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Edited Transcript of NOVN.VX earnings conference call or presentation 29-Jan-20 1:00pm GMT

Q4 2019 Novartis AG Earnings Call

Basel Feb 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Novartis AG earnings conference call or presentation Wednesday, January 29, 2020 at 1:00:00pm 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

* Richard Saynor

Novartis AG - CEO of Sandoz

* 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

* Eric Le Berrigaud

Bryan Garnier & Co Ltd, Research Division - Managing Partner Equity & 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

* Keyur Parekh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Laura Sutcliffe

UBS Investment Bank, Research Division - Equity Research Analyst

* Mark Douglas Purcell

Morgan Stanley, Research Division - Equity Analyst

* Matthew Weston

Crédit Suisse AG, Research Division - MD and Co-Head of European Pharmaceutical Equity Research

* Naresh Chouhan;Intron Health;Founder

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst & European Pharmaceuticals 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

* Simon P. Baker

Redburn (Europe) Limited, Research Division - Head of Pharmaceutical Research

* Stefan Schneider

Bank Vontobel AG, Research Division - Head of Life Sciences Team & Pharmaceutical Analyst

* 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 morning and good afternoon, and welcome to the Novartis Q4 and Full Year 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 now like to hand the conference 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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Hello, and welcome, everybody. Thank you for participating in our full year and quarter 4 2019 investor call.

Before I start, I'll read you 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.

If you then turn to Slide 3 in our investor presentation, you'll see the list of participants. So in the room, we have Vas Narasimhan, the Chief Executive Officer; Harry Kirsch, the CFO; Marie-France Tschudin, who's the President of Novartis Pharmaceuticals; Susanne Schaffert, President of Novartis Oncology; John Tsai, Head of Global Drug Development and the CMO; Richard Saynor, who's the CEO of Sandoz; and Shannon Klinger, the Group General Counsel.

I'm going to hand across to Vas just in a minute or 2.

(Operator Instructions)

With that, I'll hand across to Vas.

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Vasant Narasimhan, Novartis AG - CEO [3]

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Great. Thank you, Samir, and thank you all for joining today's full year results conference call.

So if we move to Slide 5, as you saw in 2019, we really delivered an outstanding performance across the company. And I think the big reason for that is we've had a clear strategy, and we're executing against that strategy. Clearly we want to be a focused medicines company powered by advanced therapy platforms and data science. We're focusing the company, and we're delivering against each of our 5 priorities, which I'll take in turn over the course of this presentation.

So going to Slide 6. When you look at the last 2 years, we've executed now over $70 billion of transactions, both to focus the company and build up our presence in strategic areas, including building a presence in cell and gene therapies and radioligand therapy, now with inclisiran, a presence in RNA therapeutics. Altogether, a broad-based medicines portfolio, which we believe is the largest medicines company purely focused on the discovery and broad access to medicines in the world. We also continue to execute our M&A strategy to build our deeper therapeutic expertise and therapeutic depth in areas like ophthalmology and cardiovascular disease. So we feel good about this dynamic and look forward to continuing a strategy of bolt-on M&A for the years to come, depending on the quality of the assets we identify.

Moving to Slide 7. When you look at innovation, one of our key pillars, I think we demonstrated this year that we are on the right track and really have developed the depth of a pipeline that can enable us to grow in the long term. When you think about the scale of the portfolio that we demonstrated at our R&D day, we have scale and depth across all of our key therapeutic areas from Phase I to Phase III. When you look at the replacement power of our pipeline, when we look at the data from Evaluate Pharma, we see a profile where we lead the industry in replacement power between 2019 and 2024. And we continue to focus on building a deeper pipeline in advanced therapies, 16 programs now in clinical development as well as a focus on first-in-class and first-in-indication, with 90% now of the portfolio with that profile.

Now moving to Slide 8. 2019 was truly a breakthrough year for that innovation with 5 NME approvals, which we believe is a record for a company in the industry, at least in recent years, 6 if you include 1 of our tropical medicine approvals, 30 major submissions around the world and 30 clinical data readouts. But 2019 was the year we showed that we have the depth and breadth of a portfolio that can grow for the long term. So very pleased with that, and we'll go through in a little more detail later on in the call how we're performing on some of these launches.

Now moving to Slide 9. When you look at catalysts for 2020, another full year of catalysts, major approvals, including the expected approval of ofatumumab, which we filed in December and used a priority review voucher. We also, of course, have the planned filing shortly of Entresto and have passed the filed -- the planned approval of hopefully QVM and QMF in asthma, capmatinib in lung cancer, Cosentyx non-radiographic axSpA where we also used a priority review voucher; and inclisiran, where we've now filed in both the U.S. and the EU, both with expected action dates in -- over the course of 2020.

Also, a number of major readouts across the portfolio. Highlights include the Lu-PSMA, the radioligand therapy asset in prostate cancer as well as a number of others which you can see here on the slide. And then as we tried to highlight to you in the R&D day, a number of Phase III starts. Our mid-stage pipeline now is rapidly advancing, and we'll look forward to giving you updates on how that portfolio evolves over the course of the year.

So moving to Slide 10. We also have a big focus on China, as I think you're seeing across the sector. We would like to highlight a few points when you look at our profile in China. We had 13 NME approvals over the past 5 years with 22 NRDL listings since 2017, showing we're really pivoting to a much more innovative portfolio across our China business. When you look forward, we expect now to have 50 NDA approvals between 2020 and 2024. That's a doubling of the rate we've had over recent years. And our goal is to deliver greater than 90% of our 2024 and beyond China submissions simultaneously with global submissions. We expect to have a profile in China. Our total sales in China are in the range of $2.2 billion. And our aspiration is to double that business over the coming 5 years. So a big focus on China and look forward to keeping you up-to-date on that profile as the year progresses.

So moving to Slide 11, moving to operational excellence. We delivered a strong performance in 2019, as you saw from the results release. Harry will go through these numbers in a bit more detail. But some of the highlights, I think, strong sales growth with 9% sales growth in constant currencies. We're delivering on the margin expansion, with 1.8% margin expansion in IM. And I'll talk a little bit more about that on the next slide. And I think we're delivering as well a strong shareholder return profile. When you look at the 1-year TSR, 22.3%, but both -- also when you look at the 2-year, 3-year TSRs as well, we're delivering as well nice returns for our shareholders. And we, of course, appreciate your confidence in Novartis.

Now moving to Slide 12, to go a little bit deeper on the operational performance. When you look at our growth drivers, strong performance across the growth drivers, Cosentyx and Entresto growing well. Marie-France will go into that in a bit more detail. Zolgensma, I'll cover in a moment. And then as well across the Oncology portfolio, Lutathera, Kisqali, Kisqali really now picking up momentum. Susanne will tell you a bit more about that. So when you look across that, the left-hand side of the slide, you see a broad set of assets that are continuing to grow well in market. And we're a company with 15 blockbusters in our in-line portfolio and that gives us that diversity and strength to keep growing in the long term.

When you look at growth drivers as a percent of recent launches, we're now up to 35% exiting 2019, and we expect that number to continue to grow over the coming years.

So moving to Slide 13. When you look at the profile of the company for the next 3 years, 15 ongoing or upcoming major launches. This will be a huge focus for us in 2020, driving the 2019 launches which are already in progress and now really focusing on preparing for the 2020 and 2021 launches. And you'll hear more about that from my colleagues later on in the call.

So moving to Slide 14. I wanted to say a word on Zolgensma performance in 2019. We had a strong launch. Full year sales was at $361 million. So very good performance. When you look at the patients treated commercially, we're roughly at a rate of about 100 patients per quarter, 100 for Q3 and 200 now at the year-end. We would expect in the U.S. to be largely at that rate of 100 patients a quarter until we have approval in Europe to have the next inflection point and then eventually the intrathecal approval as well, which I'll speak to in a moment.

Commercial lives were up to a 97% coverage. Medicaid lives, we're at over 50% coverage. Newborn screening continues to tick up, and we've continued heavily -- to be heavily focused on driving newborn screening. And importantly, we have 99% of patients approved now for reimbursement if they're on label for Zolgensma.

Now some of the next steps for the product, the intrathecal formulation, clinical hold, we're working on a submission to FDA for a data package to hopefully resolve the clinical hold, then continue the regulatory discussions. And we continue to hope to file the intrathecal formulation this year. CHMP positive opinion, we anticipate in Q1 of this year. With respect to Japan, we anticipate an approval in the first half of this year. And I would say conversations both into Europe and Japan are going very well. And then we also anticipate decisions in other markets around the world, including Switzerland, Canada, Australia, Brazil, and as well as a number of countries in the Middle East. These will be additional areas of potential future growth for the medicine. So Zolgensma is delivering on the promise of bringing a transformational gene therapy to children. We look forward to continuing to progress expanding its application in more patient populations in more geographies in the year to come.

