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Edited Transcript of NOVN.VX earnings conference call or presentation 18-Jul-19 12:00pm GMT

Q2 2019 Novartis AG Earnings Call

Basel Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Novartis AG earnings conference call or presentation Thursday, July 18, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harry Kirsch

Novartis AG - CFO

* John Tsai

Novartis AG - Head of Global Drug Development & Chief Medical Officer

* Marie-France Tschudin

Novartis AG - President of Novartis Pharmaceuticals

* Samir Shah

Novartis AG - Global Head of IR

* Susanne Schaffert

Novartis AG - President of Novartis Oncology

* Vasant Narasimhan

Novartis AG - CEO

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Conference Call Participants

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* Andrew Simon Baum

Citigroup Inc, Research Division - Global Head of Healthcare Research and MD

* David William Maris

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Emmanuel Douglas Papadakis

Barclays Bank PLC, Research Division - MD & Head of European Pharmaceuticals Research

* Florent Cespedes

Societe Generale Cross Asset Research - Senior Equity Analyst

* Graham Glyn Charles Parry

BofA Merrill Lynch, Research Division - MD and Head of Healthcare Equity Research

* Jo Walton

Crédit Suisse AG, Research Division - MD

* Kerry Ann Holford

Exane BNP Paribas, Research Division - Analyst

* Keyur Parekh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Laura Sutcliffe

UBS Investment Bank, Research Division - Equity Research Analyst

* Mani Foroohar

SVB Leerink LLC, Research Division - MD of Genetic Medicines & Senior Research Analyst

* Michael Richard Leacock

MainFirst Bank AG, Research Division - Director

* Naresh Chouhan

Intrinsic Health Advisors - Founder

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst

* Richard J. Parkes

Deutsche Bank AG, Research Division - Director

* Richard Vosser

JP Morgan Chase & Co, Research Division - Senior Analyst

* Seamus Christopher Fernandez

Guggenheim Securities, LLC, Research Division - Senior Analyst of Global Pharmaceuticals

* Stephen Michael Scala

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Timothy Minton Anderson

Wolfe Research, LLC - MD of Equity Research

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Presentation

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Operator [1]

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Good afternoon and welcome to the Novartis Q2 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.

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Samir Shah, Novartis AG - Global Head of IR [2]

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Thank you. Thank you, everybody, for taking the time to listen and participate in our quarter 2 investor call.

Before we start, I'll just read 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.

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Vasant Narasimhan, Novartis AG - CEO [3]

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Thank you, Samir, and thanks, everyone, for joining today's conference call. In the room with me today I have Harry Kirsch, our CFO; Shannon Klinger, our Chief Legal Officer, Susanne Schaffert, our President of Novartis Oncology; Marie-France Tschudin, our President of Novartis Pharmaceuticals; John Tsai, our Global Head of Drug Development; and Richard Saynor, our new Head of Sandoz.

So as you saw today in this morning's results, we really had an exceptional Q2 and a strong first half of the year, which we're very pleased with and very pleased to give you further details on over the course of this presentation.

If we turn to Slide 4, we delivered a strong Q2 with margin expansion and continued to progress our agenda on transformative innovation. When you look at the operational performance, we have plus 8% on sales, plus 20% on core operating income with a margin expansion of 3.2%. And Harry will go through in a bit more detail the numbers as well as some of the pushes and pulls that we see for the first half as well as for the second half. But based on the strong momentum that we've seen, we are increasing our sales and core operating income guidance for the full year, and Harry will go through the specifics of that in a few slides.

Importantly, we also advanced our transformative innovation agenda with our pipeline with Zolgensma, Piqray and Mayzent all launched. Xiidra, acquired in July, is now fully integrated and we're getting prepared to re-energize that brand. SEG101 filed with a priority review. And we also had a positive overall survival data in -- with Kisqali in premenopausal women presented at ASCO. So very strong progress on our innovation agenda as well.

So moving to Slide 5. The sales performance is primarily driven by very strong performance in Innovative Medicines. In particular, we are pleased with the performance in our growth drivers. So of course, Entresto and Cosentyx continue their strong momentum, as you can see with the growth rates in Q2 and the first half. Across our Oncology brands as well, very strong growth. Lutathera continuing to perform well. Kisqali beginning to accelerate, Kymriah also with very solid performance. So we saw a broad-based growth across our Innovative Medicines portfolio, which gives us confidence as well for the remainder of this year and going into future years.

So moving to Slide 6. When you look at Cosentyx specifically and particularly focusing on the U.S., we were pleased we could continue to grow the brand in a what is increasingly competitive environment. Looking at the U.S. dermatology segment, you can see that for NBRx percent gains of Q2 of 2019 versus Q2 2018, Cosentyx gained 1.5 share points in a very competitive space. So we're very pleased by that strong performance by our U.S. team. When you look at TRxs, we're growing ahead of market at 28% versus the market growth of 10% and with 17% overall growth in NBRx.

When you go to rheumatology, where again, Cosentyx has truly unique data in psoriatic arthritis and ankylosing spondylitis, you can see our weekly TRxs are now approaching or exceeding Enbrel and HUMIRA. When you think in terms of market growth, we're growing 38% versus a market growth of 14% on TRxs and also have solid NBRx share growth. So when you look across the U.S. business, we are very pleased with how Cosentyx is performing in this competitive environment and we'll look to continue that momentum in the back half.

Turning to Slide 7. I also wanted to highlight that we continue to generate additional data on Cosentyx in the existing indications in psoriasis and rheumatology as we prepare for data we plan to release later this year and in the coming years on new indications. In particular, when you look at psoriatic arthritis, most of these patients have so-called axial manifestations. And Cosentyx has demonstrated in our recent MAXIMIZE study that we could impact these axial manifestations in a significant way. You can see the data here that we recently presented. This further bolsters the case for Cosentyx' use in these rheumatology patients. And I think it's just one example of many as we continue to build out the data set to support Cosentyx' broad use.

So moving to Slide 8. When you look at Entresto, we are seeing a really strong performance from Entresto, continued acceleration for this important medicine for heart failure patients. You saw the revenue growth of 81% with solid growth both in the U.S. and in the ex U.S. But importantly, we continue to get strong recommendations from key groups. So on the right-hand side, you can see the European Society of Cardiology heart failure expert consensus now supports Entresto's use in a -- as first-line therapy for patients with HFrEF. This will allow us to continue to accelerate the use of Entresto in the first-line setting, in ambulatory and in the hospital setting. I'll talk a little bit more about the PARAGON data set in a few slides.

So moving to Slide 9. I'd like to spend a few slides giving you an update on Zolgensma. So we're really pleased with the launch of Zolgensma today. We've seen very strong demand. We're pleased with the launch and access progress we're making. I want to give you a few details as proof points.

First, when you look at the launch, we had an approval on May 24. Within 3 days, we were promoting in the market. Within roughly a week, we had our first commercial policy and product ready to ship. We had our first U.S. patient treated within approximately 2 weeks and we already have had patients treated through the French ATU mechanism outside the United States. In some instances, we've even had patients approved for therapy from the time of receiving the Rx within 24 hours. So that kind of shows you the enthusiasm there is in the SMA community for this medicine.

Now for some of the details, the first thing I want to highlight is even in the absence of medical policies or specific approvals, we are able to use medical exceptions to manage many of these patients getting through the process. And that's the primary route right now we're doing when we don't have a policy in place. But we're having best-in-class, we believe, progress on getting medical policies in place.

Over 20 commercial plans, representing 40% of commercial lives, and 4 Medicaid plans have policies on coverage already. Not all of these have been posted on external websites. The majority of these policies are in line or close to the label. The common limitations we're seeing are with patients with 4 SMN2 copies, which is about 10% of the overall SMN2 prevalent population in this age group; and some limitations with combination use with nusinersen. When you look at the approval rates we're seeing so far, patients going through the Novartis hub, almost all patients going through our hub have been approved thus far when appropriate steps -- after appropriate steps have been taken. We have very high approval rates for the on-label patients either via policy or medical exception, as I said. And I think the other important thing to note is we've had a wide range of the patients already approved, including patients from age 1 to 23 months, weights up to 12 kilograms, 2 and 3 SMN2 copy numbers, treatment-naïve as well as those previously treated by the currently approved product.

In terms of contracting, to get any of the special contract terms that we've been promoting, we have 17 commercial plans representing 40% of commercial lives having already signed a letter of intent on contracting terms. And we continue to try to progress across the relevant insurance community. So strong progress already, and just with the first few weeks after launching this medicine.

