Novartis AG (NVS) Q3 2013 Earnings Report, Transcript and Summary

Good morning and good afternoon, and welcome to the Novartis Q3 2013 results conference call and audio webcast. [Operator instructions.] With that, I would like to hand the conference over to Mr. Joe Jimenez, CEO of Novartis. Please go ahead, sir.

Thank you. I would like to welcome everybody to our third quarter conference call. Joining me on the Novartis end are Harry Kirsch, the CFO, then we’ve got the division heads here: David Epstein for Pharma; Kevin Buehler, Alcon; Jeff George, head of Sandoz; Andrin Oswald, head of vaccines and diagnostics; George Gunn, head of Animal Health; and Brian McNamara head of the OTC business. Now, before we start, I’d like Samir Shah to read the Safe Harbor Statement. Samir?

Thank you. 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.

Thanks, Samir. Okay, starting on slide number four, I was pleased with the sales performance of the company. We delivered nice sales growth in the quarter and it was really driven by all of the divisions. Sales were up 6% in constant currency. Core operating income was up a point, 1%, in constant currency as was core EPS. We also made good progress in the pipeline for the quarter. You can see on the next slide the overview of the financials. Net income was $2.3 billion for the quarter, up a percent. That was down, though, 6% U.S. dollars. Harry will talk more about the currency impact that we had. Free cash flow, though, was quite strong at $3.5 billion. It was up versus a year ago in U.S. dollars, up by about a percent. And we continue to make progress on our three strategic priorities. In innovation, we had four key approvals during the quarter. In terms of accelerating growth, our net sales grew in all divisions, driven by the growth products that were up 17% in constant currencies and also by emerging markets. We also had good progress on our productivity agenda. We generated about $730 million with about half coming from [unintelligible]. Now, going a little deeper on innovation, on slide number seven, the pharma division had some important product approvals. Two of the most critical were the Japan and Europe approvals of Ultibro in COPD. This is a new therapy for COPD, and we’re right now in the process of launching that drug across Europe and Japan. In vaccines and diagnostics, the FDA approved an indication expansion for Menveo to include infants and toddlers from two months. So that also was an important piece of innovation. We also received FDA breakthrough therapy designation for BYM338. This…

Thank you, Joe, and good morning and good afternoon, everyone. You’ve heard from Joe that we have continued to make good progress on each of our strategic priorities through quarter three. As you can see from the summary slide 20, Novartis again delivered constant currency growth of both net sales and core operating income in the third quarter of 2013. This reflects the strength of our growth products, which Joe highlighted in his presentation. Currency had a significant impact on our results in the third quarter, especially on the bottom line, which somewhat distorted this picture of our solid underlying performance. In the third quarter, we delivered net sales of $14.3 billion, up 6% in constant currencies over the prior year. Core operating income was up 1% in constant currencies to $3.6 billion, and we had a strong cash flow of $3.5 billion in the quarter. In the first nine months, net sales were up 4% in constant currencies to $42.8 billion and both core operating income and operating income were also up 3% in constant currencies. It’s important to note that we are clearly tracking above the full year guidance we issued last quarter. These are solid numbers and especially given that the [generics] alone drove about $0.5 billion in the third quarter and went up $1.8 billion in the first nine months. On slide 21, you can see that all the divisions made a positive contribution to sales growth in constant currencies. Joe has already commented on [unintelligible] pharmaceuticals. Sandoz showed a strong volume growth of 17%, which more than offset the price erosion of 6%. This year over year comparison benefited also from having only one month for [unintelligible] in quarter three, 2012. As you look at Sandoz and its growth trajectory for the remainder of the…