So moving to Slide 15. On the margins, we've guided -- the last time we spoke about this, Q4 of last year, that we expect to have reached the mid-30s in the near term, and you can see us already getting close to that with 33.5% exiting 2019 and the mid- to high 30s in the medium term. One important thing to note about our margin guidance is we would expect to achieve these margins independent of when a potential Gilenya LOE occurs. And that's really driven by a combination of strong sales momentum of our growth drivers, productivity programs, which I'll talk about in a moment, as well as excellent resource allocation from our older brands to newer launches. And with that, we're able to offset generic erosions as well as any launch investments we need for upcoming launches, including the newly acquired inclisiran asset.

So moving to Slide 16. I just wanted to say a word about the transformation we're advancing in NTO and NBS. With respect to manufacturing, we're well on our way of our goal of a consolidated footprint that's much more focused on high-end technologies. We also are advancing our efforts in procurement and manufacturing, really reducing the excess inventories that we're holding and also deploying data in digital much more aggressively across the manufacturing network. In NBS, we are on track now with respect to our movement of roles to our global service centers. We've been able to take a number of actions to consolidate our footprint as well as consolidate our overall real estate operations. We have a new Chief Procurement Officer, who has now been in the role for a number of months, already optimizing our top 100 suppliers. So all of this taken together is enabling us to be on track to deliver our goal of $2 billion of savings by the end of 2020. And we expect these efforts to deliver an additional $1.5 billion of savings in the medium term, to contribute to that margin expansion I showed you on the earlier slide.

Now moving to Slide 17. Sandoz also had a great 2019. They delivered accretive growth. You saw 2% global sales, 7% ex U.S., 16% in biopharmaceuticals. Importantly, excellent leverage on the P&L with 10% core operating income growth. This is in large part due to the focusing on our key strategy that Richard and his team have put in place, focusing on a core generics business, trying to be a great generics company, both in oral solid and injectables and biosimilars, focusing in on key geographies where we think we can build strong long-term positions. We have the #1 position in the EU. In Japan, we closed the -- or are in the process of closing the Aspen acquisition and are confident we can continue to build our business in Japan. And in the U.S., we're stabilizing the business. We expect a closure of the transaction with Aurobindo in Q1 of this year, which will allow us then to focus on our hospital and biosimilars businesses. We're on track as well to have an autonomous Sandoz within Novartis for the start of 2021, focused very much in the manufacturing organization. And we continue to advance our broad portfolio of biosimilars. So very pleased with the progress we're making in Sandoz.

If you go to the next slide. Now I just wanted to touch on our data and digital transformation, culture and ESG. Across all of the key pillars of our digital transformation, we are now beginning to really see this take hold at the company. I think it's fundamentally transforming how we operate. We're scaling 12 digital, what we call lighthouse projects, which are enabling us to transform ourselves, whether it's in our development and trial operations, manufacturing, in our sales force. The idea is that we have AI and data science powering our decision-making wherever relevant at the company. We're making Novartis digital. We have over 1,500 associates now in digital and data science at the company. We also are getting broad interest in learning programs on digital at Novartis. We're working to become a key partner in the start-up tech ecosystem. We have biomes which we have launched in a number of cities around the world, which allow start-ups to work closely with Novartis. And lastly, we're working on bold moves. We've made a bold collaboration with Microsoft on an AI innovation lab in R&D. We're partnering with Amazon Web Services to transform our technical operations as well as our procurement operation, and working in China with Tencent in areas like heart failure. I expect that in the coming years you will see the tangible impact of these efforts on both our top and bottom line.

Now if you move to the next slide. Also on culture change, we continue to believe culture will be the key driver of our long-term performance, truly creating an inspired, curious and unbossed organization. There's a broad range of initiatives which you see here on the slide. I won't go through all of them. But I think [it's] just to give you a sense that we take this very seriously at the executive committee level. We are working diligently to drive this through the organization, whether it's getting our people more connected with the purpose, whether it's enabling learning and growth across the company and whether it's developing leaders who are more self-aware and able to lead it in a powered, unbossed way. We're quite committed to this and we believe in the long run, for our long-run investors it will truly pay off.

On the next slide, if you now turn to our efforts to build trust with society. Many of you attended our ESG Investor Day last fall, and we continue to progress against our aspirations. In ethical standards, we rolled out a new program to really tackle third-party risk management at scale. In pricing and access, we've outlined a new approach in Sub-Saharan Africa, where our entire Sub-Saharan Africa business is now under a single entity whose goal is to maximize access without having to focus on profits, and really just say how can we build health care systems and access in Africa. In Global Health, we are pioneering work in sickle cell disease in Ghana and across Sub-Saharan Africa to really tackle for the first time a chronic genetic disease at scale in the region. And on Corporate Citizenship, we have now reached 44% women in management, and our goal continues to be to get to 50%, and we're on track to do so.

So moving to Slide 21. I wanted to highlight that, with our ESG approach, we are not just setting ambitious targets for the long run, but we're also embedding this into our operations. We have a set of ESG targets for 2020. We will -- these are embedded in my scorecards for 2020 as well as the executive team. We will transparently report on them, so really report on our progress in each of these areas against our longer-term goals. They're tracked at a Trust and Reputation Committee that I chair, linked to -- [with] compensation and transparently disclosed.

And if you go to the next slide, one thing I want to highlight is you can find a tremendous amount of detail at the Novartis in Society Report. We also have published a dynamic index which goes through all of the key ESG metrics, links them to where you can find the information you need for Novartis. This is both to enable the ESG rating agencies, as well as your own ESG groups, to be able to find the information they need about the company. And if you can't find it, please let us know. When you look at some of the things we're committed to, they include reducing the launch time lag for innovative medicines to less than 3 months for low- and middle-income countries, versus what we see in U.S. and Europe. We've committed to get to carbon neutrality in our own operations by 2025 as well as tackle our third-party Scope 3 carbon emissions, delivering on the UN Equal Pay for Equal Work and Gender Equity goals, as I said, addressing major areas in global health. So a very -- a concerted effort, one we deeply believe in, I'm personally committed to, and we hope to show progress over the course of the year.

So moving to the next slide. I just want to close before handing it to Marie-France, that we believe that, in total, when you look at the portfolio of Novartis, we're well positioned for sustained long-term growth. We have a strong set of end-market growth drivers. We have a great set of 15 ongoing or upcoming major launches, a broad set of novel assets that we highlighted in our R&D day as well as a range of new indications for products like Cosentyx, Beovu, Piqray, amongst others. We believe this will sustain our growth over the medium to long term, and we'll look forward to delivering these important medicines for the world over the coming years.

So with that, I will hand it over to Marie-France.

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [4]

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So good afternoon to all of you. I'll start with Slide 25. So 2019 was a very strong year for Pharmaceuticals, with 12% growth. Our key growth drivers, Cosentyx and Entresto, grew 28% and 71% respectively. We also laid the foundation for our next phase of growth. We're off to a great start with Beovu in the U.S. We're accelerating Mayzent and Xiidra, and we've add inclisiran to the portfolio.

Next slide. Cosentyx had a fantastic year with strong growth through multiple competitor entries. The underlying growth is very strong and the demand is strong. Actually in the U.S., we even accelerated versus prior year, and we're outperforming the market both in dermatology and rheumatology. With the strong first-line access we secured and continued news flow; for example, our MAXIMIZE and PREVENT trials, we really expect to maintain this momentum in 2020 and are confident for the future. In fact, we're increasing our guidance to beyond $5 billion.

Next slide. Entresto also saw impressive growth in 2019 at an all-time high, and I'm very pleased with the strong execution in the market. We feel that we have all of the components to sustain this momentum. We've got a strong evidence base for in-hospital initiation, but also ambulatory treatment. We see increasing guideline support for Entresto as a first-choice treatment. And of course in 2020, we have very nice expansion opportunities in new markets, particularly in China and Japan.

Slide 27 -- or 28, sorry, excuse me. In Beovu, we're very pleased with the U.S. launch, particularly the excellent customer feedback. We've seen very strong uptake from retina specialists. And with the permanent J-code, there's strong confidence for reimbursement. The feedback has been outstanding. What we hear the most is that physicians are incredibly impressed with Beovu's drying properties and with the efficacy. We're also looking forward to an EC approval later this quarter and Q2 approval in Japan. And we expect Beovu to become a major player across the globe.

