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Executives

Samir Shah - Global Head Investor Relations

Joe Jimenez - Chief Executive Officer

Harry Kirsch - Chief Financial Officer

David Epstein - Division Head, Pharmaceuticals

Kevin Buehler - Division Head, Alcon

Jeff George - Division Head, Sandoz

Andrin Oswald - Division Head, Vaccines and Diagnostics

Brian McNamara - Division Head, OTC

Analysts

Matthew Weston - Credit Suisse

Graham Parry - Bank of America

Naresh Chouhan - Liberum

Richard Vosser- JP Morgan

Andrew Baum - Citi

Tim Anderson - Sanford Bernstein

Michael Leuchten - Barclays

Seamus Fernandez - Leerink

Florent Cespedes - Exane BNP

Tim Race - Deutsche Bank

Keyur Parekh - Goldman Sachs

Novartis AG (OTCPK:NVSEF) Q3 2013 Results - Earnings Call Transcript October 22, 2013 8:00 AM ET

Operator

Good morning and good afternoon, and welcome to the Novartis Q3 2013 results conference call and audio webcast. Please note that during the presentation all participants will be in a listen-only mode and the conference is being recorded. (Operator Instructions). A recording of the conference call including the question-and-answer session are available on our website shortly after the call ends.

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

Joe Jimenez

Thank you. I would like to welcome everybody to our third quarter conference call. Joining me on the Novartis end are Harry Kirsch, the CFO; then we've got the Division Heads here, David Epstein for Pharma; Kevin Buehler, Alcon; Jeff George, Head of Sandoz; and Andrin Oswald, Head of Vaccines and Diagnostics; George Gunn, Head of Animal Health; and Brian McNamara, Head of the OTC business.

Before we start, I would like Samir Shah to read the Safe Harbor statement. Samir?

Samir Shah

Thank you. The information presented in this conference call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the Securities and Exchange Commission for a description of some of these factors.

Joe Jimenez

Thanks, Samir. Starting on slide number four, I was pleased with the sales performance of the company. We delivered nice sales growth in the quarter and it was really driven by all of the divisions. Sales were up 6% in constant currency. Core operating income was up a point or 1% in constant currency as was core EPS. We also made good progress in the pipeline for the quarter.

You can see on the next slide the overview of the financials. Net income was $2.3 billion for the quarter, up 1%, that was down though 6% U.S. dollars. Harry will talk more about the currency impact that we have. Free cash flow though was quite strong at $3.5 billion versus year ago in U.S. dollars, up by about 1%.

And we continue to make progress on our three strategic priorities; in innovation, we had four key approvals during the quarter. In terms of accelerating growth, our net sales grew in all divisions driven by the growth products that were up 17% in constant currencies and also by emerging markets. We also had a good progress on our productivity agenda. We generated about $730 million with about half coming from procurement.

Now going a little deeper on innovation on slide number seven. The Pharma division had some important product approvals. Two of the most critical were the Japan and Europe approvals of Ultibro and COPD. Since it's a new therapy for COPD and we are right now in the process of launching that drug across Europe and Japan.

In Vaccines and Diagnostics, the FDA approved an indication expansion for Menveo to include infants and toddlers from two months so that also was an important piece of innovation.

We also received FDA Breakthrough Therapy designation for BYM338. This is our antibiotic for degenerative muscle disease cause sporadic inclusion body myositis. Now if this approved, this will be the first treatment for patients with this disease. And I think the important thing is that this designation brings our total to three in terms of new molecules and that’s the highest [achieved of] anyone since the program began.

For Alcon, we built nearly complete refractive surgical suite with the launches of two new pieces of equipment Verion and Centurion. This is important because the upfront diagnostic piece, the GPS is able to take an image of the eye and then it communicates with the other pieces of equipment downstream from laser incision to cataract removal and this is now a more automated surgical procedure that will improve patient outcomes for those patients with cataracts.

In Sandoz, we also strengthened our leadership in biosimilars launching a simple and secure device for Omnitrope. This is the fastest-growing human growth hormone worldwide and Omnitrope generates about $200 million in sales annually. This is going to help us differentiate this biosimilar.

Now second priority of accelerating growth, you can see the growth rates for all of the divisions starting with double-digit growth in Sandoz and Consumer Health in constant currency and good solid growth in Alcon and in Pharmaceuticals. Pharma core operating income was negatively impacted by the generic impact of Diovan and Zometa as well as investments into the pipeline. Our growth products will continue to play quite a key role in driving our performance. You can see on this slide that they were up 17% in the quarter to just over $4.5 billion. And importantly, they’re now upto about a third of our total group sales. I think this is another indication that the transformation of the pipeline -- of the portfolio is quite robust.

Let me just touch on the division highlights starting with Pharma. You can see the growth products grew nicely in the third quarter, particularly Gilenya and Afinitor with growth that was over 65% versus a year ago. Alcon grew 6% in the quarter and this was driven by very strong 9% growth in the surgical franchise. This was again driven by the cataract segment. It was both an increase in procedures as well as improvements in overall market share.

For Sandoz, you can see that we had a strong quarter across the globe and really we grew faster than market in all regions around the world for the generics business. And then in Consumer Health, we continue to show very strong growth this quarter. OTC delivered double-digit growth. This was driven not just by the U.S. re-launch but also outside of the U.S. we have brands growing like Voltaren and Otrivin growing in the teens. So this is a business that is performing very well. Animal Health also has successfully re-launched Sentinel back into the U.S. market.

Now in the third quarter our emerging markets business grew about 9% China and Russia led that group with 18% growth in China and 15% growth in Russia for this quarter. And now on productivity we’re on track to move our productivity targets of 3% to 4% of net sales. This focus that we have on procurement continues to pay off. We’re now standing at almost $1 billion in savings for the first nine months of 2013. I think we’re also managing our marketing and sales spend well across the group even during this period of very heavy number of product launches. So M&S, as a percent of sales dropped again about 30 basis points versus prior year.

