Novartis 2009 Annual Conference Call Transcript

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Novartis (NYSE:NVS) 2009 Annual Conference Call Transcript January 26, 2010 8:00 AM ET


Daniel L. Vasella - Chairman of the Board and Chief Executive Officer

Raymond Breu - Chief Financial Officer

Joseph Jimenez - Chief Executive Officer of Pharmaceuticals Division


Daniel L. Vasella

Good morning ladies and gentleman. It is my pleasure to welcome you today to our annual results conference and it's a special pleasure because we have good results. So, I would start with an overview. Then Raymund Breu will give you details on the financial results and then I'll talk about later, after Joe about the other divisions very briefly and Joe will detail the success in Pharma in the last year and then I will close on some aspect of the new organizations and the outlook.

So in the past year, we had record results and these record results were really driven by all divisions. The divisions gained market share all, and that was especially satisfactory and we will see later in if we look at the geographic spread and we had double-digit growth across the world. The portfolio is strong. A lot of new products are waiting and the pipeline is developing quite nicely. And with this business expansion we can also propose another increase in dividends by 5% to CHF 2.10 which will be the 13th in a row and really it represents a 12% annual growth of dividends, so, which I consider not bad at all.

And finally, we have announced this morning, a new leadership of the company with Joe Jimenez becoming CEO and with some what smaller executive committee. So quick look at the figures in local currencies growth achieved 11% and operating income currency corrected was 20% above last year.

And then obviously the first three quarters had a negative impact from the dollar. So the respective numbers in dollars are 7% and 11% and then we have the Alcon acquisition cost, the financing cost which then interviewing between the operating income and the net income. I won't go into details. Raymund will do that. So, 4% increase at in net 3 in EPS and if you take the core earnings, and the core income, core operating income, that numbers are 11%, 8% and 8%.

If you look at the sales and the operating income by division, we have sales growing by 12% in Pharma and OpInc by 18 in constant currencies, 11% in dollars. V&D, Vaccines and Diagnostics, very dynamic growth of 39% respectively 38% and a decent increase in operating income obviously heavily influenced by H1N1. And then Sandoz in local currencies up 5% and in constant currencies also you see the productivity improvement up 10% and then unfortunately a lot is eaten away by the dollar and a similar picture in consumer health and there I would just like to add that, we had a very good campaign on Prevacid 24HR, which brought in a lot of sales the cost even more than the sales.

So, I will come back very briefly to that. Here you see the growth in the various geographies as I said double-digit, so a very balanced across the globe and if we look at the strategy and the factors really which will influence the strategy. We have on one side, demand factors which remained quite constant and the aging of society is very important. The emerging markets are very important and on the other side we have the other equation of the balance, which is more demand creates more costs.

So, there are cost containment measures and that's also across the world and the real trick is how to navigate there and to provide real value to patient and customers so that they are willing to pay the price which is asked for the product and they see that they get better values from us than from somebody else.

If you look at the achievements of last year, we have stepped up innovation. We have had 25 approvals in Pharma in the major geographies, 30 overall in the group. We strengthened our portfolio mainly with the Alcon acquisition, which is intended now and then expand it in the high growth markets. Of course, China is the most important there for us and we will continue to strive in the future. We also invest very heavily in China, notably in innovation, in research and development.

The productivity has been improved and we continue to pay a lot of attention on the people side. An organization which is so heavily dependent on the degree of innovation and the performance of people, it's really acknowledge company does have to pay a lot attention to its people.

And finally, we also continued to pay contribution to society where we don't make a profit but really contribute. We had in the last several years more approvals in the U.S. than any other company. That continued in 2009 and if we have a quick look at the pipeline and these are products which are now in earlier development, clinical development with a positive proof of concept trial and we see that we have not just innovative structures, but we have very innovative targets and these are in cancer, in asthma, in epilepsy, and Uveitis.

So, you see smaller indications, larger indications, and in general, I would say the degree of innovation we have, also shows later that we see new applications in new efficacies in different diseases that has been the history of these highly innovative compounds and I am very confident of that this will be throughout in the future.

Since the creation of Novartis, we really have done two things on the business portfolio. On one side, we have focused on healthcare. We have divested chemicals, we have divested agribusiness. We have divested the nutritional businesses, and on the other side we have acquired smaller and larger companies in order to strengthen our existing businesses and we have become a hundred percent healthcare company.

