Novartis' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Novartis AG (NVS)

Novartis AG (NYSE:NVS)

Q1 2014 Earnings Conference Call

April 24, 2014 8:00 AM ET

Executives

Joseph Jimenez – CEO

Samir Shah – Global Head, IR

Harry Kirsch – CFO

David Epstein – Division Head, Novartis Pharmaceuticals

Timothy Wright – Global Head, Development

Kevin Buehler – Division Head, Alcon

Jeff George – Division Head, Sandoz

Analysts

Andrew Baum – Citibank

Alexandra Hauber – UBS

Richard Vosser – JP Morgan

Matthew Weston – Credit Suisse

Tim Anderson -Sanford Bernstein

Graham Parry – Bank of America

Florent Cespedes – Exane BNP Paribas

Jeff Holford – Jefferies

Seamus Fernandez – Leerink Swann

Eric Le Berrigaud – Bryan Garnier

Tim Race – Deutsche Bank

Keyur Parekh – Goldman Sachs

Good morning and good afternoon and welcome to Novartis Q1 2014 Results Conference Call and live audio webcast. Please note that during the presentation, all participants will be in listen-only mode. (Operator instructions)

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

Joseph Jimenez

Thank you. I’d like to welcome everybody here today. Joining me from Novartis are Harry Kirsch, our CFO; David Epstein, Head of the Pharmaceutical Division; Kevin Buehler, Head of Alcon; Jeff George, Head of Sandoz; Andrin Oswald, Head of Vaccines, George Gunn, Head of Animal Health; and Brian McNamara, Head of OTC.

So before we start, Samir, can you read the Safe Harbor statement?

Samir Shah

Thank you, Joe. 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.

Joseph Jimenez

Thanks, Samir. Okay, starting on slide number 4, I’d say we had a solid first quarter. We had sales growth across all divisions and total, our sales were up 3% in constant currencies. We had a very strong innovation, again, in the quarter which sets us up for future growth.

On Tuesday, as you know, we announced significant changes to the portfolio where we will be focusing the company on our three big engines. And then today, we announced greater cross-divisional synergies and simplification through the formation of Novartis Business Services.

Now, looking at our results in a little bit more detail, as we have said, it’s important for us to deliver leverage. And in the first quarter, we were able to show sales up 3% and core operating income up 6% in constant currency which resulted in a 0.9 point increase in core operating income margin. Harry’s going to go into this in more detail in a minute.

In terms of our three strategic priorities, I think we made progress on all three. And let me start by talking about innovation on the next slide.

We had several important approvals in the quarter, I think the most significant was XOLAIR which we got approved in both the US and Europe for chronic spontaneous urticaria. This is a debilitating skin disease and we’re often running in terms of getting that launched in the new indication.

For Bexsero, we had some very positive news, as you heard, with the recommendation in the UK for routine use in infants. And in the US, we received breakthrough therapy designation from Bexsero. We’re going to be filing as early as this quarter.

The news flow from the pipeline beyond the approvals was also very impressive. I think we were disappointed by the news on serelaxin but we also had an upside surprise on LCZ696 in chronic heart failure and you’re going to hear more from this by David in a minute.

Also in the quarter, we acquired CoStim with several early age immunotherapy assets. I think this portfolio is going to help us build strong combinations with our own kinase inhibitor portfolio in oncology.

Now moving on to accelerating growth on the next slide, slide number 10. All the divisions grew the top line, as you can see, ranging from 1% in pharmaceuticals to 12 points in vaccines. And all divisions grew their bottom line with the exception of Sandoz.

I think the growth was driven, if you look on the next slide, by our growth products which now account for 31% of our sales and they were up 17%. And also, I was pretty pleased with the emerging markets growth, up 9% across the entire group and that was led by China, up about 17%.

In pharma, the growth products continue to grow nicely, shown on slide number 12. In Q1, Gilenya was up 31% over $550 million and Galvus was up 20% to over $300 million.

In emerging markets, we did see that solid growth. You can see here ‘11, ‘12 and ‘13 and now ‘14, so I feel like we’re building that emerging markets presence for Novartis across the entire group.

In terms of productivity, on Slide 14, you can see that we also had a solid quarter. So we continue to manage our marketing and sales spend well. We’re down 20 basis points as a percent of sales despite all the launch activity. And G&A was also down another 20 basis points.

On the next slide, we announced importantly the creation of what we’re calling Novartis Business Services. And this is a key step for us to better leverage the fact that we are a diversified portfolio. We have businesses that are quite different if you think about innovative pharma and generics. So the division structure is right but there are a lot of back office functions like IT, like procurement, financial reporting and accounting that can be consistent across all divisions, all of the three big divisions across 60 countries. So we’re very interested in getting after this.

On the next slide, you can see why we’re doing this. First, I expect this to help the divisions in market. So this will help the divisions focus on their customer, on their patients and spend less time in the countries thinking about IT and infrastructure and financial reporting because that’s going to be done through Novartis Business Services in country and a very similar way across all divisions, so one process.

So the whole mission here of this business – Novartis Business Services is to provide quality services to the divisions at a lower cost. Now looking at our quality, I think we also had a very good quarter. We had 65 health authority inspections across our manufacturing sites and 12 of them were from the FDA. All of them were rated good or acceptable. And this gives me additional confidence that the intense work that this team has executed over the last 24 months is really paying off.

Now as you know, on Tuesday, we announced the transformation of our portfolio with a series of acquisition – or a series of transactions, I would say, between GSK and Novartis and also Eli Lilly. So this was really the completion of that portfolio review that we started a year ago. Just to briefly summarize, we acquired GSK’s oncology products. In turn, we form a joint venture with them, contributing our OTC business to their consumer business and we create a $10 billion powerhouse. We then divest Novartis vaccines, excluding flu, to GSK and these three transactions are interdependent, so they will close at the same time. Separately, we will divest Animal Health to Eli Lilly.

When you look at what this does for the company, it really does three things. It focuses on our three big divisions which have global scale and innovation power. It also improves the financial profile of the company, so we do expect this to improve our sales growth rate, our profit growth rate and our operating income margin. And importantly, I think it positions Novartis well for the future of the healthcare industry because these are going to be number one, number two, number three segment in their segment with the innovation scale to be able to really compete very effectively.

Earlier this month, we also announced some leadership changes at the Executive Committee level. Kevin announced that he’s going to retire after 30 years with Alcon. I’ll talk about that in a minute. So I appointed Jeff George to take his place as Head of the Alcon division. And I think everyone out there knows Jeff.

He’s got – when I was thinking about the criteria for selection of the next Alcon leader, this person had to be very customer oriented because Alcon has built its reputation with the surgeons and the physicians and that’s going to be critically important. Secondly, it had to be somebody who was focused on top line growth because with 35% core operating income margins, the only thing that matters at Alcon is driving the top line. And Kevin’s put some great innovation in place and now Jeff will be continuing that and driving the innovation that we currently have to get that top line up.

