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Novartis AG (NYSE:NVS)

Q3 2007 Earnings Call

October 18, 2007 8:00 am ET

Executives

Daniel Vasella- CEO

Richard Jarvis - IR

Raymund Breu - CFO

Thomas Ebeling - CEO of Pharma

Joerg Reinhardt - CEO NovartisVaccines and Diagnostics

Andreas Rummelt - CEO Sandoz

James Shannon - Head of PharmaDevelopment

John Peacock - CFO of Pharma

Alex Gorsky - Head of North America Pharma

Joe Jimenez - CEO of ConsumerHealth

Emmanuel Puginier - Global Headof Marketing and Sales in General Medicines and Pharma

David Epstein - CEO NovartisOncology

Analysts

Graham Parry - Merrill Lynch

Birgit Kuhlhoff - Rahn Bodmer

John Murphy - Goldman Sachs

Alexandra Hauber - Bear Stearns

Marcel Brand – Cheuvreux

Jo Walton - Lehman Brothers

Amit Roy – Citigroup

Kevin Scotcher - HSBC

Michael Leacock - ABN AMRO

Martin Brunninger – Cazenove

Michael Lowenstein - DeutscheBank

Ben Yeoh – Dresdner

Asika Gunawardena - Piper Jaffray

Operator

Good morning and good afternoon.This is the Chorus Call conference operator. Welcome and thank you for joiningthe Novartis Third Quarter 2007 Sales and Results Conference Call. As areminder, all participants are in listen-only mode and the conference is beingrecorded. After the presentation there will be an opportunity for you to askquestions. (Operator Instructions). At this time I would like to turn theconference over to Mr. Daniel Vasella, CEO. Please goahead sir.

Daniel Vasella

Thank you. Good day, everybody,and welcome to our Q3 conference call. Let me first start by telling you who ison the call on our side and then James -- Richard Jarvis, will read the Safe Harborstatement and then we will go into the content of the presentation. Aside ofmyself, we have Raymund Breu; Thomas Ebeling; Joerg Reinhardt; Andreas Rummelt;Joe Jimenez; Emmanuel Puginier, Global Head of Marketing and Sales in GeneralMedicines and Pharma; James Shannon, Head Global Pharma Development. Then wehave also on the phone Alex Gorsky, the CEO of Pharma North America and DavidEpstein, the CEO Novartis' Oncology business.

With that I would like to askRichard Jarvis to read us the Safe Harbor statement.

Richard Jarvis

Thank you. The informationpresented in this conference call contains forward-looking statements thatinvolve known and unknown risks, uncertainties and other factors that may causeactual results to be materially different from any future results, performanceor achievements expressed or implied by such statements. Please refer to thecompany's Form 20-F on file with the Securities and Exchange Commission for adescription of some of these factors.

Daniel Vasella

Thank you, Richard. I will starttogether with Raymond to give a few words as introduction and then hand over toThomas for the Pharma business, Joerg will cover vaccines and diagnostics,Andreas, Sandoz and then I will close with an outlook and we will have enoughtime for Q&A afterwards.

I am starting with slide number 4which, shows that we had year-to-date dynamic growth of 13% in US dollars and9% in local currencies, driven mostly by the vaccines and diagnostics in Sandozbut with a good performance in Pharmaceuticals up-to-date and then ConsumerHealth with double-digit growth of 10% and 6% in local currency. On continuingbasis, the Group operating income increased by 9% in US dollars if one excludesthe one time charge of the increase of the environmental provision.

Slide 5, you see here again thegrowth in top line and operating income and then net income, takes into accountthe 590 million which makes the net income is increasing by 7% to $5.6 billion.

Slide 6, and that complicatesobviously a little bit the reporting this year, are the one timers and thebiggest effect or impact is due to the divestment of the Medical Nutritionbusiness and Gerber -- the Gerber business, so that the Group net income forthat nine first month is $11 billion.

In slide 7, one can see that theportfolio strategy, which the Group has taken and reinforcing the non-Pharmahealthcare businesses focusing on one side on healthcare but diversifying at thesame time, is paying out. We have very dynamic growth rates in Vaccines,Diagnostic, solid growth rate in Consumer Health, and then obviously we havesome risk impact here of Pharmaceuticals and we will come back to that lateron.

Slide 8, you see the correspondingfigures or growth figures in operating income and in slide 11, we go now to Q3.In Q3, we see not a different picture in Vaccine, Sandoz and Consumer Healthbut here we see clearly the negative impact we've had by some anticipated andsome unanticipated events in Pharma. The loss of Zelnorm, Lotrel, Lamisil andFamvir on one side, the withdrawal from the market, and then the genericcompetition. And what I can already stress is this is a phenomenon isolated tothe USmarket and all other markets have performed really strongly at a double-digitgrowth rate.

Operating income on slide 12shows now, the deep impact it has in percentages on the Pharma business and ofcourse in the absolute numbers since Pharma is the biggest business, the impactis also visible.

On slide 9, net income decreasingby 12% obviously is the impact of the $590 million, which we have taken inthird quarter and one could debate to what degree this is just a one timer orshould be an operating income. We have treated it in as a one timer andexcluded it from the reporting of continuing operations but accounting wise youcould also include it.

Then on slide 10, you'll see theimpact of the divestment gains and on the next slide -- I'm going to 13 now, wehave the margins. On the margins on nine months we see that Pharmaceuticals isbeing hit by the mentioned events, Vaccines and Diagnostics has turned muchfaster then anticipated into positive numbers. Sandoz improves its margin likewe have planned, Consumer Health is about flat.

If now, one excludes the onetimers, intangibles, the effect of the acquisitions on slide 14, you can seethat on a normalized basis the margin in the Vaccine and Diagnostics businessand also in Sandoz is significantly better than on a reported basis.

I'm now handing over to RaymondBreu to go into deeper analysis of the figures.

Raymund Breu

Thank you, Daniel. I am on slide15, the slight drop in operating income from continuous operations of 0.7percentage points is the result of a couple of major factors. One is in thecost of [the results]. We have booked Famvir impairment charge of $320 million.Then R&D another negative impact that of 1.2 percentage points, it wasgrowing much faster than sales as we have large investments in the Pharma late-stagepipeline projects and we have a positive impact in offsetting these margindeteriorations. We have a positive impact of 1.6 percentage points in otherincome, reflecting the gains that we have booked in Pharma in 2007 of $166million and then we benefited from one time Chiron acquisition charges that wehave booked in 2006 in the comparable period.

On slide 16, I can comment on thenon-operating elements and you will see that the result from associatedcompanies into financial income, net are significantly up and the other verypositive development that we had in the nine months was the taxes fromcontinuing operations where the tax rate is only 11% compared to a 15.1% in thesame period a year ago.