Now one thing not on the slide that I want to bring to your attention is some breaking news. Yesterday the FDA completed a week long inspection of our Lincoln, Nebraska manufacturing site. That was a very thorough inspection and we got the news last night that they have closed out the inspection with 0483 observations. So this is extremely positive result. It’s too early to characterize what the FDA’s reaction to that was, but just factually, the facts are that, that was a thorough inspection and it is now closed out and really it’s a signal that we are on the right track on the Lincoln site. We still have work to do, still work to do on some of the Sandoz sites, a definite positive piece of good news.

Okay now I’ll turn it over to Harry.

Harry Kirsch

Thank you, Joe and good morning and good afternoon everyone. You’ve heard from Joe that we have continued to make good progress of each of our strategic priorities through quarter three. As you can see from the summary slide 20, Novartis again delivered constant currency growth of both net sales and core operating income in the third quarter of 2013. This reflects the strength of our growth products, which Joe highlighted in his presentation.

Currency had a significant impact on our results in the third quarter especially on the bottom-line, which somewhat distorted this picture of our solid underlying performance. In the third quarter, we delivered net sales of $14.3 billion, up 6% in constant currencies over the prior year. Core operating income was up 1% in constant currencies to $3.6 billion. And we had a strong cash flow of $3.5 billion in the quarter.

In the first nine months net sales were up 4% in constant currencies to $42.8 billion and both core operating income and operating income were also up 3% in constant currencies. Important to note that we are clearly tracking above the full year guidance we issued last quarter. These are solid numbers and especially given that we have generic erosion of about $0.5 billion in the third quarter and $1.8 billion in the first nine months.

On slide 21 you can see that all divisions made positive contribution to sales growth and constant currencies. Joe has already commented on Alcon Pharmaceuticals. Sandoz saw a strong volume growth of 17% which more than offset the price erosion of 6%. This year-over-year comparison benefit was also from having only one month for generic recession in quarter three 2012.

As you look at Sandoz and its growth trajectory for the remainder of the year, it’s important to remember that quarter four 2012 includes four months of the Fougera sales. This combined with a likely absence of an authorized generic Diovanmonotherapy in U.S. which challenged growth rate for the division in quarter four of this year.

V&D was up only slightly as Menveo sales were partly offset by a [later start] to the U.S. flu season. Consumer Health, which includes OTC and Animal Health saw double-digit growth mainly driven by strong performance of key brands globally and product re-launches in the U.S.

Slide 22 shows the breakdown of our top-line and bottom-line performance. In the third quarter, we see underlying sales growth of 10% driven by strong volume growth of 9% with an additional cost of 1% for pricing. This more than offset a negative impact of generic competition of 4% and we sighted a reported sales growth of 6% in constant currency.

Currency had a negative impact of 2% mainly from the weakened yen and weakening emerging market currencies, which we have to a net sales growth of 4% in U.S. dollars. We hear a similar, but more pronounced story for core operating income with strong performance due to [offsetting] 11% impact from generics.

Now on slide 23, I want to talk about our underlying performance, because this is important not only for our 2013 outlook, but also for our longer term trajectory. And to adjust for the impact of generic, you can see that for the first nine months our underlying net sales grew 8% in constant currency. This is indicative of the strength of our growth product portfolio which we expect should drive our performance in the future.

Our underlying core operating income was up 15% in constant currencies in the first nine months, growing faster than sales. This shows that our group margins would have increased excluding the impact of generic.

As I mentioned in the quarter two earnings call, you cannot extrapolate this underlying core operating growth rate for the full year for two reasons. First, we have historical pattern of spending more in the second half than the first, which will be more pronounced this year. And second, we have a very robust pipeline with promising projects. And we will be investing in R&D to get into margin as quickly as possible. This explains also why the underlying core operating income for the quarter three was 12% lower than 16% for the first nine months.

On slide 24 you can see the currency impact on sales and core operating income over the last several quarters. In the third quarter currency had a negative impact of 2% on sales mainly due to the weakened yen and weakening emerging market currencies relative to the U.S. dollar. On core operating income currency had an impact of 6% again due to yen and emerging markets. And they will just represent the larger portion of our operating income and sales.

This September rate or September average rate will continue in fourth quarter for there will be a negative impact of about 2 to 3 percentage points on sales, higher to 6% on core operating income and about 8% on reported income for the fourth quarter. This will result in a negative full year effect of currencies of about 2% on sales, 5% on core operating income and 6% on operating income.

Let’s now turn to margins on slide 25. Year-to-date core operating income in constant currencies has been growing ahead of full year guidance, as a result of the core product momentum and the lower impact of generic competition.

In the third quarter, as group level of our core operating margin decreased in constant currency by 1.4% points. Pharma and Alcon declined by $0.01, the bit more time explaining the circumstances behind each. As sum up, of courses there is significant effect of generics, which awarded higher margin sales.

In addition two other factors impact this quarter. R&D expenses as percent of net sales increased to support incremental investments in multiple pipeline projects in oncology, respiratory and heart failure. Higher costs of goods sold for a good performance of Gilenya resulting in higher net royalties and from higher production levels this year compared to a low prior year base.

At Alcon, the decrease in margin this quarter is mainly due to one-time other revenues and some of accounting adjustments in the prior year as policy integration, leading to a higher margin compared to the prior year. Year-to-date in constant currencies, Alcon has the margin accretive, growing topline by 5% and bottom line by 7% and this is closer to the outlook for the full year. For both Pharma and Alcon, they have brought obviously a negative currency impact.

Slide 26, shows our strong cash flow of 3.5 billion in quarter three, up 1% versus prior year. For the full year, as mentioned earlier this year, we expect to stay somewhat below 2012 cash flow levels due to increased capital investments for manufacturing and research sites, safety stock increase and currency impact.