Slide 29. Ofatumumab, we are very, very excited about this opportunity, and we're getting focused to bring this product as quickly as possible to patients. We filed both in the U.S. and the EU. And I just want to spend a moment on this, because there's a real shift happening in the marketplace about how physicians treat MS, and this leads us to believe that we have a truly unique product profile with ofatumumab. What physicians tell us is that they increasingly believe that it is best to use the most efficacious therapy upfront. And if you think about ofatumumab, we offer unsurpassed efficacy of B-cell depletion. If you look at the chart on the left, which we presented at our R&D day, you'll see that the confirmed disability worsening data is very impressive. If you combine that with a very favorable safety profile, an easy mode of administration, we'll have an auto-injector at launch, we're really proposing a winning first-line value proposition. So our objective this year is to really focus on making sure that we can provide broad access to as many neurologists as possible and, of course, to as many patients as possible.

Slide 30. We're also very excited about our opportunity with inclisiran because the profile, including this administration twice a year, really lends itself to significantly impacting cardiovascular mortality in a very broad patient population. We've begun the integration, which we will complete by March, and we've also filed in both the U.S. and in the EU. We're ongoing with our bridging studies in Japan and China. So the key focus for this year is to provide broad and affordable access and start engaging with payers in multiple different countries.

So all in all, if we move to the last slide, we have a very clear strategy for 2020. We're going to continue the momentum with Cosentyx and Entresto, with a strong focus on preparing our launches, so scaling Beovu, launching ofatumumab and inclisiran. And the biggest shift that you'll see is that we firmly have our eyes on the future. We have a number of fantastic assets and they're only a few years away. We're investing earlier in our launches, and we're making sure that we're prepared well ahead of time. I'm really confident in the teams that we have across the globe, and I just want to thank them for their outstanding work in 2019.

I'd like to pass on to Susanne.

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Susanne Schaffert, Novartis AG - President of Novartis Oncology [5]

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Thank you, Marie-France, and good morning, good afternoon, everybody.

So let's move to Slide 33. Also for Oncology, we had a very good year. We reached sales of $14.8 (sic) [14.4] billion and delivered growth of 10%. So I'm really proud of what the oncology team has achieved. The growth was mainly driven by the strong uptake of our recently launched products, including Lutathera, Kymriah, Kisqali and Piqray, but we also saw continued very strong momentum from our growth drivers, Jakavi, Promacta/Revolade and Mekinist/Tafinlar (sic) [Mekinist + Tafinlar].

We aggressively shifted investments to our growth drivers, to our launches and prelaunches to really invest early and also approved an investment case for China. And the growth really could more than compensate for generic impact we saw in 2019, mainly from Afinitor and Sandostatin LAR in Europe and Exjade/Jadenu in the U.S.

So moving to Slide 34. One of the key growth areas for us was our breast cancer portfolio. We have launched Piqray in June 2019. This is a first-in-class PIK3CA inhibitor indicated for 40% of HR-positive, HER2-negative metastatic breast cancer patients with a PIK3CA mutation. And these patients usually have a very poor prognosis. So very high medical need. The product had a very strong start, delivering $118 million of sales in 2019, and we're very pleased that testing rate was up to 25% at year-end, starting at 5% probably in the beginning of the year. We have launched a product with a Qiagen test and now also have approval for the Foundation Medicine's tissue test and expect the plasma test of Foundation Medicine to be approved by Q2 2020. In addition, we have launched a very broad development program in 5 new indications called the EPIK program, with the potential to serve additional 100,000 patients with Piqray.

Also, Kisqali had a very great year, reaching $480 million of sales. Just to remind you, Kisqali is the only CDK 4/6 that consistently demonstrated superior overall survival in 2 pivotal Phase III trials. We saw clear early signs of accelerated growth both in the U.S. and very, very strong continued growth ex U.S. So very pleased with the performance. We are also rapidly enrolling in our NATALEE trial. This is a trial in high and intermediate adjuvant breast cancer. NATALEE has a different design than the other ongoing trials in adjuvant setting with 3 years' treatment and could potentially get registration as early as 2022 based on a positive preplanned interim analysis.

So moving to Slide 35. The second launch we had in 2019 was Adakveo, the only approved product for the reduction of frequency of vaso-occlusive crisis, or VOCs, in sickle cell disease. In the U.S., there are more than 54,000 patients suffering from sickle cell disease and having more than 1 VOC per year. And therefore there is a huge medical need. We have made the commercial product available 2 days after approval, and we are now actively engaging with payers, working through reimbursement. We saw already initial orders from community centers. We have applied a permanent J code that we expect in July 2020. And usually it takes about 18 months to achieve reimbursement across the country, but we are very pleased that already 6 states published their guidelines for Adakveo.

So moving to the next slide, giving an outlook on 2020, we will continue to maximize our growth drivers. We expect continued growth from Kisqali. We plan to tap into the potential of earlier lines with Lutathera, and we expect continued growth in Revolade/Promacta from ITP and also first-line SAA in the U.S. and Japan. We are committed to deliver on our launches. We will further expand Piqray in the U.S. and prepare for the launch in Europe. And we hope to continue strong on Adakveo, expanding to larger accounts in the U.S. and drive further capacity increase for Kymriah to meet the strong demand in pediatric ALL and DLBCL.

Last but not least, we will prepare for our next big bet, capmatinib, with the potential to be the first to market c-Met inhibitor. Expecting the data readout of our PD-L1 spartalizumab in combination with Mekinist and Tafinlar, preparing our commercial organization for the readout of lutetium-PSMA later this year and also focus medical education on canakinumab to establish the importance of inhibition of tumor-promoting inflammation.

So with that, I will hand over to Harry.

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Harry Kirsch, Novartis AG - CFO [6]

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Yes. Thank you, Susanne. Good morning, good afternoon, everybody. My comments refer to the results of our continuing operations. And growth rates are in constant currencies, unless I would note otherwise.

So moving to the next slide. As Vas said, 2019 has been an exceptional year overall, for the results of the company and the financial results.

On Slide 38, we compare our actual results with our latest guidance. As you know, we revised guidance upward throughout the year and delivered as expected. Full year sales growth was 9% and core operating income growth 17%.

Slide 39 shows a summary of our quarter 4 and full year performance. Basically, quarter 4 followed the same pattern as each quarter of 2019 and the full year. Focusing on the full year, the sales increased high single digit, driving accretive double-digit core operating income and core EPS growth of 17% each. This resulted also in a strong free cash flow of $12.9 billion, up 15% in U.S. dollars versus prior year. The net income decline you see here is entirely due to the $5.7 billion OTC joint venture onetime net gain that we recorded in 2018 when we divested our stake to GSK.

Now you will recall that one of our key financial priorities is to increase free cash flow, and we have delivered another strong result in 2019. On Slide 40 the free cash flow of 2019 is compared with 2018. And our free cash flow increase was mainly driven by operating income adjusted for noncash items. As you can see, we had a couple of large onetime items, which we of course also reported. And they are offsetting each other, some divestment gains, but in also 2018 when we still had the OTC joint venture and another milestone from the prior portfolio deals. Of course we will continue to place a strong focus on cash flow management also going forward.

Next slide. As you can see on Slide 41, we are proposing the 23rd consecutive dividend increase to CHF 2.95 per share. This is an increase of 3.5%, and the dividend yield remains above 3%. It's, of course, also fully in line with our dividend policy of increasing our dividend every year in Swiss francs.

On Slide 42, you see our strong core margin improvement in quarter 4 and the full year. Given the excellent sales execution and productivity focus, core margin grew in each quarter and the full year for both divisions. Full year continuing operations margin improved by 1.9% points. And in Innovative Medicines, sales grew 11%, driving 18% core operating income growth and enabling the margin to improve to 33.5%, up plus 1.8% versus prior year. At the same time, we have been increasing investments to support our many launches and prelaunches. With this result, we are clearly on track to deliver our medium-term core margin guidance of mid- to high 30s for Innovative Medicines.

Sandoz had a solid year, returning for growth with sales growing 2%. Core operating income grew much stronger than sales driven by the sales growth, but also continued gross margin improvements and the ongoing business transformation. The Sandoz core margin for 2019 was 21.5%, up 1.5% versus prior year.

Now moving to the 2020 full year guidance on Slide 43. In short, we anticipate the strong business momentum of 2019 to continue in 2020. For the focused medicines company, we expect sales growth in the range of mid- to high single digits. By division, Innovative Medicines sales are expected to grow mid- to high single digits. And Sandoz sales are expected to grow low single digit. Once again, we expect accretive growth and margin improvement in 2020. Core operating income is expected to grow ahead of sales in the high single to low double-digit range. Our guidance includes the forecast assumption. As you can see at the bottom of this slide, that no Gilenya or Sandostatin LAR generics would enter in 2020 in the U.S. Further, the guidance excludes the Sandoz U.S. oral solids and derm portfolio, which we're in the process of divesting, in both years, in 2020 and 2019. We expect to close the sale to Aurobindo in quarter 1.