On slide 17, we explain the mainfactors that have to be taken into account when one analyzes these numbers,plus the rate of 11% has benefited from a 2.9 percentage points from reducedprofits in the US in particular, obviously profits in the US are taxed at thehigher rate of 39.5% and too much reduced profits in Pharma in the US there hada positive impact. Then we had a reduction in the German corporate tax rate.The overall tax rate was reduced from 37.5 from 28.5 percentage points and tocatch up on all the items for the new tax rate, improved the tax rate by 1.2percentage points. And finally, the restructuring of the Chiron acquisition inthe Novartis organization had a deferred tax credit impact which improved therate again by 1.6 percentages points.

The environmental charge of $590million had a small positive impact too, but that impact is approximately 0.5percentage points only. So, one has to take these elements into account becauseobviously the rate excluding these one time effects of 16.7% is more indicativeof the underlying tax rate going into next year. Obviously for the remainder ofthis year and for the fourth quarter, I think the 11% is the best currentestimate that we have.

On slide 18, a short summery ofthe cash flow, cash flow from operating, from continuing operations was up 15%but the free cash flow after dividends was then down 20 -- 33%. The mainreasons are much increased dividend and secondly higher investments in plantand equipment in particular, the capacity expansions in manufacturing in Pharmaand in Sandoz and finally increased working capital needs, which are directlylinked to increase stocks for Tekturna and other launch projects. Inparticular, Tekturna had a fairly large impact because the cost of goods soldfor Tekturna is relatively high.

On slide 19, you see that our netliquidity after the adoption of financial debt, at the end of September nowstood at $7.3 billion. This is the result of the proceeds from thedivestitures, which contributed net of other acquisitions $7.9 billion and thenyou can see that the in the period we bought our own shares for a net amount of$3.1 billion.

On slide 20 we summarize thelong-term gains that we had to book from -- what we could achieve from thedivestiture of the Nutrition businesses. Overall $5.2 billion divestment gainafter tax. Medical Nutrition contributed $1.6 billion, and Gerber $3.6 billionand we can now say that our Novartis portfolio of businesses is 100% focused onhealthcare with Pharmaceuticals at its core.

On Slide 21, you can that we havestepped up our share buyback activity in the nine months 2007. We already havebought back $3 billion over the so-called second line. These are shares thatwill be destroyed at the next AGM. Our policy for share buybacks has beenslightly changed. We have commented on this recently before. The policy is nowthat we will return up to 100% of free cash flow after dividends andacquisitions via share buyback.

We still have $1.6 billion openthat can be bought back under the currently approved programs and our intentionis that this open amount will be bought back before our next AGM. At the sametime we have also indicated that we are currently considering a higher dividendpayout ratio that then will be proposed to our next Annual General Meeting.

On slide 23, we explain what wedid in the quarter with regard to environmental provisions. In the quarter weundertook a thorough review of our liabilities related to past environmentalliabilities for landfills and similar events relating one has to say tocompanies or activities that are no longer part of Novartis or part of our coreportfolio, so these are activities that go back 20, 30, 40 years. They relatemostly to chemicals and agrochemicals activities and as a result of a decisionof our Board to pre-mediate these landfills as far as the Novartis share isconcerned. We then have undertaken a thorough review of these liabilities andhave as a result of this increase our provision by $590 million. Included inthese is the CHF200 million that we have contributed to a Swiss foundation thatwill undertake or that will contribute to Novartis share of the remediation inthe Basel arealandfills. This underlines our commitment to a very rapid and sustainable andappropriate solution to historical pollution problems. With this I hand over toThomas.

Thomas Ebeling

I will start on page 25 Pharmahad a US dollar growth of 8%. The operating income growth was suppressed by theasset impairment charge of Famvir of $320 million taking down the operatingincome growth by 6% points. Overall the fundamentals remain strong. Outside theUS,Pharma is growing double-digitly. The two key brands Diovan and Gleevec areperforming really well with Diovan reaching 40% market share in the US and Pharma has achieved five FDA approvals,seven positive approvals in Europe and two positive CHMP opinions in Europe. These approvals will lead into a very dynamicgrowth period starting in the second half of 2008.

On page 26 you will see P&L.As I would -- you would draw the attention on the adjusted return on net sales,you can see here that this level would be 31.6% which would represent areduction of 1 percentage point, which can be explained by an increase inmarketing and sales and investments based on new launches and an increase inclinical development because we have significant higher number of patients inPhase III and Phase IV, which will hopefully translate soon into increasedsales.

Page 27 in a simple wayillustrates the different growth dynamics we have in our business where the US isdeclining and the rest of world is growing. On page 28 you see that the dilemmaof the USis basically that they got hit by the impact of Zelnorm, Lotrel and Lamisilgeneric. Lotrel alone would represent 3 percentage point growth reduction, andif you think about this, the trial is not yet completed. I think this wouldgive you an idea how much we could have grown if we would have kept Lotrel inthe market.

Page 29 shows the differentdynamics in different regions. You can expect that geographies like Latin America and emerging growth markets are growingdouble-digitly. So I am very pleased to report that Europe as well haddouble-digit growth, which is a great turnaround driven by markets like France and Germany. Our top three franchisesare all growing nicely. If you would exclude the Lotrel impact, actually allthree would demonstrate double-digit growth.

On page 31 you can see that ourtop two brands are both growing double-digitly and are defending the number oneposition in their segment. Page 32 shows the achievement of 40% market sharefor Diovan in the US,despite the launches of Exforge and Tekturna, which is illustrated on the nextpage where you can see that we are gaining net market share. The [new written]prescription level of Tekturna is still around Benicar, which we consider to bea good success given that this is a new class, which always takes a little bitmore time to be built.

On page 35 we tried to explain alittle bit the gap between the written prescriptions and the dispenseprescriptions. Last time we met, we talked to you about the higher rejectionand reversal rate at the pharmacy level. You can see it here that over themonths these rejections -- the reversal rate actually has been reduced. At thebottom of this chart, you can see the managed care gains, Alex Gorsky and theteam have accomplished in the recent months, and we estimate a two to threemonths time lag for covenants to finally impact Rx growth. So maybe that has tomodel a little bit the growth potential of Tekturna in the upcoming months.

Page 36 illustrates that themajority of our account gains actually have been in the Medicare channel and alittle bit in commercial. Exforge on page 37 is doing extremely well, allperforming all launch analogs, and we're very, very hopeful that this willbecome a blockbuster. And on page 19, on the right side, you will see thesource of the business in Germany,which is pretty much indicative of what we see as well in other markets. AndI'm pleased to report that valsartan represents less than 10% of the source ofbusiness for Exforge. So the cannibalization is fairly low, and we're gettingour business from competition and not from our own portfolio.

Exjade continues to -- I'm sorry,I'm now on page 39 with Xolair growing very nicely, and this represents herethe global sales, which include the US sales, which are booked byGenentech. Lucentis had a very strong quarter with very good growth dynamicfrom quarter one, two and three, and we hope that this dynamic will continue.Exjade continues to perform well. It almost $100 million in quarter three, andthe pie chart illustrates that especially in US we are able to get a lot of newpatients with this drug.