On slide 27, you will see how net debt decreased from 11.6 billion at the end of 2012 to 11.4 billion at the end of September. To note, we are mitigating the dilutive impact of employee auction programs on an ongoing basis and that have already repurchased 26 million of shares for amount of 1.9 billion in the first rate in line year-to-date.

On slide 28, I want to explain the benefit we’ve had from the lower impact of generic competition in 2013 compared to earlier expectations. At the start of the year we estimated that a generic impact would be up to 3.5 billion in 2013, assuming Diovan monogenerics would enter the U.S. in quarter one 2013. Of course we still don’t know when generic Diovan monotherapy will enter the U.S. market. On the modeling assumption that it doesn’t happen through the fourth quarter, we now estimate that generic impact will be more like up to 2.3 billion in 2013, the average from the lower impact of generic competition fold for a large part to the bottom-line with the exception of the additional investments in key development project I alluded to earlier.

Before we leave this slide, I just want reiterate our outlook for 2014. At the start of the year, we said 2014 and 2015 growth rates would be at least mid single digit and core operating income growing ahead of sales in constant currencies. This remains intact, but obviously needs to be adjusted for the Diovan monogeneric outside U.S. Clearly 2014 reported growth rates will be impacted by the timing of Diovan monogeneric entry in U.S. We do not know when this will happen and we will give more detailed updates of the 2014 guidance in January.

I will close with our revised full year outlook for 2013. On slide 29, you can see that we raising our full year outlook again, this assumes that Diovan monogeneric does not enter U.S market in Q4. In terms of report recites our new full year guidance in constant currencies is group net sales raised to grow lower to mid single digits. Group core operating income to be in line or better than 2012 and Pharmaceutical sales raised to grow low single digit. Raising guidance reflects our strong growth product momentum and lower impacts from generic competition.

With this I’d turn now over to David.

David Epstein

Thanks Harry. The Pharmaceutical division as Harry mentioned delivered a mid single constant currency sales growth during the quarter. Our core operating income however declined due to as Harry mentioned the loss of high margin product to generic and importantly the investments we are making getting ready for now multiple launches.

Turning now to page, you see this underlying volume growth was double digit which is impressive for most of the industry. Our growth products now represents 39% of total sales growing 28% in constant currency over the same period of last year, more than offsetting of a loss to generic.

On next page, you see that we continue to have strong growth in the emerging markets. During the quarter China, slowed down a bit, however we see overall nice progress in the case of China itself, it appears that we are gaining share on a relative basis.

Turning now to page 34, this is a drug you are very familiar with, this is our unparalleled growth platform, product with exclusivity to 2017 and beyond all with the blockbuster potential. I am going to speak about a number of these, but takeaway messages are all products with the exception of Lucentis grew a strong double-digit during the quarter. And two of the smaller ones in the bottom our respiratory portfolio and Jakavi are outside in the mode of just warming up, just trying to contribute to our future growth rate.

On the next page, you see overview of Gilenya, you see that the growth continues. Annualized sales are now surpassing $2 billion. Both our U.S. and ex-U.S. teams have done really an outstanding job with the commercialization of this product in the U.S. We've strengthened our ability to compete with some really novel commercial programs. And as a result, you see that we're able to maintain share in an overall rapidly expanding world markets after med products.

Outside the U.S., the growth is even better. And as you know we’ve discussed in the past outside the U.S. it is much easier to get patient started on Gilenya, because it’s easier to get the screening done that’s necessary prior to the patient start. And in addition outside the U.S. we do not yet have competition from tecfidera overall. We're very excited about this product and where it is likely to go over the medium term.

Turning now to Lucentis. This product is making a very significant contribution to our business. If you look at the chart on the left hand side of the page what you see is that the new product launches, something we've focused on quite a lot or nothing should be doing about 25% of the sales volume. And you recall at that time we had spoken about the fact that we had to give up price in a number of markets in Q3 in Europe in order to achieve market [aspect] of new indications. While the overall growth of the product is more or less flat to slightly down, you’re seeing a change in mix and a good mid-term outlook as those new indications get bigger and bigger.

I would like to spend now a moment on our Respiratory Franchise. From a regulatory perspective, we are doing well. I think now we had near simultaneous approval in Europe and Japan for Ultibro and our filings in the U.S. to a Seebri and Ultibro on track with the first half of 2014 target for Seebri and the second half of 2014 for Ultibro.

I’d like to give you just a quick snapshot onto how Seebri is doing on page 38 of our presentation. This is just a look at Germany, because there are some surprises here and I think they’re positive surprises. First of all, on the left hand side of the chart, we see where the business is coming from. First of all, we are doing quite well in picking up new patients with about 39% of the volume and the other thing that's interesting is the switches, switches are 30%. And while the gaps in numbers which is a 30%, it’s not so much of the surprise. It’s where the switches are coming from which I think is a positive surprise.

If you look at the pie chart, you see 37% of the sales are from the combination ICA/LABA products and another 10% of the product sales are coming from the ICS itself. Almost half of the business is because doctors are switching to patients off steroids in the COPD space to Seebri which tells us that physicians are understanding the steroids are not the ideal treatment and they are looking for an alternative. And we believe that when we bring in even better products to market, Ultibro, we will see a nice uptick of that product.

The other thing that’s very interesting is we are getting very positive feedback on this retailer device reading across the respiratory line. We’re seeing very strong patient preference for this device over the competing on our product device.

On page 39, just taking a snapshot of some of the data. In fact there are so many data from our Phase III program, it would be impossible to show even on two or three pages. But when you see the head to head comparisons of Ultibro Breezhaler to open-label Spiriva or Ultibro Breezhaler to Seretide, you see very significant differences in peak FEV. In addition, we’ve seen significant benefits demonstrated versus open-label Spiriva in terms of reducing the rate of exacerbation. And based upon that, we think there is more to do in that space to further elucidate the opportunity, to further differentiate this product on its ability to reduce exacerbation. First launches in Germany and Japan will be some time during the fourth quarter of this year so I’d just say stay tuned.

