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Novartis AG (NYSE:NVS)

34th Cowen and Company Healthcare Conference Call

March 3, 2014 2:50 PM ET

Executives

David Epstein – Division Head, Novartis Pharmaceuticals

Unidentified Analyst

Good afternoon. I would like to welcome you to the Novartis session. We are very pleased to have Novartis here at our 34th Annual Healthcare Conference. Representing the company is David Epstein, who is Division Head of Pharmaceuticals.

I’ll just ask you to stop for a moment and think about the last ten or twenty years and just ask yourself what companies in our industry have brought true innovation to patients and have really made a difference in patients' lives. And when you stop and really ask that question I think there are a few companies that have and I think Novartis in particular has achieved that. So with that I would like to turn the podium over to the Head of that particular business. David?

David Epstein

Thank you. So my plan today is just to give you a real snapshot about the company and why I believe we are entering a new growth phase and then save most of the time for Q&A.

To get going just first to put some numbers in perspective. Last year we reported sales growth in constant currency in our pharmaceutical business of about 3%. Now mind you if you dial back a couple of years prior many were expecting us to have significant sales decline this year as well as in 2012 and that was because we were facing in generic competition for Femara, Zometa, Aclasta, Diovan and several other products. In fact the products that we were losing to generics represented about $10 billion of our $31 billion business.

Despite that, despite the loss of those products to generic what you see is the multiple new launches [I am sure] that have allowed us to continue to grow despite that period. There will be a point in time when the generic impact on the business starts to diminish quite a lot and all the products that we launched over the last two or three years that growth profile starts to come through on the top line and the resulting profits will follow in. What I am trying to do here is set up that dynamic for you and then allow your questions.

So let’s look a little bit about where that 3% sales growth came from starting first with what we define as our growth products. You see that between 2012 and 2013 we had about 25% growth of the brands that we define as growth product. I will show this to you in a minute, and they now represent 38% of the portfolio. So what that means is the revenue generated by these products sets up our portfolio to be one of the youngest in the industry. Revenue coming from new brands which have substantial future ahead of them both in terms of growth and also patent protection.

If you take a look more deeply at that growth portfolio you see with the exception of Lucentis you see that these products are growing very, very fast. So Gilenya grew 62%, Afinitor 66%, Tasigna 31%, Galvus 40% and the like and we have some newer assets, principally the COPD portfolio over there on the right with Onbrez, Seebri, Ultibro who are at a very-very beginning of the launch into a category that’s worth over $12 billion. These are the products that for the most part will determine the growth profile for the company over the next three to four years. Besides these products is a very healthy late stage pipeline of products which I think will add incrementally to the growth in the near term but will fuel the next wave after these products start to grow.

The other interesting factor is that we decided also about four years ago to heavy up our investment in the emerging markets. We believed that we had an opportunity to also launch these growth brands in those markets and you can see that that strategy has paid off. So part of the reason we had 3% sales growth for the company overall is because we managed to get our emerging market growth near the top of the industry now. We grew about 9% last year in those emerging markets versus about 1% in the established markets like the U.S. and Europe. So clearly that part of the strategy has also proven to be a good call for us.

So to try to set up the future for you I would ask you to look at three different phases for the company. The first phase are the blockbusters that reached loss of exclusivity and generic inroads. As I said products like Diovan and Zometa. This will be the year when we finish getting through that period. Then a growth platform of products that has exclusivity through 2017 and beyond, products like Lucentis, Gilenya, Afinitor, Tasigna, Galvus, and Xolair, our respiratory family and Jakavi and then the creation because of the pipeline that’s also coming through of deeper business segments and the ability to take leadership positions in oncology, dermatology, respiratory, heart failure and cell therapy, which will allow us to have good revenue growth but also higher margins for this business.

And to put some of those future segments in respective for you already know that we are the second largest oncology player. We have multiple new launches on the way for example we are still expanding Afinitor into new indications. We just saw the Phase 3 pivotal data for LBH589 in multiple myeloma which was positive. We will have new data soon on Jakavi in polycythemia Vera. We will have data soon for our compound in Basal cell carcinoma; we have our product LEE the CDK46 that’s now in pivotal trial for the treatment of breast cancer and we have the best PI3 kinase portfolio in industry also in Phase 3 which will help this portfolio to continue to grow up even through the Glivec patent expression and will allow of course continue at very higher margins in the oncology business.