The initial feedback on Reclastand Exelon Patch in the USis positive, but it is too early to draw definitive conclusions. I think wehave to wait a couple of more months, and then report back a more robustassessment of the performance. Page 43 illustrates the approvals we haveaccomplished both in US and in Europe. Andthose approvals will lead into a very dynamic period that we have between nineand 10 launches in all major markets outside the US and to the end of 2008. So oursales forces will be pretty busy, and we will hopefully convert theiractivities into sales. And these activities will lead to robust growth salesstarting in the second half of 2008, which we reflect on page 46 by additionalfilings of an average four to six per year over 2008 and 2010.

We will safeguard all of theseinvestments by driving productivity initiatives even further. We have severaltimes reported to you that we are confident to hit $1 billion savings versusour cost base 2005, which we're very, very comfortable to reach this year, butwe want to go even a step further. On page 48, you see the headcount reductions,which, Alex Gorsky and his team will implement in the US, which are 1,260 positions outof which roughly 1,000 coming from the field force. Half of it's in externalsales force. As you know, the generic competition for Lotrel, the genericcompetition for Lamisil and the [devisal] of Zelnorm basically resulted andmight overcapacity, and I think we have corrected this for now.

And we will realize annualsavings of $230 million. So the outlook for Pharma is that we will have lowsingle-digit growth based on the generic impact. We have a very dynamic growthrate as of second half of 2008. Our productivity initiatives will enable us tolimit the 2007 negative margin impact to 3 percentage points, and those 3percentage points include 1.5 percentage points coming from the assetimpairment impact of Famvir. And we have promising drugs which are in use andahead. With this, I would like to give onto my colleague, Jeorg Reinhardt.

Joerg Reinhardt

Thank you, Thomas. On page 51 youhave the key messages for Novartis Vaccines and Diagnostics. We had very goodsales growth versus 2006 of 49%, driven mainly by the influenza vaccine butalso TB vaccines and pediatric Vaccines and Diagnostics. We had a strongoperating income contribution, but due to the seasonality of our vaccinebusiness, you should expect the fourth quarter sales to be weaker probably muchcloser to the level of last year's fourth quarter sales. Our meningitisproducts are on track to complete key milestones. On page 52 you will see thenumbers, which have been discussed before.

On page 53 you will see thereason for our good performance in the third quarter. We could ship this year ahigher number of influenza vaccines in the third quarter than last year with 26million doses into the year as versus 15 million doses last year. Page 54, ourtick-borne encephalitis vaccine had a very strong season this year with morethan 6 million doses sold in the first 9 months as compared to 3.4 milliondoses last year. This vaccine is mainly sold in central Europe and Germany, Austriaand Switzerland.

On page 55, Optaflu, ourcell-culture based influenza vaccine, is making good progress. We got approvalin June by the European Union; however, we're still waiting for the season ofthe flu in the year, which we hope we will get soon so that we can still launcha very small quantity into the European markets. No other launch is expectedfor next year. On page 56, Fluad is the only adjuvanted influenza vaccine thatis on the market at the moment, and we will in the future count more on thesuccess of Fluad. Fluad contains our proprietary adjuvant MF59 and has beenapproved 10 years ago in Europe with more than27 million doses now in the meantime being sold. It is registered in 23countries but not yet in the US.We will submit next year in the USas well. Currently we're indicated for use in individuals of 65 years andabove, but we are also working on a pediatric indication that we will developin the next two years and we will then submit in Europe and in the USalso.

On page 57, Aflunov, ourpre-pandemic flu vaccine, is currently under review in Europe.We still expect a decision by the European Union early 2008. On page 58, ourmeningitis franchise is moving ahead nicely. We have two projects in late stagedevelopment. One is the ACWY project. The one is the B project. Both of themare expected if everything goes fine to be indicated for infants andadolescents. The infants' first cohort in Europe and India as together, are more than 40million infants that are born every year. And in addition to that, with theACWY product, there may be a catch up opportunity in adolescents as well.

On page 59 you will see the nextsteps for these two vaccines. We did present new data on ACWY as it showed goodpersistence of immunogenicity versus Menomune. We will present more data of thePhase II program soon. Phase III is on track for completion around the end ofthe year and for submission next year, and the infant program is stillrecruiting and is expected to be submitted in 2009. The B vaccine is makingprogress as well with the Phase II to be completed before the end of the yearand Phase III then to be started next year.

So, in conclusion on page 60,good performance to-date with good growth expected for the full year results.The improvement of the business operations is progressing well, and thedivision as a result of that expected to be profitable on a reported basisahead of forecast. And with that, I hand over to my colleague, Andreas Rummelt.

Andreas Rummelt

Thank you, Joerg. On page 62, youwill see that Sandoz continues to show good sales performance, up 21%, mainlydriven by the retail business, particularly in the USand Eastern Europe, Germanyand France.The operating income grew faster than sales by 48%, mainly driven by strongvolume growth and productivity gains across the division in production,marketing and sales, as well as in development. With this we could reachoperating margin of 15.2% adjusted for all exceptional items at 28%.

Page 65 you will see the split ofthe performance across our businesses, the strongest contribution from ourretail business, 16% in local currencies. The key countries I have alreadymentioned. In addition to this, we have a very good business in Latin America,especially in Brazilin retail. Anti-infectives grew 4% in local currencies and increased theoperating income by 35% based on strong productivity gains and favorablepricing with some key compounds.

On page 66 you will see that thelaunches we did in the US inlate last year and early this year account already for 29% of our total sales,which grew in the US28% year-to-date. Driven, this by strong contribution of difficult-to-makeproducts here especially Metoprolol Succinate ER and Ipratroprium Albuterol, ofcourse, also supported by products launched under co-exclusivity, like theAmlodipine/Benazepril and Ondansetron.

On page 67 you will see that wehave achieved two major successes in the bio-similars field. Bio-similars are akey strategic pillar to increase the proportion of difficult-to-make productsin our portfolio. We achieved EU approval for the Omnitrope liquid, which nowmakes its human growth hormone version fully competitive to the originatorproduct. In addition, we achieved the EU approval of erythropoietin alfa, whichin the meantime we have launched in Germany on the October 1st. Based on theresults in the first 9 months, the successful launch of many new products inour broad portfolio, we can confirm the double-digit sales and operating incomegrowth target for 2007. And with this, I hand it back to Daniel Vasella.

Daniel Vasella

Thank you, Andreas. We are comingto slide number 70. Having listened to my colleagues, I think we can say thatthe performance in the third quarter was solid. Obviously we had some one-timeevents which confuse slightly the picture, but underlying I think it's quite agood performance in view of the environment which has changed quitesignificantly in the US, namely seeing much more aggressive generic players wholaunch products at risk on one side and then much higher hurdles on the FDAside, mostly driven by the request for a higher safety margin than we were usedfrom the past and some difficulties in predicting the actions really of FDA.