Last product I want to mention to you is one that’s in our pipeline. I know it’s in right, our Head of Development spoken about it in the past and this is AIN457 or secukinumab or anti-IL-17A initially being developed for psoriasis, but eventually other immune conditions as well. And you can see here that basically we believe that we are getting clear progress working closer and closer to the keratinocyte and basically the source of where we need to intervene. Based upon this understanding of the mechanism of action that we thought we have a product that would demonstrate superior efficacy and at least equivalent safety if not even better safety.

And when you turn to page 41, you see some of the Phase III data from our clinical trials. And this is the comparison of two different doses of AIN secukinumab to Enbrel which is the TNF standard-of-care and you see both doses are markedly better, statistically and significantly better than Enbrel.

Now before you just turn the page and walk away from the chart, I'll just ask that really pay attention to the vertical axis. This is a measure, it’s called PASI 90. This is a very, very high bar for skin clearing. In fact, most clinical trials in the past that focused on PASI 75 could sell few drugs that are able to accomplish a PASI 90 kind of clearing. And you see here that 70 plus percent of patients are achieving this PASI 90 rate with the high dose and importantly 55% of the patients are maintaining clear or almost clear skin at 52 weeks versus only about a third for Enbrel. I want to remind you that the psoriasis biologics market is over $4.5 billion. So we think this is a very good opportunity for the company and for patients who really need a better product.

Turning now to page 42, this is a quick snapshot of what we promised at the beginning of the year. And it terms of regulatory outcomes that you can see, it's been a very, very positive year. RLX030 or serelaxin will have to go, it may come at the end of this year, I would say even more likely it will come early next year just in terms of (inaudible) expectations. The reviews are going well. We have unusual questions that would expect and there will be more to say later on.

So wrapping up now on page 43 just a couple of key points. Solid performance in the quarter. We are improving our full outlook for the division for the year. The nice, I would say even beyond the short underlying volume growth from Pharmaceuticals, which is offsetting this loss to generics. Regulatory performance has been great. We had a new opportunity with our Respiratory Franchise, particularly in the area of COPD. AIN show the possibility I think of a new and effective treatment for people living with moderate to severe psoriasis.

And then turning to the outlook, setting tough the sales outlook now being reached to low single-digit growth. However, I just want to remind you that one would expect the decline in margin in Q4, a, because of the normal cyclicality that Harry already mentioned and because of some of these new launches of we will need investments so they can take off at really good pace.

And with that, I’d like to turn it back to Joe.

Joe Jimenez

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

Question-and-Answer Session

Operator

(Operator Instruction). First question comes from Matthew Weston from Credit Suisse. Please go ahead.

Matthew Weston - Credit Suisse

Good afternoon and thank you for taking my questions. Three if I could. There were number of areas of growth within Pharma, one noticeable area of weakness was the Bcr-Abl franchise where those Tasigna and Gleevec looked weaker than the market expected. Can you just walk us through what’s driving that and what you anticipate any impact from the recent competitor safety issues maybe going forward?

Secondly, we have the Capital Markets Day coming up in November there has been a lot of discussion around corporate change agenda at Novartis. So I guess in the interest of full disclosure what should we expect. I guess from our perspective, from my perspective I was thinking you’re going to be focused on pipeline and growth product. But can you just say whether or not that's a wrong expectation and what we should be thinking of for that event and the agenda?

And then thirdly, I noticed in the release there was litigation has been started by OREO, previous OREO shareholders which I can only question does that suggest that complaining there has been a little progress with the U.S. generic ad-back. Can you give us an update on what that litigation is at least about, I know you have a policy of not commenting on the progress of your generic pipeline?

Joe Jimenez

Okay. David why don’t you start with....

David Epstein

Yeah. I’ll start with Gleevec/Glivec and Tasigna to be [favorable] franchise. A couple of, well I think the overall business is doing well, wonder if you guys can remember that as we get bigger and bigger in emerging markets, quarterly numbers are more and more depending upon the timing of different (inaudible). If you just take a look on the underlying (inaudible) we’re doing very nice in the U.S. and Europe. So I think there is nothing to be concerned about there. In addition if you look at our ability to move the business from Gleevec/Glivec to Tasigna, you see that Tasigna is a growing percentage of the business versus Gleevec/Glivec which is another good time.

In terms of Ariad’s safety issue, I think this just essentially means that there is one less significant competitor in the market which from our perspective is a good thing. From patients’ perspective they do need other alternatives. And we plan on giving you an update on our research strategy as well at the Novartis IR Meeting. We think there is actually some innovative things that happen in these variables.

Unidentified Company Representative

Hey Matthew regarding the Capital Markets Day I think you should expect to focus, we’ll focus around three areas. First is, we’ll provide an update on group’s strategy and obviously we’ve been pretty open about taking a look at parts of our business and we’ve said over the next year we would be able to talk about things as they materialize. So that could either be a short conversation or a longer depending on time, but I think you should just assume that’s going to be an update on strategy and capital allocation.

Now in terms of the pipeline, we’ll be talking about Pharma and Alcon. We’re going to really focus on those two divisions partly because of the growth in both of those divisions and potential value creation, so we want to focus on those two. And then Jeff in terms of --.

Jeff George

Sure, Matthew I can confirm that there was a complaint, order-related complaint filed in the New York State Court which is essentially a refilling of a complaint that was done over a year ago that was denied, We denied the allegations and we intend to vigorously defend ourselves in this case. As it’s a legal matter, I can’t really comment further. As far as generic add go, we have never come to them what programs we are working on and have no interest in giving our competitors transparency as to where we are. But I can say that we remain confident in our ability to bring substitutable generics to the market which will be an important compliment to our number one global position not only in biosimilars, but in generic injectables, dermatologics, ophthalmics and antibiotics.