In dermatology we have two drugs that we were preparing for launch, the first is Xolair in chronic spontaneous urticarial. We’ve received those approvals now, it was a very, very fast review period in the European Union and the FDA decision should be coming in not too distant future. This looks like at least a $2 billion to $3 billion opportunity in dermatology, perhaps it will turn out to be more also in a very nice high margin business.

In heart failure two drugs, Serelaxin, for acute heart failure where we are waiting for both an FDA and EU decision and LTZ696 for chronic heart failure. We will see the Phase 3 data at the end of this year. Those two drugs together both could easily be in $5 billion in revenue for the company.

In respiratory three different inhaled products and then cell therapy just seeing the tip of the iceberg right now with our anti CE19 construct that we licensed in University of Pennsylvania we believe we will have multiple shots at bringing together technology to modify patients T cells, re-infuse those cells in patients and potentially cure them of their cancer. So setting up some very nice business segments for the company all of which with the expectation of respiratory which are higher margin businesses than the current categories that we are in.

To show you some data on just a few of the drugs, as you know we have a drug called LDK378 that received breakthrough therapy designation from FDA last year for ALK+ non-small cell lung cancer. This is a product that will compete with Pfizer's crizotinib. We submitted in the U.S. towards the end of 2013. We’ll file in the rest of the world in the first half of 2014. We believe this will be a fairly quick review at FDA and we’ll be launching during the course of 2014 in the U.S. market.

And the other product I think people are underestimating is a drug called AIN457 or Secukinumab. This is an anti-IL17 monoclonal antibody. As you see from the trial this was a comparison pivotal trial versus Enbrel, you can see that both doses, both the low and the high doses of Secukinumab were dramatically better in clearing the skin than Embrel. In fact if you look at the chart there is something called PASI 90 at the left, that means nearly clear skin for psoriasis patients. This is the first drug that going to be able to provide PASI 90 and PASI 100 for psoriasis.

And this is a drug that will have because of its mechanism multiple future indications for psoriatic arthritis, ankylosing spondylitis and then a series of other indications that are in Phase1 and Phase 2 which will result in subsequent approval.

The market for the Anti-TNS and related drugs is somewhere between $25 billion and $30 billion today. The psoriasis component market between $4 billion and $5 billion already, the Psoriasis component of the market is growing at over 20%. This is a product we are very excited about. The first approvals will occur in the back half of 2014. We are now gearing up for the launch of this product. So it's one to pay a lot of attention to.

Another product I am excited about is out third introduction to the respiratory space, this is the combination of LABA/LAMA called Ultibro very, very affective agent, is now launched in a number of European countries. We think we are launching in about 25 countries actually this year and we’ll file in the U.S. in the back half of 2014. When I showed you in that chart Ultibro initial sales, and is very early so don’t over read into it. But so far it is actually the best launch in the Novartis portfolio in primary care ever. And it's speaking to the unmet medical need for COPD patients for combination drug and the desire of a pulmonologist to walk away some steroids for COPD patients. Steroids while very appropriate for asthma patients are of questionable value except for frequent exacerbators in the COPD space and they are starting to see the doctors, both with their prescription pattern move those patients over.

We'll be competing with Glaxo; Glaxo just received the positive opinion in Europe. The opinion is for their low dose. It's very hard of course to do any comparisons but we've been able to show significant improvement versus [inaudible] dipped so more or equivalently. So we think we have the efficacious drug and it will be a battle for leadership particularly outside of U.S. in this category and I think this would become a very nice product for us.

One thing we all are aware about is funding all these new launches takes money. We are also trying to manage the margin over the short and medium term and give you the profitability you are looking for. We've done that in multiple ways to take out costs, particularly in our commercial organization, we are doing work to streamline manufacturing plants all around the world, but in addition, towards the end of last year and the beginning of this year we started to begin to work at our R&D portfolio with an idea of focusing the money on the biggest opportunities. And as you can see from the chart we discontinued some agents and that we set up a couple that we are looking to out license or partner through VC vehicles have them develop somewhere outside the company.

So that the real big that can be fully funded and we can make sure that R&D spend as a percentage of sales doesn't grow from the peak percentage that you saw in 2013. So this gives you a sense of expected news for 2014. It will be a busy year. So far we are on a good track. We already received in action in Japan an approval for diabetic macular edema, DME in Japan and we received a positive CHMP opinion for Xolair in Chronic Spontaneous Urticaria so we are off to a good start for this year.

In conclusion, strong operational and maybe even more importantly regulatory performance in 2013 in the pharmaceutical business. Our R&D engine is extremely productive and we are getting even better at how we spend that money. Barbara Weber will be around tomorrow talking a little bit about here oncology, here oncology translational medicine approach. The fact that we put so many products in one therapeutic area through the clinical development team allows us to do at more cost effective way than any other company in the space.