So if you go to Slide 10 and you look at the news flow we have for the second half, we are planning to initiate discussions with the U.S. FDA on intrathecal dosing for the older populations based on our STRONG study. We are on track to have EU and Japan approval by Q4 2019. And we plan to have other country filings initiated in Q3 for our broad global rollout of the medicine. Later on this year, we'll show the data -- updates on data from SPR1NT, STRONG and STR1VE at various medical congresses, as you can see, over the course of the fall.

So moving to Slide 11. One piece of data I wanted to highlight from our recent presentations at AAN is Zolgensma's performance in presymptomatic patients, where patients are achieving age-appropriate motor milestones. Just to remind you, SPR1NT is our presymptomatic study. It's a study that has patients with both 2 copies and 3 copies of the SMN1 gene. Patients were presymptomatic.

And what you can see on the right-hand side is the progress these patients are making versus the WHO windows of normal achievement. So you can see the patients in green boxes are patients who are sitting without support that have 2 copies of the SMN2 gene. You can see patients standing with assistance, and you can see how these patients are now progressing. And we're looking forward to providing you an update to show, we hope, that we can get these patients to progress normally after treatment early in their life after being identified by newborn screening or in the early months of their life. So very exciting data presented at AAN already on presymptomatic patients and more updates to come in the fall.

So now moving to Piqray on Slide 12. Piqray received FDA approval on May 24. CHMP opinion is expected in the second half of this year. We're pleased with the progress we're already making with payers, covering over 80% of the target population in terms of the engagement we already had. We're also seeing good uptake of the PIK3CA mutation testing, which was really our focus for this year to really ensure high testing rates so that we can drive the launch for the years to come. The NCCN guidelines currently recommend PIK3CA mutation testing, and we've also entered into an agreement with Foundation Medicine to develop plasma and tissue testing.

We're also pleased that we're now able to confirm we'll be exploring Piqray in other tumor types in the second half of 2019. We'll have trial starts for HER2-positive advanced breast cancer as well as triple-negative breast cancer. And then based on data we already have in house, we will be moving to late-stage studies in first half of 2020 in head and neck and ovarian cancers.

So on Slide 13, we move to Mayzent. Now in Mayzent, we're also pleased with the progress we've made. This was a year where we wanted to focus on educating the patient -- physician community, making sure we had strong access in place so that we could drive this brand's use in the SPMS setting for the long term. Just to remind you, we had unique clinical data and a supportive label to start with, with the full range of RMS indications, but the only medicine that has SPMS data specifically in its label. And some of the interesting profile elements of the drug, high efficacy, reduces disease progression, no first-dose observation for 70% of the patients.

Thus far, our priorities for Mayzent are progressing well. We believe we're the first choice now for active SPMS for health care providers in the United States. We have 90% of neurologists willing to prescribe Mayzent based on the survey data that we see. We currently have 70 million lives with preferred access to Mayzent to date, and we continue to try to grow that access over time. And we're also working to use digital tools to help identify patients who truly are active SPMS patients and would benefit from Mayzent in the long term.

So we'll look forward to providing detailed sales data in Q3 for both Zolgensma and Mayzent, but I hope that gives you a sense of where we are in building the foundational building blocks for both of these launches.

Now turning to ophthalmology. With Beovu, or RTH258, we've, as you know, developed a differentiated medicine that now is on track for launch upon approval later this year. Remind you that HAWK and HARRIER clinical programs demonstrated uncompromised vision, less retinal fluid and fewer injections versus the comparator medicine. We've also launched a pretty expanded clinical program, including a study called TALON, which is a head-to-head study of brolucizumab versus aflibercept in a treat-to-control regimen in kind of an apples-to-apples setting. So we look to continue to provide the data needed to support Beovu's use in a broad range of patients for the long term.

We're prepared for the launch. Approval expected in Q4 '19, CHMP in Q1 2020. We've already seen strong awareness of the clinical data. Both our U.S. and EU operations are preparing, and we plan to be ready for a strong day 1 launch of this medicine.

Also in ophthalmology, when you go to Slide 15, our plan is to accelerate Xiidra now that we've brought it fully in house while laying the foundation to maximize its long-term potential. Now just to remind you, dry eye is a significant patient unmet need. It's generally underdiagnosed and undertreated. 34 million patients with dry eye in the U.S. alone. It's estimated only 50% are accurately diagnosed and really only a fraction of that, 10%, is treated with an appropriate medicine.

We're well aware that when you look at the TRx data for Xiidra over recent quarters, it has been very flat. We believe this is because of the uncertainty involved as Xiidra's ultimate ownership was not clear. Now that we've brought certainty to the sales organization and the marketing organization, our plan is to reinvest in the medicine. We'll reengage the sales force, focus on share of voice. We have a plan to optimize our medical education with a plan to promote, including a DTC campaign starting in Q4 of '19. Longer term, our plan to maximize Xiidra will depend on our ability to expand access for Part D patients beginning in 2021. So we'll continue to track, continue to push, and we'll look forward to keeping you up to date on our progress with Xiidra.

Now lastly on our near-term portfolio, I wanted to give an update on SEG101, crizanlizumab, which has been submitted in both the U.S. and EU. Now just as a reminder, in the world of sickle cell disease, we have therapies which are to treat a sickle-cell pain crisis. There are therapies to prevent a crisis from happening in the first place, such as with SEG101. And then there are of course cell and gene therapies that are looking in certain patients to try to definitively treat the underlying genetic cause of the disease. In the case of SEG101, we're really focused on preventing vaso-occlusive crises, which are the primary reason for hospitalization, the primary cause of pain and long-term sequelae for these patients, including some of the mortality outcomes, and the long-term cost to the system.

So as I think you may have seen, we've been granted priority review for SEG101 in the U.S. and we continue to advance our filings around the world. We're also gearing up for a successful launch in the U.S. with a commercial organization in place, access plans in place and an innovative disease awareness campaign that we've launched using digital technology, which we hope will truly mobilize the patient community behind this medicine. As a reminder, there's about 60% of the patients, we would expect within the sickle cell disease population, who have 2 or more vaso-occlusive crises and would be eligible for SEG101.

So moving to Slide 17 and just to say a word -- a few words about upcoming readouts. We have a number of upcoming readouts in Q3, Q4 and Q1. And wanted to highlight a few of these in my closing comments.

So if you move to Slide 18, I think as many of you are aware, the PARAGON heart failure studies, the first confirmatory trial that's been -- trying to be conducted in preserved ejection fraction -- large-scale study to be conducted in preserved ejection fraction, or heart failure, using a novel endpoint with recurrent heart failure hospitalization. Our next expected milestones for this are results and filing in the second half of 2019. And we also have a shell that's been posted for the ESC late-breaker. I would note we have not seen the data yet for this study. This is really a shell for the late-breaker presentation. The study was intentionally designed to assess Entresto's impact on the burden of disease with these repeat hospitalizations. We believe the study design looking at that primary endpoint, as well as other elements we've learned from past failures in preserved injection heart -- fraction heart failure, will give us the best possible chance of succeeding in a patient population that's never had an approved medicine. So we'll look forward to giving you updates as soon as we can. And hopefully, we'll have positive results to share later this year.

So moving to Slide 19, I also wanted to say a word about ofatumumab, which is our -- a subcutaneous B-cell depletion agent targeting the CD20 target to provide -- which has the potential to provide access to high-efficacy B-cell therapy for a broad RMS patient population. We believe taking a medicine that is highly efficacious, moving it subcutaneous to give patients full flexibility, the potential to avoid having to go regularly in for a lengthy intravenous infusion process, will be welcomed by providers and by patients and could potentially allow the more broad use of B-cell depleting agents in RMS.

I also wanted to remind the group -- of the data profile that we have for ofatumumab, where we know that with the loading dose we've taken into the Phase III program, 60 milligrams Q12 dosing to start, we've seen very rapid B-cell depletion, and you can see that in the attached graph. Then what we expect is with monthly dosing, we can maintain that B-cell depletion and hopefully avoid some of the rebound that you might see in drugs that are dosed less frequently, especially towards the end of the therapy timing. So we wouldn't want to see that rebound, so we believe monthly dosing will hopefully keep those B cells down.

On the flip side, we know that when we stop therapy, the B-cell repletion will happen in case safety signals are seen. So we think it could be a positive both from an efficacy and a safety standpoint. And ultimately of course, the data will tell us. So we'll look forward to provide that data to you later this year and hopefully bring something to patients that's flexible, self-administered and provides an approved overall profile.