Then I replaced Jeff in Sandoz with Richard Francis who joins as the Sandoz division head and he’s coming from Biogen Idec. He’s got great results orientation, somebody from – if you think about generics and how fast it moves, somebody from the biotech industry is a great profile for that business. And as well, Richard has biologics experience which is going to be important as we develop our biosimilars portfolio in Sandoz.

And then finally, I’ve elevated Andre Wyss who some of you know to the Executive Committee, he was appointed Head of Novartis Business Services. In a company where there’s a strong division culture, setting up Novartis Business Services is not going to be easy, so I wanted somebody who had very strong operating experience. Andre’s run countries; most recently, he’s head of our US operation. So he knows what the divisions need.

He is customer oriented for the divisions but he’s also executionally very, very strong. And I think he’s going to be a good addition. I elevated this to the Executive Committee level to demonstrate to the entire organization that I’m serious about this and we’re going to execute it and with everybody’s help, this will be a big success.

So finally, I want to thank Kevin Buehler for his great leadership of Alcon over the last 30 years. We were talking and he joined Alcon when the sales were $330 million which is unbelievable in terms of the growth that that business has seen over the years. We could not have done this integration without him. I’ll personally miss working with him and I want to wish him best of luck and happiness in his next phase of life.

Okay, now, I’d like to hand over to Harry to go through the financials in a little bit more detail.

Harry Kirsch

Thank you, Joe. So quarter one has been a solid quarter with a solid P&L which you can see on Slide 23. In constant currencies, we grew sales by 3%, core operating income by 6% and achieved some core operating leverage. Core earnings per share were also up 6%. But to say it upfront, I’m not happy with the cash flow result.

As a reminder, all comparisons are on the pro forma basis which excludes the Blood Transfusion Diagnostics Unit in 2013. We completed that divestment in early January this year. And the divestment gain of $0.9 billion is included in the reported operating income.

If you look to Slide 24, you can see that the foundation of our good quarter is underlying volume growth. Let me walk you through the slide. In terms of net sales, underlying volume growth contributed 8%. Price had a slight negative impact of 1% which led to the underlying sales growth of 7%. This is more offsetting the impact of generic competition of 4% or about $0.5 billion and resulted in net sales growth of 3% in constant currencies.

FX took another 2% off the top, leading to a US dollar growth of 1% for net sales. You see again a similar but more pronounced picture for core operating income where underlying growth core operating growth of 16% more than offset the 10% of generic competition. FX took us from 6% growth in constant currencies to flat earnings in US dollars. I will provide more detail on FX later but the main drivers continue to be the yen and the emerging markets currencies.

Now turning to Slide 25, you can see that our core margin in constant currencies improved by 90 basis points. This improvement was mainly due to pharmaceutical and corporate items. In pharma, it’s a mixture of improvement and M&S, G&A and cost of goods partly offset by investments in key oncology pipeline assets.

In corporate, the positive contribution is mainly due to gains from a venture fund investment. Even when excluding the positive one-time effect in corporate, our core margin would be flat versus prior year as pharma improvements offset Sandoz and other core margin declines.

Alcon core margin is at 35% but was down almost 1 percentage points due to sales mix with a higher share of equipment sales. Sandoz core margin decreased due to unfavorable sales mix, in particular, lower European cough and cold sales which are more profitable. Consumer health, core margin was slightly down due to small non-core brand divestment in the prior year. Including the significant currency effect of just over 1 percentage point, our core margin was 26.1% which now brings me to currency on Slide 26.

Currency impacted the top line by minus 2% and the bottom line by minus 6% in the first quarter. This was mainly due to the weakened yen and weakening emerging market currencies against US dollar. Recall that the yen was still quite strong in quarter one 2013 and also the emerging market currencies started to weaken in quarter three 2013. Hence, as mentioned in our full year earnings call in January, I expected a higher currency in fact in quarter one and quarter than in 2014 overall.

In terms of net sales in quarter one, the currency impact was partly offset by a stronger euro. For Q1 operating income, the strengthening of the Swiss franc had a negative impact due to our Swiss cost base. If March average exchange rates would prevail for the remainder of the year, the full year impact would be about minus 1% in sales and minus 4% in core operating income in 2014 versus 2013.

Let’s turn to free cash flow on Slide 27. Our free cash flow this quarter was $0.8 billion versus $1.2 billion in quarter one 2013. The decrease was mainly due to the timing of tax and revenue deduction payments as well as currency effects. Please note, we don’t report the cash from the blood transfusion diagnostics divestment under our free cash flow definition. Also for 2014, we expect our free cash flow to follow historical pattern of the last few years where it is stronger in the second half of the year than the first.

Now on to net debt. On Slide 28, you can see how net debt increased by $4.7 billion to $13.5 billion at the end of the first quarter. This was mainly due to our dividend payment of $6.8 billion in March which was partly offset by our free cash flow of $0.8 billion and divestment proceeds of $1.7 billion.

Finally, our outlook on Slide 29. In short, our outlook for the full year 2014 remains unchanged. For modeling purposes, we now assume that Diovan monotherapy generic will enter the US market in July 2014. Of course, we don’t know this. It is simply a forecast assumption.

Originally, under the assumption that the Diovan mono generic would enter the US in April 2014 be estimated a generic impact of up to $3 billion for 2014. With our new assumption, that estimate goes down a bit to approximately $2.7 billion. For the extra quarter of exclusivity, we expect to add about 0.5% to the top line and 2% to the bottom line and therefore expect no change to our outlook which has group net sales growing low to mid single digit in constant currency and core operating income growing ahead of sales in constant currency.

Overall, a solid start to the year. And with this, I hand over to David.

David Epstein

Thank you, Harry. For the quarter, we reported in constant currency 1% top line growth and nice leverage growing 4% in core op inc. and this is despite the negative impact of generics particularly for Zometa. Currency, as Harry described however, was negative on a US dollar basis.

Turning now to the next page, you see underlying volume growth was plus 6% and more importantly, growth products grew 17% reaching now 41% of sales. In essence, our portfolio is getting younger and healthier all the time.

As you can see on the following page, the emerging markets continue to provide strong growth despite the occasional problem markets; in this case, Venezuela. We’re up 7% overall for the emerging growth markets.

And the following slide, you see that our unparalleled growth platform with exclusivity until 2018 and beyond continues to deliver. All products on this list showed very nice growth and in particular, some of the products in the bottom of the list, our respiratory portfolio and Jakavi, are now getting to a side where they start to really contribute to our forward growth.

I’d like to mention just a few of the larger brands now as we flip through the next few pages, starting with Gilenya. Gilenya has now exceeded the $2 billion sales mark for the rolling 12 months. Over 91,000 patients have been treated worldwide and you see that the ex US market share growth continues and revenue growth continues with really strong momentum.

In the US, the growth was much smaller and it was negatively affected by a temporary effect of a larger and longer than expected yearly benefit reverification process. If you look at the data in more detail, you see that January and February were weak but March was very, very good. So we felt confident about the growth outlook for Gilenya for the rest of the year.