The pipeline is rich with the potential of record number of approvals and hope I made the case for why we are going to be entering a new growth pace as we finally get past the generic particularly, the generic on Diovan which some believe will come this year, we will have to wait and see and why we expect to have very good depth across a number of future business segments which will provide more profitability both for this space.

So there's lot of stuff I didn't cover, that's by design, so you can ask me your questions and I think at this time I'll try to take some of those.

Question-and-Answer Session

Unidentified Analyst

Yeah. You are probably the most knowledgeable senior executive in the industry on oncology so I'd like to hear you about it. So looking out not in the next five years but say in the next five to 10 years ago or that second five years what you think is going to happen in the oncology. So today we have still of our some amount of therapeutic use, targeted therapies across our dominant therapies but in that five to 10 year window, chemotherapeutic is the relevant -- targeted agent 90% of all agencies in that -- how much is immune oncology and one last part to the question are there any major breakthroughs that may be Novartis is working on that going to disrupt this whole thing?

David Epstein

Hope so, the last part. So if I had to project out say a decade chemotherapy will get regulated to two cases. Chemotherapy will be used in patients for which a targeted therapy does not exist, and chemotherapy will be used as a salvage approach when other therapies have failed. I mean the ideas of giving patients a poison base that would attempt to kill more cancer cells than normal cells is from bygone era. And it's just now a matter of them moving on, all patients in the decade will have next generation sequencing as well on their tumors as well their healthy tissue and patient will come in, we will look at what mutations they have, and we will choose individual targeted therapies and immune-stimulatory agents based upon that tumor profile.

So breast cancer it won't breast cancer anymore it will be what mutation you have and what common issue? I think that most patients will be treated in combination of two to three drugs, often there will be multiple either targeted therapies -- immune-stimulatory agents and targeted therapies with hormonal agents and the companies that are in a position to offer the entire portfolio will have a competitive advantage. And that's because we face the economic reality that as we keep these patients alive longer that people are not going to be able to pay for three highly expensive drugs for a given patient and not bankrupt healthcare systems around the world.

Our strategy as our company has to be present against as many of these targets as possible and in fact we are with the exception of the immune-oncology products that's in part why we brought CoStim, so that we can one day go to a payer, if it ever comes up, a problem and say we will treat your breast cancer patients, we will give you all the drugs that you need and here is the price to do it. I think the company that can just have one product unless it is truly unique, will struggle in order to remain competitive in the oncology space. It's going to come down to just a few players.

In terms of some of the drugs in the clinic we pay most attention to in oncology, the first it is CDK4/6 inhibitor, LEE, we started pivotal trials in December. Pfizer has reported their Phase II data which looks at least on the surface looks very, very good. They will either get approval as a case example they will even get approval based on their Phase II data which I think the rumor is that they are going to submit sometime this year or they will have to wait for Phase III. If they get approval on Phase II they will beat us to market. If they have to wait for Phase III it will be probably a more simultaneous launch.

So the combination of the CDK4 and the hormonal agent but the real answer for that class of drug is going to be the appropriate combination. So for example who will be first to deliver to the market the CDK4 and the PI3 Kinase inhibitor as just one example. We've already started these combination trials and we can do that because both drugs are on our portfolio. We believe that even if Pfizer would launch first we will then surpass them we are going to have the standard-of-care in that category sometime thereafter.

So pay attention to LEE, pay attention to the PI3 Kinase inhibitors and then pay attention to the work we are doing in the area of cellular therapy. Everybody is talking about now in terms of CD19. This is the therapy that we licensed from the University of Pennsylvania, the ability to manipulate T-cells and give them back to patients to treat their CD19 expressing hematologic cancers. But you need to look at T-cell therapy or the CD19 component as the tip of an iceberg.

So CD19 is a small set of patients. It's one length of virus construct and below that there are multiple discovery programs some of which will go in the clinic in the not too distant future against other targets. Novartis is far ahead of the other players in terms of its ability to bring those other constructs into the clinic and then grow out this business on a global scale. So I hope that gave you some perspective.

Unidentified Analyst

[Question Inaudible]

David Epstein

Okay. So maybe I will move it up a little as well, okay, very good. Yes Alan.

Unidentified Analyst

[Question Inaudible].

David Epstein

So, no I mean there are some preclinical work now which would indicate at least complementary in terms of going into the clinic this hasn't happened yet. We are mixing the cell therapy with another immuno-oncology products or another targeted therapy. It's reasonable to expect it will happen but that's still a number of years off before we have meaningful clinic data. I will come back over here. Yes?