So moving to Slide 20. Now I just want to say a word as well about fevipiprant, our oral DP2 agent to tackle severe asthma. Just a reminder, on the left-hand side, our goal here is to address the so-called treatment gap in severe asthma. We know that there are 3.4 million patients, in GINA 3 moderate patients, who are on inhaled therapies. But these patients -- many of these patients progress and need something beyond their inhaled therapeutics. Well, we know there's only 120,000 patients on biologics, which leaves a significant gap of 3 million patients either with high EOs or all-comers that need a better option to enable them to be in control of their asthma before potentially needing a biologic or perhaps in lieu of a biologic.

We have a sizable Phase III program of 5 separate studies. LUSTER 1 and 2 looks at exacerbations. We have an endpoint there that tries to put us in line with the exacerbation reduction seen with biologics. We have ZEAL 1 and 2 that target lung function. And then we have the SPIRIT trial that's looking at safety. So we'll look forward to providing you additional data. ZEAL 1 and 2, we would expect the data release in Q4, and LUSTER 1 and 2 in Q1 of 2020.

So lastly, I wanted to just introduce -- we have here in the room Marie-France Tschudin, who's been appointed President of Novartis Pharmaceuticals. She's of course a member of our Executive Committee. We're thrilled to have her. She's had 25 years of experience in pharma and biotech, including a lengthy period at Celgene. Most importantly for us, she's a purpose-driven leader who lives the culture we're trying to build at the company every day: Our unbossed, inspired, curious culture. She joined us in 2017, has held a few different roles. And we'll look forward to supporting her with great success here at Novartis Pharmaceuticals.

So thank you very much. And I'll hand it over to Harry for some more details on the financials.

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Harry Kirsch, Novartis AG - CFO [4]

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Thank you, Vas. Good morning and good afternoon, everyone. My comments refer to the continued operations results, and growth rates are in constant currencies unless otherwise noted.

So Slide 23 shows a summary of our quarter 2 and first half continuing operations performance. In quarter 2, sales grew 8% mainly driven by continued momentum of Cosentyx and Entresto and our Oncology growth drivers, including Lutathera, Taf/Mek, Promacta, Kisqali and Kymriah.

Core operating income and core EPS both grew 20%, mainly driven by higher sales and productivity, partly offset by growth investments. On free cash flow, we had $3.6 billion, up 11% in U.S. dollars, mainly driven by the strong operating performance and the divestment proceeds from the sale of our Klybeck site here in Basel. These positive cash flows were partly offset by OTC joint venture dividends which we received for the last time in quarter 2 2018.

Net income in the quarter for continuing operations was $2.1 billion and $4 billion in the first half. The slide you see here, this reported net income numbers versus prior year is due to the $5.7 billion OTC joint venture divestment gain we recorded in quarter 2 of last year.

On Slide 24, you see the quarter 2 core margin by division. Continuing operations, margin improved by about 3 percent points in the quarter and the first half, driven by Innovative Medicines division. The Innovative Medicines' strong sales leverage and productivity were the key drivers of the margin expansion. While there was sales growing 9%, we are expanding margin while still increasing investments in our key growth drivers and pre-launches.

There were also a couple of favorable onetime items this quarter in the IM core margin. Pre-launch inventory provision releases after the regulatory approvals of Zolgensma and Piqray contributed about 1 margin point. The continued Diovan and Exforge growth due to generics valsartan supply shortages contributed about 0.5 margin point. So the total Innovative Medicines margin improved 370 basis points to 35.4% of sales. If we exclude the onetime effects described earlier, the Innovative Medicines margin would have been around 34% of sales.

Sandoz improved by 140 basis points, the margin. And this was driven by sales growth, positive product, geographic mix, productivity and cost discipline as we continue the Sandoz transformation.

On to Slide 25. So in light of this very strong first half performance, we are revising upwards our 2019 full year guidance. For the new focus medicines company: Net sales are revised upwards, expected to grow mid- to high single digit; core operating income revised upwards, expected to grow low double-digit to mid-teens. And from a divisional perspective, we revised Innovative Medicines sales guide upwards to grow mid- to high single digit. And the Sandoz sales guidance is also revised upwards to broadly in line to a low single-digit growth.

We now also expect, just a word on the tax rate, our full year core tax rate to be in line with what you see on the half 1 core tax rate of 16.4%. The increase both versus the previous year as well as versus our original 16% is driven by some profit mix changes.

On Slide 26, I want to talk through some of the dynamics for the first and expected dynamics for the second half of 2019. Clearly, the half 1 performance was very strong with core operating income growing 19%. This was mainly driven by the continued sales momentum of our growth drivers as well as ongoing productivity programs. We, of course, expect these to continue in the second half.

In the first half, we also benefited, as mentioned earlier, from valsartan competitor supply shortages which resulted in double-digit growth for Diovan and Exforge. Recall that this supply issue and Diovan-Exforge growth started in quarter 3 of 2018 and may stop at any time. Hence, also in quarter 3, we begin to lap the growth in the base from this valsartan situation.

As we look at the second half, we are expecting potential increased generics headwinds, particularly on AFINITOR, Exjade and some older ophtha brands. Furthermore, we continue to monitor generic activities on Sandostatin LAR. Now as discussed on the quarter 1 call, we were expecting these generic headwinds earlier in the year, basically in quarter 2. There is of course a potential that we continue to see less generic headwinds than expected also in quarter 3. In that case, if that situation would come up, I would assume that we end the year 2019 at the higher end of our full year core operating income guidance, but it's a bit too early to tell. And I'm sure we will discuss this topic again at the quarter 3 call.

On Slide 27, you see how currencies would impact our results. If mid-July rates prevail for the remainder of 2019, the full year impact on sales would be negative 3%, and on core operating income, would be a negative 4%. And as you know, every month, we update the expected currency impact on our website.

And with that, I hand back to Vas.

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Vasant Narasimhan, Novartis AG - CEO [5]

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Thank you, Harry.

(technical difficulty)

And so in conclusion, a very strong first half to 2019. And when you take a step back over the last 18 months of the company, we've been able to do over $60 billion of transactions to transform the company. We've set 5 priorities in place to truly drive performance, starting with culture and innovation. And it's starting to pay off, we believe: Strong sales and margin expansion, double-digit core operating income growth, the innovation pipeline is really kicking in, catalyst-rich second half. And we'll look forward to continue to keep you updated in the second half of the year.

So with that, I'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Graham Parry of Bank of America.

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Graham Glyn Charles Parry, BofA Merrill Lynch, Research Division - MD and Head of Healthcare Equity Research [2]

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So the first one's on Zolgensma and the $100 million inventory expectations for a quarter or perhaps the second half of the year. Just trying to get a feel for what sort of inventory you would have built prior to launch.

Secondly, on label expansion with the SPR1NT data, could you give us some time lines of when you expect to meet with FDA? And whether you think a 2H filing on the back of that still remains possible? And similar for the STRONG data on the intrathecal filing as well.

And then thirdly on both PARAGON and the ofatumumab data, you submitted both for medical conferences. You flagged that you don't have the data in house yet on PARAGON. But would you issue a headlined press release on the data when it comes? Or do we have to wait for ESC? And a similar question for ofatumumab, ASCLEPIOS has data submitted for ECTRIMS, and do you have data in house there? Or should we expect a headline press release somewhat imminently?

And final on Gilenya, just can you give us an update on where you are with your Mylan declaratory judgement and preliminary injunction? And whether the API win that you had, do you think, strengthens your hand in settlement negotiations with generics now?

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Vasant Narasimhan, Novartis AG - CEO [3]

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Thanks, Graham. So on the Zolgensma $100 million provision. Harry?

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Harry Kirsch, Novartis AG - CFO [4]

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Yes. Thank you, Graham, for the question. So we basically -- from an IFRS standpoint, we basically expense or write-down immediately any production of product that is not yet approved. It happens on every product. And then once approval is there, the inventory basically gets written up and there's inventory provision release. Now in this quarter, we got 2 products approved, Zolgensma and Piqray, and therefore had roughly $100 million north inventory provision release in OIE, where you see it.

That -- now that happened last time, I think -- usually, this happens and you don't even notice as much, it's smaller numbers. Last time this was a large number was 7 years back with Entresto approval. But it's normal practice. And basically, that presents on these products what has been produced over the -- since -- on AveXis since we acquired. And is of course also showing that production is going extremely well. And we are ready to supply many, many patients with it.