This was not the case in '96 when we had 65% of our turnover in other businesses. So major transformation that one which has worked extremely well and I am very pleased today with the position we are in. In fact, if we look ahead, assuming that we can acquire Alcon entirely, it will create a new division as the leader in eye care, which will integrate the Alcon activities and also our own eye care activities.

Forward was a project we have announced three years ago. We did the project $1.6 billion in savings in three years, which is $2.3 billion in savings in two years. So, we were able to close that program with the high success where especially in procurement we have been able, if I say we, it is Daniel Vasella and his team and across the divisions to achieve an excellent result and that doesn't mean that productivity is no seen anymore. It is an ongoing thing, but this project has been closed successfully.

Again, we were able to deliver a high number of treatments for indigent patients almost 80 million treatments mostly of course, in malaria but not only we continued the leprosy program, tuberculosis program and we have two ventures in research, one in vaccines in Siena which is relatively new. One which is a little bit more mature in Singapore, which is not for profit and overall continue to be about 3% of our turnover valued at $1.5 billion.

In the Corporate Social Responsibility area, we also include the responsibility to have the smallest possible impact on the environment, which means that we measure production of waste. We measure utilization of energy. We look at various types of waste if you look at the annual report, you will see that year-after-year we set targets and we work hard at achieving them and we want of course, in everything we do to be as environmentally neutral as possible, and you will see here two or three projects we are doing.

And I think we are pretty much on target to fulfill the self-inflicted if I may say Kyoto Protocol. So with that I would like to ask Raymund to take over.

Raymond Breu

Morning. I have the pleasure of complementing Daniel Vasella's assessment after he discharge the few additional insights into financial numbers and figures. The financial highlights and to take away of the year are the following.

One is a strong currency headwind that reduced the probably underlying operating performance in U.S. dollars to the sales increase of 7% and operating increase of 11% but despite these currency hedging, a record earnings. Then the focus on the cash flow which was one of the projects that was a priority in the year delivered. Free cash flow before dividends up 24%, I have further insights there.

Then we strengthened the portfolio by acquisitions. We announced the desire to gain 100% ownership of Alcon and finally talk to shareholder return in the year is up 12%. Of this scorecard that you have seen already, the only performance indicators which are bit below normal, are net income and basic EPS increase of 4% and 3%. The reasons for these are twofold. One, higher financing cost due to the Alcon transaction and secondly much reduced income from associated compound year-off because of the tax transaction. If you correct for these [Roche] effect and other exceptional items then the underlying increase in net income is a solid 8%.

The year ended really on a strong foot, on a strong note, because in the first quarter you will see very high growth rate. And all these performance indicators, so lay into the double-digit and it's across all divisions, where we have seen operating progress and where we have seen acceleration of the sales or launches of new products.

In addition, we have to mention here the pandemic vaccines sales and vaccine and diagnostic division. And finally, a bit of help in the first quarter of currencies, so in the first quarter it was a bit positive. And even if you correct for all that very strong numbers in the first quarter.

We have decided at the year end to introduce this measure of core earnings in addition to the reported earnings that you are used to. Why are we doing this? Two reasons, one is to improve comparability of our figures with our [peers] because all our peers have similar set of numbers, of core numbers and second it is a quite insight into the underlying performance of the business.

From the IFRS numbers to core earnings, we eliminate unusual acquisition accounting impact, such as amortization of intangibles and other items then we eliminate impairments of these intangibles when they occur and other impairments. Then we do the same corrections for the associated incomes or the same items there and finally we eliminate all the exceptional items there, they have an impact of more than $25 million on the case-by-case basis. So these then should be a better reflection of the underlying performance and the underlying growth of the business.

Now, I made a mistake. Productivity improvements account for a 0.9% is point increase in the operating income margin. So, very positive development, obviously driven by project all have been related productivity savings. The net income margin as reported is down 0.6% [inaudible] for these exceptional items, then the net income margin is up 0.2 percentage point as well. So it carries strong.

The improvement in the operating income margin is focused on two expense areas marketing and selling and general and administrative. So marketing and selling at 1.5% is quite margin improvement to the operating income margin and general and administrative 0.2 percentage points. These two calls categories grew only at 2% in U.S. dollars while the sales grew at 7%. So you see the increased leverage that we were able to achieve in the income statement.