Let me add a word on quarterly core op income, core operating income dynamics in 2020. We do expect that quarter 1 will be at the upper end of the full year guidance. This is due mainly to 2 drivers. First, the generics we were already also discussing, the impacts are expected to be lower in quarter 1 as we model a ramp-up throughout the year. So the overall generic burn will be a bit higher than 2019, but ramping up as we model it. And second, in quarter 1 we are not yet lapping the Zolgensma launch -- you may recall last year we got [an AD] approval -- and also not the midyear Xiidra acquisition of last year.

On Slide 44, just to -- I would like to add some perspective on other key elements of our expected bottom line performance beyond core operating income. We expect core net financial expenses to increase by around $0.2 billion, reflecting the financing cost of our acquisition of The Medicines Company. Core taxes are expected to be broadly in line with 2019, which is in the range of 16%.

And with that, I hand it back to Vas.

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Vasant Narasimhan, Novartis AG - CEO [7]

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Thank you, Harry. So just to close, if we move to Slide 46. Just to reiterate again, a strong performance, really an exceptional performance in 2019. A big thank you to the entire Novartis organization for a truly outstanding year, delivering on our long-term strategy and our operational performance.

In closing with Slide 47, again just to highlight, the portfolio and the medicines we create are the strength of this company. We believe we have the right profile to deliver growth for the long term. And we look forward to consistently demonstrating that in 2020.

So with that, we can open the lines for questions and answers. Thank you.

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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 Steve Scala from Cowen.

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Stephen Michael Scala, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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I have a couple of questions. First on Zolgensma, Vas, you mentioned that conversations are going well in the EU and Japan, but I don't think you stated the tone around the U.S. discussions. I think back to John Tsai's comments at the R&D meeting last month, which also did not offer optimism. It seems that things are tough with FDA on the IT study. And I'm just wondering if you would say that, that's not the case.

And then secondly on Xiidra, Novartis's rationale for the acquisition was that its marketing force would boost sales, but growth has been slow. And it didn't get mentioned in the prepared remarks, other than Harry mentioning that you acquired the asset. When should we expect this inflection in Xiidra?

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Vasant Narasimhan, Novartis AG - CEO [3]

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Thank you, Steve. So I'll take Zolgensma and I'll hand it to Marie-France for Xiidra. So I would not agree with your characterization. I think we have had good discussions with the FDA. We're clear on the information we need to provide, both from a preclinical standpoint as well as the clinical data, which is the most important element of the story in terms of the -- how the patients are doing from the STRONG study. We plan to provide that data package to the FDA in the coming weeks. Then assuming we adequately have answered their questions, I would expect -- or at least hope that we would get off of clinical hold. We would then move forward with a pre-BLA proposal for the filing of the STRONG data for an IT approval, and we continue to guide to a filing of AVXS-101 IT in 2020.

Now with respect to Xiidra, Marie-France?

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [4]

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So we've always said that we had to rebuild this brand. So we went through a complete restructuring, which we've now completed. The product has great potential. As we know, the marketplace is huge, 34 million patients in the U.S. and only 1.6 million of those are currently on a prescription product for their dry eye disease. We also know that the product has a unique product profile. It's the only one to treat the signs and symptoms. So we are through this restructuring. We returned to DTC in Q4. We're going to continue to invest in Q1 and return to growth certainly by the second half of the year with greater share of voice and DTC strength.

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Operator [5]

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Your next question comes from the line of Graham Parry from Bank of America.

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Graham Glyn Charles Parry, BofA Merrill Lynch, Research Division - MD and Head of Healthcare Equity Research [6]

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Firstly on Gilenya and the litigation, we see overnight that you sued on the newly issued 179 patent, which had some additional language on infection prevention. I was just wondering, should we view this as any signal that you have any concern that you might not win the IPR appeal or any lack of confidence in your 405 patent litigation? And how does seemingly evergreening the patents fit with Novartis's social trust agenda? Do you think there's some reputational risk here, that you seem to be trying to extend the patent life unfairly here?

Secondly, on Zolgensma, the timing that you're giving for the intrathecal filing of the 2020 is obviously somewhat vague. I was just wondering if you could try to tighten that into first half, second half. And I was wondering, just on your comment earlier about, I think you said 100 patients per quarter through 2020. Why no inflection there without intrathecal? Are you just fully penetrated into incident patients and there's no more prevalent patients under 2 left?

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Vasant Narasimhan, Novartis AG - CEO [7]

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Yes. Thanks, Graham. So there are 2 separate things going on right now with respect to Gilenya. We have the 405 patent, which was held up in the IPR, and is currently under an IPR appeal in the Federal Circuit. Also, that 405 patent is being appealed as well in district court. And both of those trials are either ongoing or soon to start, and we expect decisions in both trials over the course of 2020. And we'll, of course, keep you all up to date. And we continue to believe that the strength of that patent -- in the strength of that patent [and] continue to work to defend that fully.

Separate from that, yesterday we received a U.S. patent related to the treatment of RMS by determining varicella-zoster status and vaccinating in appropriate cases. We actually had filed this patent close to 8 to 9 years ago. It's just that the patent was issued only yesterday. And we immediately then filed infringement lawsuits in the U.S. District Court against all generic companies that are still currently involved in the dosing regimen patent litigation. So not necessarily all companies, but those companies that have not settled with us on the dosing regimen patent litigation.

Again, to your comment on evergreening, we don't view this as evergreening. We view this as legitimately defending patents that we filed long ago based on insights on how the mechanism of Gilenya operates. In this case, with respect to zoster virus, in the previous case with respect to dose as the dose differed from transplant medications for the use of the drug in the transplant setting. So that's the situation. We continue to pursue these various lines, and we'll see ultimately how the year unfolds and keep all of you up-to-date as these various lines of discussion continue.

Now with respect to Zolgensma IT, difficult for me to tighten this any further, I think, until we submit the pre-BLA meeting request. I think it would be premature to do so. If everything were to go exactly as we wanted, we could file as early as mid of this year. If the FDA asked us to provide additional information from the high dose of the STRONG study, we would probably be towards more at the end of this year. So it really depends on us getting that feedback from the FDA. And as soon as we have that feedback, we'll of course provide it back to you.

Now with respect to the dynamics we see in the U.S., you saw a strong Q3, a strong Q4. Right now, what we see is continued share gains in the under 6-month segment. But we also, of course, have the 6 to 18 months -- 6- to 24-months-old starting to age out of the segment. So I think right now, we're guiding to an offset of our gains in under 6 months offsetting the aging out of the 6 to 24 months. The next inflection points will first come actually from the European approval. It turns out that for the SMA market, the ex U.S. market is larger than the U.S. market. So on European approval, as I said, we expect CHMP opinion in first quarter; Japanese approval, which we also expect in the first half; and then a range of other country approvals. There's sizable market opportunities in the Middle East as well as in Latin America. Those filings are also in and we would expect all of those to be inflection points for the IV under 2 years as Zolgensma. And then separate from that, the IT would be a further inflection point once approved.

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Operator [8]

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

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Andrew Simon Baum, Citigroup Inc, Research Division - Global Head of Healthcare Research and MD [9]

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A couple of questions, please. You've indicated that you are going to file Entresto for preserved ejection fraction heart failure sometime in Q1 with respect to [reparalac]. Could you just give us some details on what population you're filing as they're modestly reduced? Is it women? Is it both?

Secondly, how much weight do you really put on the 179 patent? Surely a carve-out and a skinny label would seem to circumvent, given the widespread prevalence of varicella vaccination in the U.S. market.

And then finally, on lutetium-PSMA, is the therapy trial filable in addition to your Phase III trial, broadening the initial approvals for this product in refractory prostate cancer?

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Vasant Narasimhan, Novartis AG - CEO [10]

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Okay. So first on the indication for Entresto in preserved ejection fraction heart failure, John?

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John Tsai, Novartis AG - Head of Global Drug Development & Chief Medical Officer [11]

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Yes, just -- thanks for the question, Andrew. Just in terms of a quick reminder for folks, on PARAGON study, the results came out in the third quarter of the year, where we saw a very narrow miss with a p-value of 0.059 in terms of patients with preserved ejection fraction. We've had good discussions with the U.S. FDA, and the approach that we would take is a broad indication, given the benefits that we've seen across the population. And we'll have continued dialogue with the regulatory agency on the approach moving forward.

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Vasant Narasimhan, Novartis AG - CEO [12]

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And so then on the 179 patent, we -- overall our view is that we have -- we're confident in the strength of both the dosing regimen patent and the Zoster patent. We think, given that the Zoster patent relates to the safety of the product, we feel like it is a strong patent, and we'll continue to vigorously defend our IP rights, particularly against those companies that have not yet settled overall with respect to Gilenya. Settlement discussions, of course, are ongoing. And we'll see where we land over the course of this year.