Unidentified Analyst

[Question Inaudible].

David Epstein

Yeah, so it's probably I actually debated whether to put it on the chart. Let me tell you why. So it's pretty clear Gilenya is doing well, it's over $2 billion now and growing. We have several investments in multiple sclerosis. We have BAF312 which is another S1P1 which we are progressing in secondary progressive disease. We have anti-IL17 in the clinic for MS, and clearly our company has the generic Copaxone and a generic beta interference. So clearly we will be in that space.

It will be us and Biogen, I think will be the leaders. I didn't write it down at the time because I didn't have like a new asset coming soon and I wanted to provide some focus but you could argue that it probably should be on the chart and it's a good category.

Unidentified Analyst

You mentioned the acquisition of CoStim and when you did -- what when you announced the acquisition of -- kind of wondering what was behind it? [Question Inaudible].

David Epstein

So I won't talk about what we get or don't get in terms of IP from our acquisitions with we always play itself out when it’s time to be played out. The main rationale for me was our oncology discovery group is very, very good at developing TKIs. They are getting increasingly good now working with pan around T-cell, antivirus constructs but we had very little activity in the immune-oncology route, whether it be PD1 or the other targets that are being developed. And we needed to make sure that we kick-started our discovery effort and the way to do that was to bring in a group of people that knew how to do that. They will be working both on targets that we’re familiar with but also the next generation sets of immune-oncology targets.

So that’s the main reason for making it. If we start up from scratch it would take another two to three years to be where they were.

Unidentified Analyst

[Question Inaudible].

David Epstein

They have multiple teams working against different targets and I won’t say more than that because the next question is when are they in the clinic and when are they going to be approved and it’s too early to talk about that.

Unidentified Analyst

[Question Inaudible].

David Epstein

It’s outdated. Well so couple of things. There are two components to safety, there's treating the acute reaction because without destroying all these B cells these patients can get very sick. There has been progress made with the use of anti-IL6 and other components to control that early stage reaction which we believe will allow T-cell therapy to be used in earlier stage patients rather than waiting for really last stage patients so that’s one.

The next question is do you want to turn off the effect at some point, and the scientists that believe yes you should, then you would need some kind of suicide approach to do that. And then there are others who believe no, you want to make sure this is always there. It’s sort of a surveillance feature where anytime a new cancer cell would pop up you would be in position to kill it. So it’s debatable.

We are working on a variety of different approaches. I think no one knows what the right answer is right now. Some companies are also working on stabilized the patient with the short-acting CART and then [inaudible], that’s yet another approach that’s not the approach that we are taking. So there is lot to be figured out. So you are asking me I think if our approach was outdated, right?

Unidentified Analyst

[Question Inaudible].

David Epstein

It will be supplemented by something better but in the meantime a lot of people will benefit from it. Yes.

Unidentified Analyst

[Question Inaudible].

David Epstein

We are planning to get approval for that first one, yes, absolutely.

Unidentified Analyst

[Question Inaudible].

David Epstein

I think what I put up there was a dermatology opportunity. There’s always our forecast for CSU is about the same size as [inaudible], so it will double the size of drug. And remember we have complete rights to the drug ex-U.S., we booked the sales but we share the profit with Genentech, in the U.S. it’s the other way around, right? So they book the sales and then we share the profit with them.

Unidentified Analyst

[Question Inaudible]

David Epstein

Sales are kind of flattening in the U.S.

Unidentified Analyst

[Question Inaudible].

David Epstein

You know we looked at the number of patients we believe will be eligible having second or third line metastatic disease. The number comes up to be much more than 2 billion, made assumptions about Lantus therapy and market share and it looks like 2 billion is achievable. If we are wrong on this front then maybe it turns out to be a little less or little bit more but I think ballpark is not too far off. We are talking about peak sales, we are not talking about tomorrow and I think people who are just expecting it to happen, it will happen fairly quickly. The other thing you need to remember is we will then roll over our breast cancer franchise into the PI3 kinase inhibitors.

PI3 kinase inhibitors are now in Phase III. We expect the efficacy to be at least as good and we don't expect the mucositis problem. So this will be an ongoing.

Unidentified Analyst

[Question Inaudible].

David Epstein

Actually the patent…

Unidentified Analyst

[Question Inaudible].