If -- we're looking -- we havestrategically a good performance of the non-Pharma businesses which balance andmitigate to some degree at least the risk we have in this Pharmaceuticalbusiness. And the other very significant event I think for future growth is thefact that we had 12 approvals this year and two positive views or opinions byCHMP. So that gives us a solid foundation I think for the future. And if you goto slide 71, we really want to take advantage of the current platform instrengthening and pursuing our strategy, which is focused on innovation, andobviously productivity is a must because we must be able to fund ouractivities, be it in innovation or marketing and sales.

We have grown our research anddevelopment portfolio in the biologics area to 25% now of our portfolio. So itis a very rapid expansion in this field and that requires additionalcapabilities and resources, and we have decided that the best way to goal is tocreate a focused biologics development unit, which will be able to pursue theseopportunities in a very dedicated way. Secondly, development has reorganizedits activities. We announced this today also. Also, in order to strengthenproject teams, create development franchises, which will have aligned decisionmaking within therapeutic areas and we will also simplify the developmentgovernance.

We are looking overall at thegroup to simplify the structure where appropriate to simplify the decisionmaking, and then we have also some significant savings opportunitiesspecifically in procurement and IT infrastructure. We want to realize, and oncewe're ready, we will obviously announce this. As immediate action, Thomas hasmentioned that already, to adapt to the new size of the product portfolio, wehave reduced the sales force in the US and in the marketingorganization. Having said that, I also have to say that we have lots of growthopportunities in other areas also, of course, with a new product in the US,and we do not anticipate ex-US sales force restructurings to occur.

So you should not expect theremajor changes. Today we also announced that Joe Jimenez and Thomas Ebeling areswapping responsibilities in order to expand experience of top management leveland at, if you want to say outside and view into these businesses. We want toaccelerate the growth of the non-Pharma businesses, and I think with Thomas'track record, he is very well positioned to achieve that in the future. We aregoing now to slide number 73 in closing our remarks with the outlook for 2007.The Group sales are expected to grow at mid-single digit levels in localcurrencies and Group operating and net income at record levels and here I haveto say excluding obviously the one-timers we have mentioned in thepresentation.

I would also like to give you aheads up on what we expect in the fourth quarter and specifically in the firsthalf of 2008. You have to take into consideration that based on 2006 sales wehave lost more than $3 billion in annual sales in the Pharmaceutical division.So this will have a negative effect until mid-2008. Then the base effect willbe gone, and we will fully see the effect of the new launches and initiate andhave a new growth phase. With that I would like to close our remarks and openfor questions-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions). Firstquestion from Mr. Graham Perry, Merrill Lynch. Please go ahead sir.

Graham Parry - Merrill Lynch

Thanks very much for taking myquestions. Just firstly on the cost reductions, can you just be absolutelyclear that this is all incremental over the cost reductions that you talkedabout at the second quarter? And perhaps you could comment on to what extentyou think this can help you grow your margins in 2008 versus 2007 or is thisall just needed to sustain margins in the phase of the worsening revenueenvironment that you see? And secondly, separately could you just give us alittle bit more detail behind the Group level restructuring referred to in thepress release and actually quantify potential margin impact and cost reductionsfrom that? And then thirdly does your recent increase in share buyback policyand the fact that you are now talking about increasing dividend payout ratiossignal that you really don't see any major acquisition opportunities on thehorizon? Thanks.

Daniel Vasella

Thank you, Graham. On the costreduction side I can confirm that the $230 million in savings are additionalsavings and are not included in the $1 billion Thomas mentioned earlier asproductivity improvement. If I were or we were to give you a margin outlook for2008 indirectly, obviously we would already include whatever is to come which Icannot do today. So that is my short answer but I have back up here by Raymondand by Thomas to expand if needed.

Also, on the Group side from apoint of view of margin we have the picture where we have the underlyingbusinesses and their margin production, and then we have as a second elementobviously potential simplifications which may occur, which should have an alsopositive effect on growth. Meaning that it -- these are changes we want to dofor future growth not just to have a short time cost cutting effort.

And finally on M&A, andRaymond you add whatever you think is appropriate, but on M&A, I would saythe following; our policy says after acquisitions and after dividend payout andbuyback, we will spend up to 100% of free cash flow. It doesn’t say that wewill not acquire but don't please read that into position that we are going toacquire now. So we want to keep our strategic options open as we did in thepast. But we also want to apply due diligence to any target we're looking atand to remain financially disciplined and also as we have been in the past. So,Raymond, please add your thoughts on that.

Raymond Breu

I think on the acquisitionsGraham, no change to the policy and nothing large on the horizon one reallyshould say. On the margin outlook for 2008, this is too early. We're only doingthe budget now. [Or we have to watch] and before we have the impact of theseinitiatives that we have started it is too early to comment on 2008.

Daniel Vasella

Thank you. Can we have the nextquestion please?

Operator

Next question from Ms. BirgitKuhlhoff, Rahn Bodmer. Please go ahead madam.

Birgit Kuhlhoff - RahnBodmer

Good afternoon. I have twofinancial questions please and one Pharmaceutical. First of all on theredundancies in the US,is there -- are there any costs associated with that? Then on the tax rate, Ithink, Mr. Breu, you mentioned that the 16.7% is the base tax rate also for 2008.But I was wondering some elements like the lower tax rate in Germany should be -- should have asustainable lower effect. So, could you please elaborate a little bit more onthat where you see that tax rate in 2008? And then lastly the Pharmaceutical questionon Galvus, I was wondering is there actually any progress in the discussionswith the FDA? What are the issues and why is it taking so long?

Raymond Breu

Okay, Ms. Kuhlhoff, first, theone-time cost for the USrestructuring is expected to be somewhere in the range of $20 million to $25million. So, a very minor amount. Tax rate, the adjustment for the reduction inthe German corporate tax rate has a big long time impact because all the assetsand liability positions on the balance sheet have to be tax effected at thenewer rate. So that is a big long time impact that will not recur in next yearor the years thereafter.

As to the underlying rate I thinkthe indication that we have given you in the past that I have given again isthat that rate is expected to be somewhere in the 16% to 18% range. Obviously,you can always have one time effects to the positive or the negative side thatare accounting driven.

Finally, just to repeat that wehave no misunderstanding. The 11% that we now have shown for the nine months isalso our current best estimate for the full year 2007.

Birgit Kuhlhoff - RahnBodmer

Okay, just one follow up please,but the negative effect that the US earnings are having will also be -- have apositive effect on the tax rate in the first half of 2008?

Raymond Breu

That will have to be seen becausethis depends now how the 2008 will develop. How the initiatives for costreduction will develop and so on, so it is too early to comment.

Birgit Kuhlhoff - RahnBodmer

Okay. Thank you.

Thomas Ebeling

So as far as Galvus is concernedin the United States, I am afraid I don't have any clear news for you, I wouldhope by the end of August I would be able to come to you with clarity on whatthe FDA were wanting, but they did not do that, and in the recent days, theyhave come to us with what appears to be a moving target, asking for additionalpatients in the trials with longer follow-up, etcetera. And we have not yetcome to an agreement as to what we do need to do, go back, and so thediscussions continue and I can’t give you any clarity on what the FDA arereally looking for...

