Novartis AG (NVS)

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Novartis AG (NVS)

Q3 2012 Earnings Call

October 25, 2012 8:00 am ET

Executives

Joseph Jimenez - Chief Executive Officer

Susanne Schaffert - Head of Oncology - Novartis Pharma Germany

Jonathan R. Symonds - Chief Financial Officer

David Epstein - Division Head of Novartis Pharmaceuticals

Kevin J. Buehler - President, Chief Executive Officer, and Chairman

Brian Mcnamara - Division Head of Novartis Otc

Andrin Oswald - Division Head of Vaccines & Diagnostics

Jeffrey George - Member of Executive Committee

Timothy C. Wright - Head of Exploratory Development

Analysts

Gbola Amusa - UBS Investment Bank, Research Division

Michael Leuchten - Barclays Capital, Research Division

Naresh Chouhan - Liberum Capital Limited, Research Division

Graham Parry - BofA Merrill Lynch, Research Division

Matthew Weston - Crédit Suisse AG, Research Division

Alexandra Hauber - JP Morgan Chase & Co, Research Division

Andrew S. Baum - Citigroup Inc, Research Division

Odile Rundquist - Helvea SA, Research Division

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

Florent Cespedes - Exane BNP Paribas, Research Division

Presentation

Operator

Good morning, and good afternoon. And welcome to the Novartis Q3 9 Months 2012 Results Conference Call and Live Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions] A recording of the conference call, including the Q&A session, are available on our website shortly after the call ends. [Operator Instructions]

With that, I would now like to hand the call over to Mr. Joe Jimenez, CEO of Novartis. Please go ahead, sir.

Joseph Jimenez

Thank you. I'd like to welcome everybody to our third quarter conference call. Joining us on the Novartis end are Jon Symonds, the CFO; David Epstein, Head of Pharma; Kevin Buehler, Head of the Alcon business; Jeff George, Head of Sandoz; Andrin Oswald, Head of V&D; George Gunn, Head of Animal Health; Brian Mcnamara, Head of OTC; and we have Tim Wright with us also, Head of Development Pharma. So before we begin, I'd like Susanne Schaffert to read the Safe Harbor statement. Susanne?

Susanne Schaffert

The information presented in this conference call 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 Securities and Exchange Commission for a description of some of these factors.

Joseph Jimenez

Thank you. Okay, starting on Slide #4. As in the first half of the year, our recently launched products supported Novartis sales in the quarter. Our core EPS was $1.34, and importantly, cash flow was $3.5 billion in the quarter. We also achieved a number of regulatory milestones in the quarter, most notably Afinitor in advanced breast cancer and Jakavi in myelofibrosis.

So next slide shows the financials for the quarter, sales of $13.8 billion and core operating income of $3.9 billion. And Jon's going to take you through some of the details in a minute. We continue to execute against our strategic priorities of extending our lead in innovation, accelerating growth and driving productivity, and I want to just touch on each one of those, starting with innovation.

So in the third quarter, on Slide #7, we delivered 9 regulatory milestones. Besides the 2 that I mentioned, Afinitor and Jakavi, we received approval to Seebri Breezhaler in Europe and Japan. This is key to our respiratory pipeline and to QVA, which we also have filed now in the EU.

On Slide 8, importantly, we received first interpretable results of our Phase III trial on Serelaxin in acute heart failure. So we're right now in the process of discussing results with the regulatory agencies, and we're going to present our results on November 6 at the American Heart Association congress in Los Angeles. In terms of growth, Pharmaceuticals had a very good quarter, with the launched brands offsetting the Diovan patent expiration. And importantly, we were able to show an increasing core operating margin during this period to 33.4%.

On the next slide, in emerging markets, China really led the growth, with 22% for the group. Our businesses in China continue to perform well behind not just the new launches but also very good base execution. Alcon's growth rate was below the year-to-date average, with sales growth of 3% in the quarter, and this is primarily driven by 2 factors.

First, they had a very strong year-ago base, specifically a very strong allergy season in Japan a year ago and a shift in some order patterns in the Middle East. But secondly, we did feel some price competition in mono focal intraocular lenses in Europe. We expect this to be a temporary issue as we respond competitively, and we do expect a stronger fourth quarter more in line with the year-to-date results.

Now despite that quarter, Slide 12 shows that Alcon is really positioned well. In IOLs, we're the market leader, with over 50% share, and we're now focusing on execution excellence. In glaucoma, we've gained share this year driven by global gains in DuoTrav and TRAVATAN x U.S. And in contact lenses, we're gaining share in monthly silicone hydrogel lenses.

Now while Sandoz results were impacted by the loss of exclusivity on enoxaparin and the slowdown of production due to quality issues at some plants, there is some very positive news. Sandoz delivered double-digit growth rates in western Europe, in Asia and also in Russia, and biosimilars were up 35% versus a year ago.

I think we've made some good progress on our remediation efforts in the few sites across our network that have quality issues. We did have an FDA inspection in Broomfield, Colorado, which was one of the Sandoz' warning-letter sites, and that audit was -- or that inspection was satisfactory. So across the divisions, we have had many good or satisfactory inspections in the third quarter, and that includes sites in Pharma, sites in Alcon and sites in vaccines.

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