Thanks, Harry. The pharmaceuticals division, as Harry mentioned, delivered mid-single constant currency sales growth during the quarter. Our core operating income, however, declined due to, as Harry mentioned, the loss of high-margin products to generics and importantly the investment we are making getting ready for now multiple launches. Turning to the next page, you can see that the underlying volume growth was double digit, which is impressive versus most of the industry. Growth products now represent 39% of total sales, growing 28% in constant currency over the same period of last year, more than offsetting the losses to generics. Continuing on the next page, you see that we continue to have strong growth in the emerging markets. During the quarter, China slowed down a bit. However, we see overall nice progress. In the case of China itself, it appears that we are gaining share on a relative basis. Turning now to page 34, this is a chart you’re very familiar with. This is our unparalleled growth platform product with exclusivity to 2017 and beyond, all with blockbuster potential. I’m going to speak about a number of these, but the takeaway messages are that all products, with the exception of Lucentis, grew strong double digits during the quarter. And two of the smaller ones on the bottom, our respiratory portfolio and Jakavi, are, I would say, in the mode of just warming up, just starting to contribute to our future growth rates. On the next page, you see an overview of Gilenya. You see that the growth continues. Annualized sales are now surpassing $2 billion. Both our U.S. and ex-U.S. teams have done really an outstanding job with the commercialization of this product in the U.S. We’ve strengthened our ability to compete with some really novel commercial programs, and as a…

Okay, I want to just close by reinforcing our strategic priorities. If you think about the third quarter, we strengthened our pipeline in terms of innovation. We accelerated our growth by driving our launches and driving emerging markets. And we also made good progress in productivity, which helped us offset some of the generic erosion. So, overall we’re on track, and I’d now like to open up the call to questions.

[Operator instructions.] Today’s first question comes from Matthew Weston from Credit Suisse. Please go ahead.

Three, if I could. There were a number of areas of growth within pharma, but one notable area of weakness was the BCR-ABL franchise, where both Tasigna and Gleevec looked weaker than the market expected. Can you just walk us through what’s driving that, and what you anticipate any impact from the recent competitor safety issues may be going forward? Secondly, we have the capital markets day coming up in November. There’s been a lot of discussion around corporate change agenda at Novartis. So I guess in the interest of full disclosure, what should we expect? From our perspective, from my perspective, I was thinking it was going to be focused on pipeline and growth products. But can you just say whether or not that’s a wrong expectation and what we should be thinking of for that event and the agenda? And then thirdly, I noticed in the release litigation has been started by previous Oriel shareholders, which I can only question, does that suggest that they’re complaining there’s been little progress with the U.S. generic Advair? Can you give us an update on what that litigation is at least about? I know you have a policy of not commenting on the progress of your generic pipeline.

We’ll start with Gleevec and Tasigna and the BCR-ABL franchise. A couple of thoughts. One is I think the overall business is doing well. One of the things you’ve got to remember is that as we get bigger and bigger in emerging markets the quarterly numbers are more and more depending upon the timing of different tenders. Taking out the tender business, we’re doing very nicely in the U.S. and Europe. So I think there’s nothing to be concerned about there. In addition, if you look at our ability to move the business from Gleevec to Tasigna, you see that Tasigna is a growing percentage of the business versus Gleevec, which is another good sign. In terms of the Ariad safety issue, I think it just essentially means that there’s one less significant competitor in the market, which from our perspective is a good thing. From a patient’s perspective, they do need other alternatives. And we plan on giving you an update on our research strategy as well at the Novartis IR day. We think there’s actually some innovative things that can happen in the BCR-ABL space.

Regarding the capital markets, I think you should expect we’ll focus around three areas. First, we’ll provide an update on the growth strategy. Now, obviously we’ve been pretty open about taking a look at parts of our business, and we’ve said over the next year we would be able to talk about things as they materialize. So that could either be a short conversation or a longer, depending on time. But I think you should just assume that it’s going to be an update on strategy and capital allocation. Now, in terms of the pipeline, we’ll be talking about pharma and Alcon. We’re going to really focus on those two divisions, partly because of the growth in both of those divisions and potential value creation, so we want to focus on those two. And then Jeff, in terms of oil?