On Page 36, you see that our decision to invest in new indications for Lucentis as well as to take a price adjustment to improve market access is really making a difference. The brand is now back to growth with 6% top line growth and roughly 40% of that business is coming from those new indications. In addition, we launched in Germany a really state-of-the-art prefilled syringe. The qualitative feedback from the physicians is really quite encouraging.

On the next page, you get a snapshot look at how Ultibro is performing. In our view, the launch is positive. You see a comparison here to a few select external analogs. We’ve only launched in seven countries so far and we expect to launch in more than 25 during the course of 2014. Filing is expected in the US before the end of this year. So this is a brand that we have very big hopes for.

Now turning to the next slide, we take a look at Afinitor. Here is one where the story has not been as good. We recently saw the BOLERO 2 overall survival data and while there’s a trend in favor of Afinitor, it was not statistically significant. As a result, our hope that the overall survival data would be used in order to expand duration of therapy, if not that is likely not to happen now. And due to that, we’re adjusting our breast cancer sales that was down from $2 billion to somewhere between $1.5 billion and $1.7 billion. Keep in mind, there are still multiple new indications ahead for this product in carcinoid, in lymphoma and other indications.

Some people have written that they fear that the downgrade in Afinitor will have a negative impact on the outlook for the oncology business. And while this is a little bit negative, we also have to remember, and I will show you some data in a while, we have other oncology products coming that are not yet in most people’s forecast models.

Turning now to the next slide, we see that the early approval of Xolair in chronic spontaneous urticaria is now out the door. Launches are underway and once again, qualitative feedback is very good. We hope to finish regulatory reviews in a number of other countries during the course of this year including Canada, Australia and Switzerland.

For secukinumab, we decided to launch a head-to-head trial versus what is now considered the best therapy in the category Stelara. And we’ve done this because in our pivotal trial with Enbrel, we saw such a better profile for secukinumab than Enbrel that we thought we had a very good chance to beat Stelara as well. Note, the primary endpoint of something called PASI 90 which is a nearly full clearing of the skin, a score that we believe will become the new benchmark for measuring success in the field of psoriasis.

Secukinumab is filed in the US, Europe and Switzerland with some additional filings occurring this year. We now have confirmation on the FDA action date which will be January 2015 and we expect the CHMP opinion before the end of 2014. So secukinumab is a brand to definitely watch as it will be a key contributor to our growth in the not too distant future.

Now on the next slide, I’d like to spend a moment or two on our heart failure franchise. You recall at investor day in October we described our intent to build a new leg for our business around heart failure. We talked about primarily serelaxin and to a lesser extent LCZ. With serelaxin as an update, just want to remind you that we did in fact submit a request for reexamination asking for conditional approval in Europe. We expect that to go to a scientific advisory review during the month of May and we would expect the CHMP opinion before the end of May.

In the US, the FDA Advisory Committee voted against approval and that formal action date is mid-May. Importantly, the second Phase 3 pivotal trial is now enrolling with interim results expected in 2015 and final results in 2016. And just to help you recall, the primary endpoint is focused on mortality.

Now as Joe said, LCZ is a good news story. In fact, a very good news story. The Data Monitoring Committee unanimously recommended early closure of the reduced ejection fraction heart failure trial called PARADIGM based on the strength of the interim results. The study close out commenced on March 31st and is targeted for presentation in September at the ESC this year. We anticipate filing in Q4 2014.

We believe the unmet medical need here is very high and the efficacy results portend a need for this product to be placed very prominently in guidelines. As a result, we believe a mega blockbuster is in the making in a product that we should pay a lot of attention to.

On Page 42, I show you the study design for the PARADIGM trial. Note, this is a very large trial, over 8,400 patients that we compared LCZ 200 milligrams twice a day to enalapril at full dose to make sure that the comparison to LCZ was as tough as possible. We were able – the trial was then stopped because the primary combined endpoint ability times the cardiovascular depth and reduced heart failure hospitalization in these patients was exceeded.

I also want to be clear that there was a reduction in the risk of cardiovascular death. Now, I want to repeat that again. There is a reduction in the risk of cardiovascular death which will be a key driver of the uptake of this product.

Lastly, on the next slide, just to try to dimensionalize the opportunity for you in chronic heart failure, you may have seen this slide once before in one of our analyst presentations. There are roughly 3.6 million patients in the US and just the top five EU countries that are currently treated with prescription medicine in our heart failure class II to IV. If you begin to extrapolate potential pricing and the fact that this product will be used ultimately worldwide, you can very quickly get to rather large sales forecast numbers for this brand.

Now just a few more products. LDK378 trialed [ph] positive on non-small cell lung cancer. We had a very nice publication in the New England Journal of Medicine during the month of March. We’re imminently waiting for FDA approval for this product.

Also on the next page, you see one of the products that was not included in our model when we last gave you the five-year outlook on our business. And that’s LBH589 which met the primary endpoint of progression-free survival in multiple myeloma. This is a study of Velcade plus or minus LBH589. We submitted the dossier in the US in March of 2014 and we expect to file in Europe in the second quarter of this year.

Now let’s just take a pause and reflect back a little bit more on the transformational deals that Joe announced earlier this week by looking at the GSK oncology products that we’ll enjoy in our company, and I believe will strengthen and complement our innovative oncology portfolio.

As you can see from the left, there are a number of very, very interesting products with a particular focus on three of them – Votrient, Tafinlar and Mekinist. Votrient will be a blockbuster. Tafinlar and Mekinist, assuming the COMBi-D trial is positive for overall survival, something that we should know either at the end of this year or early next year also will then become blockbuster products.

When you take these products and add them to our considerable development and commercialization capabilities, we believe these products can be bigger in our hands than they ever could have been in GSK’s hands.

Now in order to get a real sense of where these products can go, one must look beyond the initial indications. And if we turn to the next page, we outlined here four of the three key assets, the ongoing phase III and phase II clinical trials.

And what you see is that these brands have a lot of potential. There are trials where the brands are being used in earlier stage of disease such as adjuvant therapy. And there is also a number of trials both for Votrient and the combination of Tafinlar and Mekinist where immuno-oncology drugs either a PD-L1 are being added to therapy.

We expect the additional of these molecules will allow us to position the right combination for the right patient, and potentially extend the duration of therapy for these patients as survival is increased, thus further increasing the top line sales potential of these brands.

With that, I’d like to bring you to the last page of my presentation. We so far had a very heavy year in terms of newsflow. You can see the green checkmarks on the slide. There will be multiple opportunities for business expansion based upon these outcomes. And there will be certainly more newsflow during the rest of the year.

And with that, I hand the presentation back to Joe.

Joseph Jimenez

Thanks, David. So to sum up, we had a solid Q1. Beyond the portfolio transformation, we delivered strong innovation in the quarter and that sets us up for future growth. We grew each of the divisions, and we announced greater anticipated cross divisional synergies through Novartis Business Services.

So at this point, I’d like to open the call to questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We’ll take the first question from Narim Niam [ph]. Please go ahead.

Andrew Baum – Citibank

It’s actually Andrew Baum here. Thank you for taking my question. Two parts about analysis that firstly, could you just remind us how many of the – what percentage of patients in PARADIGM came from the US?