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Vasant Narasimhan, Novartis AG - CEO [5]

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And does not necessarily indicate anything about sales expectations. I think that's it.

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Harry Kirsch, Novartis AG - CFO [6]

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No. I mean, I would not -- first of all, we were -- of course, this is a product that has long shelf life. So -- and production of course is important, and we want to make sure that we are ready to supply any sales scenario.

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Vasant Narasimhan, Novartis AG - CEO [7]

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Yes. And I would say also on Zolgensma production, it's going well. We have, in addition to our Chicago, North Carolina facility, acquired a facility in Colorado. This year, we'll have ample capacity up to 1,000 patients plus. And then we'll plan to expand capacity there going forward.

Now with respect to the SPR1NT and STRONG studies. So SPR1NT is now technically covered by our existing label, the treatment of patients in the presymptomatic phase. So we would plan to present updates on that data, per the slide, I think, at WMS. And -- but it wouldn't affect our filing.

Now with respect to STRONG, our plan is to go to the FDA in Q3 and hopefully come to an agreement on a filing strategy. If there was agreement, we would aspire to file before the end of this year.

Now moving to PARAGON and ofa, John?

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John Tsai, Novartis AG - Head of Global Drug Development & Chief Medical Officer [8]

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Yes, Graham, thanks for the question. And we have very rich second half of the year with data readouts, in Entresto, for PARAGON, ofatumumab as well as fevi. As Vas said earlier, we don't have any of the data in hand. We're obviously very excited about seeing the data in the very near future. We're going to look at these case by case and evaluate whether we will issue press releases moving forward. But what I will say is that we've had to submit some of the abstracts, for example, for Entresto and for PARAGON to the ESC so that we could hold the late-breaking session at ESC. So moving forward, we'll be looking forward and evaluating these case-by-case basis.

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Vasant Narasimhan, Novartis AG - CEO [9]

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Yes. And lastly on Gilenya, we do not expect any launch of a generic Gilenya in 2019. And this is in part because, as you know, Novartis was granted a motion for preliminary injunction which prohibits any generic manufacturers in that case from launching Gilenya until the decision on the patent, which at the earliest would be in March 2020. So we do -- we expect a potential appeal decision in early 2020. But right now, our focus is on vigorously defending the dosage patent and protecting Gilenya for as long as possible.

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Operator [10]

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Your next question comes from the line of Tim Anderson from Wolfe Research.

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Timothy Minton Anderson, Wolfe Research, LLC - MD of Equity Research [11]

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In my opinion, the 2 most important readouts for Novartis through the rest of the year are PARAGON-HF and the QAW trials. And there's reasons to be cautious with both of those. With PARAGON, no one's succeeded yet in getting a label for HFpEF. And then for QAW, there's been lots of prior failed attempts with that class of drugs. So of those 2 programs, if you had to pick 1 with the higher odds of success on delivering Phase III results that are positive, which would it be?

And then second question is on Cosentyx. About a year ago or so, you guys had kind of repriced the brand in the U.S. to try to get more first-line biologic usage in psoriasis ahead of [KNS]. And I'm wondering how that has evolved and played out. And if you can just talk about that evolution of your first-line biologic usage due to that repricing strategy.

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Vasant Narasimhan, Novartis AG - CEO [12]

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Thanks, Tim. Well, I'll let John go on his pick and maybe I'll think about my pick. Go ahead, John.

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John Tsai, Novartis AG - Head of Global Drug Development & Chief Medical Officer [13]

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Thanks, Tim. If I had to pick one versus the other, I would say there was a differential of about 0.01% difference, perhaps, if I had to differentiate between the 2. But this is my own personal, subjective opinion, which is I would say PARAGON perhaps has a 0.01% chance higher likelihood of success.

As you know, there's been numerous trials that have failed in heart failure with preserved ejection fraction. And currently, there is no treatment for this population of patients. We've learned from some of the trials that have been conducted in the past and we've actually incorporated those learnings into our trial for PARAGON. So success in PARAGON really is based on what we have for a primary endpoint: Combination of CV mortality with hospitalizations, whether that would be first-time hospitalizations or recurrent hospitalizations. So we're excited about it and we're looking forward to seeing those results.

Now in terms of fevi, I wouldn't say it's a lower likelihood of success. It's just I think that asthma is such an unmet -- a significant unmet medical need. And currently, we have the biologics, and there's really no oral treatments beyond your current inhalers. So we have a very extensive and comprehensive clinical program that we call VIBRANT with close to 5,000 patients. But if I had to pick 1 of the 2, it might be slightly higher, but it would almost be on -- par on par. So I'll defer to Vas to see if he has any other comments.

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Vasant Narasimhan, Novartis AG - CEO [14]

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No, I mean, the only thing I'd add on QAW at fevipiprant is just to remind that the key insight here was to shift the DP2s into more severe patient populations. So we saw a positive result in Phase II presented at ERS a few years ago in patients with high eosinophils. But the class had been explored in the past, but had been explored in GINA 3 or less, so far less severe patients. And so we believe that with the profile of the medicine, its good penetration of the relevant tissues as well as the eosinophil reductions we saw in the Phase II study, that's what really gave us confidence.

In terms of Cosentyx in first-line biologic use in the U.S., Marie-France?

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [15]

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So first of all, it's great to be back. It's a great time to be back in pharma. What I would say is that the performance for Cosentyx has played out as expected after last year's access wins, so we're very happy with that. We do remain confident that we will maintain our #1 or #2 position in our major markets.

We see very strong underlying demand, and that is because of Cosentyx' unique profile that does address manifestations beyond skin. We also believe we've got the most robust data, and that will continue. We're also presenting further data later this year, for example PREVENT in non-radiographic axial SpA. We're very confident in the future of Cosentyx in both derm and womb indications.

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Vasant Narasimhan, Novartis AG - CEO [16]

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Maybe if I would just add on the first line, we believe that it was the right strategy to get to the first line because I think the data supported it, but also from a payer perspective, it put us in a strong position. I know there's a lot of focus on the entrants, some of the new entrants coming in. And I think at least what Q2 showed is we were able to hold our own on formulary positioning thus far, and that's going to have to be our focus going forward, to ensure we keep growing share and beating the market in the years to come. But we're on it, and we believe we remain -- continue to believe that first-line usage, and -- keeping it in the first line is critical.

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Operator [17]

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

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Keyur Parekh, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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Two questions, please, the first one for Vas and then for Harry. Vas, you described the launch for Zolgensma as being very strong and good demand. Can you give us some sense for how many patients have you actually treated so far? Is it kind of single digit? Is it double digits? How should we think about that?

And then secondly, Harry, kind of in your remarks about the differences between the first half and the second half, you alluded to the fact that if there was going to be lower generic impact than you expect, you would get to the higher end of the range you have just issued. Given you've delivered 19% core operating income growth in the first half, it would be difficult mathematically for you to get to anywhere other than the midpoint of the range, even if you were to get a lot of generic competition given the guidance you've given on AFINITOR. So what would it take for you to go above the range? And why isn't that more likely?

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Vasant Narasimhan, Novartis AG - CEO [19]

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Thanks, Keyur. So first on Zolgensma, we're not going to give any specific numbers. But what I would say is we're seeing strong demand in terms of Rxs coming into the hub, which is I think the first marker we were looking for and that steady week-on-week, and that's what we wanted to see and is in line with our plan. We're seeing good conversion of those Rxs through the system, whether it's in Medicaid or in private payers, ultimately into approvals either through the medical exception process or getting policies in place and then ultimately shipping the medicine and getting the patients treated, which is when we ultimately recognize sales.

So we're looking at all 3. We have a great team on it. I think I personally am involved in many elements of this. So I think when we say it's on plan, I think it's exactly what we mean. It's where we wanted it to be. We have a lot of work to do, but we're happy with where we are.

Now with respect to the second half, Harry?

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Harry Kirsch, Novartis AG - CFO [20]

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Yes, Keyur. We have great momentum, no question. So the first half has been great. And we do expect that the key growth drivers continue to do well, productivity programs to continue to go slightly -- or ahead of expectations.

The generic impact, we start seeing some. There is [Zaflar] coming in a couple of European countries, so we expect a bit higher generic impact. We see early signs. Of course, we will rigorously defend all of our products, but that starts a bit. And of course, the inventory provision release, will not to this magnitude happen again.