This does not mean that the costs necessary investment in marketing and selling or research and development call the opposite, it means that productivity gains more than finance the necessary investments. For example in emerging growth market sales infrastructure or the late stage development process in Pharma, Vaccines or Sandoz.

But the core net income only grew 8% slightly less fast in core operating income is entirely due to the financing of the first 25% stake amounted to $10 billion of the Alcon purchase and then another $8.5 billion partial re-financing that we did in the year for the additional 52% stake that we now have announced. Financing as a result dropped from a $94 million income in 2008 to a $353 million expense in 2009.

Core taxes, on the other hand, didn't move a lot. They only increased 7% into tax rates say to almost unchanged at 15.4%. As I mentioned, cash flow management clearly is a success story in 2009. We have implemented project across the divisions to improve cash flow from operating activities and to reduce investments in capital and the intangible assets. These are the very positive impact, free cash flow is up 24% from $7.6 to $9.4 billion.

Free cash flow is the cash flow that is generated to the group that is not needed by the division. So, after you have paid for the normal expansion into investments and so on, so that's the free cash flow which is generated for strategic purposes or dividend payments. It now accounts to 21.3% of sales versus 18.4% of sales only a year ago. It is $9.4 billion of free cash flow, dividends call up to, increase of the dividend last year of 18% and they allowed us to come from a net debt position of $1.2 billion at the end of 2008 to a net liquidity position of $3.5 billion at the end of 2009.

The recently announced enhances to gain full ownership of Alcon, we will have a very significant impact on our financial standing. Overall, the acquisition will cost some $50 billion or roughly 40% of our market cap. The second 52% stake will be financed by cash and by debt. And then the proposed merger with the minority shareholders of Alcon which would cost another $11 billion would then be financed by the issuance of new shares. These 77% cash debt financing and 23% equity financing is a compromise or a balanced proposal. We are paying other than discussion that could have been done or led to a downgrading of our debt from double A to single A.

And this would clearly also have to restrict the power stability for the future. Even the very strong free cash flow, we will be able to pay down the extra debt within four years and try to chase and de-integrate this acquisition in this timeframe financially.

Alcon transactions will be 9% diluted to 2011 EPS, as reported under IFRS and on the core earnings, we would be immediately accretive.

With this I hand over to Joe. Thank you.

Joseph Jimenez

Good morning the pharmaceutical division had a very strong year in 2009. In the fourth quarter our sales were up 13% versus a year ago in local currency and this was driven largely by our new product launches on top of what was very strong base business growth. We had strong productivity measures which allowed us to grow our operating income at a faster rate than sales, so we saw margin improvement and we had some great pipeline progress which I'll talk about in a minute.

So, this shows the pharmaceutical numbers, if you look to the bar on the far right, you can see that for the 12 months, we delivered $28.5 billion in sales, which is up 12% in local currency. Our core operating income is of 10%, which allowed us to deliver nice margin improvement.

Now, the best part about the performance, I think this year is that all therapeutic areas grew double-digit, from oncology at about 14% to even our respiratory franchise growing 27%. So the growth was very broad based across many geographies and all of our therapeutic areas.

We are also proud of the fact that the new product launches over the last 24 months have resulted in a substantial transformation of the portfolio ahead of the Diovan patent expiration in 2012. So our new products in the fourth quarter accounted for almost 20% of our total pharmaceutical portfolios and it is very important as we move forward. We also had great pipeline news in the fourth quarter. We were able to file at FTY720 under the brand name Gilenia. This is our new best-in-class multiple sclerosis oral compound. So, we are looking forward to a review by the FDA and by the EMEA, so that we can bring this new compound to MS patients around the world.

Our performance in 2009 has put us at the top of the pharmaceutical industry in terms of our growth rate. This is IMS data so it is comparable across companies and you can see the 12% growth.

Another very positive part of the Pharma performance this year was our development pipeline. We had a record number of approvals in our key geographies 25 and the importance of this is if you look at our current growth trend, it was partially driven by what happened in 2007 with 23 approvals. So, you can see in 2009, we had even more approvals than in 2007, which bodes well for 2010, 11, and 12.