And the reason I’m asking, which you probably might guess is, should we feel comfortable assuming it’s a relatively low contribution that there’s no diversion treatment trends compared to the overall patient population? Obviously thinking of recent experience with Valenda [ph].

And then second, David, perhaps you could comment on the intellectual property and [indiscernible] that in the US market. You put out some punchy comments about you anticipated exclusivity time. Perhaps you could outline what underpinned that confidence.

David Epstein

Okay, so your first question was about the makeup of this multi-country study for LC [ph] that I don’t actually have the number of US patients in front of me, but it was substantial. And we do not expect to see results that are different from the US versus other countries.

But you also have to remember, we haven’t actually analyzed all the data ourselves. It has to be collected. So we’ll get back to you on that. I don’t think there’s any issue there.

In term of the LCs [ph] at IP [ph] situation. Exclusivity is based on a combination of regulatory data protection as well as several different patent families. We expect a lot of exclusivity in 2026 in the US and Europe and 2030 in Japan.

I know some people have questioned whether or not that is sufficient protection given that AHU which is a [indiscernible] component of the drug is an old drug as well as [indiscernible].

Please keep in mind that AHU was never launched. We have a number of combination patents and we also have a series of other patents that we’re not ready to discuss yet. So we feel pretty good about the outlook for this product’s protection.

Andrew Baum – Citibank

Thank you.

Joseph Jimenez

Next question, please.

Operator

The next question comes from Alexandra Hauber from UBS. Please go ahead.

Alexandra Hauber – UBS

Thank you. I’ve got three questions. Firstly, this is a quick follow up on LC [ph] that I just noticed that slide that you put out today on the eligible patient population is slightly different from the one you put out previously as in there was no longer a restriction for patients without renal insufficiency. So whether you could just comment on why that restriction is – was in there originally, there’s no longer there.

Second question on Afinitor, you mentioned you’re not getting the expectations based on the outcome of BOLERO. Were you also hearing from the US that [indiscernible] is used. It’s actually considerable proportion of patients considering to go straight from the endocrine therapy to [indiscernible] which is not available generically.

[Indiscernible] one thing about your market intelligence tells on that point, but that has contributed to your [indiscernible] expectations. And also, if you’re seeing that happening for Afinitor whether that makes you somewhat more concerning about the Gleevec patent exploration with regards to the Tasigna switch.

And then just final question on just looking again on the deals that are announced under consumer JV, if you think about the restructuring which is going to happen in that business, is this going to come out of the consumers’ pockets or out of GSK’s pockets? And how are you actually accessing cash that comes from this business?

Joseph Jimenez

Okay, let’s start with David on LC [ph] there.

David Epstein

Okay. So I have to go back and find the last slide because I don’t have it in front of me. I don’t expect any significant restrictions around our renal function for the product.

So we’ll go back and check and find out what happened for you. Alexandra, I don’t know at this particular point in time. Just to give people a little bit more color on Afinitor, so Afinitor does have stomatitis as a side effect. It can be quite painful for a percentage of patients.

And patients can be coached through that pain. And if they stay on for a period of about two months, it tends to go away. And then they can benefit from the full therapy.

The problem we had is we expected to have an overall survival benefit which would provide enough encouragement for the physician to work with the patient and get them through. We’ll probably be out to extend the duration of treatment.

Without the overall survival benefit, it’s tougher to do that. And as a result, you’re seeing the drug use third and fourth line.

Now you mentioned something about I think Gleevec [indiscernible] and I didn’t quite catch that.

Alexandra Hauber – UBS

Sorry, David. But the point was what we’re hearing, I don’t know, that is just of course talking to a few doctors, is that because of copayment issues that patients have actually – now that [indiscernible] which was the – which the patient would use before that Afinitor available, that is now generically available and there’s no copay or very low copay compared to Afinitor.

That is basically copay considerations which is now on the margins. There’ll be more patients away from Afinitor going straight to the chemotherapy, whether that is also [indiscernible] in your down rate and therefore, just thinking ahead of Tasigna, there may be similar copay consideration at some point in time.

David Epstein

So it is true that some doctors do skip Afinitor and go to chemo. This is the third, fourth line use that I was describing to you. It’s not our sense that copay use are a key driver of that. It’s more the side effects.

Alexandra Hauber – UBS

Okay.

Joseph Jimenez

And on the consumer JV question, Alexandra, was your question around the structure of the JV or was is – I didn’t catch the last part whether you are asking who’s going to pay, whether it was a consumer pay business?

Alexandra Hauber – UBS

Yes, there will be some restructuring in this business and there will be restructuring charges associated to that. So I was just wondering, who pays for that? And a more general question, how do you access the cash coming from that business?

Joseph Jimenez

Harry.

Harry Kirsch

Yes, as you know, Alexandra, rebuilding [ph] have 36% of the JV. It will be, our income will be reported as income from associated companies. Now the restructuring charges as well as the [indiscernible] benefits will be managed by the JV. We get our cash out in form of dividends. And the minimum of the dividend is 65% of net income.

Joseph Jimenez

Next question please.

Operator

The next question comes from Richard Vosser from JP Morgan.

Richard Vosser – JP Morgan

Hi, thanks for taking my question [indiscernible]. But [indiscernible] I wonder if you could talk about the statistical [indiscernible] with the trial and whether those [indiscernible] ensured that you met the FDA requirements before approval on a single arm trial.

And just on your comments on CV risk reduction, whether you can confirm that that is a statistically significant benefit. Then secondly, just on the portfolio transaction or transformation, it clearly improves the margin of the group quite dramatically. But could you talk about the margin improvement that you’ve been highlighting previously whether this is limited to that effects on the portfolio transformation group or whether we can expect from a margin on an underlying basis outside of the oncology assets I suppose whether they should be improving as well and how we should think of that through [indiscernible] as well.

And then finally, just a question on LBH which you highlighted today, just some feedback within guessing that with the drug being on top of Velcade that some doctors are preferring [indiscernible] to single agents [indiscernible] in myeloma. Just your thoughts on the context of that around that product [indiscernible].

Joseph Jimenez

Okay, I’ll start with the portfolio question because I think you have to repeat the first two for David. But the margin improvement that we modeled in 2013 if you would have taken those results demonstrated that because we are acquiring higher margin businesses and we are divesting the lower margin businesses at least in those years, vaccines and animal health, there was a ratcheting of the core RAS [ph] of about 250 basis points versus where we would have been.

But we had said previously that our belief is that we can improve our margins over time. So this would be essentially resetting the margins at a higher level and then growing our margin off of that.

Now obviously, it will take some time even with the acquisition of GSK oncology to take it from what is today 25% up to where we think we can go which is substantially above that. So that will also contribute over time.

But you should think about this transaction as incremental to what we had said before in terms of our desire to take the margins up on this company. This was not the way to do this. This was on top of what we have previously said. So David?

David Epstein

So the only part we heard was you were asking about the LC [ph] that’s stopping the rules, is that correct?