Sure, I can confirm that there was an Oriel-related complaint filed in the New York state court, which is essentially a re-filing of a complaint that was done over a year ago that was denied. We deny the allegations and we intend to vigorously defend ourselves in this case. As it’s a legal matter, I can’t really comment further. As far as generic Advair, we have never commented on what products we’re working on, and have no interest in giving our competitors transparency as to where we are. But I can say that we remain confident in our ability to bring substitutable generics to the market, which will be an important complement to our number one global positions, not only in biosimilars, but in generic injectables, dermatologics, ophthalmics, and antibiotics.

Our next question comes from Graham Parry from Bank of America. Please go ahead.

Firstly, a question on the guidance and why you’ve shifted to seemingly no generic [unintelligible] launch in 2013. The timing seems a little strange given that Ranbaxy’s own partnership’s been approved for supply to the U.S. market and certainly some Indian commentators are suggesting that that may open or at least relieve potential hurdles to getting [unintelligible] approved this year. So I was just wondering is that based on any competitive intelligence, or is it more that you were just [unintelligible] to the end of ’13, so losing two months or a month wouldn’t be that material to that guidance anyway? Secondly, on pharma margins, obviously still seeing [unintelligible] stepping up as royalties grow, and you’re talking about the phasing in the expenditures on the business on prelaunch and R&D. How should we think about that spending phasing you’re talking about for Q4 going into 2014, where you’re obviously still going to have Diovan and presumably still some more of that launch expenditure to go through next year. And then thirdly, on the strategic review, you had indicated that that was completed. Would you be communicating on full conclusions for this at the analyst day in November? Or is this something that we should just expect to hear piecemeal throughout the course of the year?

So we don’t have competitive intelligence that would give us a good idea or any idea of when there will be a generic launch in the U.S. So this is simply a forecast modeling assumption. Now, you mentioned the [unintelligible]. To my knowledge, the science has been released, or [unintelligible] product flows, and we haven’t seen that happening. And as you mentioned, there’s another two months to go. Will there still be a launch, let’s say, in December, and then there would be an automatic generic launch from Sandoz, which [unintelligible] would offset the pharma downside. So I don’t see at this point in time even that a big impact would happen.

Right, it could come next week or it could come in six months. We just kind of just put a stick in the ground and for modeling we said end of the year.

I think the pharma margin for next year does in fact depend a lot on the timing of the Diovan mono U.S. generic entry. Further, we do have ensure that the rich pipeline and launches are perfectly supported. At the same time, the organization is working intensively on productivity, both in development and in M&S. If you take sort of a midterm look, you would expect margins to become more positive, and we’ll start getting the benefit of the mix effect with more product in the oncology and the specialty area and the generic impact will get reduced.

And then in terms of the strategic review, on the smaller businesses, I had said before not to expect us to announce what we want to do, but we’ll be announcing as we take action. And so that’s what you could expect, and if it came in pieces, what we would do is provide more color and direction around what it means as we unveil those pieces. But I really don’t want to get into the position of announcing what we’ve done instead of what we’re going to do.

Our next question comes from Naresh Chouhan from Liberum. Please go ahead.

On Tasigna, when you gave us guidance on the oncology franchise, almost a year ago now, and one of the reasons for you being bullish or confident that the Gleevec patent expiry wouldn’t be as big an issue as perhaps the market was concerned about was because Tasigna would become a bigger product [unintelligible] and the switch rate would be higher. If we were to continue to have this kind of mid-teens growth in Tasigna for the next couple of years, would that change your view on whether or not we could get through the Gleevec patent expiry with revenue growth in the oncology franchise? And this seems to be slower than what we were expecting. And then secondly, on Gilenya, just can you give us some guidance on what the underlying volume growth is likely to be? There’s been a lot of confusion around scripts. Just some underlying volume growth over the last three quarters would be really helpful.