Not only did we internally develop a number of very important compounds, but we also had a record year in terms of in-licensing compounds. We in-licensed or acquired six new compounds ranging from Elinogrel which is our new antithrombotic to a compound down at the bottom that we announced in December called Relaxin from a small company called Corthera for acute decompensated heart failure.

So the outlook for Pharma is very optimistic in 2010. We will grow mid-to-high-single digit sales growth and this will be behind very substantial volume growth. The pricing environment in 2010 is less certain then it was in 2009 with U.S. healthcare reform and cost containment measures that even despite those measures, we believe we will be mid-to-high-single-digit.

We'll also grow operating income ahead of sales, so showing margin improvement and continued very strong news on the pipeline.

So with that I will turn it back over to Dan.

Daniel L. Vasella

Thanks Joe. What you see here are the growth rates of our Sandoz division. And you see how it accelerated in the course of the year. So, obviously that raises expectations. If you look at there, free cash flow also a very substantive improvement and a substantial amount of money generated by the division and another point which I think is very important is that our biosimilars are really gaining ground, are penetrating the market and are much better accepted. So, we are here in a lead and it will be important to keep and even expand that lead.

In consumer health, the markets did suffer from the recession. You see that demand in contact lenses, OTC, and animal health went down. So on the left side, you have the market growth and then you see on the right side, our growth and it's obvious that we did well and gained market shares. So George Gunn with his team has done a super job.

In OTC, certainly the most important event was the launch of Prevacid24HR. In November, we sold over $100 million packages I think over $120 in fact, and shipped very quickly and I think the pickup now has been excellent. So, this can become a very important brand which may exceed $500 million if over a number of years, if we continue to do a good job.

The big swing in Vaccines and Diagnostics has been achieved, thanks to a very rapid introduction of an H1N1 vaccine. In fact, our team was the first to launch such a vaccine and to publish the results. The work which went into this was phenomenal. So, we had hundreds of employees shifted from Pharma to vaccines to help really to achieve that result. We had an enormous dedication by the vaccines team from research to production to make it happen a great success. And I would say that also thanks to the work of our people in that division. It hadn't been worst than it has been if you look at the pandemic.

Nevertheless, in the U.S. alone we had over 16,000 patients who died mostly, it's not seniors, more younger people vast majority is our recent CTC data. We had about 460,000 hospitalizations, so humongous cost to the systems. So, if you look at that to vaccinate that makes a lot of sense and I think the industry overall reacted enormously, quickly, and well to this pandemic.

We hope, of course that 2010 will be much quieter. It seems that its much quieter and with that, of course, it will become very important that the other franchises are being built successfully and that in our case is the meningitis franchise with Menveo which received in December a positive CHMP opinion, which generally is followed by an approval and then with MenB we have finished the recruitment for the phase III in Europe and the results will be available in the first half of this year, I believe. And with that we would be able to really build a base business in vaccine, which does not have the cyclicality of the flu business, where we are strong, but it's a cyclical business.

With that let me take the quick look back on a number of years. You see here sales double-digit increases over the recent years. Operating income also strong increase. If you look at the dividend, I mentioned it initially, since 1996 every year an increase in average 12% per annum. If you calculate in dollars, of course, it's even more. Then it is over 14% per annum because you have some currency benefits. And if we look at the share price and the total shareholder return then over the recent years we did outperform our peers in the world market but also if you take the whole 14 years, we have outperformed the world Pharma the peers and the world market substantially.

We have grown total shareholder return in average by 9% per annum, so anybody who thinks this is a decent return with a decent risk factor then Novartis will do that also in the future. So I can only advise you that it's a solid company.

By the way it is just a side remark. I have almost all money in this company so I wouldn't do it if I don't believe it.

Now, we have also made a few changes in our corporate governance. We have first introduced a call back part and we will roll it out into all of our contract. What it really says if you receive your financial incentives based on wrong results or you pushed the pipeline at end of the year and have to correct it afterwards, we will take back the incentives. If you achieve your results thanks to a behavior which we will consider out of our rules and unethical business behaviors, we will take back your incentive. And that is also happening in the sales force and I think it's the right way to go.

We have created a new risk committee on the Board level last year to specifically look at the risks. The Board will not manage risks. The Board will look that we have a proper risk management in the operations. So, it is more looking at the systems and the implementation of it rather than doing itself. And then, we propose the next AGM that shareholders can express there view on our compensation system proactively, meaning contrary to current practice, where shareholders express there view with respectively on what has been decided which is not really a constructive approach. We will ask shareholders in advance of any major change in the remuneration system for at least a recent year to express themselves if they are in sync with what the Board does on this level.