The second impact -- I don't want to talk down second half year, but we saw the acceleration of our sales momentum in the second half of last year. And also when you compare half 2 margins last year versus half 1, already an increase off the margins last year. So we have also a bit of a base effect, but we expect continued good performance and just mainly the generics, in addition to some of these base effects, basically is the unknown.

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Operator [21]

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Your next question comes from the line of Andrew Baum of Citi.

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Andrew Simon Baum, Citigroup Inc, Research Division - Global Head of Healthcare Research and MD [22]

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First question is I note that you provisioned $700 million in relation to the DOJ case related to Diovan. Given your Chief Legal Counsel is on the call, perhaps you might care to talk to any anticipated changes to your corporate integrity agreement in terms of the addition of any onerous impact for your marketing activities going forward?

Second, on Zolgensma, historically, Novartis has provided guidance for full year for the newly launched product. I think Entresto and Cosentyx. I wonder whether you might care to do so in this case.

And then finally, I know you're not exposed to government plan anywhere near as much as some of your peers, but I also remember, Vas, you enthusiastically embraced the proposed rebate reforms being for patients and by inference for the industry. Now that's no longer in place, I'd be interested to hear your thoughts on how you assess the risks for U.S. reimbursement and pricing given the pressures from both sides of the aisle.

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Vasant Narasimhan, Novartis AG - CEO [23]

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Thanks, Andrew. So first on the provision, I'll answer the question. We've taken the legal provision of about $700 million related to the Southern District case. We've taken the provision in the context of the ongoing settlement discussion, and I think you can understand we can't comment further as the discussions are ongoing. And once we have a further update, we'll of course provide it, but I don't want to pre-speak against those negotiations. With respect to providing full year guidance, I can't recall what we did when, but I think with Zolgensma, we're focused on getting the fundamentals in place, getting a very strong launch and getting as many patients as possible in the just, call it, the prevalent pool, patients who are not new newly diagnosed and trying to get all of the patients that are newly diagnosed if we can. So we're not going to give any guidance. But anyway, you'll see it all in Q3, and I got to say we feel really good about where we are, we feel good about the trajectory we're seeing thus far.

Lastly, with respect to U.S. government policy. Certainly, the environment is very fluid. You can imagine we need to stay very close to it. Very difficult for us to predict between the executive branch and between the various proposals between the committees and the Senate, which ones will ultimately prevail or if they come in the end to full legislative vote. So hard to comment on specifics. Also hard to comment on specifics because we haven't actually seen on paper any of the proposed legislation, proposed rules or proposed bills.

In broad strokes, we, as a company, remain supportive of many of the reforms, whether that's around transparency, whether that's around some of the elements addressed by the CREATES Act, enabling stronger access to biosimilars, reforming Part B, thinking about the patient caps in Part D, all of these things are things that we're open and supportive of. But until we see something concretely on paper, it's difficult to say and difficult to really determine how any of this will progress. So we look forward with you to get more updates as the year progresses. I would want to highlight that we are very low exposure relative to our peer group, and we are -- amongst the leaders ex U.S. in the world in medicines, depending on how you look at it #1 in Europe and amongst the leaders around the world. In the U.S., we're low exposed to these government programs relative to our peers. So that also, I think, creates a positive relative situation for us.

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Operator [24]

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

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst [25]

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Just got a few quick ones. Firstly just for Harry, on the margins. We all know obviously the Innovative Medicines margin long-term gain basically goes to around mid-30%. Just curious as to whether or not we should think of that now as being conservative or should we think that to be likely to be hit sooner?

I guess I'm asking is it likely potentially you start back to see the conservative number where you can likely go ahead of that? Or is it more likely that, that mid-30% will just be achieved before the initial 2022 guidance.

Just secondly then, on Piqray, you mentioned that the sales for Zolgensma and Mayzent could be disclosed in the third quarter, but there is no mention of Piqray. Should we be taking that, I guess, to mean that Piqray with the companion diagnostic is going to take longer for sales to build? Or should we also anticipate some further visibility on Piqray during the quarter?

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Vasant Narasimhan, Novartis AG - CEO [26]

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So, on the margin, Harry?

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Harry Kirsch, Novartis AG - CFO [27]

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Peter, so as we all know, quarterly margins are also a bit volatile. So for example, last year, in quarter 3 we had a 34% margin. We entered the year at 32%, and we made good progress in 2017, 31%, last year, 32%. Now if you take a bit of the onetimers out, the first half, we are in the range of 33% to 34%. So good progress. Now could we achieve on a full year basis a bit earlier, we have to see. The big 2 or 3 big components, I would say, that will determine that. One, is the Gilenya defense. That is, of course, a big piece. We are confident, but of course, when we gave the mid-30 guidance it was not part of it. So that would certainly be helpful and potential upside. If it holds longer than that, then we will do everything that it would, but too early to update our guidance. And the other element is, of course, how the launches are doing, and we have many of them. Good, good progress overall, and I think what I'm highly confident about is how our productivity efforts are progressing. That's fully in our own control, and was part of our, I would say, overdelivery in the first half already. But of course, the first 2 elements I described we have to see how it develops over the next quarters.

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Vasant Narasimhan, Novartis AG - CEO [28]

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And then on Piqray?

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Susanne Schaffert, Novartis AG - President of Novartis Oncology [29]

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Peter, as Mayzent and Zolgensma, there's no difference in terms of the disclosure for Piqray. As Vas said, we're off to a very solid start. As you know, Piqray is approved together with a companion diagnostic for PIK3CA mutation testing from Qiagen and both of that is already included in the NCCN guidance. We are engaging these payers, covering 80% of the target population. And as you -- as we emphasized last time, obviously focus is on testing because that's the condition for Piqray treating, and we have to say that testing is going up, and we expect this to continue.

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Operator [30]

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Your next question comes from the line of Steve Scala from Cowen.

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Stephen Michael Scala, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [31]

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I have a few. First, on Zolgensma. Based on the strong reception in the market, it would seem an average of 5 to 10 patients could be put on the drug per week in Q3. Would you like to take this opportunity to suggest that that expectation is too aggressive, too conservative or are you unsure? All of your comments on the call so far have been plural, patients, Rxs, plans, contracts. So based on what you've said it would seem like that would be a good range.

Second, if PARAGON is a clear success or a clear failure, wouldn't you have to issue a top line release before ESC? So no top front line release implies fuzzy data at ESC? And then lastly, what are some reasons why Mayzent cannot duplicate Gilenya's first year sales, which were nearly $0.5 billion given a superior profile and label?

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Vasant Narasimhan, Novartis AG - CEO [32]

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Thank you, Steve. Always well-phrased questions from Steve. On Zolgensma, unfortunately, I cannot provide specifics on patients per week. I think what we would say is we are in the plurals range on all of the things you mentioned, and so we continue to see very solid uptake, and we are seeing that uptake every week. And so I think it's been positive. Every week, in terms of patients, every week in terms of plan, plans in terms of policies, every week as well in terms of contracting. So good momentum, and we look forward to sharing details in quarter 3. In terms of the PARAGON top line release, John?

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John Tsai, Novartis AG - Head of Global Drug Development & Chief Medical Officer [33]

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Yes. Thanks, Steve. As I have had a chance to look at various clinical trials, especially the large ones in cardiovascular clinicals, we've seen that results are sometimes difficult to interpret because it takes longer for us to either look at subgroups or sometimes there are secondary endpoints that we need to understand. So it will be great if it were clear and it will be great if it were clearly positive. Then I think that would be a very easy decision for us to move forward. But obviously, it really depends on the results that we see, and we do have some secondary endpoints as well as some sub-studies so we'll have to await what those are.

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Vasant Narasimhan, Novartis AG - CEO [34]

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And then lastly on Mayzent. Marie-France, you want to just take that?

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [35]

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Sure Vas, thanks. So the first thing I would say is that the physicians haven't identified patients so far with SPMS because there has been no medicine in the marketplace. So as we've said before, this year is all about education. I can give you some data on where we are with the launch. As you know, it is the only product proven to delay the stability in active SPMS patients. The awareness is high. We've got more than 90% of neurologists willing to prescribe. Even in my own personal conversations with physicians, there is a lot of appreciation for the EXPAND data. They need a treatment for this patient population. We've also seen a lot of progress in access. Over 70 million lives with preferred access, but we really need to focus on patient identification, creating a sense of urgency. At the end, we are very confident on the long-term potential of Mayzent, but this year is all about education.

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Operator [36]

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The next question comes from the line of Florent Cespedes from Societe Generale.