Daniel Vasella

And you do not expect to getclarity very soon?

Thomas Ebeling

I -- we will continuediscussions, but right now we're not at a point where the FDA are willing togive us clarity.

Daniel Vasella

Okay. So --

Birgit Kuhlhoff - RahnBodmer

Thank you.

Daniel Vasella

Thank you. Next question please?

Operator

Next question from Mr. JohnMurphy, Goldman Sachs. Please go ahead sir.

John Murphy - Goldman Sachs

Yes thanks very much indeed, Ihave got three questions please and Daniel a couple for you first, please. And-- just in terms of the management changes, can you tell us a little bit more,why now? What are the implications for the divisions? I think we have knownThomas for many years and he has presided over a period of strong growth. Wemaybe don't know Joe Jimenez quite so well. So, should we think about adifferent focus, a different strategy, what should we be thinking there? And secondyou just touched on the biologics and establishing that as a focus unit, arethere implications there with regard to either internal spend or maybe externalM&A? And then finally a question for James Shannon, related to Galvus, wejust saw a Januvia safety label update yesterday and I wonder if you had anythoughts or comments on that.

Daniel Vasella

Okay. Let me give a try to yourfirst question. You're absolutely right, Thomas has had a seven year run Iwould say and great performance in growth of Pharma and as you may rememberwhen he came in, there were a ton of question marks. How come that you take aperson who only had nutrition and cigarette experience and no Pharmaexperience? So I think it has proven to be a right choice at the time, the righttiming and the right person, and after seven years I think on a divisionallevel, it is more than ready to go to a new field. It is a little bit morecomplex obviously to lead in three businesses. It is also a slightly adifferent role than running directly a business. And so I think it offers anexpansion of the experience and reverse that is true for Joe who has strongbackground in fast moving consumer goods, has a background where he worked alsoin private equity, was on the Board of AstraZeneca for a number of years, sohas firsthand experience on fast moving consumer goods. And more from a strategic view on the Pharma businessand obviously knows how private equity operates and how to make numbers work.

His work background, since manydon't know him yet, is that he graduated from Stanford, had an MBA degree from Berkeley, then worked invarious consumer good companies. The last two positions was heading the Heinzbusiness in North America and in Europe in two positions, so he hasinternational experience, and then went to private equity, so just in asnapshot.

Now I understand that one isalways comfortable when one knows a person and it is always raising questionswhen somebody new is coming. And that is more than fear, and I don't anticipatethat it is very different internally. And I'm very confident that this is theright choice we made and the right timing. So, I'm very optimistic as to thefresh look both executives will take at these businesses and what they will dowith these businesses to bring them to new shores of performance.

With that, I'm coming quickly tothe question on strategy. Do not read any strategic change into this switchother than that we from a portfolio -- business portfolio point of view do wantthe non-Pharma healthcare businesses to really grow and perform and don't readinto it that we would maybe not pay attention to specialty products inPharmaceuticals because of Joe's background in fast moving consumer goods thatwould be a wrong conclusion. With that, we have the other question please.

James Shannon

So, on the biologics piece, whatwe have tried to do on the biologics, as well as, across the rest of Pharma, isto create entrepreneurial units which are really dedicated and focused on thebusiness and empower decision making at the project team level. As far asbiologics is concerned, specifically we have, as Daniel mentioned, 25% now ofour portfolio and we needed to make a decision to increase the talent pool andthe capabilities and we will try to do that both by building, as well as, bylooking externally for capabilities and technologies in the biologics. 25% ofour portfolio certainly does mean that we will move some budget towards thebiologics piece, but what we will do externally I cannot say.

Galvus, Januvia, the Januvialabel update yesterday on Stevens-Johnson, we have not seen Stevens-Johnsonwith Galvus in the clinical program in a very large number of patients. I havenot seen the complete data on Januvia with regard to Stevens-Johnson, so Icannot make any comment on that.

John Murphy - Goldman Sachs

Thanks very much indeed for thecomments.

Daniel Vasella

Thank you. Next question please?

Operator

The next question is from Ms.Alexandra Hauber, Bear Stearns. Please go ahead madam.

Alexandra Hauber - Bear Stearns

Hello, I thank you very much fortaking my questions. Firstly, I just have a question on CapEx. When -- you saidyou are adding capacity both in generics and in Pharma but I do understand thegenerics because that is a volume business, could you give us some insightwhere you were actually adding capacity in Pharma? Is that biologicals, or isthat -- where is it that you need to add capacity which would require that kindof CapEx increase? And could you just give us a little bit of an outlook onoutlook on CapEx? Because it looks like you are coming in way above the fullyear last year. Is that going to be a peak, or will you continue at that level?

Secondly on working capital, thedifference compared to last year, for the nine months at 700 million, I'mreally wondering given your comments on Tekturna whether there is reallyanything meaningful within that figure we should attribute to Tekturna giventhe sales so far because I was wondering whether we should read across thatmaybe it is not quite living up your -- as much to your expectations as youhave been guiding -- as you have been saying so far. Can you just comment onthis, please?

Daniel Vasella

Thank you. CapEx?

Raymond Breu

Okay. Alexandra, the increase incapital expenditure is really linked to manufacturing expansion in Pharma forthe launch products, Tekturna in particular, and for Diovan and then forgeneral chemical productions. The level of CapEx that you now -- and then inaddition to Sandoz, which I mentioned, the level of CapEx that you now seeevolving this year as a percentage of sales, I think is a level that willpersist for the foreseeable future. Working capital, yes, Tekturna has a bigimpact there. I mention it because it has a high cost of goods sold, and itsimply means that we have a launch of Tekturna coming in a number of countries,and we're preparing for that.

Andreas Rummelt

Regarding Tekturna, let me maybeelaborate a little bit on this one. First of all, qualitatively from the marketresearch we have done in the US,we can really clearly deduct that physicians are very pleased with the efficacythey have seen. There are no safety issues. I would say almost 95% ofphysicians are willing to prescribe the drug and are very open-minded, andactually we expect a significant increase of prescribing physicians in themonths to come. If you take a look at the new prescribers, we're gaining everyweek.

It's a very, very steady numberbetween 800 and 1,000 doctors every week. Most of these doctors really becomerepeated prescribers, so we see a very steady growth of the prescription base.As you mentioned before, it is much more difficult today to build a new classthan it was eight years ago, and the reasons are basically driven by managedcare, co-pay, safety concerns and other restrictions, including promotionalrestrictions by the way. Secondly, I think you should not forget that ourpricing for Tekturna is not a discount in contrast to what Zeneca did when theylaunched their drug. So if you keep this all in mind, we are reasonably pleasedwith the uptake. We have not changed our peak sales guidance on Tekturna.