Richard Vosser – JP Morgan

Yes. So stopping rules of whether the – what the stopping rules were and whether the statistical power of those stopping rules I suppose ensure that you meet the FDA’s statistical requirements for approval on a single arm trial. And then the second part of it was whether that statistically you mentioned the CV risk reduction, whether that was statistically significant or not.

David Epstein

Tim Wright is in the room, our Head of Development. I’m going to ask him to answer the questions to the extent he can.

Timothy Wright

So Richard, the answer to your question is that the stopping criteria were set such that the level of significance would enable us to file with a single study. And that’s very important because otherwise, it would not have stopped. And it would have stopped early that is.

And as far as the CV mortality, that was one of the key criteria. There were two that allowed the study and what it required the study to be able to be stopped. One was meeting the primary end point with a high degree of significance enabling a single file. And the second was a significance in the CV mortality.

Richard Vosser – JP Morgan

And LBH, David, the question of [indiscernible] to a single agent about Velcade?

David Epstein

Can you repeat that question? I didn’t quite understand it.

Richard Vosser – JP Morgan

It was just that some doctors we’ve been speaking to actually said that they want to use single agent therapy when they’re treating refractory myeloma and the efficacy of the single agent as such, but they don’t want to use Velcade in refractory and obviously LBH is on top of Velcade. So just how you’re thinking about that within the competitive environment.

David Epstein

Yes, so clearly, LBH is not a first line drug for these patients. So there’s about 75,000 multiple myeloma patients around the world that have relapsed or refractory multiple myeloma. So they would have an opportunity to go through this combination at some point during their treatment.

Just to give you some rough idea, the brand should probably give you something north of $500 million in sales.

Richard Vosser – JP Morgan

Thanks very much.

Joseph Jimenez

Next question please.

Operator

The next question comes from Matthew Weston from Credit Suisse.

Matthew Weston – Credit Suisse

Good afternoon. Thank you for taking my questions. Three product-related and one pipeline please. Gilenya, the benefit reverification process, can you just please explain what that actually involves? Are we basically thinking that you gave Gilenya away free while people have to get reautorization? And I guess, my only question is why have we never seen that before for any specialty drug that I can think of. What’s different with Gilenya?

Secondly, somatostatin, the revenue progression look week in Q1, are you seeking competitive pressure following the positive data in neuroendocrine tumors at the end of last year or is it just a seasonal stocking issue?

And then finally on Afinitor, clearly a disappointing to peek where we’ve already had a lot of discussion. I’m just mindful on the GSK transformation call, David specifically said that you were able to deliver on the promise of flat oncology revenue through the Gleevec patent expiry.

And so I guess my question is you’ve got Afinitor by $0.5 billion, where is that additional $0.5 billion coming from to meet that expectation.

And then finally on pipeline. We never seem to have any discussion on PKC412 in [indiscernible] AML. I think we’re expecting phase III data later this year. Am I right in that expectation and whether we’re likely to see the data?

Joseph Jimenez

David.

David Epstein

Okay. So let me – I’ll explain a little bit about reverification. Reverification actually is not unusual for a high priced chronic brand. It’s an internal process through which patients are required to confirm their benefits prior to being provided the drug.

What has happened here is that it has taken longer than it normally does. And you are correct, what that meant was we had to provide some predrug to patients during that period. If you recall that if you discontinue your Gilenya, then you have to go through the first dose observation period again, something that was not good for us or good for the patients. So you are right about that.

But I want you to feel reassured that the brand is doing well in March and in fact even the early April data. We’re seeing very good sales data.

The next question was about somatostatin in Q1. It was up about 6% worldwide versus Q1 prior year. Senostag [ph] is an interesting product, all right. And I wish I could you an exact answer. But it often bounces around, and we’ve never been able to fully understand why you see some of those deviations. So I would not read anything special into that.

In terms of oncology growth through the Gleevec patent exploration, what we said is assuming Gleevec does go generic in mid ‘15 or which when the US patent is planned to expire, which is our base case. Then we would expect for the oncology business, essentially not to shrink during that period.

Of course, if for some reason, generics don’t come in that period, for example, if generics were to come in 2016, you’d have a very different story because 2015 would then be bigger and we’ll get the full impact in 2016. And then it would be a different scenario.

And then I also mentioned earlier today that the LBH was not included in that modeling you saw when we were talking about the oncology outlook. So you start adding that back and we feel more or less comfortable with what we told you before.

Now regarding PKC, I believe it was difficult to accrue patients in a timely manner. I think there’s now been a result. So we’re waiting for the result. And it has been a big enough brand that I’m actually on top of exactly when t he data is available.

So we will double check and let you know or I can tell you, it is still actively in the portfolio for both FLT3 mutant AML and also systemic masses cytosis.

Matthew Weston – Credit Suisse

Thank you. If I could just have one quick follow on. David, it’s the second time in the week that you’ve made a clear allusion to the statement that we should anticipate a delay to generic entry of US Gleevec. Clearly, it’s a statement that you’ve made before. You’ve never been prepare to make any commentary as to why you have some confidence in that outcome. Can you at least explain to us [indiscernible] that you now have increased confidence in that outcome both on the transformation call of this call, you’ve clearly stressed that that is a possibility.

David Epstein

So our confidence is the same. As you know there are multiple other patents to go beyond the base case patent. The reason for addressing it is because I’ve been getting the questions of, can you reassure us that you can grow? And I just don’t want people to make the mistake that if it turns out to be a different date that we can hold on to that. So if the date gets pushed out and then if it starts becoming more complicated, actually it would be much more difficult to show the growth. So I want people to understand that a lot is pinging [ph] on this date.

Joseph Jimenez

Next question please.

Operator

The next question comes from the Tim Anderson from Sanford Bernstein.

Tim Anderson –Sanford Bernstein

Hi, thank you. A couple of questions. Now that you find a multipart deal of Glaxo and it seems you’ll do a business partner with them going forward in a couple of areas, yet in another area of your company specifically with your generic Advair program, you’re trying to take out their lead product at least in the markets where you might argue for substitutability like the US. And I can imagine that this battle between the companies could be ugly.

So my question, should we assume that your generic Advair program now somehow gets deprioritized given this new relationship with Glaxo?

And then second question is, on your Glaxo oncology products, there’s been a fair amount of criticism about what you paid and what’s in that portfolio, and there’s no leading anchor products. When you look at analyst models for the different products that you’re across to Novartis, which products do you think analysts are underestimating the most?

Joseph Jimenez

Okay, Tim, starting with the deal that we did with GSK, while we do have the joint venture that is – while we do have the joint venture that’s an OTC combination with GSK, we are looking forward to growing that business. But that is going to be a separate legal entity.

They control, we are minority partners. The rest of this combinations is really kind of a surgical strike where we take their oncology business. We do have right of first negotiation on their pipeline. But that’s not really a collaboration. We’ll get an early look at their earlier pipeline. And then they take vaccines and own it 100%.

So you should assume that we would be prioritize anything that we’ve confirmed that we’re working on. So any respiratory drug would fall into that. We never really have confirmed that we’re on a generic Advair for the US.