I’ll start with Gilenya. Underlying volume growth in the U.S. is single digits. Ex-U.S. it’s a very large number, and I actually don’t have the calculation in front of me. You can just see it from the sales growth. It’s all volume there ex-U.S. The product is doing very, very well. In terms of Tasigna, if you look at the script add it’s actually very much on our plan. The percentage of Tasigna sales as a percentage of total worldwide Gleevec, is about 22%. That’s up about a point from Q2. So it is definitely improving. As you know, we have underway now a clinical trial to show that Tasigna is a possible way for patients to discontinue therapy. It’s going to take a while for the trials to enroll and play out. I think that’s going to be another boost. There are better diagnostics coming to the market, more people are getting used to using complete molecular response as a diagnostic. Plus, from the question asked earlier, we will have a little bit now more headroom, because there will be probably one less competitor that’s going to be making a lot of noise in this market. The other question essentially was would oncology be able to continue to grow post or through the Gleevec patent expiration if Tasigna is perhaps a little weaker or a little better. And the answer is yes, there’s enough room for oncology to continue to grow through that patent expiration.

That is one of the areas that we’ll talk about at the investor meeting in November. We’ll supply a little bit more color.

Our next question comes from Richard Vosser from JPMorgan. Please go ahead.

First question on Alcon please. Just looking at your commentary around gaining market share, just wondering whether you’re giving up on price to gain that market share, or whether the incremental investment in SG&A is giving you that growth there. And thinking about the incremental spend going forward in terms of incremental SG&A, how long should we expect margins to be suppressed? Would we think about that into the fourth quarter and into 2014? And then secondly, just thinking about a few pharma products, just on Tobi, just what sort of generic impact should we expect there? Should we expect a lesser impact because it obviously is an inhalable product? And then on the pipeline, you’ve moved [unintelligible], I think, into Phase III. What sort of differentiation do you see to those products given of course we have [unintelligible] and GSK products already on the market?

In terms of our performance and market share, specifically we’re pleased with the combination glaucoma growth that we’re seeing outside of the U.S. We are very pleased with what we’re seeing in intraocular lenses, both in terms of our monofocal business, but also what we’re seeing in terms of toric continuing to see penetration. And then we’re pleased with what we’re seeing in terms of contact lens growth. But as we’ve spoken, this portfolio is starting to evolve similar to what we’re seeing in terms of the developments in the pharmaceutical division, and we’ve got new products across each of our three areas. Now, where the impact shows up in terms of our P&L is that when we’re launching equipment you have to assume that’s an investment in terms of there’s less margin in equipment than you have in the pull-through products. Secondly, because of the frequency of the new products that we have, we are going to spend against those launches. But again, if you look at our performance from a profit standpoint year to date as Harry said, we’re growing sales 5% and profit 7%. And we’ve already got a relatively healthy P&L to start with. So this is really about top line growth.

Yeah, the only thing I can add to that is I think some of the suppression that you saw in the third quarter was due to one-timers. So we would expect in the future our efforts would be to hold the margin or increase it. David?

First, I want to thank you, because no one ever asks me about tobramycin, and we do have some products that are often considered smaller that are starting to make a big difference for the company. The combined tobramycin group of products, plus the old [solution of podhaler] grew about 45% versus prior year. And right now I’ll just give you some rough idea, we’ve been very good at introducing the podhaler device, that’s the microsphere dry powder inhalation, which is much, much easier to use than the old solution. And that’s approximately 40% of the business already, which I think is protected really from generics, because no one’s going to want to go back to using a difficult to use nebulizer. So, yes, we will lose a little bit of the [exclusion] business to generics, but I think the podhaler itself will continue to grow, and this will be a nice business for us over the medium term. The other program you asked me about was the MEK and BRAF for mutant melanoma. I’m going to leave it to [Herve] to describe it in more detail, the advantages of this particular drug, during our November investor day. I just want to let you know, from our filing [unintelligible] you probably know [it’s going to be] now accelerated by about a year to 2016. So we’re pretty excited about the program.

Our next question comes from Eric Le Berrigaud from Bryan Garnier. Please go ahead.