Now on Lu-PSMA, John?

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

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Yes, I didn't ask -- I didn't hear the specific question. Could you repeat that, Andrew?

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Andrew Simon Baum, Citigroup Inc, Research Division - Global Head of Healthcare Research and MD [14]

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Sure. So you have your Phase III trial in patients unwilling or unable or failed chemotherapy, the large Phase III -- the name escapes me -- later this year, but you also have the THERAPY Phase II trial versus chemo. So my question was whether you could get approval for both indications, therefore broadening the initial label at the time of first launch.

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John Tsai, Novartis AG - Head of Global Drug Development & Chief Medical Officer [15]

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Yes, thanks, Andrew. For the VISION trial, we're actually looking at the later lines, and we would not get both indications because the second trial would actually come later. So our intent is through the VISION trial.

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Vasant Narasimhan, Novartis AG - CEO [16]

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Yes. So we -- I think we'd expect to see first VISION, get that third, fourth line and then move into earlier lines of therapy as the other readouts happen. I don't think we'd have data available to really enable us to get an even broader population at launch, at least that's our current expectation.

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Operator [17]

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The next question comes from line of Tim Anderson from Wolfe Research.

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Timothy Minton Anderson, Wolfe Research, LLC - MD of Equity Research [18]

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I just wanted to go back to Gilenya again. After Q3, management was felt to be on the road as being quite bullish that you would extend LOE and not have generic entry for years to come. And there's a sense now that perhaps you've backed away from that, maybe related to oral arguments recently. So I'm wondering, just to simplify it, Vas, giving guidance to the analyst community, what would be a safe assumption for when we should expect LOE?

And second question is Sandoz. You've previously talked about that, I think, as being a 3-year journey to turn it around, to reevaluate what to do with the division. Maybe we're a year into that or slightly less. And I'm wondering if you can update us on long-term plans for that division. It's performing. We see that. But at the same time, it is a drag on growth, especially as the innovative pharma side of the business picks up and has momentum.

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Vasant Narasimhan, Novartis AG - CEO [19]

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Thanks, Tim. Gilenya, unfortunately, I can't answer your question because I think it's difficult for us to know precisely. What we are confident on is, we have a strong set of patents here that we're vigorously defending. We're giving guidance so that you can all assume that no generic entrants in 2020. And I think we'll know a lot more over the course of this year as we see the results of the IPR appeal, our own effort to strengthen the 405 patent with the IPR office, the District Court litigation that's ongoing; our 179 patent, which has now been granted. And we have filed infringement lawsuits on it. And then of course the wildcard with all of that is, would someone attempt to launch at risk in various scenarios as well. So I think it's difficult, I think, to give a precise answer. But I think what's really important is that, along with the 2020 guidance, we also are committed to delivering the margin expansion that we talked about, independent of when this happens. So that should give you -- all of you confidence, we believe, in the overall growth profile momentum and financial profile of the company.

Now with respect to Sandoz, I -- yes, I'm very pleased with where we are in this journey to date. I think we're on the right track. I think we're committed to the business and continuing to drive the margins up to the mid 20s, which would put us in the range of our peer set over the coming years, continuing to strengthen the pipeline and portfolio, separating it in the company, so that it has the ability to compete very successfully.

Richard, do you want to just give some comments on where we are on the Sandoz strategy?

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Richard Saynor, Novartis AG - CEO of Sandoz [20]

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Thank you, Vasant. Yes. I mean, clearly, a strong year in 2019. We want to continue that momentum growing in 2020 and as Vas said, improve the margin journey as well. Also, a part of that is moving supply chain more within the Sandoz framework. That gives us greater control of our costs and resource allocation and continuing to build our strength. Clearly in Europe we're in the #1 position, taking market share, building a very strong and dynamic biologics portfolio. The U.S. now re-based, much more focused in terms of growing on a much stronger injectable and specialty platform. And then emerging markets, closing the Aspen acquisition and integrating that into this quarter and then continue to build strong dynamic growth. So I think there's a lot of things that we're focused on that really support that agenda.

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Vasant Narasimhan, Novartis AG - CEO [21]

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Yes, so we'll keep you updated as Sandoz continues on the journey. And of course, if any of our perspectives change, we'll, of course, let you know.

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Operator [22]

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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 [23]

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So 2 questions. #1, can you just -- can you guys just update us on the trajectory for Beovu in the market? It looks like we're off to a good start. What we are hearing from some physicians, though, is that there are some questions being raised about the reimbursement dynamics in the market, and whether or not PRN utilization is something where they're struggling to get reimbursed if a patient is not getting the kind of benefits that they hoped early on. I know it's early on in the launch. So just trying to get a better sense of, if that may be due to the J-code and lack of that in the early days, or just education that Novartis needs to do of the physician base for reimbursement.

And the second question is, can you just help us understand the inclisiran agreement with the U.K.? I think there's a lot of confusion around this. So just love to know the inputs with regard to distribution and really how this agreement is structured and the kind of revenue potential that you might see just from that type of an indication, and if this is something that Novartis is seeking to expand into this type of structure, Novartis would expand into other markets internationally or even in the U.S.

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Vasant Narasimhan, Novartis AG - CEO [24]

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Thank you, Seamus. So first, on Beovu overall performance and profile, Marie-France?

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [25]

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Okay. So I'll just say that overall we're extremely pleased with our launch of Beovu in the U.S. There's actually a very strong uptake. We've got 84% of retina specialists that have Beovu in their fridge. And actually, we got the J-code in record time. So we -- there's a lot of confidence in the marketplace around the reimbursement and the benefits investigation experience. We're also supporting physicians and providers and payers with a number of different initiatives, so that this will flow quite easily.

You have to remember we've had the permanent J-code since the 1st of January. But so far, their benefits investigation and the reverifications have gone extremely well. What we're really excited about, though, is the feedback. So we get outstanding feedback from physicians regarding the efficacy and regarding the drying properties of Beovu. So we're very encouraged. We feel strongly that there is confidence in the marketplace around, not only the clinical experience so far, but also the experience around reimbursement.

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Vasant Narasimhan, Novartis AG - CEO [26]

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In respect to inclisiran, the U.K. agreement, Marie-France?

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [27]

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So the NHS partnership is made up of 3 memorandums of understanding. The first one is really around a population health agreement in secondary prevention to enable broad access in the U.K. The second agreement is around a partnership for a primary prevention trial, and that is something that we would be working, not only with the U.K., but hopefully, other -- with other countries, obviously, with the intention of having a trial beyond just the U.K. And here, the intent would be much more to look at those patients who would be at high risk of having an event, but have not yet had an event. The third memorandum of understanding is around the collaboration and manufacturing, and this is really around the optimization to scale capacity. So these are 3 agreements [or intent of] agreement. They're in preliminary phases, and we're obviously in conversations with the U.K. government around all 3.

What is really interesting is this novel approach. And I think that's what we're very excited about because it is an opportunity for us to work with health care systems in a very different way. We know LDL-cholesterol is a huge issue because of the lack of adherence, and we feel that with inclisiran, twice a year injected at a physician office, can really have the potential to increase that adherence and make a dent in CV disease and CV mortality over time.

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Vasant Narasimhan, Novartis AG - CEO [28]

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Maybe, Seamus, just on the modeling side of your question. And if you just think about the secondary prevention market in the -- or number of patients actually within -- in the U.K., there's about 1.8 million patients in the U.K. who would be eligible from a secondary prevention standpoint. The initial part of this memorandum of understanding, which we still have to, I think, fully get the final agreements around, would enable the treatment of multiple hundreds of thousands of patients. And then as data becomes more of -- from launch, I should say, and as data becomes more available, especially the outcome study in 2024, a potential to further expand that. So there would be a clear commercial potential right from the start with inclisiran being broadly used in the U.K.

I can't guide, obviously, to specific numbers, but we think it's -- we're highly attractive with respect to that launch. And Marie-France and her team are very actively discussing now with payers in the U.S. as well as other parties around the world to see, can we use similar population-based agreements to drive significant volume uptake, even ahead of the outcome study?

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Operator [29]

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Your next question comes from the line of Matt Weston from Crédit Suisse.

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Matthew Weston, Crédit Suisse AG, Research Division - MD and Co-Head of European Pharmaceutical Equity Research [30]

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The first question, Vas, in your introductory comments, you flagged $1.5 billion of incremental efficiency gains. You'd already raised margin guidance to mid- to high 30s with The Medicines Company deal. So how should we interpret today's message? Is it now a target of even higher 30s? Or this new savings program helps achieve the previous goal? Or are we looking for a large proportion to be reinvested in launches and innovation?

And then 2 other quick ones, if I can. Mitsubishi Tanabe, the Gilenya arbitration. Can you just update us on timing, please, and when we should expect an outcome?