The new organization has been not only modified at the top, basically Joe Jimenez now taking over all the operations. We also streamlined the Executive Committee and that was necessary and I have been asked this morning why, if you think about chairman, CEO, COO, it is just too many levels, if you count also the division heads. So, with that, we needed to compress and that was right and it was also very well understood and supported by my colleagues and particularly in this case Joerg Reinhardt and Joerg has had a super career with us. He has been an outstanding Head of Development. He has led the Vaccines and Diagnostics Division and now works as COO and he decided that rather than taking another position, which he could have done, he wanted to take this starting position to pursue other opportunities.

Now, here I doubt that his phone is probably already ringing today. We also did try to streamline on the other functions and to rebalance staff functions and operations and with that, we pushed down all the manufacturing functions into the divisions, which will continue to work across divisionally at more in a peer level and we just kept QA at a Executive Committee level and Joe has selected [Dr. Andreas Rummelt] and Andreas is also going to be responsible for quality assurance in Pharma. So that is a way, I think, we had it for many years before we separated and we came to the conclusion that it's better to manage it this way.

And then, we also separate the functions, which were led by Thomas Wellauer and that has to do also partially because in the Chairman's role I created a audit and compliance function together with the Board and there we wanted to include all risk functions and compliance functions, so that a part is going to that function and some of it is going in the divisions and so the remaining part is very small.

Joe has decided not to appoint anybody right now but later on and to [Jonathan] train himself and so you see that we go really from 12 participants this year end to 9 participants and I think smaller group is more effective, faster, and that's the way it should be.

So, if we look at the work ahead and we look at the priorities, really there is no big difference, you know, the world doesn't change overnight. Innovation will remain key. The integration of outcome will be very important. It is like Raymund said this almost half of our own market caps, so this has to work well and I know it will work well.

Our teams have a lot of experience in integrating company's operations larger and smaller ones. So, I think, we can build a lot of experience. Globalized standards in vaccines and consumer health franchisees continue our journey to improve productivity and to push for simplicity and get rid of bureaucratic things which are really live in every large organization and then bring and maintain the strongest team we can, continue to learn. Learning and constantly listening and learning is so crucial for an organization like ours.

And finally, I think, we have the commitment to patients. We also have a commitment to the broader society. We can and should contribute at that level too. And with that I am closing usual cautionary note that barring unforeseen events we will increase sales, meet the single-digit rate whatever that means.

We never wanted to give precise projections and we will not do so neither in the future, but, you know, the new CFO pushed and said well we should at least say something about the margin and he said, he commits that the margin will be higher and Joe supported that and so I said welcome. And we didn't say anything here about the net income, because this net income will swing just related to the Alcon transaction and since this is depending on [STC] and many other factors, we thought it better we leave it open.

With that I thank you for your attention and we can go to Q&A.

Question-and-Answer Session

Who wants to start? Yes, please.

Unidentified Analyst

When was the decision made to change the Executive Board like that?

Daniel L. Vasella


Unidentified Analyst

You are kidding me. No, you are kidding me not?

Daniel L. Vasella

I would never kid you.

Unidentified Analyst


Daniel L. Vasella

Its material information, we couldn't decide earlier. We would have to disclose immediately. Therefore, there was no other moment than within a 24-hour limit.

Unidentified Analyst

And there was no how shall I say fallout, I mean obviously –

Daniel L. Vasella

You are asking about the decision making process?

Unidentified Analyst

Yes, thank you.

Daniel L. Vasella

Much longer.

Unidentified Analyst

Okay. May be, can I ask Mr. Jimenez when did you when where you told?

Joseph Jimenez


Unidentified Analyst


Daniel L. Vasella

You have always to be very circumspect how you ask the question. Told what? So told that he has been selected indeed yesterday. A little bit earlier that he was in the run, but you know, you have to be I think in this situations you have to have a certain process which is very clean because this is very serious stuff. And that's also you saw there were no leaks and we were very disciplined and I think it reflects how we work.