I have four, actually, and I will try to make it short. First is on tax rate. Tax rate was an all-time low this quarter. What would you guide us for 2014? Is 15% on the top end rather than the low end of the range? Second, on share buyback, you bought some shares this quarter. Was that opportunistic? Or do you plan to buy some more by year-end? Third, on Afinitor, could you update us on breast cancer penetration, duration of use, and perhaps could you make a comment? Referring to the investor day in Boston, you suggested that your internal forecasts were much higher than consensus. Are you still on this page? And lastly, on emerging markets, there was a lot of concern about slowdown in growth. Is there anything significant to report in terms of any change in trend in any region in emerging markets?

On tax rate, [unintelligible], for next year, but in fact overall we are very comfortable with the 14% to 15% range. And in terms of share buyback, yes, you’re right, we have [unintelligible] shares. [unintelligible] as we are always trying to mediate the diluting impact of [unintelligible] option share programs and as you have maybe seen, 30 million were exercised, so we will continue to [unintelligible].

Afinitor, as a background, is for people with renal cancer. It’s tuberous sclerosis and [unintelligible] and also the most visibility program is the breast cancer program. We still estimate that less than 50% of the U.S. eligible breast cancer patients are on the product, so there’s certainly room to expand, and it takes time to change that treatment paradigm. In addition, we have launches expected in the next 12 months in France, Italy, Spain, Brazil, and Japan. So this product is still pretty early in its lifecycle.

And then in terms of emerging markets, we saw fairly robust growth across most of the markets. We are seeing a general slowdown in China, as you’ve heard from many companies. In fact, we just got the latest data a couple of days ago that shows that the category in August grew only about 8% in terms of the pharmaceutical market. And those would be products going to hospitals, which is a good proxy for what’s happening to the market. And that’s down from the teens before. So I think that what’s happening in China is you are going to see an impact. I don’t think it’s going to be permanent. So I do think that it will bounce back in a few months, and I think that we’ll return to nice growth rates. Novartis is somewhat insulated from this. We’ve focused on innovation in China, and as we’ve been able to show in the third quarter, we’re up 18%.

Our next question is from Andrew Baum from Citi. Please go ahead.

Three questions. First, I think George is on the call, but should we interpret George Gunn’s planned departure from the group’s CSR responsibilities, coupled with the green light on Lincoln, as accelerating the near term divestment of your animal health business? Second, regarding Gleevec, Sun filed their declaratory action this June. Could you outline next steps? And would you agree that assessment with Sun in the U.S. would extend the potential of generic Gleevec potentially until 2018 given the appeal case trigger? And then finally, it’s difficult to understand quite what’s going on with your vaccine business, because on the negative side, Bexsero has not been reimbursed, and you’ve delayed the development of staph aureus, TDAP and group B strep by at least a couple of years, and yet on the positive side, I see you are opening a new R&D site in North Carolina. So if you could help us clarify the strategic intend around the vaccine business that would be very helpful.

I’ll start on the conspiracy theory. [laughter] I thought it was very interesting, but no, we announced this morning that Jurgen Brokatzky-Geiger, who has spent 10 years leading human resources, is going to step down from the executive committee and he’s going to run our corporate responsibility program across the company. As you know, corporate responsibility is something much more important in terms of the company’s reputation, and I want 100% focus on it by at least one person. I wanted accountability. George has done a great job managing corporate responsibility over the last two years. He’s made good progress on a lot of fronts in terms of access to medicines in Africa. At the same time, he’s got a day job. This animal health business and relaunching into the U.S., it’s a lot of work. So after 10 years, 10 years in any function is a long time doing one job, and Jurgen I think will be very energized to move into this assignment. But there was no linkage between that and the review.