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Florent Cespedes, Societe Generale Cross Asset Research - Senior Equity Analyst [37]

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Three quick ones. First on Entresto, what is behind the sequential acceleration of the sales mainly in Europe, is it the guidelines that were new recommendations? I'm just wondering what could be the trigger to see such acceleration on the U.S. market?

Second question on Beovu. Could you give us more color on your U.S. commercial operations as your competitors are quite strong and well established there. And if you have maybe some flexibility to even further expand your U.S. operations on ophthalmology?

My last question is on Sandoz. So the division growth is back into positive territories. Do you see some improvement in some areas? Or is there any base effect? And is this better performance sustainable?

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Vasant Narasimhan, Novartis AG - CEO [38]

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All right. First, on Entresto acceleration, Marie-France.

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [39]

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So we see very strong momentum overall, and this is really due to underlying demand. Obviously, the PIONEER data has opened up a new patient segment for us in the in-hospital initiation. We're very confident with the momentum we're seeing across geographies, not only in Europe and in the U.S., but I can also say that China is off to a good start. Obviously, the ESC Heart Failure Association consensus paper that positions us in first-line on new onset in decompensated patients has been very, very useful for us and a real endorsement of the product. We are confident Entresto is becoming standard of care across the board, so we'll continue to see strong momentum, as I said, worldwide.

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Vasant Narasimhan, Novartis AG - CEO [40]

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Thank you. Lastly, on Beovu, we are having a really strong commercial team. We've been able to attract some excellent talent with deep experience in retinal disease and launching retinal medicines. We have a sales force fully deployed and ready. We have an excellent MSL team that's been out now for some time educating physicians on the data. We have good plans in place with respect to contracting, particularly given how the medicine is given in a buy-and-bill model. We've been working a lot on our patient hub to ensure that we are ready to go and make it seamless and easy for physicians to get patients on to the medicine. So we've got all, I think, the elements in place ready to go. Also, ex U.S. as well, we're gearing up well for the RTH -- of the Beovu launch. So overall, we feel like we're in a good place. I would say that for all of our launches, we have an executive-level review with our leadership team and deep ownership at the executive team level to make sure that we're doing the best we can to get all the details right on these upcoming launches.

The next question? Sandoz. Sandoz growth. Yes, of course. So Sandoz, we're pleased with the Q2 performance. When you look at it, it was primarily driven by strong performance outside the U.S. A mix of mostly strong biosimilars performance, but also I would say our core generics business with some recent launches such as fulvestrant and a few others continues to overall do well. So we're very proud with how Sandoz is performing ex U.S. Within the U.S., our team continues to work hard on what is a challenging environment. If you take out onetime -- certain onetime effects, you will see that in the U.S. the base business continues to have declines in the mid-teens consistent with what we've seen in past quarters. So we haven't seen yet the stabilization in that core GX business in the U.S. I think for U.S. -- in the U.S., the key will be our upcoming launches, which we hope will be a pegfilgrastim potentially as well are our inhaled generics as well as some of the injectable launches we have upcoming. And if those go well, we hope to also have the U.S. contribute. So going forward, we feel comfortable raising the guidance to in line to low single-digit based on that momentum that we're seeing really outside the U.S.

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Operator [41]

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Your next question comes from the line of Jo Walton from Credit Suisse.

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Jo Walton, Crédit Suisse AG, Research Division - MD [42]

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Just a few quick ones, please. Harry, you said that you were looking at sandostatin LAR generics in Europe. I wonder if you could tell us which countries the product has been approved in and what you expect the timeline for that to be moving into perhaps bigger, more important countries and potentially into the U.S.

On the Gilenya situation, could you tell us whether you're still accruing for royalties to Mitsubishi Tanabe? Their changing guidance earlier this year suggest that they're not being paid since February. So is that an extra benefit that this product is now even more profitable for you?

On Zolgensma, I wonder if you could just tell us a little bit about how you're progressing ex U.S. You say that you have treated somebody in France. But when do you think we'll actually be able to see paying customers outside of the U.S.? And finally, for Harry, you mentioned the tax rate going up because of the mix effect for -- to over 16%. Does that mix effect keep going? Should we now be looking at something above 15% for medium-term tax rate?

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Vasant Narasimhan, Novartis AG - CEO [43]

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So on sandostatin, Susanne?

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Susanne Schaffert, Novartis AG - President of Novartis Oncology [44]

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So sandostatin, let me share the facts that we have. There is one generic company that has recently received marketing authorization in the EU via decentralized procedure, and they now start getting national ratifications for their local marketing authorization. We know that there are several countries where they already achieved that like U.K., Denmark, Germany. And we see some first limited commercial activities. On the U.S., we are closely monitoring the situation, and we will keep you updated of information, in case we have.

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Vasant Narasimhan, Novartis AG - CEO [45]

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I think one reminder on sandostatin is it's a unique medicine, the setting it's given in. And so I think when you think about when and if generics start to come in, one generic starts to come, you will really have to model your erosion curves similar to what you see with biologics and with very limited competition and that's what our expectation at the moment in all geographies.

Next on Gilenya, Mitsubishi, Harry?

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Harry Kirsch, Novartis AG - CFO [46]

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All I can say, I don't know where some of the statements come from, but we are still paying and accruing royalties for Gilenya to Mitsubishi Tanabe and according -- in accordance to the contractual terms and agreement with them. So we keep paying, and we keep accruing.

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Vasant Narasimhan, Novartis AG - CEO [47]

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And then in terms of Zolgensma ex U.S., first, to clarify, the patients we referenced from the French ATU or from the named patient program are fully paid patients. So these are not -- these are paid patients by the -- either by self or by the relevant government, in the case of France. In terms of when we would expect approval as I said, in the presentation, we're targeting approval before the end of this year. I think for planning assumption you should assume Q4 of this year is when we expect to get European Commission okay and be able to launch the medicine.

In terms of tax rate, Harry?

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Harry Kirsch, Novartis AG - CFO [48]

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Thank you for the question on tax rate, Jo. Because often it's a complex topic and sometimes overlooked topic. It's also hard to forecast, so we had a slight increase from 16% to 16.4%. That's where we are quite confident the tax rate will be for this year. First of all, a couple of developments. As you know, the Swiss tax reform got approved on -- for us here in the Basel city, cantonal level and federal level which is excellent because that gives us a very good planning security in a very large part of our operations. We have a huge substance as you know in Switzerland with our 10,000+ associates, many manufacturing sites as well as R&D and our headquarters, many of them are here. So very positive development there that takes away uncertainty. That's great. And we have overall a very attractive tax rate. Now of course, the tax environment is getting -- since years more and more difficult, we have been able to maintain an attractive tax rate. And I also expect that we continue to maintain attractive tax rate probably midterm in the range between 16% and 17.5%. To be more precise than that, we usually do year by year, but I expect that over the years we continue to have a very attractive tax rate.

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Operator [49]

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Your next question comes from the line of Seamus Fernandez from Guggenheim.

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Seamus Christopher Fernandez, Guggenheim Securities, LLC, Research Division - Senior Analyst of Global Pharmaceuticals [50]

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So just a couple here. Can you guys talk a little bit about Cosentyx and the direction and performance there? Just looks like you were coming in somewhat below in the U.S. relative to script trends. Just wanted to get a better sense of how the mix of impacts there were coming in, whether it be inventory effects, price, direct price negotiations impacts relative to formulary access or perhaps just a doughnut-hole impact.

The second question, just wanted to get a general sense of the performance of your HUMIRA generic or biosimilar, and I assume presumably most of that performance came in European markets. Can you just give us a general qualitative sense, if you can't give us the exact sales? Just trying to get a sense of how the penetration is going for that product.

And then the last question, in terms of the expectations for PARAGON, John, you mentioned that there are always things with regard to large clinical studies like this that we have to be careful about and think about. Maybe could you just give us a general sense of what you would characterize. Is that a clean win? How would you characterize a clean win? And then what are some of the aspects that you think kind of complicate an evaluation of a large study like PARAGON, whether it be the different regional dynamics that we've seen become an issue in a number of studies or other factors?