But I don’ t think that you should assume that because we have done this surgical deal with GSK that that would deprioritize anything in our pipeline that would generate value for Novartis shareholders.

In terms of the onco products, David, do you want to discuss that?

David Epstein

Yes, you asked me a bit about analyst estimates and to use your words back of the anchor, when I look at the analyst estimates, they went out [indiscernible] about 2018.

And as I showed you on the slide in my deck, there are multiple ongoing clinical trials for the top three assets – Votrient, Tafinlor and Mekinist. Now a lot of them don’t report out until towards the end of that period.

So what happens is that there’s quite a lot of growth after 2018. When you start getting to peak sale of number is that are very, very exciting in my opinion. Three of these drugs, if COMBi-D is positive, three of them become blockbuster assets plus of course, revenue contributions from the other as well.

And then you might ask why the products are the fab [ph] they are today, A, some of them have just launched; B, a company like GSK frankly just does not have access to physicians in a way that a company like we do, to get your products prescribed. So you’re getting the immediate synergy once we have the products in our hands that we can grow them much faster than the other.

So you have to be willing to look out to 2020, do a sales forecast and then a look at multiple what we pay to that sales number. And also remember that as the products get bigger and as we leverage our infrastructure, the margins will go up substantially as well. And all of a sudden, rather than looking expensive, the deal actually from an oncology perspective looks reasonable if not quit cheap.

Joseph Jimenez

So I think the only thing I’ll to that is, yes, if you take the current consensus numbers and you continue to project particularly on Mekinist and Tafinlar assuming positive overall survival. And on top of that, you take their margin of 25% more to a reasonable ongoing oncology operating income margin.

And then on top of that, you put the tax benefit on it, you quickly get to a very, very nice deal for Novartis. Next question.

Operator

The next question comes from Graham Parry from Bank of America.

Graham Parry – Bank of America

Hi, thanks for taking my questions. Just firstly on a couple of the one offs in the quarter and on the venture fund gain in corporate expenses, can you confirm that that is a one off and quantify exactly how much that was.

The $64 million accounting gain in associates, again, can you just quantify how much of that is balance, reevaluation of assets held in the venture funds that wouldn’t be repairing versus a removal of say, share of a loss in a biotech company which would be repairing.

And then secondly on deals. Could you try to quantify for us what level of synergy you see from the oncology acquisition? So you talked about taking the business up to a reasonable oncology business margin probably as you give yourself away you see that [indiscernible] and specifically if you’ve identified any actual amount of synergy there.

And then a couple of product questions. Exelon Patch generics, I think [indiscernible] has expired. Can you just give us an update on your expectations if and when if ever we would see a generic?

And secondly, on Gilenya, with the longer reverification process, why was that longer? I think he going to qualify that. And can you actually recoup any of the payments for the free drug that you are giving away once the patients reverification prices has occurred. Thanks.

Joseph Jimenez

Okay, starting with Harry on the one offs.

Harry Kirsch

Thanks, Graham. As I said in my speech earlier and also as we have laid out on page 3 of the additional financial data, now we have made a change in the Novartis venture fund accounting. We had prior the two different accounting principles for participations below and above 20%.

We have harmonized this. We have put it to an calming standard that is used in the industry for venture funds. And we have changed from an equity accounting basically to a fair accounting.

Now there is has two effects. And one is that there is a onetime reevaluation. As you mentioned, it is [indiscernible] approximately the 64 million. This is reevaluation. Now in the prior quarters, the equity accounting related to pick up of losses was also reported on core. So we did this catch up also in core and transparent related out.

So it was one effect and as you say, it’s a onetime effect.

Now there was then an IPO of one of the venture funds participations for background. We have basically the biggest corporate venture fund about $800 million under management. This pick up was roughly $40 million in quarter one and then [indiscernible] in corporate cost.

Now the corporate cost line as you can imagine and you know is quite volatile, it is average let’s say $170 million of cost per quarter. Now this quarter, it was around $100 million in core, so in other quarters, last year was sometimes 200, sometimes 140, 150. So it was a bit around – but that was a onetime effect of that venture fund IPO related of $40 million.

And w have [indiscernible] accounting policies, in several years we say that ups and downs intervention fund because of their core business, we also report on the core. There may also be then limited downs, and we will always transparently disclose that as part of our reporting.

Joseph Jimenez

And Graham, on top of the – around the oncology synergy, I’ll jump in and then David can go on to other questions also. The way to think about the way we model this is this is a revenue play for us on the three important molecules that are in that basket.

But I think what you could do is there will be a combination of cost synergies and revenue synergies described as under our ownership versus let’s say a standalone GSK model.

But I think the safest thing to do is just to model out from 25% operating income margin two, an average oncology operating income margin by peak sales, some combination of cost and revenue. David.

David Epstein

Yeah, I think that’s a good way to look at it. And then the other questions, one was around Exelon Patch, when will there be generics? There are actually generics in Europe now. We are in litigation in the US. I’m not going to comment exactly on how that’s likely to play out in the US market. And as soon as we know something, we will let you know.

And then you asked me for a little bit more color on, did we have to give away free drug for joining a reverification and how much was that, I don’t have any exact number, but it probably in the order magnitude of high single digit millions.

Graham Parry – Bank of America

And just to be clear, you can’t recoup that once a reverification process has happened. [Indiscernible] basically.

David Epstein

No, no, that’s all up to us.

Graham Parry – Bank of America

Yes, okay.

David Epstein

But the patients are not, which is the most important thing because they will stay on long-term chronic benefit.

Joseph Jimenez

Next question.

Operator

The next question will come from Florent Cespedes from Exane BNP Paribas.

Florent Cespedes – Exane BNP Paribas

Good afternoon, gentlemen, thank you for taking my question. First, a question on outcome. Could you give us more color on the trends on the different subdivisions, that would be the cataract surgery ophthalmic products generic environment. And also, when should we start to see some favorable product mixed impact from the new product launches?

Second question on emerging pharma deferment, could you elaborate on the trends on the different regions, please?

And the last question, a product question on LCZ. Could you tell us a bit more on the other ongoing with LCZ, the PARAGON trial on the preserve to take some fraction population? And are you planning to accelerate the recruitment of this trial given the Ion Med [ph] medical need? And when should we see the first results of this trial? Thank you.

Joseph Jimenez

Kevin?

Kevin Buehler

So in terms of Alcon and the segment growth, I think we were pleased with what we saw in the surgical growth being 9%. We saw a very traditional pharmaceutical growth rate and we saw a little bit stronger growth in vision care. Notably the contact lens segment was up, but it was also positively impacted from a onetime event in terms of the purchasing pattern on a VAT situation in Japan.

But as you know, we’ve been talking about our launch cycles of products. And for the most part, we’re very pleased with the CENTURION launch. We continue to grow install base. Now you have to keep in mind that our first priority is against replacing Infinity and obviously we start with our loyal accounts, but we also then start to expand and with the expansion we’re able to look at pulling through additional products.