I understand your interest and probably others’ interest in understanding when there will be first generics in major markets for Gleevec. And I think it goes without saying that if there’s litigation ongoing or other ways to defend intellectual property, we can’t really talk about them in a public forum, because that would weaken any position we have. But for everybody’s information, just to reset the baseline, I think because it’s good to get clarity on it, the current assumption is that in the U.S. we would lose exclusivity in July 2015. And then in Europe, including the recently granted pediatric exclusivity we’d lose that exclusivity in December of 2015. We do, however, currently have several other patents, including beta crystalline patent protection in the U.S. and many other countries. And the beta crystalline patent expires in Europe in July 2018 and in the U.S. in November 2019. So that’s all I can really say right now. I think we’ll be talking about this for a while. But there’s not much I can say until decisions actually occur.

Andrew, I think the key priorities for us have not changed the last recent period. Above all, we are the leading meningitis franchise, and of course the launch of Bexsero will be absolutely fundamental for that. Now, there is no [negative reimbursement] decision yet from the U.K., but an interim position was published in July, and we’ll see how that goes while this decision is finalized. That said, I wouldn’t be focused just on the U.K. Bexsero is a global launch. There is a global market, and we’re working with several countries in Europe, in Australia, and Canada, for example, to make that product available and we do expect to see significant sales from Bexsero coming next year. The second priority is our two franchises. We are making good progress in shifting to a sales culture platform which we think is longer term more sustainable. The key for that will be the licensure of our Holly Springs facility in the U.S., which we expect next year. But we refer to, this is also R&D in a sense that there is no R&D center, but we do have adjacent to the Holly Springs facility a [patent] plan for technical development of production processes. And that’s the only thing that we’re doing there.

Our next question comes from Tim Anderson from Sanford Bernstein. Please go ahead.

Going back to Alcon, ignoring near term pushes and pulls, do you think that we should be expecting to see continued margin expansion in that business if you look out over the next handful of years? Second question is something similar, on the consumer division of yours, do you think it’s realistic that the margins in consumer can get back to the levels where they were prior to manufacturing? And if so, what’s the timeframe for achieving that? Or should we think about the margin structure as being permanently impaired in that business. And then last question, on the pipeline drugs, Secukinumab, the drug obviously seems to have great efficacy in psoriasis. Can you talk about the indication you’re next most excited about where you have a high degree of confidence? Or is it less clear that this will work in non-psoriasis settings?

We sort of anchor to a couple of points. If we look at the core profit in 2012, we were in the 36 range. And when you look through the first six months or nine months of this year, we’re in that same range. So it’s more or less at the same level. And also when you look at the level of profitability from the Alcon business, it suggests that there’s an opportunity for us to focus on top line growth, which is where the real opportunity is. Now, clearly as Joe said, in Q3 we had a number of offsets that when you were to adjust those out, it was more or less 6% top line, 6% bottom line. So when you look at where we’re trying to go, I think we want to invest in the business. There may be some periods of time where we’ve got growth margin reduction when we’re launching equipment like the Centurion launch that we’ve got, the microscope launch, but clearly what we’d like to be able to do is accelerate the top line and try to hold the bottom line consistent at the relatively high profit levels that we have.

Now, let me say also on the consumer margin, if you go back to pre-Lincoln on consumer, our margins were not as scintillating, I think, as we even would like. So I do believe that we will get back to margins pre-level, and even exceed them over time. Now, it’s not going to be immediate. There’s going to be time required to wrap up Lincoln as we get a green light in terms of our ability to fully staff and fully move that into full production for OTC and for animal health. So I would be thinking that if you’re looking at a time period over the next three to four years that we move the margins back up to or exceeding the pre-Lincoln situation. You guys have any other thoughts about that?

No, I think that’s right. I think you’ll see continued improvement as we get Lincoln back online and continue to relaunch the brands in the U.S.

Okay, and David, on AIN what would you tell them?

We’ve got Tim Wright, our head of development in the room, and [unintelligible] not to pick my favorite indication, so I’m going to let him try.

I don’t think it’s about favorites, but based on the unmet medical needs, and the strength of the data that we saw in Phase II, because the programs are now in Phase III, I think the two indications that I would be most excited about would be psoriatic arthritis, which obviously will have a positive impact on the uptake in psoriasis when we file that and get it approved, as well as for ankylosing spondylitis, another disease with high unmet medical need.