And one for Susanne. Lutathera, it previously had been flagged as a blockbuster opportunity, but sales now seem to have very much plateaued. What's going to drive the inflection and when should we see it?

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Vasant Narasimhan, Novartis AG - CEO [31]

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Thank you, Matthew. On the $1.5 billion, we really see this as a part of the ongoing journey to achieve the mid- to high 30s margin. Harry, do you want to add any other details?

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Harry Kirsch, Novartis AG - CFO [32]

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Yes, Matthew, thank you for the question. So basically, we updated where we stand on the prior $2 billion productivity program that we announced 2 years ago, which we are completing end of 2020. And that was, of course, also supporting our short- and mid-term margin guidance.

This is also further supporting our margin expansion to the mid- to high 30s, so it's part of the overall program. Of course, the growth drivers from the sales from the launches and market growth drivers as well as resource allocation and these ongoing continued efforts, mainly in technical operations, supply chain, but also NBS and procurement.

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Vasant Narasimhan, Novartis AG - CEO [33]

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Thank you, Harry. And then on Mitsubishi Tanabe, we don't have any updates from where we last were on this. We'll continue -- we're continuing that dialogue, and we'll of course, provide you an update if and when we have one. And then with respect to Lutathera, Susanne?

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Susanne Schaffert, Novartis AG - President of Novartis Oncology [34]

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Yes. So on Lutathera, actually, it is and will be one of the key growth drivers for the Oncology business. And overall, we're very pleased with the performance. We have, however, observed a slight deceleration in the growth in the U.S. Just remember that still, more than 80% of sales are coming from the U.S., and that's largely due to the reason that the major net centers that we focused on in the first round of our commercial efforts have now worked through the existing prevalence pool of cap net patients. So now we focus on really tapping into earlier lines. We have expanded our U.S. field force, now really targeting community centers and Tier 2 centers and should be very -- we were -- we are very optimistic actually. We also should see now more sales coming from Europe as we got reimbursement in several key markets like France, Italy and Spain. So overall we remain very confident on Lutathera. We still believe this has blockbuster potential and, as I said, still remain very optimistic about this product.

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Operator [35]

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Our next question comes from the line of Florent Cespedes from Societe General.

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Florent Cespedes, Societe Generale Cross Asset Research - Senior Equity Analyst [36]

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Florent Cespedes from Societe General. Two quick questions. First, ofatumumab, could you remind us what are the resources that you will use to push the U.S. launch in terms of sales force? And will you use the Mayzent or Gilenya sales force as well? Or do you need to build new ones ahead of the launch?

My second question is more big picture regarding respiratory following [aferiperpid] results. What is your strategy in the U.S. in terms -- in respiratory timetable in the U.S.? Would you change your view on this therapeutical area?

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Vasant Narasimhan, Novartis AG - CEO [37]

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So Marie-France, on ofatumumab.

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [38]

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So on ofatumumab, obviously we are resourcing to win, and we've got a strong focus on the U.S. also, given the fact that we have submitted a PRV. We are looking to work with 2 separate sales forces, so 1 dedicated to ofatumumab. And then, of course, we have a sales force with Mayzent and Gilenya. So we will be resourcing to win in this marketplace. As I said to you before in the presentation, we firmly believe that we have a very unique value proposition with ofatumumab, with unsurpassed efficacy in -- with B-cell depletion. We've got an excellent safety profile and also the ease of administration will -- can really make this product a first-line choice for, not only centers of excellence, but just the general neurologists.

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Vasant Narasimhan, Novartis AG - CEO [39]

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Great. Thank you, Marie-France. On the respiratory strategy, what I'd say is, of course, [aferiperpid] was a big step back. But we still have a significant global presence with Xolair. Xolair is a major medicine for the company and obviously, a leading medicine for the treatment of atopic asthma. We've had a number of life cycle management opportunities with Xolair, both in Japan, the U.S. and in the EU. So Xolair remains a pillar. Ex U.S., we will, of course, have the inhaled range, which now will get expanded with the QVM and QMF approval. And then longer term, we have a pipeline within R&D, within development and research, that could address a broad range of a more specialty respiratory areas, including idiopathic pulmonary fibrosis, PAH, sarcoidosis. We have a program, a medicine called QBW, which is an oral medicine for COPD. So a full range of assets in respiratory. So I'd say right now, we're waiting to see how that pipeline matures. And in the meantime we focus on Xolair and our inhaled range.

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Operator [40]

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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 & European Pharmaceuticals Analyst [41]

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Just 2 brief ones, please. Firstly, just, I guess for Harry, on the corporate cost base. And despite obviously, a lot of the cost-cutting cgoing through, which will be completed this year, we're still seeing around a mid-single digit increase in corporate SG&A costs year-on-year. Can you sort of provide some guidance perhaps as to how that might develop in the future, and whether or not we should see a change in that trend?

Secondly, then just for Richard, I wonder if you could give us any more visibility on the reasons behind the discontinuation of generic Advair. Was this a decision based on regulatory discussions? Or was this related to some other part of the product characteristics?

And perhaps a question to ask Harry. I think I didn't see it in the release, but do we have the exact numbers for the Sandoz oral U.S. solids business, please. We're being asked about sales and profits to take out of 2019.

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Vasant Narasimhan, Novartis AG - CEO [42]

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Great. So thank you, Peter. Corporate costs, Harry?

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Harry Kirsch, Novartis AG - CFO [43]

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On the corporate cost, I mean, first of all, let me start with all of our guidances, of course, include always also the corporate sector, even though it's a small part, when you add up, of course, Innovative Medicines and Sandoz. So there are quite a few moving parts in that. We expect, actually, for next year that the corporate cost part comes down and -- in the range of $50 million to $80 million. But it's a bit more volatile because it's often -- so it's including some pension charges and other things, share-based compensation, all of that. We're, therefore, a bit more volatile than maybe other parts of the business. But we do see an overall reduction in the corporate cost line for core corporate cost as we go into 2020. Maybe I should just add to it [on the pure increase].

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Vasant Narasimhan, Novartis AG - CEO [44]

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Certainly. Go ahead. Yes.

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Harry Kirsch, Novartis AG - CFO [45]

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So we have footnoted that it's $1.1 billion in -- $1.2 billion in 2018 and $1.1 billion in 2019 on sales. I can't -- I just give you the exact numbers, then you have it, we will anyway once the deal is concluded, we will issue them for a set of pro forma financials. So the net sales of this part of the business was $1.174 billion in 2018 and it's $1.072 billion in 2019. In terms of core operating income, it was $294 million in '18, and it's now $272 million in 2019.

Now that sounds probably very low decline. It's, of course, helped that we stopped the depreciation and amortization. Of course, for core, the stop of depreciation is important. And basically, the depreciation that didn't get booked was $9 million in 2018 and $26 million in 2019. So if you add that back, then you have there a decline of 14% on the bottom line. But of course, when you compare the numbers, and when we give pro forma, the $272 million and $294 million for the 2 years in core operating income will be the ones that now are the public numbers.

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Vasant Narasimhan, Novartis AG - CEO [46]

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Good. Thank you, Harry. And then generic Advair, Richard?

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Richard Saynor, Novartis AG - CEO of Sandoz [47]

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Thank you. So as you know, we received a CRL for a proposed Advair Gx in 2018 and our latest Q3 guidance that we would not be able to launch before H2 2020. Following a recent review of our data readouts, we no longer see a pathway to launch in the next 18 months. And as a result, we've decided to discontinue further development.

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Vasant Narasimhan, Novartis AG - CEO [48]

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Yes, so -- and I think they're really much very data-driven, not necessarily from a regulatory feedback standpoint.

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Operator [49]

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Your next question comes from the line of Stefan Schneider from Vontobel.

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Stefan Schneider, Bank Vontobel AG, Research Division - Head of Life Sciences Team & Pharmaceutical Analyst [50]

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Vas, you showed us on Slide 23 that in-line products and pipeline would sustain long-term growth for the company. What do you project for your bolt-ons, which were on an annual basis for $10 billion? Do you still need that to drive long-term growth? And the other one is, what about share buybacks in that context?

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Vasant Narasimhan, Novartis AG - CEO [51]

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Yes. Harry, do you want to just go through our capital allocation priorities? And I can comment in a little more detail on M&A.

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Harry Kirsch, Novartis AG - CFO [52]

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Yes, sure. Stefan, I mean our capital allocation priorities have not changed. So I think most of you know them. I should repeat them: so the first being investments in attractive organic growth opportunities; the second being to growing dividend, and we're -- assuming AGM approval, we will pay out $7 billion early March to all of our shareholders in totality; and then third would be the M&A, bolt-on acquisitions, where we see usually in the range of roughly 5%.

