that are positive in the sense that they reflect a very strong pipeline.

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