Also, the lensac [ph] launch continues to go quite well both in terms of install based growth where we are getting a disproportionate amount of the units in [indiscernible] second units purchased. But better still is the disposable pull through which is the confirmation of usage.

But we are in a ramp mode where the sales are not as significant in the quarter, but really the opportunity as you look out longer term even beyond ‘14 is looking at the two pharmaceutical opportunities with Jetrea and then our combination product with Simbrinza and then a complete line of product launches across daily total one; DACP, structural fee product for torque and multifocal and then AIR OPTIX colors.

But those products are more in a launch mode and will take time to develop.

Joseph Jimenez

And David, on the regions?

David Epstein

Geography. So the US was down 4%. Europe was up 1. Japan was up 2. Asia excluding Japan is up 6. And then Latin America and Canada together were up double digit 10%. That’s where you get the net 1% overall from that breakdown.

In terms of LCZ, the PARAGON trial or the preserved objection fraction trial. We’re very excited about starting that trial. And it will start in the second half of this year. And maybe we’ll talk more about it at the next investor day.

Florent Cespedes – Exane BNP Paribas

Thank you very much.

Joseph Jimenez

Next question.

Operator

The next question will come from Jeff Holford from Jefferies.

Jeff Holford – Jefferies

Thanks very much. So as you continue to review your overall pharma businesses, are there any smaller franchises within that that you see as non-core?

Secondly, now you’ve completed or begun the journey of completing a big portion of restructuring on the company, can you continue to think about Alcon as a very long-term partners business? Or do you think there’s further room for shareholder value in looking at restructuring options for that business down the line?

Thirdly, around Gleevec, if we do lose exclusivity next year and we see generics come into the market, do you hear some noise about potential step therapy on Tasigna? That’s the expectation and follow up positions in the US. Have you had sort of many thoughts about that?

And then just lastly, if you can just comment broadly about thoughts on the Sandoz division of our Copaxone and whether there’s opportunities for potentially launching at risk. Was that something the business doesn’t really normally consider. Thank you.

Joseph Jimenez

Okay, Jeff, I’ll take the first two. In terms of the overall pharma business, and David can jump in, but when we did our portfolio review, we looked at the businesses, not division by division, but really by business unit by business unit.

And that led to the action that we announced. So we don’t really see other elements of our businesses being right for divestiture, with the exception of some tailed brands, some mature products, you might see us divest. But not the would be material.

In terms of Alcon, we absolutely see it as a long-term play for the company. If you think about the way that we’ve shaped this portfolio with innovative pharma, eye care and then generics, and you think about industry dynamics going forward, this is a place where eye care with the ageing population – I’ve said this before that there’s going to be a million more people on the planet and half of them are going to be over the age of 50.

So Alcon is going to have significant ability to growth in the next 10 years. And then you put an innovative pharma business next to that. And a generics business, it allows us to help systems around the world lower their total cost .

This is going to be a company that is focused and that is unstoppable. And that’s really what the whole portfolio review was all about. David, on Gleevec?

David Epstein

So your question is once there’s a generic for Gleevec, will there be step therapy? And it’s quite possible there will be to where patients will be put on Gleevec first and then move over Tasigna either due to – well, not efficacy or complete molecular response or due to side effects from Gleevec.

We have to remember that the majority of CML patients are in long-term chronic therapy and the number of new patients coming at the market is probably they know around 5% of the total. So the real question is, what happens to the installed base of long-term Gleevec users, not whether the step therapy at the beginning or not.

And with that in mind, we’re running two treatment pre remission trials. And the idea is to show the patients when they are on Tasigna can actually at some point discontinue their treatment overall, which makes Tasigna a much better option for patients and maybe even healthcare systems because you won’t have to treat them for life.

So a reasonable question, but probably not that relevant for how our revenue will play out over the next couple of years.

Joseph Jimenez

And Jeff on Copaxone?

Jeff George

Yes, so Jeff, while we really don’t comment on our launch strategies in advance, what I can say is that we are definitely pleased that the Chief Justice of the US Supreme Court last week denied the application for a state to prevent the launch of generic Copaxone.

We continue to believe that the US Federal Circuit Court of Appeals correctly invalidated the patents as sort of by telling including the [indiscernible] patent which is the one expiring in September 2015.

And together with Momenta, we are continuing to work closely with FDA toward the approval of our generic version of Copaxone when the remaining [indiscernible] patents expire in May 24th.

And what I can say to your last comment is we do take at risk ones decisions on our first files when they are value creating for shareholders.

Joseph Jimenez

Thank you. Next question please.

Operator

The next question will come from Seamus Fernandez from Leerink.

Seamus Fernandez – Leerink Swann

Well thanks very much for the questions. Just wondering on LCZ if you can give us a little bit of color on the background use of MRAs, I didn’t see much in the way of baseline evidence in that study. What we’ve heard is is that there is an expectation that you would have at least 30% of the patients also on background MRA therapy both in the control arm and in the active arm.

So I was just hoping that you could provide us a little bit of color in that regard. And then separately, as we think about the launches of respiratory generics in Europe, Jeff, could you give us a little bit of color on your expectations for how we should anticipate that rollout with regard to the health of pricings in Europe and just sort of the pace of uptake? Thanks so much.

David Epstein

So, Seamus, it’s David. I thought I knew most of the acronyms in our industry but you’ve just stumped [ph] me on what an MRA, can you tell me what it is?

Seamus Fernandez – Leerink Swann

Yes, they’re the mineralocorticoids, so like spironolactone and eplerenone which are part of the guidelines and counterpart of the recommended HFrEF background therapy.

Joseph Jimenez

David, you want to comment?

David Epstein

Yes. We can’t give you the percentage right now but we can tell you that this is probably one of the most intensively treated population ever studied in heart failure. And that includes both beta blockers and MRAs.

Seamus Fernandez – Leerink Swann

Fantastic. Thank you.

Joseph Jimenez

Jeff, on respiratory.

Jeff George

Yes, so Seamus, given that generics in respiratory in Europe are not interchangeable like we see on many drugs or all drugs under the 505(j) pathway or the ANDA pathway in the US, we see more measured uptakes and we’ve always had more measured expectations. Having said that, we’ve been pleased with the uptake that we’ve seen out of the gates. Clearly, the District Court of Cologne which upheld a PI on the lilac or the purple color of our AirFluSal Forspiro device has impeded our marketing in Germany.

Having said that, we received – after the approval in Denmark in Q4, we received seven additional approvals in Europe or six in Europe in Q1 and one – or first in Asia and Korea. And we continue to market these products in Denmark and other European countries. And so we’ll continue to contest vigorously the actions that GSK has taken to restrict patients and payer access to this product. And we have good confidence in our prospects for litigation going forward.

Joseph Jimenez

Okay, next question please.

Operator

Now we’ll take the next question from Eric Le Berrigaud from Bryan Garnier. Please go ahead.

Eric Le Berrigaud – Bryan Garnier

Yes, good afternoon. Three questions please. First, you presented in detail the NVS initiative. For us, obviously, the idea would be to try to quantify the financial benefits that we can expect from it. Could you help us try to make some numbers on that and perhaps on timings as well?