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Vasant Narasimhan, Novartis AG - CEO [51]

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First, on Cosentyx. I'll just quickly take that one. In terms of what we saw, there was a small difference in terms of sales versus script trends. That's was primarily driven by small bit of inventory. Mostly, it's RDs which were just related to formulary access. In general, right now, we're seeing sales volume trend with Rx scripts and there is nothing that we would say as important to flag with respect to Cosentyx momentum in the U.S. across indications. With respect to adalimumab in Europe, I think as you know there are number of generic entrants who have come to market in adalimumab, which means that it's, of course, a competitive marketplace. We have, to our experience, seen solid uptake of the adalimumab biosimilars, whether through tenders or in other ways. When you look at our add-up penetration in Europe overall versus the originator it is around 22%. We estimate we are ranked #3 amongst biosimilars players. That's probably the best data we can get. We are very proud of our performance, particularly in rituximab, where we face less competition, as well as in etanercept which is, I think, a more favorable situation for us relative to the competition.

With respect to PARAGON endpoints, John.

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John Tsai, Novartis AG - Head of Global Drug Development & Chief Medical Officer [52]

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Thanks, Seamus, for the question regarding PARAGON. As you know, as I said earlier, the success would be really based on the primary endpoint, and the primary endpoint being CV mortality and hospitalization. What we know about heart failure with preserved ejection fraction is that the burden really is around hospitalizations and rehospitalizations for these patients. So for us, what we think would be success really is dependent on this hospitalizations or sometimes the subsequent readmission into the hospital. So that's something that we're looking at very closely and knowing that this is a significant burden for that population of patients.

Now regarding your second part of the question on what are some of the things we're looking at for perhaps secondary endpoints or sub-studies, and you had specifically mentioned are there regional differences. We have looked at some of the previous studies, looking at regional recruitment, particularly in the Eastern European countries, and we think we've factored that into our study. We have less than 5% from Russia and Georgia where -- in one of the previous studies, where there were some questions around that. We think we've taken that into consideration. But thinking about some of the other perhaps sub-studies we're looking at, we do have a cognitive sub-study looking at cognitive impacts. What I will say is that as we look at the overall adverse event reporting, we haven't seen and as well as the patient experience from spontaneous reports because Entresto is being used. We've not seen any signals in the current spontaneous adverse eventing -- events. But obviously, we need to see the results of the cognitive sub-study to be able to tell for sure. So these are some of the things that we take into consideration for the trial.

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Vasant Narasimhan, Novartis AG - CEO [53]

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I think overall, with PARAGON, I think the key thing to remember as we get to the final study is we looked very closely at past history, we studied very closely how the past studies were conducted, we tried to manage as best we could, we tried to also ensure we use repeat hospitalization for the composite endpoint along with CV death for the composite primary endpoint. And then we tried to also leverage our Phase II study, which showed both significant decreases in NT-pro-BNP as well as atrial remodeling. So all of that taken together makes us feel like we've conducted the study in the best possible way to give us a chance of success. But then in the end, the science will ultimately tell us.

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Operator [54]

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Your next question comes from the line of Richard Parkes from Deutsche Bank.

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Richard J. Parkes, Deutsche Bank AG, Research Division - Director [55]

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This is Richard Parkes from Deutsche Bank. First question on gross margin within Innovative Medicines. I think you previously said that the flat year-on-year gross margin for the full year would be a good guide, but you had a very strong second quarter, and I just wondered how we should think about that. Whether there's anything specific in Q2 gross margin and should the new launches be a positive to gross margin, offsetting maybe some of the impact from the generic launches? So that's the first question.

The second question is on Lutathera. I think sequential quarter-on-quarter growth slowed a bit. So I just wonder if there were any special effects there and whether you could discuss the longer-term growth prospects for that franchise?

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Vasant Narasimhan, Novartis AG - CEO [56]

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So first on gross margins, Harry?

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Harry Kirsch, Novartis AG - CFO [57]

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Gross margins is a bit hard to predict. As you know, our gross margin started to increase quite significantly driven by the productivity programs and favorable mix in the second half of last year. So whilst I continue to see good gross margins for the second half from the improvement versus prior year second half is expected to not be as much. Now a lot depends on the product mix, as you know, depends on -- some of the products with higher cost of goods progressing versus the ones that have either no royalty burden and very high gross margins. So hard to predict, but I think it just hopefully helps a bit with the modeling that probably was prior year half 2 I would not assume such a significant improvement.

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Vasant Narasimhan, Novartis AG - CEO [58]

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I just want to add, I mean, our overall transformation of our manufacturing is progressing really, really nicely, whether you look at our improvements in yield and improvement in production performance in our facilities, the optimization of our planned footprint around the world, the use of new technologies, we have set out to really transform our manufacturing engine as a company. I think you're seeing now the impact of all of that work in the gross margin. Susanne, on Lutathera.

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Susanne Schaffert, Novartis AG - President of Novartis Oncology [59]

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On Lutathera, we had another strong quarter reaching $109 million, and the majority of sales are still coming from the U.S. And you're right when you said that growth rates in the U.S. slightly declined in Q2, and the main reason is really that major Tier 1 centers have now worked through their prevalence pool, really patient on the waiting list that were mostly in late-line. So what we're focusing now on is really positioning Lutathera as the preferred second-line treatment and we expect really further continued growth. We remain very confident on Lutathera, and we also expect now sales coming in from ex U.S. We make nice progress in receiving reimbursement approvals, recently got approval for reimbursement in Spain and Italy. We got also regulatory approval in Switzerland and in Israel. So we remain very, very confident with Lutathera that it has potential for blockbuster sales, and we'll continue to grow strongly.

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Operator [60]

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Next question comes from the line of Richard Vosser from JPMorgan.

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Richard Vosser, JP Morgan Chase & Co, Research Division - Senior Analyst [61]

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I have one question on China and the impact from the 4 plus 7 tenders, please. Just thinking about I think Gleevec is mentioned and there's been some tenders there but maybe thinking about the impact on Diovan and Exforge. How should we think about that? And maybe if I can ask 1 second question, just on SEG101. How are you expecting that to be used? You see it being used primarily in patients who have had a vaso-occlusive crisis? Or how should we think about that?

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Vasant Narasimhan, Novartis AG - CEO [62]

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Thank you, Richard. So on China, in general, we are focused very much on our launch medicines. We are focused on moving out of the historical established medicines business given the number of recent approvals we have had, we have had double-digit approval, double-digit reimbursement. Entresto is doing well. Cosentyx is off to a strong start, our new oncology medicines are off to a strong start. So our focus is very much on driving the new launches. We do expect in due course these tenders to impact our legacy established medicines business, primarily Gleevec and valsartan-containing medicines. To date, these tenders have not started at a significant scale on those specific medicines for a variety of reasons. So at the moment, it's not a significant impact. Even when it comes, we expect that our launches should more than offset the impact of the 4 plus 7 tenders. That's very much our focus on strategy. We also believe the government is doing the right thing in shifting resources from these older medicines and focusing on new innovation that actually fits Novartis' strategy quite well. With respect to SEG101, Susanne.

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Susanne Schaffert, Novartis AG - President of Novartis Oncology [63]

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In terms of positioning, what we would expect really SEG101 has impressive effect on prevention and reduction of VOCs. We could show in our data that we could reduce VOCs by 50%, and that's how we would expect it to position. So patient population is probably the patients with 2 or more VOCs per year, which is around 60% of the total patient population.

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Operator [64]

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Your next question comes from the line of Michael Leacock from MainFirst.

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Michael Richard Leacock, MainFirst Bank AG, Research Division - Director [65]

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Two very quick questions. On Entresto, any update in terms of reimbursements timing in China? And you mentioned on Xiidra that there was a lack of progress owing to uncertainty of its ownership. Could the same apply to Aimovig?

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Vasant Narasimhan, Novartis AG - CEO [66]

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So I'll start with Xiidra and then come back on Entresto. So right now, with respect to Aimovig, we think there's clarity in the sales force. And we've been working together with Amgen to ensure that any of our legal disputes do not impact the focus of the sales force in the United States. I would also say we're pleased even though it has not come up yet on the call. We are pleased with the uptake of Aimovig outside the United States. It's been very positive overall, and we continue to drive that. With respect to Entresto, we're working through now reimbursement at the regional level and are focused very much on getting an NRDL listing nationally for Entresto. We hope to achieve that in one of the upcoming cycles. We do have a number of regions where Entresto is already now on the listing at the regional level, but the goal very much remains to get on the national NRDL schedule in the coming cycles.

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Operator [67]

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The next question comes from the line of Naresh Chouhan from Intrinsic Health.