For the short-term future in theUS, managed care gains, the launch of Tekturna HCT, Dextrose combination andthe promotion of data, which are differentiating us stronger than with ACEs andARBs will certainly give a fresh impetus into the growth potential for thebrand. And again, I think if you take a look at Exforge and Tekturna, I thinkwe have shown that we can launch two hypertension products in the same periodwithout cannibalizing our core business and we are able to drive total share.No doubt we wish we would have sold more, but we're very, very comfortable inthe peak sales guidance for both drugs.

In terms of Exelon Patch, I thinkit is somewhat natural that to some degree you get people who believe in Exelonto try out the patch. I think we have seen already sufficient new patients herewho have been on other drugs, and you're absolutely right. Alexandra in orderto make Exelon a blockbuster drug in the US, we have to get use of fromcompetition, and we're fairly comfortable that we will get it. I don't know,Alex, do you have anything to add regarding Exelon Patch or Tekturna?

Alex Gorsky

Thomas, on the Exelon Patch Iwould add we're working on only a few weeks of data, Alexandra as yousuggested, but overall we're very encouraged by what we are seeing. You knowphysicians are seeing good efficacy, solid tolerability, as well as theconvenience of the patch. We're getting all that from the market research, andwhat we are pleased with, if you look at the franchise share, it has actuallyincreased by about 2 points recently, and it is up to 10%. And that is the newto brand share. Among PCPs, our NWRx share has shown also very nice growth, andit is up to 6.6% and 8.2% for the overall franchise.

And very encouraging, ourawareness is also very high, over 90% with primary care physicians. So we arequite encouraged, and the early data also suggests that we are seeing less than25% of the prescriptions for the patch being direct switches from the capsule.So we think that we have an opportunity obviously to transition patients overbut also to expand our overall share.

Alexandra Hauber - Bear Stearns

Thank you. Can I just quicklyfollow-up on the Tekturna inventory questions? I'm just wondering whether I'mright to conclude taking in all your comments that you have several hundredmillion dollars worth of Tekturna inventory on your books?

Daniel Vasella

Let me pass it to [John Peacock],the CFO of Pharma.

John Peacock

You are right Alexandra to saythat we have substantial inventories ahead of several launches across Europenext year so, more in the order of a couple of hundred million in terms of whatwe hold.

Alexandra Hauber - Bear Stearns

Yes.

John Peacock

But clearly we have severallaunches coming up next year, and we're building inventories ahead of the otherlaunches as well. Tekturna is the biggest, but there are others as well wherewe're building inventory.

Daniel Vasella

I think and couple John, you useit in the UKlanguage. Two.

John Peacock

Two.

Daniel Vasella

Yes.

John Peacock

Okay.

Daniel Vasella

Thank you.

Alexandra Hauber - Bear Stearns

Thank you, and the generic one?

Daniel Vasella

We have the last question?

Alexandra Hauber - Bear Stearns

The generic question?

Daniel Vasella

Yes, on the generics startuprestructuring of sales force question.

Andreas Rummelt

The generics business model in Germany is amodel in transition, mainly through this Monday, that new rebate contractsbetween the health insurers and the manufacturers. This is moving the decisionpower away from the doctors and pharmacists to the payers, that is, the healthinsurers. Currently we have more than 30 contracts with leading health insurersin Germanycovering the old portfolio. And with these contracts, we could really achieve avery good market position increasing volumes, and this certainly is supportedby our pharmacy, as well as the physician field force.

The AOK, which is the biggerhealth insurer in Germany,has taken a different approach. They tender individual molecules, which was notthat successful in the first year. The process for 2008/2009 is on hold becausesome of the companies have taken legal actions against the process. Sobasically here it is too early to speculate what the outcome will be, and as amarket leader, we are grasping the existing opportunities, and we believe thatto get these existing opportunities, as there are no exclusivities, there'salways many companies, some companies where if a contract with the insurers wecould use our field force.

Daniel Vasella

Okay. So, no restructuring in theshort-term. Thank you. Then next question, please.

Operator

The next question is from Mr.Marcel Brand, Cheuvreux. Please go ahead sir.

Marcel Brand - Cheuvreux

Yes, good afternoon, thank you. Afew questions, first, on the restructuring. I'm not so surprised by that but abit more by the timing. Why do you restructure in the middle of four majorlaunches in the US?Do you want to take on the rest of the pharmaceutical majors -- the Pfizer's,the Merck's and Sanofi in osteoporosis. In hypertension, the battle continuesto be fierce with Sankyo getting ready for Azor, so why now? And, on the otherhand, when you talk about the loss of Zelnorm that is a while ago and Lotrel isexactly the same customer target group.

The second question is relatedmore to genetics. Are you aware of any competitors developing aLosartan/amlodipine combination? And then my last question is on Galvus. How doyou see the chances that after going through this useless study that the FDA ismandating that you need to do outcome studies when listening to the remarks bythe head of the Avandia ODAC? That is it.

Daniel Vasella

Thank you, Mr. Brand.Restructuring obviously it is a question of the portfolio, the size of theportfolio. Thomas?

Thomas Ebeling

I think, first of all, wheneverwe calculate our share of [alternates], we use a very rational objectiveapproach and basically be highly confident that we will be able to getsynergies by detailing products like Diovan, Exforge and Tekturna. You knowthis is a very, defined sales force as a category. This will allow us tobasically reduce the number of calls we need. We're very comfortable that forall the brands promoted we have sufficient share of voice, and on the otherhand, we're very committed as well to drive productivity of our sales force. Sowe think the cut we're making is not a dramatic one, and enables us to becompetitive and on the other hand, drives productivity already a first stepforward.

Marcel Brand - Cheuvreux

Alex, you commit to launch allthese products and drive these products optimally?

Alex Gorsky

Absolutely. As Thomas commented,we have been very deliberate in our analysis and review and the number ofrepresentatives that we are applying to ensure that we've got the right shareof voice with all of these products. And I think the combination of having acategory approach, plus increased productivity, will allow us to be verycompetitive.

Daniel Vasella

Thank you. We're not aware of anygeneric Losartan/amlodipine combination, and then on Galvus your concern is ourconcern to make it very short.

Thank you. Next question please.

Operator

The next question is from Ms. JoWalton, Lehman Brothers. Please go ahead madam.

Jo Walton - Lehman Brothers

Good afternoon. A few quick onesplease. Just returning to the biologics theme, you have obviously got a lot ofprojects in this area. Do you have enough money factoring capacity to takethese projects forward, or would you be in the market for a substantialbiologics manufacturing facility, which might be available? Secondly, on theconsumer business and we don't have an awful lot of visibility on it as it standstoday, stripped off with the bits that you have disposed of. Is thethird-quarter level of profitability a good guide for the fourth quarter andgoing on or you have to -- that is representative now of that business? And, onthe vaccine side, have you had any revenues this year for your H5N1 contractorsor is, there any material revenue in there? Or if there has not been up to now,will there be any in the fourth quarter?

Daniel Vasella

Thank you.

Jo Walton - Lehman Brothers

And I'm sorry, one final question.Just on the mature brands, is the decline of 9% purely related to Lamisil, orhas the market conditions effectively started to turn down that type sort of20% of your business?