That's not a formula. We go by it whatever the opportunities are, but I think it's mainly to indicate we are not after large M&A; last but not least would be share buybacks. And we completed last year $5 billion share buyback that we started in the middle of 2018. Now given also we bought The Medicines Company for $9.7 billion. We will finance it. Of course, share buyback, at the moment, we do not see an additional one. So we haven't announced it. Therefore, whenever we would do an additional share buyback, we would announce it. We have a standing commitment that we always buy back employee participation programs. So we never dilute our shareholders with employee programs. And that's, of course, an ongoing buyback that comes that we do without announcing it, but a specific share buyback program at the moment is not announced. I do expect that share buybacks will be always part of our capital allocation, but it's also the fourth priority.

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Vasant Narasimhan, Novartis AG - CEO [53]

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Thanks, Harry. And I think with respect to bolt-on M&A, I mean, when I look at this chart, what I see is the power of Novartis' internal R&D. And we appropriately supplement it with M&A, but we're never in a position where we need to do or have to do M&A. We do it based on attractive assets that fit with our M&A strategy. And then if we can have very strong economics beyond the acquisition, then of course we do them. So [we're feeling] very good about our overall profile and the strength of our internal R&D engine.

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Operator [54]

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The 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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Firstly on Cosentyx, you obviously raised your peak sales guidance. But if we look at the Q-on-Q volume growth in the U.S., it's slowed a bit, and it sounds like you're talking about maintained rather than improved commercial access for 2020. I know historically we've seen a soft Q1 with an acceleration as you've benefited from improved volumes. I wonder if we should expect that again this year? Or are we in more of an equilibrium with an acceleration more dependent on new approvals? That's the first question.

Second, I just wondered if Harry could talk about the swing factors to the upper and lower end of guidance. Consensus is already at the -- pretty much at the top end of the guidance. So I wondered if there's anything maybe that we're not considering. Or is your range, would you see that as a conservative kind of start for the year?

Final question is just a clarification. There's a few products where U.S. sales have significantly exceeded the IQVIA volume growth in the quarter, including Entresto, Promacta and Gilenya. I just wondered if you could talk, give us some insight on trends in pricing mix and stocking changes impacting those products.

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Vasant Narasimhan, Novartis AG - CEO [56]

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Thank you, Richard. So first on Cosentyx dynamics, Marie-France?

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [57]

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So let me try and take parts of your question. So let me maybe address the Q4/Q1 transition. So yes, we do expect the typical Q1 seasonality, and we'll probably see that across the industry. We actually aim to be broadly in line with Q4, potentially with a small deviation. But we wouldn't see a very, very large deviation.

With your access question, we remain very focused on first- and second-line access. And obviously the incremental RDs as usual to make sure that happens. We feel very confident about where we are in access. There have been some changes, but we are in a solid first- and second-line position in the U.S.

I'd just like to remind that we've continued and we've sustained growth through multiple competitor entries, and we see Cosentyx relatively untouched by new competitors coming in the marketplace. If I just give you an example, so in the U.S., we're outperforming both in dermatology and rheumatology. But if I take the dermatology market, we grew 27% this year versus the marketplace at 12%. And if we look at quarter 4, it's 27% with the marketplace growing at 14%. We're very confident in Cosentyx' product profile. But I think what's more important is that physicians are really confident with Cosentyx' products profile. If we look at PSO, we provide complete treatment. Cosentyx is great on skin, but it is a complete treatment. 2/3 of patients will have additional manifestations on nail, scalp and palmoplantar, and we do propose a very strong value proposition. What's also important is that payers want an IL-17 on their formulary. And so we're in a very good position to keep our market position.

We're also leaders in the rheum space. So that's why we've upped our guidance based on the momentum and also on the additional news flow that we expect in the future.

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Vasant Narasimhan, Novartis AG - CEO [58]

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Thank you, Marie-France. And I always think people should remind themselves Cosentyx has almost 45% of its sales now coming from rheumatology, fast growth. And there, of course, we face minimal competition and continue to have an outstanding profile that we expand with additional indications. And Marie-France and her team are doing an outstanding job. So we feel very good with where we are on Cosentyx.

So on guidance, Harry?

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Harry Kirsch, Novartis AG - CFO [59]

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Yes. I think Richard, you asked about what are the potential swing factors. I mean I think in the end all what we discussed here, it's the 3 key elements on the top line, I think our key growth drivers in market are well established, and that is not so much of a swing factor in my mind. Of course, the launches. We have some key launches. And there's always a range, how fast will it be if we tick up. It's a great start.

And other key launches that are driving onco and pharma. So it's a bit the range of outcome on the launches. The second piece is, of course, then the productivity part. There, we are very confident. We are slightly ahead of our $2 billion program to be finalized this year. The next program is there, but that's completely under our control, and that's going extremely well. The third element is then the potential generic entries. And we have now in the U.S., basically, Exjade/Jadenu the world competition entering in November, on Afinitor, the 3 lower strengths, not yet the higher strength, and then Travapost.

Another element, of course, will be how quickly are [the various] large generic suppliers resubmitting. Some of them are back in the market. And we would expect that Diovan and Exforge decline in 2020. Now if there are some other smaller products in ophtha and pharma. Of course, it could be that these come a bit later. Then we talk about the higher end and also if our launches overperform, we talk at the higher end of the guidance.

So it's the usual, let's say, set of swing factors. But overall, very confident in the top line growth. A bit more on this uncertainty, what generics outside of Gilenya and [Xaflar] which are out of our guidance, and the other smaller products, when are they coming in.

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Vasant Narasimhan, Novartis AG - CEO [60]

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Thank you, Harry. And then I think on the last question on the IQVIA mismatch, probably we can't comment on why the data missed. But in terms of Entresto dynamics and then in terms of Kisqali and Taf/Mek the dynamics, maybe first, Marie-Francedo you want to comment on Entresto momentum in the U.S.? And then Susanne, you can comment on the onco portfolio?

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Marie-France Tschudin, Novartis AG - President of Novartis Pharmaceuticals [61]

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So as you saw before, the momentum for Entresto is extremely strong. And it's really based on demand. As I said before, the NBRxs are at an all-time high in the U.S. We've seen a fantastic quarter 4, and we expect that momentum to continue through 2020. We're very encouraged by the fact that we have very strong data both in supporting ambulatory initiations, both in-hospital initiations. We have strong endorsement from the guidelines. So from ACC, AHA and ESC. And also, we've got opportunities to grow in the future in China and Japan. So I think we're poised to do really well with Entresto this year.

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Vasant Narasimhan, Novartis AG - CEO [62]

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Thank you, Marie-France. And volume dynamics, Susanne?

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

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Yes. I think also on the oncology portfolio in the U.S., very, very strong, accelerated growth on Kisqali. And I think Richard, you pointed out Promacta. Actually there, we see continued strong growth in ITP and also very strong uptake in first-line SAA. We also had very favorable guidelines published at ASH, putting Promacta favorable versus Revlimid. So continued growth there and very pleased with the momentum.

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Vasant Narasimhan, Novartis AG - CEO [64]

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So overall, Richard, I'd say it's not stocking or other effects. This is real demand growth that we're seeing on our key brands.

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Operator [65]

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

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Keyur Parekh, Goldman Sachs Group Inc., Research Division - Equity Analyst [66]

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The first one is, Vas, last year, Novartis started by guiding to operating profit for the Innovative Medicines business to grow at mid- to high single digits, and you ended the year delivering 17%. Can you help us think about what might be the factors that might prevent you from doing similar levels of growth or a similar kind of momentum as we look at 2020? That's question #1.

Question #2, relative to inclisiran, and you spoke about the NHS kind of memorandum of understanding being hundreds of thousands of patients to begin with. The highest-selling medicine in the U.K. prior to inclisiran would have been HUMIRA, at about GBP 400 million in NHS spend. As one thinks about potential market pricing for inclisiran, with the kind of population numbers we are talking about, how likely is it that inclisiran is not the biggest-selling medicine in the U.K.?

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Vasant Narasimhan, Novartis AG - CEO [67]

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My first comment, Keyur, is your questions are extremely like entrapment, I feel like. So I will do my best to answer them. On the overall momentum, as Harry said, of course we have tremendous momentum on our growth brands, on our launches. I think the key difference between 2020 and 2019 is that we do have the Exjade and Afinitor generics coming in. We also have the ophtha mature portfolio with generic exposure, and there's just a range of different outcomes for those brands. And on the upside, of course, if our launch brands deliver or over-deliver our aspirations, they would more than offset them. So that's why we gave the range that we've given at the start of this year to be prudent, and then we'll, of course, update as we -- as the year progresses, and we have a better read on some of these key launches that are currently ongoing.