Matthew Weston - Credit Suisse

Okay. Many thanks.

Operator

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

Joe Jimenez

Andrew, are you on mute? Operator maybe we could come back to Andrew later.

Operator

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

Graham Parry - Bank of America

Hey, thanks for taking my questions. And firstly, a question on the guidance and why you shifted to assuming no generic Diovan launch in 2013, the timing seems a little strange given that Ranbaxy’s own partnership being approved to supply to the U.S. market and certainly some Indian commentators suggesting that may open or at least release the potential hurdles getting to Diovan approved this year. So I was just wondering is that based on any competitive intelligence or is it more of, but just close to the end of 2013, so leaving 2 months, 4 months wouldn’t be that material to that guidance anyway?

And secondly on pharma margins obviously you still think of setting up the royalties grow and you're talking about the phasing in the expenditures on the business on pre-launch and R&D. How should we think about that spending phasing, you’re talking about the Q4 going into 2014 where obviously you’re still going to have Diovan and presumably still some more of that launch expenditure to go through next year?

And then thirdly and almost strategically, you had indicated that, that was completed, would you be communicating on full conclusion to this at the Analyst Day in November or is it something that we should just expect to hear (inaudible) throughout the course of the year? Thanks.

Joe Jimenez

Hey Harry I’m making you talk again.

Harry Kirsch

So, Graham we don’t have competitive intelligence that would give us a good idea about any idea when there would be a generic launch in U.S. So this is simply a forecast modeling assumption. Now you mentioned the old sites to my knowledge just the site has been released -- immediately product flows and we haven’t seen that happening. And as you mentioned there is another two months to go, will there be still a launch let’s say in December than there would be in also generic launch which is likely that offsets to Pharma downside. So we don’t see at this point in time even that big impact will happen.

Joe Jimenez

Well, it could come next week or it could come in six months we just have to stick to the ground and for modelling this at the end of the year. David, Pharma margins?

David Epstein

Yeah, Graham so I think the Pharma margin for the next year does in fact depend a lot on the timing of the Diovanmono U.S. generic entry. Further we just ensure that the risk pipeline and launches are properly supported. At the same time the organization is working intensively on productivity both in development and in M&S. If you think sort of a mid-term like you would expect margins to become more positive you will start getting the benefit of the mix effect with more products and their oncology in the specialty area and the generic impact will get reduced.

Joe Jimenez

And then in terms of the strategic review on smaller businesses, I had said before not to expect us to announce what we want to do, but we’ll be announcing as we take action. And so that’s what you could expect and that might come in thesis what we would do is provide more color and direction around what it means as we avail those pieces for available R&D acquisition on announcing of what we've done instead of what we are going to do. Okay, next question.

Graham Parry - Bank of America

Thank you.

Operator

We will go back to Andrew Baum from Citi for our next question. Andrew your line is now open. Okay. Andrew seems to have stepped away. So we’ll move on to our next question which comes from Naresh Chouhan from Liberum. Please go ahead.

Naresh Chouhan - Liberum

Hi. Thanks for taking my questions. On Tasigna, I mean when you gave us guidance on the oncology franchise almost a year ago now. And one of the reasons for you being bullish on or confident that, forgive me if I missed, but it would not be putting in issues as perhaps market was concerned about what, because Tasigna would become a bigger part and the switch rate would be higher. And if we were to continue to have this kind of mid-teens growth in Tasigna for the next couple of years, would that change your view on whether or not that we could get physical view upon expiry with revenue growth in the oncology franchise, this seems to be slower than we are expecting? And then secondly on Gilenya. Just could you give us just some guidance as to what the underlying volume growth is likely? It’s been a lot of confusion around scripts, just underlying volume growth as the last three quarters would be really helpful? Thank you.

David Epstein

Okay. I’ll start with Gilenya actually. So underlying volume growth in the U.S. is single-digit; ex-U.S., it’s a very large number and I actually don’t have the calculation in front of me, you can just see it from the sales growth, that’s all volume ex-U.S. and that product is doing very, very well.

In terms of Tasigna, it’s actually, you look at the script out, it’s actually very much on our front. The percentage of Tasigna sales on a percentage of total worldwide Gleevec/Glivec, Tasigna sales is about 22% that’s up about a point from Q2 so that is definitely improving. As you know we have right now our clinical trials to show that Tasgina is a possible way for patients to discontinue therapy and take a while for the trials on roll and payout the thing that’s going to be another boost. There are better diagnostics coming to the market and more people getting used to using molecular response at the diagnostic.

Plus as from the question asked earlier, we will have a little bit more headroom that will probably one less competitor that’s going to be making a lot of the noise in this market. And the other question that essentially was, would oncology be able to continue to grow post or through, I could say that, through the gate of patent expirations, if Tasigna is perhaps a little weaker or a little better and the answer is, yes, there is enough room for oncology to continue to flow through that patent expiration.

Joe Jimenez

That is one of the areas that we’ll talk about at the Investor Meeting in November. So provide a little bit more room. Next question.

Operator

Our next question comes from Richard Vosser from JP Morgan. Please go ahead.

Richard Vosser- JP Morgan

Hi, thanks for taking my questions. First question on Alcon please. Just looking at your commentary around gaining market share. Just wondering whether you will get giving up on price to gain that market share or whether that the incremental investment in SG&A is giving you that growth there? And thinking about the incremental spend going forward in terms of incremental SG&A, how long should we expect margins to be suppressed? Would we think about that into the fourth quarter and into 2014? And then secondly, just thinking about a few Pharma products. Just on Tobi, just what sort of generic impact should we expect there, should we expect a lesser impact because obviously it's an inhalable product? And then on the pipeline, just thinking about you have moved, I am not going to be rough I think into Phase III, what sort of differentiation do you see to those products given of course we have Roche and GSK products already on the market? Thanks very much.