Second question, in terms of R&D as a percentage of sales, is there any timing here also to expect R&D to level off and stabilize globally in pharma? And lastly, surgical again at Alcon, when can we expect kind of a different mix and balance that could favor machines versus disposable and in fact again favorably the margin, is it a matter of quarters during this year or longer term effect? Thank you.

Jeff George

Okay, I’ll start. The way to think about NVS is as we make this effective on July 1, there’ll be a lot of people who change reporting lines. There won’t be a lot of immediate change. But as Andre Wyss gets in and starts planning how we can improve the efficiency of the operation country by country, then I think you’ll see an effect.

And the way to think about this is we’ve committed to 3% to 4% productivity savings going forward. This obviously is part of that and this should allow us to either meet or exceed that I think going forward. The way that I think about the company right now is we’ve got about $60 billion worth of sales, yet I believe that as we grow over the next five years, we should not be adding a heck of a lot of overhead on top of that. So the efficiency that we’re going to get is going to allow us also margin improvement.

And we’ve committed to margin improvement as we go forward and it’s going to come from a lot of different places. Productivity is one. NVS will help us to grow and leverage off of an existing cost base plus or minus. And when you go back and you think about the GSK action that we took and what that does for our margin and then on top of that the efficiency that David is getting in the pharmaceutical division, you put all of this together and I think we’ve got a very, very good plan to overall improve margin in the company.

Regarding R&D as a percent of sales, David, do you want to comment?

David Epstein

Yes. It was roughly 22.3% in Q1 which was up 0.1% in constant currency. You’ll recall that we had taken a pretty detailed look at our development portfolio and we’ve identified a number of compounds that we believe are good assets that can be partnered [indiscernible] to make that happen now.

What happened early this year, it’s pretty interesting with the very good results that we’re seeing on a number of our compounds is actually driving slightly increased cost. So we haven’t seen the savings come through yet but we do anticipate over the medium term that R&D cost will start to take down as a percentage of the sales line.

Joseph Jimenez

And Kevin on Alcon surgical.

Kevin Buehler

I think for clarification, you have to be thinking about a longer term window than individual quarters when you’re replacing an installed base. I mean there’s somewhere in excess of 12,000 installed base units. So when we’re selling a new Phaco unit, obviously it takes multiple years to roll out the pipeline.

Now as you start to put the new equipment in and the equipment is being used, there’s a disposable price benefit that you realize as you start to use that machine across the procedures. I think it’s also interesting to note that you’re not selling just one Phaco unit, it’s at the same time, we’re putting LenSx in which is a standard of care change in terms of how to do the procedure. Again, that takes a longer time period.

But ultimately, the strategy is that the installed base drives benefit through disposables and intraocular lenses with time. So you should see that benefit over time. But it’s not on a quarterly basis.

Joseph Jimenez

Okay, next question.

Operator

We’ll now take the next question from Tim Race from Deutsche Bank.

Tim Race – Deutsche Bank

Thank you for taking my questions. First of all on LCZ, you mentioned on the call, David, it potentially could be a mega blockbuster. In November, you gave a range for the heart failure franchise of $2 billion to $5 billion or post $5 billion [ph], now that you’ve got the data in hand and you know pretty much what’s going to happen with serelaxin over the next year or so, could you just tighten that range for us and tell us whether it’s at the lower end or the higher end? Given your comments, I’m expecting higher end or even beyond $5 billion.

Then just on LCZ further, you talk about the power of the study and obviously it’s overpowered to get a strong result for filing on one clinical study. Could you just confirm that the clinical benefit we’re seeing is going to be sort of above that 15% to 20% range that most companies aim for given that it’s been difficult for some of the companies even with relatively good data to gain traction in that sort of range? So should we be seeing a clinically meaningful result above that?

And then just lastly on Glivec, I’m not sure if you will comment. But assuming yourself have a soon [ph] and definite delay to [indiscernible] last time I looked, is there any update to that and does that actually mean that your negotiations are to be potentially delayed? Thank you.

Joseph Jimenez

Okay. LCZ, David.

David Epstein

Okay, yes, so we showed a range of $2 billion to $5 billion plus I believe for the heart failure franchise. And of course, when we show you things like that, we probabilize because we didn’t know the outcome of either the serelaxin discussion or the LCZ discussions.

Now, of course, we are much more bullish in LCZ and we know with serelaxin at least in the US, there are delays. It would be hard for me to imagine given what we know now with LCZ that we could not verily easily achieve somewhere between that $2 billion to $5 billion plus and more likely the upper end and the lower end.

Regarding the powering and what – and how the trial goes on, I can’t comment until we see all the data exactly and all the percentages that you like to see. You’re going to unfortunately have to wait the ESC. All I can tell you, yes, it’s clinically meaningful, otherwise the stopping role [ph] would not have been designed in the way they were.

And regarding Glivec and patents and the like, I don’t really want to say anything else.

Tim Race – Deutsche Bank

Thank you.

Joseph Jimenez

Next question, please.

Operator

We’ll now take the next question from Keyur Parekh from Goldman Sachs. Please go ahead.

Keyur Parekh – Goldman Sachs

Good afternoon and thank you for taking my questions. I have two if I may. First on a product related stuff, as you look at the epitopesy [ph] required from Glaxo, you clearly have a CD20 in there with Arzerra. And as you think about the plans for your biosimilar reduction [ph] map, can you help us think about how you will potentially be promoting a second to market anti-CD20 and yet be competing in the biosimilar space for the first anti-CD20?

Secondly, Joe, if you can just give us a sense of what kind of the actual kind of bidding process was for the various parts of the asset, were you kind of looking at kind of running a separate sale process for each individual asset or were you much more interested in doing a bigger deal like the one you did execute on Glaxo? Thank you.

Joseph Jimenez

Okay, David, why don’t you just start on the RJ [ph] or the CD20?

David Epstein

Yes. So, yes, I wouldn’t confuse the two, Rituxan and Arzerra are slightly different drugs, so they’re not going to be competing directly with each other both in terms of epitopesy bind and as well as indications and the like. So I would think about them completely separately.

Joseph Jimenez

Okay. And in terms of the deal, obviously, when we started this portfolio review, we cast a very wide net. So we essentially talked to everybody and we looked at what we wanted, what we needed to get done surgically and ended with GSK. But even with GSK, each of these three deals, while they’re interdependent, it was very important for me and for our Board of Directors that each deal independently of those three within GSK be good deals for the company.

And that is really the criteria that we use relative to what else we could do. So literally, the four deals that we announced Tuesday, we did not sacrifice on any of them relative to what we could have done with some other partner. And I feel very, very confident to be able to say that because we basically talk to everybody.

Okay. I think we have time for one last question.

Operator

We’ll take our final question from Tim Anderson from Sanford Bernstein. Please go ahead. He’s just removed himself from the queue. There’s no further questions in the queue.

Joseph Jimenez

Okay. I’d like to thank everybody for joining us today. We look forward to keeping you updated. Thanks a lot.

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