Novartis AG (NVS)

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Novartis AG (NVS)

Q3 2007 Earnings Call

October 18, 2007 8:00 am ET

Executives

Daniel Vasella - CEO

Richard Jarvis - IR

Raymund Breu - CFO

Thomas Ebeling - CEO of Pharma

Joerg Reinhardt - CEO Novartis Vaccines and Diagnostics

Andreas Rummelt - CEO Sandoz

James Shannon - Head of Pharma Development

John Peacock - CFO of Pharma

Alex Gorsky - Head of North America Pharma

Joe Jimenez - CEO of Consumer Health

Emmanuel Puginier - Global Head of Marketing and Sales in General Medicines and Pharma

David Epstein - CEO Novartis Oncology

Analysts

Graham Parry - Merrill Lynch

Birgit Kuhlhoff - Rahn Bodmer

John Murphy - Goldman Sachs

Alexandra Hauber - Bear Stearns

Marcel Brand – Cheuvreux

Jo Walton - Lehman Brothers

Amit Roy – Citigroup

Kevin Scotcher - HSBC

Michael Leacock - ABN AMRO

Martin Brunninger – Cazenove

Michael Lowenstein - Deutsche Bank

Ben Yeoh – Dresdner

Asika Gunawardena - Piper Jaffray

Operator

Good morning and good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Novartis Third Quarter 2007 Sales and Results 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 for you to ask questions. (Operator Instructions). At this time I would like to turn the conference over to Mr. Daniel Vasella, CEO. Please go ahead sir.

Daniel Vasella

Thank you. Good day, everybody, and welcome to our Q3 conference call. Let me first start by telling you who is on the call on our side and then James -- Richard Jarvis, will read the Safe Harbor statement and then we will go into the content of the presentation. Aside of myself, we have Raymund Breu; Thomas Ebeling; Joerg Reinhardt; Andreas Rummelt; Joe Jimenez; Emmanuel Puginier, Global Head of Marketing and Sales in General Medicines and Pharma; James Shannon, Head Global Pharma Development. Then we have also on the phone Alex Gorsky, the CEO of Pharma North America and David Epstein, the CEO Novartis' Oncology business.

With that I would like to ask Richard Jarvis to read us the Safe Harbor statement.

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.

Daniel Vasella

Thank you, Richard. I will start together with Raymond to give a few words as introduction and then hand over to Thomas for the Pharma business, Joerg will cover vaccines and diagnostics, Andreas, Sandoz and then I will close with an outlook and we will have enough time for Q&A afterwards.

I am starting with slide number 4 which, shows that we had year-to-date dynamic growth of 13% in US dollars and 9% in local currencies, driven mostly by the vaccines and diagnostics in Sandoz but with a good performance in Pharmaceuticals up-to-date and then Consumer Health with double-digit growth of 10% and 6% in local currency. On continuing basis, the Group operating income increased by 9% in US dollars if one excludes the one time charge of the increase of the environmental provision.

Slide 5, you see here again the growth in top line and operating income and then net income, takes into account the 590 million which makes the net income is increasing by 7% to $5.6 billion.

Slide 6, and that complicates obviously a little bit the reporting this year, are the one timers and the biggest effect or impact is due to the divestment of the Medical Nutrition business and Gerber -- the Gerber business, so that the Group net income for that nine first month is $11 billion.

In slide 7, one can see that the portfolio strategy, which the Group has taken and reinforcing the non-Pharma healthcare businesses focusing on one side on healthcare but diversifying at the same time, is paying out. We have very dynamic growth rates in Vaccines, Diagnostic, solid growth rate in Consumer Health, and then obviously we have some risk impact here of Pharmaceuticals and we will come back to that later on.

Slide 8, you see the corresponding figures or growth figures in operating income and in slide 11, we go now to Q3. In Q3, we see not a different picture in Vaccine, Sandoz and Consumer Health but here we see clearly the negative impact we've had by some anticipated and some unanticipated events in Pharma. The loss of Zelnorm, Lotrel, Lamisil and Famvir on one side, the withdrawal from the market, and then the generic competition. And what I can already stress is this is a phenomenon isolated to the US market and all other markets have performed really strongly at a double-digit growth rate.

Operating income on slide 12 shows now, the deep impact it has in percentages on the Pharma business and of course in the absolute numbers since Pharma is the biggest business, the impact is also visible.

On slide 9, net income decreasing by 12% obviously is the impact of the $590 million, which we have taken in third quarter and one could debate to what degree this is just a one timer or should be an operating income. We have treated it in as a one timer and excluded it from the reporting of continuing operations but accounting wise you could also include it.

Then on slide 10, you'll see the impact of the divestment gains and on the next slide -- I'm going to 13 now, we have the margins. On the margins on nine months we see that Pharmaceuticals is being hit by the mentioned events, Vaccines and Diagnostics has turned much faster then anticipated into positive numbers. Sandoz improves its margin like we have planned, Consumer Health is about flat.

If now, one excludes the one timers, intangibles, the effect of the acquisitions on slide 14, you can see that on a normalized basis the margin in the Vaccine and Diagnostics business and also in Sandoz is significantly better than on a reported basis.

I'm now handing over to Raymond Breu to go into deeper analysis of the figures.

Raymund Breu

Thank you, Daniel. I am on slide 15, the slight drop in operating income from continuous operations of 0.7 percentage points is the result of a couple of major factors. One is in the cost of [the results]. We have booked Famvir impairment charge of $320 million. Then R&D another negative impact that of 1.2 percentage points, it was growing much faster than sales as we have large investments in the Pharma late-stage pipeline projects and we have a positive impact in offsetting these margin deteriorations. We have a positive impact of 1.6 percentage points in other income, reflecting the gains that we have booked in Pharma in 2007 of $166 million and then we benefited from one time Chiron acquisition charges that we have booked in 2006 in the comparable period.

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