Joe Jimenez

Richard thanks. In terms of our performance and market share, specifically we are pleased with the combination glaucoma growth that we're seeing outside of the U.S. We are very pleased both what we are seeing in intraocular lenses both in terms of our monofocal business, but also what we are seeing in terms of Toric continuing to see penetration. And then we are pleased with what are seeing in terms of compact lens growth. But as we have spoken this portfolio is starting to evolve similar to what we are seeing in terms of the developments in the Pharmaceutical division and we have got new products across each of our three areas.

Now where the impact shows up in terms of our P&L is that when we are launching equipment you have to assume that’s an investment in terms of there is less margin in equipment than you have in the pull through products.

Secondly, because of the frequency of the new products that we have we are going to spend against those launches. But again if you look at our performance from a profit standpoint year-to-date as Harry said, we're growing sales 5 and profit 7 and we've already got a relatively healthy P&L to start with. So this is really about top-line growth.

Kevin Buehler

Yeah. The only thing I would add to that is I think some of the suppression that you saw in the third quarter was due to one-timers so we would expect in the future Alcon to early start and our efforts would to hold the margin or increase it.

Joe Jimenez

David?

David Epstein

First I want to thank you, because no one ever asked me about tobramycin and we do have some products that are often considered smaller that are starting to make a big difference for the company. The combined tobramycin group of products brought the all solution of Podhaler grew about 45% versus prior year. And right now just give you some rough idea that we've been very good at introducing the Podhaler device that’s the micro treator dry powder inhalation which is much, much easier to use in the inhale solution and that’s approximately 40% of the business already. So which is I think protected really from generic because, no one is going to longer go back to use a difficult to use nebulizers. So, yes, we will lose a little bit of the solution business to generic, but I think Podhaler itself will continue to grow. And this will be a nice business for us over the medium-term.

The other program you asked me about was the BRAF or immune melanoma. I am going to leave it to describe it in more detail the advantage of this particular drug during our November Investor Day, basically from our filing chart, you have probably noticed that we’ve now accelerated filing by about a year to 2015. So we're pretty excited about the program.

Joe Jimenez

Okay. Next question?

Operator

Our next question comes from (inaudible). Please go ahead.

Unidentified Analyst

I have four actually in that I will try to make sure. First is on tax rate, tax rate was an all-time low this quarter. What would you guide us with for 2014? Is 15% rather top end rather than low end of the range?

Second on share buyback, you bought back some shares this quarter. Was that opportunistic or do you plan to buy some more by year-end?

Third, on Afinitor, could you update us on breast cancer penetration, duration of use, and perhaps could you make a comment referring to the Investor Day in Boston, you suggested that your internal forecasts were much higher than consensus, are you still on this page?

And lastly on emerging markets, there was a lot of concern about slowdown in growth. Is there anything significant to report in terms of any change in trend in any region in emerging markets? Thank you.

Harry Kirsch

Eric, we are on track with the 15% tax rate this year [Technical Difficulty] for next year, but we expect overall very comfortable with 14% to 15% range. And in terms of share buyback, yes, you are right we have bought back [Technical Difficulty] shares of [Technical Difficulty] as we always try to mitigate the diluting impact of [Technical Difficulty] auction and share programs. And as you’ve may be seen the 30 million [exercise] so we will continue to optimistically make sure to eliminate this dilution [Technical Difficulty] as we look forward.

Joe Jimenez

David?

David Epstein

[Technical Difficulty] the background there for people with renal cancers, [Technical Difficulty] most visible program is the breast cancer program. We still estimate that less than 50% of the U.S. eligible breast cancer patients are on the products, but there is certainly room to expand and it takes time to change that treatment paradigm. In addition, we have launches expected in the next 12 months in France, Italy, Spain, Brazil and Japan. It is product with still pretty early in its lifecycle.

Joe Jimenez

And then in terms of emerging markets, we saw very robust growth across most of the markets and we have seen a general slowdown in China [Technical Difficulty] companies. In fact, we just got the latest data a couple of days ago that shows that a category in August grew only about 8% in terms of the pharmaceutical market and those with key products going to hospitals which is a good proxy for what’s happening to the market and that’s down from the teens for August.

So I think that what’s happening in China if you are going to see an impact, I don’t think it’s going to be permanent. So I do think that it will bounce back in three months and I think that we’ll return to nice growth rates. Novartis is somewhat insulated from this. We focused on innovation in China. And as we’ve been able to show in the third quarter, we’re up 18%.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question, we’ll move back to Andrew Baum from Citi. Please go ahead.

Andrew Baum - Citi

Thank you for bearing with me. I apologize. The three questions. First, I think George is on the call, but should we interpret George Gunn’s planned departure from the Group CSR responsibilities coupled with the green lights on Lincoln is accelerating the near-term divestments of your Animal Health business?

Second is regarding Gleevec, some filed the declaratory action this June, could you outline next steps and would you agree the assessment of (inaudible) in the U.S would extend the potential of generic Gleevec potentially until 2018 given the appeal case trigger?

And then finally, it's difficult to understand quite what's going on with your vaccine business, because in the negative side Bexsero have not been reimbursed and you have delayed the development of staph aureus DTaP Group B strep by at least a couple of years. On the positive side, I see you are opening a new R&D site in North Carolina. So if you can help us clarify the strategic intents around the vaccine business that would be very helpful. Thank you.

Joe Jimenez

Sure. Andrew I'll start on the conspiracy theory, it’s very interesting, but we announced this morning that Juergen Brokatzky-Geiger who has spent 10 years in human resources, (inaudible) resources is going to step down from the Executive Committee and he is going to run our corporate responsibility program across the company. As you know corporate responsibility is becoming much more important in terms of the company’s reputation and I want a 100% focus on it by at least one person, one point of accountability.