Daniel Vasella

Thank you. On biologics we haveobviously the generic area, which has a lot of biologic capabilities toproduce, and we have here a substantial amount of capacity. Also, we havewithin Pharma, capacity for biologics and I do not anticipate short-term. Wewould have to go out and buy a big plant. Consumer business, Joe?

Joe Jimenez

The consumer business in thethird quarter had top line growth of 10% with animal health and the OTCbusiness generating double-digit increases. The profitability in the thirdquarter was somewhat suppressed by some incremental investment in R&D,particularly in animal health, and some significant investments in marketingand sales in OTC in front of the [comparable] business launch in the US. So Iwould assume that the profit picks up and the profit growth rate improvesversus the third quarter.

Daniel Vasella

Vaccines & Diagnostics?

Joerg Reinhardt

Due to the structure of thecontract with the HHS, we have not yet booked any substantial revenues thisyear, and we do not intend to do so for the full year.

Thomas Ebeling

Just as an explanation of maturesproducts, we basically have products, which are either not anymore promotedand/or don't have anymore patent protection. Usually these type of productsdecline between 2% and 5%. This decline of 9% is very much, as I said, drivenby Lamisil and maybe driven by Lescol. All other mature products actually are holdingup very well.

Daniel Vasella

Thank you. Next question please.

Operator

Thank you. The next question isfrom Amit Roy, Citigroup. Please go ahead sir.

Amit Roy - Citigroup

I have got a couple of questionshere. Firstly, on the Stevens-Johnson syndrome on the Januvia label, have youseen any Stevens-Johnson in the monkeys with the skin necrosis, which from theGalvus experience or in the toxic epidermal necrolysis? First question. Andthen secondly, when will we be getting any data on a triple therapy combinationof Tekturna, Diovan and the (inaudible), the three together. And lastly, we sawa recent announcement by Genentech on them restricting the sale of Avastin toour pharmacists to stop them from setting it up. Do you think there's apotential of anything like that happening in Europe?

Daniel Vasella

Thank you, Amit. Stevens-Johnsonin monkey we have not seen. Then triple therapy.

James Shannon

So triple combination, the threecombination of the triple combination, you should see data early next year.

Daniel Vasella

And then the restriction onAvastin? Emmanuel.

Emmanuel Puginier

In Europewe knew that Roche is really making sure that the product is used within thelabel, and ensuring proper distribution.

Daniel Vasella

So basically the Company isbehaving in a very professional way.

Emmanuel Puginier

Correct.

Daniel Vasella

And then it is up to thephysicians to prescribe and use it appropriately.

Emmanuel Puginier

Correct.

Daniel Vasella

Thank you, Amit. Can we go to thenext question, please?

Operator

The next question is from KevinScotcher, HSBC. Please go ahead sir.

Kevin Scotcher - HSBC

Thank you. One question and aclarification. On the Pharmaceutical outlook on the margin, the negative impactof 3%, as you say, includes the 1.5 for Famvir. Does it include or exclude theTanox profit? Does it also have -- includes nor an exclusion of any of therestructuring charges? And the second question relates -- I hate to speak to it-- but the Januvia label changes, I understand it included the warning ofangioedema and exfoliative skin conditions, including Stevens-Johnson. And Iguess my question is, do you think that these observations in humans areaffecting the FDA's approach to you when it is trying to set the patientrequirements for your studies, or are these two events not linked?

Daniel Vasella

Thank you. John Peacock, thefirst question.

John Peacock

Yes, in answer to the firstquestion, the guidance does include the proceeds on the sale of Tanox sharesand it does include the USrestructuring charge.

Daniel Vasella

Okay. Thank you, John. Please.

James Shannon

On the label changes, I think Mr.Brand asked the same question about the Avandia. I think FDA takes all of theinformation they have into consideration when requesting information from us.So I cannot tell you what is driving them right now, but clearly there areevents which are driving them.

Daniel Vasella

Yes, but it is obvious I wouldsay that if competition has these kind of events then they will look into thiskind of stuff too and whatever new product in that class. Thank you. Nextquestion, please.

Operator

The next question is from MichaelLeacock, ABN AMRO. Please go ahead sir. Mr. Leacock you can ask your question,your line is open.

Michael Leacock - ABN AMRO

Okay thank you very much. Justone question if I may. Can you talk a little bit more about decision-makingchanges in the development function? I wondered if you could just say a littlemore about what actually practically will change in the decision-making processand how will that help speed up the development to some of your compounds tothe marketplace?

James Shannon

As I mentioned earlier on thebiologics, we have looked at the development organization, and we have threeobjectives in essence in restructuring development. One is to empower andstrengthen the project teams which are our basic operating unit. Second is tocreate better cross-functional integration with senior leadership at a levellower than myself. And the third then is to simplify and speed up thedecision-making between the project teams and the most senior management withindevelopment. So we will give the project teams more autonomy.

We will put some more seniorpeople into the project teams and give them an objective setting andperformance appraisal to the leaders of those teams. We will have strong peopleintegrating cross-functionally at a franchise level within development focusedon development decisions. And then, me and my senior management will work in amentorship oversight capacity with these folks, but simplifying and minimizingthe number of steps they have to go through between the teams and seniormanagement.

Michael Leacock - ABN AMRO

Thank you very much.

Daniel Vasella

Thank you. Next question, please.

Operator

The next question is from MartinBrunninger, Cazenove.

Martin Brunninger - Cazenove

Thanks very much. Good afternoon.One question on Sandoz. The current situation in Germany is explained with anincreasing importance of direct rebate contracts through the statutoryinsurance companies. Can you shed somenew light on the German generic market? Now since pharmacists are now obligedto dispense these rebated products, in theory it seems now relatively easy forbig non-German companies to gain rapid market share. With this new situation,do you still feel Hexal is a necessary investment for getting access to the Germangeneric market? And if so, how do you now defend your market share in Germany againstlarge new entrants like Teva? Given you are not restructuring in Germany as wellas you said, what is the future role for a generic sales rep in this country?Thank you.

Daniel Vasella

Thank you, Andreas.

Andreas Rummelt

Martin it is a good questionactually. It is true. I think that it is more -- it is more new entrants cominginto the German market. Basically following a business model result sales force,basically supporting the AOK contract which I mentioned before, which istendering individual molecules, and so far this is the only health insurerdoing this. I think here I cannot comment on the ongoing process, but you knowthat we have three brands in Germany,and we will use these three brands to optimally participate in the biddingprocess. I think in the long run, if this model goes in the direction ofindividual tendering of molecules, then, of course, we would also adopt ourcost structures. Currently we're looking at every line in our cost structuresand optimize the organization.

Daniel Vasella

But as you have said before, Ithink, Andreas, the pharmacy space is still a significant draw. You have apresence others don't have. And I think premature changes before the market isreally changing your needs, dynamics are changing would be a mistake. And towhat Andreas tells you very clearly that he is ready to act, but it is not timeto act.