Now on -- with respect to inclisiran, it's certainly our aspiration that we would want to make it one of the largest medicines, or if not the largest medicine, in the history of the NHS. So we have many steps to get there. We have to get the medicine approved. We have to arrive at the final agreement with the U.K. at NICE. And then ultimately, we need to drive significant uptake within the NHS system, which will require Marie-France and her team to do a lot of work to ensure that patients are diagnosed and ultimately get the medicine.

The good news and what we're excited about, is the commitment of the NHS to work together with us to drive that uptake, which is what we feel like on the first part of this agreement is truly unprecedented for the Head of the NHS and myself to sit together and discuss the introduction of a medicine into the NHS system. And the goal of driving large-scale utilization together, including the NHS, directly working on driving that utilization themselves. I think this shows the potential of this medicine to impact what is the leading cause of death and disability for health care systems. So there's a huge desire.

I've been genuinely impressed by the partnership that we've seen with the U.K. NHS and relevant U.K. government agencies on this. And what they're hopeful now is that we can hope -- replicate it in other geographies and hopefully in other systems in the U.S. as well.

(Operator Instructions)

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Operator [68]

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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 [69]

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It is 1 question with 2 subparts. For the assets going to Aurobindo, do you see any further risks to the execution time line? And have there been any changes to what you're actually going to be able to dispose of there?

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Vasant Narasimhan, Novartis AG - CEO [70]

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Richard? Thank you, Laura.

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Richard Saynor, Novartis AG - CEO of Sandoz [71]

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We are confident we'll close this quarter with moving in the direction we would expect to. We're working closely with Aurobindo and the FTC to close that off, and there shouldn't be any surprises.

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Operator [72]

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Your 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 [73]

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So just one about the tax rate. So just -- I think we had an idea that the tax rate might go up to in between a range of 16% to 17% because of some of the tax reform in Switzerland and maybe the U.S. So just thoughts on what's going on there to bring it in line for 2020, sort of 16%? And how we should think about it going forward?

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Vasant Narasimhan, Novartis AG - CEO [74]

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Harry?

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Harry Kirsch, Novartis AG - CFO [75]

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Right. Thank you, Richard. So it's, of course, always the core tax rates and the tax rates move around with a bit of different split of profits in the different geographies. We are differently taxed. So again, I was pleased that for 2020, we have an outlook that the tax rate of the core tax of 16% is realistic, right, basically in the range of last year. At -- and then ongoing, there could be an increase in the range of the 16% to 17%, 17.5%. But we update really here year by year.

And there's a lot going on the -- in the overall tax -- field of taxes. On the other hand, we feel that we have a very attractive tax rate and that we will continue to have a very attractive tax rate. Of course, it's with tax reform being embedded and approved last year is super helpful for that. But it's very hard to give exact long-term outlooks on it, but I'm confident we'll continue to have a very attractive tax rate in the range of 16% to 17.5% in the long term.

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Operator [76]

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Your next question comes from the line of Eric Le Berrigaud from Bryan Garnier.

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Eric Le Berrigaud, Bryan Garnier & Co Ltd, Research Division - Managing Partner Equity & Research [77]

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Yes. So 1 question as well. We understand clearly what is behind your assumption that Gilenya, there won't be any generic in 2020. Maybe a word on would you also take the assumption that there won't be any Sandostatin generic in the U.S., since it seems that Teva is quite hopeful to get positively out of the CRL answer they got last year and to be in the market by the end of the first half. So could you give maybe some sensitivity of if that happens, does that change anything to your guidance?

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Vasant Narasimhan, Novartis AG - CEO [78]

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Yes. Thank you, Eric. On Sandostatin, we -- as you know, the -- there's been an ongoing effort to launch a generic on Sandostatin LAR, given its unique formulation since, I believe, 2006 or 2007. It is a very complex formulation and a complex manufacturing process. We -- to our understanding, have not seen any activity in the channels to indicate a entrant. And so if and when that changes, we'll of course let you know and update our guidance appropriately. I don't know, Harry, if you want to comment on the level of impact?

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Harry Kirsch, Novartis AG - CFO [79]

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You know the U.S. sales of [Xaflar] right? If you assume a mid-year, this would not be so material. Of course, on both, there would be like Gilenya and Xaflar , then we would have to update. But with Xaflar alone, assuming a mid-year U.S. entry would not change our guidance. It's a big-enough range.

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Vasant Narasimhan, Novartis AG - CEO [80]

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And I would also say, it's important to note, given the production challenges with Sandostatin LAR, I think this -- we expect this to more look like a biosimilar-type erosion as we've seen in Europe, where we've been able to hold very well our Sandostatin LAR share even in the face of entrants in Germany and a few other countries.

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Operator [81]

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Our next question is from the line of Naresh Chouhan from Intron Health.

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Naresh Chouhan;Intron Health;Founder, [82]

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Sorry. My question's just been answered.

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Operator [83]

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Your next question comes the line of Mark Purcell from Morgan Stanley.

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Mark Douglas Purcell, Morgan Stanley, Research Division - Equity Analyst [84]

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Yes. Cosentyx, 2 parts. On the first part, for nonradiographic AxSpA and the use of a PRV, clearly, you have confidence the opportunity here for the product is partly [erased] against how it's [spurred]. Is this a reflection of patient cycling dynamics or subgroup data from the PREVENT study or just as a portfolio play you have from an entrenched formulary position? Because in market, it seems it has incredibly strong data in this setting, on the face of it superior. So just trying to understand, do payers and physicians want both the TNF and IL-17 approach?

And then the related question, in terms of the IL-17A/IL-17S head-to-head trial that's expected this year versus Cosentyx from UCB's Bimekizumab. If you see superiority do you feel that will have any impact, given obviously IL-23, IL-17 as you said, physicians and payers want an example of both. But if it's a head-to-head and a superior IL-17A for -- 17A-17F head-to-head study, would that have any impact on the psoriasis indication for Cosentyx as you expand into neuro-compensating indications?

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Vasant Narasimhan, Novartis AG - CEO [85]

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Yes, thanks for the question. On Cosentyx non-radiographic AxSpA, the reason we're excited is again, the mechanism here of IL-17A versus TNF molecules is it allows you to really target [entosionis] or the [MTCs at the] insertion points. And we believe in the long run leads to slower progression of the disease. And physicians, the reason you've had such a strong uptake in PSA and AS with IL-17a, and particularly Cosentyx, is because of that mechanism and the data we've been able to show across a range of different indications.

So we think versus a TNF option, patients will prefer IL-17a. Also there's an impressive safety profile. Nonradiographic, you're moving into earlier lines of -- really an earlier line of therapy, so safety also matters. So we think we'll have the right profile. We think given Cosentyx's overall strength in rheumatology, we want to expand the full indication range quickly. We have nonradiographic, then we have, as we've alluded in the R&D day, a broad range of 8 additional indications we're pursuing, primarily in rheumatology to really build out the base. So that's very much the goal.

On IL-17A/F, look, we believe Cosentyx now has 6, 7 years of real-world data, has a broad label, has proven itself for physicians. And so we are not particularly concerned about other IL-17 inhibitors now coming in 5, 6 years after with a single trial. I think, as Marie-France noted, we have been able to head off every single one of the entrants that have come in to say and lead -- leading all of you to say that the end of Cosentyx is near, and we have been able to keep growing. I think that speaks to the power of the medicine, and that's what we'll keep driving.

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Operator [86]

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Your last question comes from the line of Simon Baker from Redburn.

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Simon P. Baker, Redburn (Europe) Limited, Research Division - Head of Pharmaceutical Research [87]

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Vas, you began the presentation with a very persuasive presentation on your commitment to Novartis's ESG philosophy and targets. The question is, how and when will you be able to persuade Sustainalytics to lift the red flag that they currently have on Novartis, which we know from talking from clients, is preventing some investors from holding your stock?

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Vasant Narasimhan, Novartis AG - CEO [88]

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I appreciate the questions. I mean we are very committed to demonstrating to MSCI, Sustainalytics and the relevant other firms the depth and breadth of our commitment to these topics. You'll see in the appendix of our Novartis In Society report the most comprehensive review of our position in all of these areas that we've ever done.

We're doing an online system as well, to provide these agencies with all of the relevant facts. We're working very hard to resolve the remaining -- topics we have from the past with respect to some of our legacy issues, and I'm optimistic we'll be able to get to a better place with the reports coming out later this year. It's certainly a top focus for me and our management team. So hopefully, we'll be able to do that, and those investors then would be able to invest in our, we believe, great company.

Thank you all very much, and I appreciate you sticking around a little longer, and we'll look forward to providing you another update in a few months. I wish you a great 2020, great start to the next decade. And thank you for your interest in Novartis.

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Operator [89]

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That does conclude our conference for today. Thank you for participating and we will now disconnect.