George has done a great job managing corporate responsibility over the last two years. He has made good progress in a lot of front in terms of vaccines and medicines in Africa. At the same time, he got a day job in this Animal Health business and relaunching into the U.S, it's a lot of work. So after 10 years, 10 years in any function is a long time doing one job and Juergen I think will be very energized to move into this assignment, but there was no linkage between that and the review.

Andrew Baum - Citi

Okay.

David Epstein

So Andrew, it’s David. I understand your interest and probably other that’s just an understanding when there will be first generics in the major markets for Gleevec. And I think because of that think that if there is litigation ongoing or other ways (inaudible) intellectual property, we can’t really talk about in a public forum because that would weaken any position we have. But for everybody’s information just to reset the baseline, I think it could be a clarity and the current assumption is that in the U.S. we would lose exclusivity in July of 2015 and that in Europe including the recently granted paediatric exclusivity, we’d lose that exclusivity in December of 2016.

We do however currently have several other patents including beta crystal and patent protection in the U.S. and many other countries. The beta crystal and patent expire in Europe in July 2018, in the U.S. in November 2019. So that’s all I can really favor in now. I think we’ll be talking about this for a while which is not much I can say until decisions actually occur.

Andrew Baum - Citi

And Andrin on vaccines?

Andrin Oswald

Yeah. Andrew I think the key priorities for us have not changed over the last recent period. We are the leading franchise and of course the launch next year will be absolutely for that. Now there is no negative reimbursement decision yet from the U.K., but an interim decision that obviously in July and we’ll see how that goes by this decision finalize that we will be focused just on the U.K. and accelerated global launch, there is a global market and we're working with the several countries in Europe, in Australia and Canada for example to make the product available and we do expect to see significant sales from Bexsero coming next year.

Second priority is our two franchise, they are making good progress in shifting to third-party platform which we think is longer term or sustainable, piece of that will be the [latitude] of our full strength facility in the U.S. which we expect next year, but we refer to, this is also an R&D, saying that there is no R&D center, but we do have a change into that (inaudible) facility, a power plant for technical development of production processes and that's the only thing that we do there.

Andrew Baum - Citi

Thank you.

Joe Jimenez

Next question please.

Operator

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

Tim Anderson - Sanford Bernstein

Thank you, a few questions. Going back to Alcon, ignoring near-term pushes and pulls, do you think that we should be expecting to see continued margin expansion in that business if you look out over the next handful of years? Second question is something similar on the consumer division of yours. Do you think it’s realistic that the margins in consumer can get back to the levels where they were prior to manufacturing. And if so, what's the timeframe for achieving that or should we think about the margin structure being permanently impaired in that business?

And then last question on the pipeline drug secukinumabthe drug obviously seems to have great efficacy in psoriasis. Can you talk about the indication you are next most excited about where you have a high degree of confidence or is it less clear that this will work in non-psoriasis settings?

Joe Jimenez

Okay. Starting with Kevin on Alcon.

Kevin Buehler

Yeah Tim. If you, we sort of anchored to a couple of points. If we look at the core profit in 2012, we were in the 36th range. And when you look through the first six months, nine months of this year we are in that same range. So it’s more or less at the same level. And also when you look at the level of profitability from the Alcon business, it suggests that there is an opportunity for us to focus on top-line growth which is where the real opportunity is.

Now clearly as Joe said, in Q3 we have a number of offsets that when you were to adjust those out, it was more or less 6% top-line, 6% bottom-line. So when you look at where we are trying to go, I think we want to invest in the business there maybe some periods of time where we’ve got gross margin reduction when we are launching equipment like the Centurion launch that we’ve got, the microscope launch. But clearly what we would like to be able to do is accelerate the top-line and try to hold the bottom-line consistent at the relatively high profit levels that we have.

Joe Jimenez

Yeah the only thing I would say to that is also as you look over the next few years, Alcon is a scalable business. So we would expect in the trend line given that it is a high level of profitability not to decline profitability to expand the top-line, but we do believe that there is the ability to expand the top-line and at least hold margin over the following years as the business increase the scale because we’ve got fixed cost we don’t need to necessarily increase that fixed cost. We could invest in M&S to launch the new products still with the objective of maintaining before growing margins.

Now let me talk also on the consumer margin. If you go back to putting Lincoln on consumer, our margins were not as simply I think as we even would like. So I do believe that we will get back to margins pre-level and even exceed them overtime. Now it's not going to be immediate, there is going to be a time required to wrap up Lincoln as we get a green light in terms of our ability to fully set and fully move that into core production for OTC and for Animal Health. So I would be thinking that you are looking at a time period over the next 3 to 4 years that we move the margins back up to or exceeding the pre-Lincoln situation. Do you guys have any other thoughts about that?

Unidentified Company Representative

No, I think that's great, I think we'll see continued improvement as we get Lincoln back online and continue to re-launch the brands in U.S.

Joe Jimenez

Okay. And David on AIN457?

David Epstein

We got them right ahead of development in the room and I have warned not to pick my favorite indications that means I can try.

Joe Jimenez

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

Tim Anderson - Sanford Bernstein

Thank you.

Unidentified Company Representative

And then just beyond that, there are multiple other indications that [Tim’s] team is exploring. And I think we should just wait to see how that trial reacts the picture and that its full indication ahead us even bigger than psoriasis indication.

Joe Jimenez

Okay. Next question please.

Operator

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

Michael Leuchten - Barclays

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

Unidentified Company Representative

Yeah, so if you look at it on a percentage basis actually as you pointed out so R&D expense went up mainly because we have a lot of late-stage products that needed work. COGS went up for the reasons just that we’ve discussed. M&S actually improved during the period not by a lot, but it improved by 0.3 percentage points because we have a very expensive productivity program underway and we're getting better and better resource allocation within the, across the different brands that we have.