Andreas Rummelt

But, as we said, at the currenttime, there is no restructuring here.

Martin Brunninger - Cazenove

But maybe a follow-on. If you saythat the pharmacist still has a role, if you paint the scenario when you share,for example, a molecule with two competitors once you've got an AOK contract,what is your view when you compete with Teva or Ranbaxy in one slot? How muchmarket share do you think you can make in these products?

Andreas Rummelt

Well, I think this is exactly thesituation I described. There is no exclusivity so, and here the field force canreally help. I think if the pharmacist has his choice between three compoundsand we have a field force that nobody else has or that the other smallerplayers don't have, here we can go to the pharmacists and give them the valueproposition.

Daniel Vasella

Okay. I hope that answers thequestion. Thank you so much.

Martin Brunninger - Cazenove

Thank you.

Daniel Vasella

May we go to the next question,please?

Operator

The next question is from MichaelLowenstein, Deutsche Bank. Please go ahead sir.

Michael Lowenstein - Deutsche Bank

Yes, thank you. One question forAndreas please, regarding the erythropoietin alfa. Given you have approvalsince August, what is the plan going forward in terms of launch, capacity andso on? And then a quick question on Exjade. It looks like the third quarter isat least in trend and in terms of trend a bit weaker than what we have see inQ2 over Q1. Is anything happening with that product, or it is that just an oddquarter?

Andreas Rummelt

Well, I think on theerythropoietin alfa we have launched as I said with Hexal in Germany, and we are currently these dayslaunching with Sandoz in Germany.So we go for a dual brand strategy. We have the necessary capacities and thenecessary materials for the launch. So this is fully ongoing. The country wherewe are also launching is UK.So Germany and UK are the two markets where you can go inswiftly, and the other markets will follow once we have completed price andreimbursement discussions in Europe.

Daniel Vasella

Then David, would you please takethe Exjade question?

David Epstein

Sure. On Exjade the brand isactually growing quite dynamically ex-US where we have a lot of opportunity toconvert Desferal patients to Exjade, either primarily thalassemia markets. Inthe USmarket there is a much greater need to create a sense of urgency aroundtreating patients with sickle-cell disease and myelodysplastic syndrome. So itis a bit tougher in the US,and as you know, the USrepresents about half of the business. I think the brand will continue to growvery nicely, albeit the USwill be more difficult to grow than the rest of the world.

Daniel Vasella

Thank you, the next question,please?

Operator

The next question is from Mr. BenYeoh, Dresdner Kleinwort. Please go ahead sir.

Ben Yeoh - Dresdner

Hello it's Ben Yeoh at Dresdner Kleinwort.Three quick questions, if I may, just on Sandoz. I was just wondering is theSandoz margin now sustainable or, in fact, just a real threat to continue toincrease with better global efficacy coming through? And just on the commentson several bio-similars coming through the pipeline, I know you are quitecautious about revealing too much about that, but would we be expecting anyother launches in 2008 or 2009? I'm just trying to get a feel for whether wemight expect one or two more rollouts coming through. And then just lastly,just following on from Joe's question on biological capacity, I noticed thatPfizer stopped production of Exubera, so there could be a insulin plant forsale. Is that the type of capacity you might be looking to buy or not?

Daniel Vasella

Thank you. Andreas?

Andreas Rummelt

I think on the bio-similars Idon't want to go beyond what we said before. We have currently a project invarious phases of development. We are very active in these development projects,but we don't want to comment on details and which products these are.

Daniel Vasella

And then the margin outlook?

Andreas Rummelt

The margin outlook, while we havesaid that we will achieve the 15% ROS, which we currently have in our books. Ithink the outlook for the full year is around this number. I also mentionedthat the adjusted number of ROS is about a little bit more than 20% now, alsotaking into account the purchase price or accounting, and I'm comfortable thatthis is certainly sustainable.

Daniel Vasella

Yes, the question is, of course,can it be better? But we do everything to improve it. Okay. So there areadditional productivity initiatives going on. I can also add that there arestill remaining synergies from the acquisition of Hexal, which needs to berealized in the manufacturing area. And from that point of view, certainlythere is more work to be done and more results to be achieved. How quickly thatis a second question.

Ben Yeoh - Dresdner

So would you be disappointed ifit did not sort of slowly pick up over the next two or three years?

Daniel Vasella

I think you can be very confidentthat Andreas will be challenged, and we will ask him for more. But we don'twant to be unrealistic, and we also know that the markets move and that youhave to constantly work at productivity and generics because there is constantprice erosion, as you well know. But I think the level he has achieved. He hasachieved it earlier than we had planned for. So I'm confident that he willcontinue to do an excellent job in this area too. Regarding the Exubera plant,we have no plan to look at this plant if that is the question you asked. And wedo not have -- if I was not clear before -- we do not have capacity constraintsnow in the short-term.

Ben Yeoh - Dresdner

Okay. Thank you.

Daniel Vasella

Thank you, Ben. May I ask ifthere is an additional question?

Operator

Yes, the next question is fromMr. [Asika Gunawardena] from Piper Jaffray. Please go ahead sir.

Asika Gunawardena - Piper Jaffray

Hi, good afternoon gentlemen. Ihave a question -- two questions -- on Tekturna. Building on your responses toAlexandra's question, could you give us an idea on what the typical number ofrefills, are on Tekturna scripts written? And following up with that, what newsflow could we expect in Q4 '07 and in 2008 regarding new reimbursementaccounts?

Daniel Vasella

Thank you. Alex?

Alex Gorsky

The number of refills that we'reseeing right now it is still very early in the launch. And, as you know, veryearly during the launch phase, your NRx to TRx ratio is very difficult to readinto. So I would look at that data very cautiously.

Daniel Vasella

Okay. And news flow?

Alex Gorsky

In terms of news flow, as youknow, we just recently have gone out with the [avoid-interlock] trials. Wespoke a little bit about that a few weeks ago, and we think that is providingvery important information in both heart failure as well as proteinuria, and wehave several more that will be coming out in over the next several months andearly in 2008.

Asika Gunawardena - Piper Jaffray

Okay. And Alex just to follow-up,anything regarding new reimbursement accounts that we could expect to see?

Alex Gorsky

We have actually seen goodformulary uptake. I believe, as Thomas mentioned earlier in his presentation,just over the last few weeks we have seen a doubling in the Medicare Part Dtaking us from 23% to 45%. And our key account management team who overall hasdone an outstanding job even in competitive markets with Diovan is also makingheadway on the commercial side, and we expect to see more approvals in thecoming weeks and months.

Asika Gunawardena - Piper Jaffray

Okay. Thank you very much.

Daniel Vasella

Thank you very much. I think thiswas our last question to be answered. I would like to thank everyone for theactive participation and for the support, of course. I wish you a nice day anda nice afternoon. Bye-bye now.

Operator

Ladies and gentlemen, theconference call is now over, and you may disconnect your telephones. Thank youvery much for joining. Good-bye.

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