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Naresh Chouhan, Intrinsic Health Advisors - Founder [68]

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Just on Mayzent, could you update us how you're doing with setting up and implementing the CYP screening? And is that adding to the inertia amongst doctors to, you kind of mentioned trying to instill some urgency in doctors. Is this kind of adding to the inertia in prescribing or switching patients to Mayzent? Just quickly, if I can, Entresto ex U.S. was very strong, just some insight to that would be helpful.

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Vasant Narasimhan, Novartis AG - CEO [69]

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So on Mayzent, Marie-France.

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [70]

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So in Mayzent, we are using a hub system that does manage the start forms, the benefits of verification and genotyping as well as the other lab data and then ultimately the delivery of the product. What we do see is that the numbers in the hub are encouraging, but it is a 60-day onboarding plus 1 month free, so it's about 90 days. So we are now working to try and accelerate that, but our initial feedback is very positive on how that's looking.

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Vasant Narasimhan, Novartis AG - CEO [71]

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And then with respect to Entresto ex U.S. acceleration, Marie-France will be the right person to ask. She oversaw Entresto

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [72]

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Yes. As I mentioned before in the call, I think just the momentum is really strong all over and the PIONEER data has just really boosted the in-hospital initiation, which has really changed the dynamics. And so overall, we've seen great performance in Europe. We've seen great performance in the U.S. We were starting to see very encouraging performance in China, and I just believe that momentum will continue as we go forward and we establish Entresto as standard of care.

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Operator [73]

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Your next question comes from the line of Kerry Holford from Exane BNP Paribas.

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Kerry Ann Holford, Exane BNP Paribas, Research Division - Analyst [74]

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Kerry Holford from Exane. A final one from me on the Xiidra. I noticed on the slide in your pack and you highlighted, Vas, that you're not expecting significant Part D access expansion until 2021. I wonder if you can just talk through why that couldn't come earlier beginning of next year and so you essentially saying that really we should expect limited growth in Xiidra in 2020 will be primarily dependent on that commercial plan patient only?

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Vasant Narasimhan, Novartis AG - CEO [75]

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Thank you, Kerry. Marie-France, on Xiidra.

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [76]

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So first of all, let me just say that we're really excited to add Xiidra to our portfolio. We think it's a great complement to our front-of-the-eye business, and it does bridge to our pipeline. Xiidra has got a really strong clinical profile. It's really the only product proven to reduce signs and symptoms. Vas already mentioned the medical need and how underdiagnosed dry eye disease is. Currently, we see 1.6 million prescriptions in a market that's 34 million. What I can say to you is that we've done excellent commercial coverage and expanding to Part D will happen over 2021 because we're pretty much locked in for 2020. However, we do believe that there is a lot of room to grow. It is -- dry eye disease is promotionally sensitive. We're starting a DTC campaign in Q4. We think it's a strong strategic fit, and there's clear blockbuster potential for us in the U.S. alone.

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Vasant Narasimhan, Novartis AG - CEO [77]

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I think if you go back in time and you look at the early quarters when there was a heavy focus on Xiidra, you saw the strong performance of this medicine. So we want to rekindle that fire.

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Operator [78]

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Your next question comes from the line of Laura Sutcliffe from UBS.

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Laura Sutcliffe, UBS Investment Bank, Research Division - Equity Research Analyst [79]

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Just on Zolgensma and specifically on your Medicaid book of business. We know the reimbursement in Medicaid is going to take much longer than in the commercial setting. But I was just wondering if you could tell us whether your views on access and uptake in the Medicaid environment have evolved at all over the last few weeks since you've got approval?

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Vasant Narasimhan, Novartis AG - CEO [80]

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Yes on Zolgensma and Medicaid, we have 4 policies now already up on Zolgensma and Medicaid, which I think is very encouraging. I would say in terms of medical exception requests thus far in Medicaid that Novartis at least are managing through our hub, we've also seen positive responses from Medicaid states. Our first patient actually was a Medicaid patient. And so when you look at those narratives in general, patients are able to navigate Medicaid's with medical exception. So that gives us encouragement that even in the time that it will take us to get the medical policies fully set up, we can still work through the system and get patients treated given the demand from the parents, the children, their providers. We feel generally optimistic. We love to accelerate getting those policies in place, and our teams are working hard to do that. But as you rightly point out, it will be longer in Medicaid versus in the private insurance segment.

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Operator [81]

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The next question comes from the line of Mani Foroohar from SVB Leerink.

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Mani Foroohar, SVB Leerink LLC, Research Division - MD of Genetic Medicines & Senior Research Analyst [82]

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A quick question on Zolgensma. You talked about the attractive launch metrics you've seen thus far. When we think about modeling in future quarters, how should we think about time from dosage to realizing reimbursement in the U.S. versus global markets where you're going to be launching? Do you expect that to be relatively swift? Or should we expect the payment over time dynamics you are talking about to come into play as you launch in U.S. across different markets?

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Vasant Narasimhan, Novartis AG - CEO [83]

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So with respect to the payment over time, it's important to know we're doing this through a third-party. So actually, what we do is we recognize revenue immediately and then take a provision for our estimate of whether or not we would need to have any sort of rebate at some time over the period that we ultimately contract for. So you shouldn't model any lag. As Harry guided last time, it's really revenue recognition at the time of dosing. Today, because it's very early days, we don't have any plans currently using these kinds of models though we continue to work with clients in terms of contracting. It will be a similar situation we expect outside the United States as far as we can tell. Once we get those launches moving, we'll of course keep you updated if you need to shift your modeling at all for ex U.S. patients.

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Operator [84]

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The next question comes from the line of David Maris from Wells Fargo.

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David William Maris, Wells Fargo Securities, LLC, Research Division - Senior Analyst [85]

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Just a question. One of the proposals being floated is reference pricing. If you could just address in broad strokes what the average selling price difference of your lead products or the bulk of your pharma products are U.S. versus Europe or the developed markets that they're thinking about benchmarking to?

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Vasant Narasimhan, Novartis AG - CEO [86]

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Yes. When you look at the proposals, in our experience it would be a very limited exposure in Part B, we don't have many Part B medicines. I can't really give you a specific answer on Part B, probably better to ask some of our competitors on Part B. With respect to Part D, our analysis suggests that when you take into account rebates, other government subsidies and things that we give patient assistance programs, free drug et cetera, that our net pricing for our major medicines within Part D really -- at least, recently launched medicines in Part D approach those what we see in top European countries, so we really don't see a significant gap in Part D. I know from an industry-wide perspective, there's certainly a high variability within Part B, and I think that's where the focus has been.

Thank you for the questions. And I think we have time for one last question before we finish the call. So last question, please.

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Operator [87]

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Last question comes from the line of Emmanuel Papadakis from Barclays.

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Emmanuel Douglas Papadakis, Barclays Bank PLC, Research Division - MD & Head of European Pharmaceuticals Research [88]

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I'll try and keep it to one semi-brief question. It was to Harry Kirsch and perhaps about a little bit on margins. You talked about potentially getting a bit early to that mid-30s target. You didn't mention the possibility of us actually getting through that target and beyond. And in particular R&D, I mean, it's been perhaps one of the areas where you most actively talked in the past about something you can internally control in terms of reduction. You're already at the 20%. To what extent in the world of big data could you take it below that figure?

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Vasant Narasimhan, Novartis AG - CEO [89]

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Thanks for the question, Emmanuel. In general, for the company, we're trying to make the company as productive as possible. So our goal, of course, is not to stop in one specific number but certainly focus on areas where we can become as efficient and as competitive with anyone in our industry and if relevant in areas like business services or procurement competitive with anyone in any industry. Right now, our goal is to get to the 30 -- mid-30s in -- by 2022. If we get there on a full year basis sooner, then of course we'll give you updated perspective on where we want to head next on margins. But I certainly want to set the expectations, our aspirations are to be as productive as possible.

Now with respect to R&D, we don't view R&D as the key lever to achieve this. R&D is fundamental to the company. We always wanted to get to that 20% range; we're there now. But we don't use R&D as our driver for margin improvement. What we want to do is ensure we fund every good program, and we do that and we ensure that -- and if we need to, of course, increase our R&D levels in order to fund excellent projects, we'll do that. In the medium and longer term, if data science, digital technologies can help us transform not only our manufacturing and business services and sales areas, we hope that also will transform R&D. We hope that actually gives us capacity to do more programs, and we can continue to be at 20% and even do more programs to grow the company.

So that's -- I think that's it for today's call. Thank you again for investing in Novartis, for your interest in Novartis. We look forward to delivering a strong second half of the year. We appreciate your interest in the company, and we wish you a great summer. Thank you.

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Operator [90]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.