Unidentified Company Representative

And I think if you think about the longer term view that we created for the group - leverage this is not just an objective, this is what we're working towards we're building plants now for 2014, we're making hard choices about spending both on the R&D side on the M&S side. We are a launch machine we've been able to prove that at the same time we don’t have limited resources that we need to show leverage. We're coming to the end of patent exploration period on Diovan. I feel like our cost structure is (bit) to allow us to provide that leverage and (inaudible). Next question?

Operator

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

Seamus Fernandez - Leerink

Thanks very much. Couple of questions on Pharma. David, can you give us a little bit of an update on your thoughts on reimbursement for the LAMA, LABA franchises, particularly given the fact that you guys have an exacerbation benefit in one of your major studies. How do you think that will play out with regard to reimbursement and positioning versus potential competitors? And then, and do you think that the street is under estimating the prospects for that franchise overall?

And then separately as we look forward to some of the medical meetings that are still to come in 2013, ASH is obviously a major meeting for Novartis historically. Just wondering if you could update us on if we should anticipate some key data at ASH this year with regard to the [CART] technology and how you hope to advance those programs? I know that some of that will be discussed at the Analyst Day, but just wondering if you could give us a little bit of a preview ahead of ASH? Thanks.

David Epstein

So in terms of reimbursement for Seebri, Ultibro so far we have not had any unusual reimbursement challenges is that the reimbursements are coming through largely at plants and LAMA class and the combination of LABA classes do get premium pricing in most of the world. So we are pretty happy about that.

And in terms of ASH, there will be an update on CTL019, but I really want to wait to tell you a little bit more about that program and give you a preview at what might be at ASH when we do our November Investor Day.

Operator

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

Florent Cespedes - Exane BNP

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

David Epstein

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

Jeff George

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

David Epstein

Good. Okay, I think we got time for two more questions.

Operator

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

Tim Race - Deutsche Bank

First on Galvus, could you just comment on that Germany GBA assessment, what are the next steps there and maybe quantify what sales at risk in that market? Second, if you could just help to understand the Diovan and Japan issue. Just I know you wouldn’t talk about potential sort of (inaudible) and the magnitude, but could you expand on what the actually losing sales in Japan because of this, are you provisioning for future [fund]? And possibly third question, could you just break out the nine months’ Animal Health and the OTC sales just help us understand how sales are performing there?

David Epstein

Okay. So I guess most of you probably read in the press that the Germany Federal Joint Committee, the GBA announced that they did a benefit risk assessment of Galvus as well as a variety of other DPP-4s. And they said that our product did not provide an additional benefit relative to (inaudible). So there is now a discussion process that’s underway where prices will be discussed. Hopefully we can find our ways forward with them in the event that they choose ultimately not to be reasonable then the product could essentially work case scenario go away in Germany. That would be a one-time impact on Galvus, but Galvus still has a lot of growth ahead of it and we would manage our way through.

In terms of Diovan in Japan, I think everybody is quite aware of the conflict of interest issue where we had quite some number of years ago that was, his name was published in the clinical paper and what he disclosed (inaudible) unfortunately we didn’t catch that. There has been then controversy in Japan it’s been a lot stress and as a result we have begun to lose some Diovan market share and Diovan sale in the tens of millions of dollars in terms of loss sales that we would have otherwise. Gary I just want to remind you that Diovan was scheduled to and is expected so moved exclusivity mid next year. So while short-term equipment nice from a financial perspective, the bigger issues in Japan are really one on reputation and reputation rebuild in which we're working on.

Harry Kirsch

And then in terms of consumer health, we don’t breakout the individual businesses, the Animal Health and OTC, but we have said historically that OTC is about two-thirds and Animal Health is about a third and both of the businesses are growing nicely. OTC is growing right now at a faster rate than Animal Health, but both are growing nicely.

Tim Race - Deutsche Bank

Thank you.

Joe Jimenez

Okay. Maybe last question.

Operator

Our final question comes from [Keyur Parekh] from Goldman Sachs. Please go ahead.

Keyur Parekh - Goldman Sachs

Hi. Good afternoon and thank you for taking the questions. I have two if I may please. First, just kind of getting the sense and view kind of the potential for stock buyback going into 2014, I realized that you won’t comment on event till the end. And just how should we think about the incremental CapEx expenditures now that the Lincoln Manufacturing has been sorted out? And do you still see 2014, 2015 being an area all year of high CapEx? And secondly as it relates to the OTC business, can you just help us better appreciate the timelines with that coming back on when do we see it returning to full production, should, it be first quarter ‘14, should it be first half of ‘14? Thank you.

Joe Jimenez

Okay. Harry can jump in on the buyback, but I think it is premature to say anything about an additional buyback, we've said that we want to be comfortably in the AA rating from credit ratings standpoint. We haven’t formally announced the share buyback because historically we haven’t have the debt ability to do that if that were our target. We’re now approaching that and I think there will be more to discuss at a later time that's about what I would believe. Harry do you have anything to add?

Harry Kirsch

Yeah, just a couple of points. You have seen that we have bought back 30 million shares opportunistically, almost 2 billion as we mitigated and we have an auction programs number one. Number two, the CapEx increases you see are not only Lincoln, I mean we are building on and texturing slides and lease work slides so at this time next year we will be higher CapEx spending.

Joe Jimenez

Okay. Brian on the Lincoln?

Brian McNamara

Yeah. If you remember at the end of Q1, we made the announcement we were going to focus the site on solid manufacturing and today we’ve been producing and shipping Sentinel. And from Animal Health, we will begin shipping et cetera and at the end of this month and we are working on the qualification and validation of (inaudible) flu we seek. And in overtime we’ll continue to increase the complexity of the site as we are ready to take right now.

Joe Jimenez

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

Operator

That would conclude today’s conference call. Thank you for your participation. Ladies and gentlemen you may now disconnect.

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