And then just beyond that, there are other indications that Tim’s team is exploring, and I think we should just wait to see how those trials play out. There could turn out to be still an indication that even bigger than the psoriasis indication.

Our next question comes from Mike Leuchten from Barclays. Please go ahead.

One question going back to the pharma division, please. If I calculate the operating expenses in Q3, there’s about a $400 million increase. I take what you’re saying about the pay aways on the [unintelligible] and also the increase in R&D, but it still leaves about $200 million somewhere else, primarily marketing and sales. And if I then say you had a $300 million windfall coming from Diovan mono not going generic. That’s quite a significant step up in marketing and sales. Can you just elaborate on how much of that is just opportunistic spending because you have that windfall, how much of that is temporary, and how much is just really going to continue?

If you look at this on a percentage basis, as you pointed out, R&D expense went up, mainly because we have a lot of late-stage products that needed support. COGS went up for all the reasons that were discussed. M&S actually improved during the period. Not by a lot, but it improved by 0.3 percentage points. Because we have a very extensive productivity program underway, and we’re getting better and better at resource allocation across the different brands that we have.

And I think if you think about the longer term view that we created for the group around leverage, this is not just an objective, it’s what we’re working towards. We’re building plans now for 2014, we’re making hard choices about spending, both on the R&D side, on the M&S side. We are a launch machine, we’ve been able to prove that, but at the same time we don’t have unlimited resources, and we need to show leverage. We’re coming to the end of a patent expiration period on Diovan. I feel like our cost structure is good to allow us to provide that leverage, and that’s what we’ll be looking for, and that will be on a group level.

Our next question comes from Seamus Fernandez from Leerink. Please go ahead.

A couple of questions on pharma. David, can you give us a little bit of an update on your thoughts on reimbursement for the LAMA/LABA franchises, particularly given the fact that you guys have an exacerbation benefit in one of your major studies. How do you think that will play out with regard to reimbursement and positioning versus potential competitors? And do you think that the Street is underestimating the prospects for that franchise overall? And then separately, as we look forward to some of the medical meetings that are still to come in 2013, ASH is obviously a major meeting for Novartis historically, just wondering if you could update us on if we should anticipate some key data at ASH this year with regard to the [unintelligible] technology, and how you hope to advance those programs. I know that some of that will be discussed at the analyst day, but just wondering if you could give us a little bit of a preview ahead of ASH.

In terms of reimbursement for Seebri and Ultibro, so far we have not had any unusual reimbursement challenges. In fact, the reimbursements are coming through largely as planned. And the LAMA class and the combination LAMA/LABA classes do get premium pricing in most of the world, so we’re pretty happy about that. And in terms of ASH, yes, there will be an update on CTL109, but I really want to wait for Herve to tell you a little bit more about that program and give you a preview of what might be at ASH when we do our November investor day.

Our next question comes from Florent Cespedes with Exane BNP. Please go ahead.

First, for David, on Lucentis, do you see Lucentis performance in the coming quarters, relatively when we should see the volume affecting the pricing pressure? Second question, also for David, on the European performance for pharma, could you give us the impact from the healthcare reforms and pricing changes in Q3? And last question, for Jeff, of Sandoz, is this nice double-digit growth recorded in Q3 sustainable? What were the main drivers there and what should we anticipate going forward?

Okay, starting with Lucentis, I think what you’re asking me is when will we start to lap the reduced price we had negotiated in order to create market access for the new indications. Most of those price cuts came second quarter, some into the third quarter, and some in the first quarter. So if you project forward, you’d expect to see some of the volume begin to come through largely in the back half of next year. In terms of Europe and loss to healthcare reform, I believe it was about 6 points for the quarter.