David Epstein

Yeah so first of all the patent has expired in number of countries already. So it’s expired for example in Brazil, it’s expired in Russia, it’s expired in lot of Eastern European countries. It will expire in Japan towards the end of ’14, it expires in U.S. base time mid ’15 I think it's July, in Europe it’s the back half of 2016. So first of all it’s a rolling kind of effect.

Second, our strategy is to move people to the better drug, which is Tasigna. As you know we have started two phase, Phase III trials to show that patients who move from Glivec to Tasigna stabilize on Tasigna, can then go off of therapy, maybe quarter to 35% of them can discontinue therapy and get a cure, functional cure which will make Tasigna then the preferred agent.

And then lastly the question is when will the generics really show up in the big market saying we have a patent portfolio and this court battle is going -- you know these lawsuits and various things underway, so it will help us see how that plays out but I can’t tell you anything until something actually happens.

Unidentified Analyst

[Question Inaudible].

David Epstein

There is already public noise about companies suing each other.

Unidentified Analyst

[Question Inaudible].

David Epstein

Pretty sure, right? To make sure I didn't mistake.

Unidentified Analyst

[Question Inaudible].

David Epstein

We were sued, right.

Unidentified Company Representative

[Inaudible].

David Epstein

It will play itself out. Be conservative for now, we’ve seen the worst and if it gets better then we’ll be happy. But there will more time we have obviously to move people over to the better drug, the better it will be. Yes in the back?

Unidentified Analyst

[Question Inaudible].

David Epstein

You mean, doing CART in CML.

Unidentified Analyst

[Question Inaudible].

David Epstein

So CML the approach is move people to Tasigna. We have another agent called ABL001 which binds itself to a different part of the molecule and we believe that in combination with Tasigna may provide even better outcome. So that’s in the clinic now I believe we are about to go in the clinic.

Unidentified Analyst

[Question Inaudible].

David Epstein

We are pretty good in the CML space. We really haven’t made any promises about that one. So if you use our path to the cure trials with Tasigna as any guide we'll enroll those trials very, very rapidly.

Unidentified Analyst

[Question Inaudible].

David Epstein

CART targets we haven’t disclosed yet, there are many. It’s even possible to make a CART against multiple targets, one CART against multiple targets and pricing it’s way too premature. But these will not be inexpensive, pretty high production cost, companies will have to build manufacturing facilities to manipulate the cells and process them. We won’t say until probably a week before we launch.

Unidentified Analyst

[Question Inaudible].

David Epstein

It will initially have a role in hematologic cancers, particularly where the target like CD98 is only expressed on the hematologic cancer. We think they will have roles beyond but initially be hematologic but I don't think it will be limited to hematologic. You will see solid tumors cells.

Unidentified Analyst

[Question Inaudible].

David Epstein

Some people do relapse and we are trying to understand why. It seems like some lose the receptors, some have a different mutation so we will not cure all patients. Some will hopefully get a functional care. We people now that have been on for multiple years, having the disease and there's some people after few months they relapse and we are trying to understand what the difference is between those patients.

Unidentified Analyst

[Question Inaudible].

David Epstein

Yes, maybe that people should get an immune-stimulatory compound, maybe they should get TKI, there’s lot of things that are possible.

Unidentified Analyst

[Question Inaudible].

David Epstein

At the same time, yeah, it might be possible to design a CD19 -- those will be afterwards whatever the most likely next mutation will be. These are all possibilities, it won't happen overnight. We have the capability to design those CARTs, so….

Unidentified Analyst

[Question Inaudible].

David Epstein

So serelaxin the acute heart failure, the EU did not approve in the first call round, they asked us to re-file for conditional approval. They will then re-assign us now a new raptor and co-raptor and likely give us a second scientific advisory group meeting. Their decision is likely to be most likely scenario will be in May or June of this year. In the U.S. FDA postponed due to the last snow-storm, the outcome to March, 27th. And we could end up with an approval on one side of the ocean and not the other, I can end up with two approvals or I can end up with no approvals. The good news is if there is good news in that scenario is that the second phase III trial with mortality as the primary endpoint is well underway, and we will have then a definitive answer either when we get the interim in 2015 or the final results from that mortality trial in 2016.

This is the kind of therapy where sales initially will be fairly flat and once you get the mortality, the second mortality trial they will take off. So from a revenue perspective and problem perspective actually the short term decision makes absolutely no difference to the company. On the other hand I mean in terms of people sentiment it makes a difference obviously because when you don't get approval people then start to think that you can't get anything approved despite the fact that we are routinely getting new drugs. The answer is I won't handicap it, I just don't know.

Unidentified Analyst

We will go to the breakout room.

David Epstein

Okay, we are going to the….

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