We are carrying good momentum into the remainder of this year and 2014 with the double-digit growth that we’ve continued to see in Western Europe outside of Germany, as well as emerging markets and biosimilars. Q4 will be, as Harry said, a much more challenging quarter for us, given that in the U.S. in addition to the four months of [unintelligible] sales in Q4 last year that Harry mentioned, we also have a very large contribution from our Diovan [HCT] generic launch, which was under a 180-day exclusivity last year, and will be negligible or next to nothing this year. So we’re up against a very big comparator in terms of year over year, but at the same time I feel good about the underlying growth momentum that we have across Europe, emerging markets and biosimilars, as we continue to see strong double-digit growth there for the last couple of years.

Our next question comes from Tim Race from Deutsche Bank. Please go ahead.

Just three please. First of all, on Galvus, could you just comment on the German GBA assessment? What are the next steps there? And maybe quantify what sales are at risk in that market? And second, if you could just help us understand the Diovan in Japan issue. I know you won’t talk about potential fines, etc., and the magnitude, but could you expand on whether you’re actually losing sales in Japan because of this, or are you provisioning for a future fine? And possibly a third question, can you just break out the nine months animal health and OTC sales, and just help us understand how sales are performing there?

So I guess most of you have probably read in the press that the German Federal Joint Committee, the GBA, announced that they did a benefit risk assessment of Galvus as well as a variety of other DPP-4s, and they said that our product did not provide an additional benefit relative to sulfonylureas. So there’s now a discussion process that’s underway, where prices will be discussed. Hopefully we can find a way forward with them. In the event that they choose ultimately not to be reasonable, then the product could potentially, worst case scenario, go away in Germany. That would be a one-time impact on Galvus, but Galvus still has a lot of growth ahead of it, and we would manage our way through. In terms of Diovan in Japan, I think everybody’s quite aware of the conflict of interest issue, where we had an employee quite some number of years ago whose name was published in a clinical paper, and it wasn’t disclosed that he was a Novartis employee, and unfortunately we didn’t catch that. There’s been then controversy in Japan, there’s been a lot of press, and as a result we have begun to lose some Diovan market share and Diovan shares. It’s in the tens of millions of dollars in terms of lost sales that we would have had otherwise. The other thing I just want to remind you is that Diovan was scheduled to, and is expected to, lose its exclusivity mid-next year, so while short term this is nice from a financial perspective, the bigger issues in Japan are really one on reputation and reputation rebuilding, which we’re working on.

Our final question comes from [unintelligible] from Goldman Sachs. Please go ahead. [unintelligible] - Goldman Sachs: First, just kind of getting the sense of the potential for stock buybacks going into 2014. I realize that you won’t comment on it until the analyst day, but just how should we think about the incremental [unintelligible] expenditures now that the Lincoln manufacturing has been sorted out? And do you still see 2014, 2015 being a year of high capex? And secondly, as it relates to the OTC businesses, can you just help us better appreciate the timeline for that coming back on? When do we see it returning to full production? Should it be first quarter ’14, should it be first half of ’14?

Harry can jump in on the buyback, but I think it would be premature to say anything about an additional buyback. We’ve said that we want to be comfortably in the double A rating from a credit rating standpoint. We haven’t formally announced a share buyback because historically we haven’t had the debt ability to do that, if that were our target. We’re now approaching that, and I think there will be more to discuss at a later time. That’s about where I would leave it.

Maybe just a couple of points. You have seen that we bought back 30 million shares opportunistically, almost $2 billion, as we mitigate, I believe, [unintelligible] option programs, number one. Number two, the capex increase you’ll see are not only Lincoln. We are building our manufacturing site and research sites, so this and next year will be higher capex.

Brian, maybe on Lincoln?

If you remember, at the end of Q1 we made the announcement we were going to focus the site on [solid] manufacturing and to date we’ve been producing and shipping Sentinel, from animal health. We will begin shipping Excedrin at the end of this month, and we’re working on the qualification and validation of Theraflu as we speak. And then over time we’ll continue to increase the complexity of the site as we’re ready to take that on.

Okay, I’d like to thank everybody for attending the call today. We look forward to updating you at the end of fourth quarter. Thank you.