Unidentified Analyst

When I asked you that I mean obviously last year or one and half years ago when Joerg Reinhardt was appointed COO, the perception was it is term to try kind of you split the two functions and basically this is the period where he can show that he really has the capability to run the company and the decision no offense meant not to pick him as COO leads to the question, didn't he make the cut?

Daniel L. Vasella

Did he [throw up]? No he did not throw up. Let me tell you how you are right that in fact the process succession process has started before December '08. And then the question was, this could go on for one year, two years, three years, I mean, there was no time limit on that, but we also have to see how does these represent structure. Does this make sense or not and I for myself from myself came pretty early to the conclusion that's not the structure I think is particularly useful.

You have also to think that we are not a mono company, which has just one division. So, we have people at their divisional level, who have a lot of responsibilities and take a lot of responsibilities. So, every thing which is above that is really structure. So, we need to minimize that. Secondly, we do every year at the Board level discuss succession in June and so this June, I said I would like to propose that. And then, we discussed really what leadership model do we want? As we had it? A split or a complete, just a new person taking over both positions and for reasons of continuity the Board decided to split.

Then the second question was, what criteria would the Board use to select the successor and to elaborate these criteria went of any candidates just to be clear, what do we agree as a Board is really important to drive this company in the future. We spend quite some time on that and then we looked at the list of candidates, we did map everybody. We eliminated and we were down to two over the course of the month, which came and then it is not a decision against anybody. It's a decision for somebody.

That in my mind seems to be splitting words but it's truly different. So, I think, Joerg could be a very good COO and I wouldn't be surprise that he ends being the CEO somewhere. But our situation, our businesses, our portfolio, our globality, we felt that Joe had the optimal criteria and so the Board decided then yesterday in end for Joe and fully support that and you opt to know, I know Joe much less than I know Joerg.

So believe me emotionally, these decisions, I worked many, many years since '90 too closely with Joerg and he was 27 years here. That is not easy, that comes with a job. So, you have to separate personal relationships and business and frankly Joerg understands fully and we had a very open and in fact, several discussions and so did I with the other colleagues. None of them is leaving because of poor performance. That is not the reason.

Once you have such a trigger at the top, there is a whole cascade of things, which are being discussed and put into question and it may be let's fix whatever we can fix now and we see now. Let's do it now in one change, otherwise you have these changes. Every three months or six months there is a change and then people become very insecure in the organization because you need stability. To perform, you need stability.

Unidentified Analyst

Concerning Alcon takeover. The minority shareholders or that the Board members of Alcon who were represent or the minority shareholders refuse the proposed merger, so what's your reaction on that and do you still think that you can end these transactions at least 2.8?

Daniel L. Vasella

I think Raymund Breu will answer that question much better than I do.

Unidentified Analyst

Okay. I have two more questions then.

Daniel L. Vasella


Unidentified Analyst

I would like to know your sales numbers in the emerging markets and your market position there. And also I would like to know whether they are planned changes in the Board?

Daniel L. Vasella


Unidentified Analyst

In the Board. Changes in the Board.

Daniel L. Vasella

In the Board?

Raymund Breu

I will start with Alcon, I think you understand that obviously a little can be said today. We have made our offer. We think it's a fair one and now we have had a response from the independent directors. At this point, I think, we should not comment on it further. We feel very comfortable with our proposal and we feel that it is there. I think you have to understand that these discussions go through a normal process and obviously because we don't want to comment on the future or on how these could evolve. Emerging markets it depends – what's you mean if you talk all emerging markets then we have approximately 24% of sales in those market, if you just look at the six largest emerging markets which are Russia, China, India, South Korea, Turkey, Brazil, then you have approximately 9%, if I remember correctly. And obviously, the growth rates are very high in those markets.

Joseph Jimenez

And where we are really investing particularly in China or seeing growth that is substantially greater than that. So the Pharma business in China grew over 30% versus a year ago, because of some investments that we have made and that's up from, let say the mid-teens, just a couple of years ago, so we are seeing good success. Market position, we are in the top 10 Pharma businesses in terms of the multinational in China. The best thing about China is that the market is growing substantially, so everyone is winning. The Chinese government has decided to invest very heavily in healthcare reform to expand coverage for many Chinese nationals and that's leading to significant growth for all Pharma companies.

Daniel L. Vasella

And I think, you will be helped also by the fact that marketing and development is investing in China and Shanghai in a very large facility, so it really demonstrates the commitment and I think that will give us more sources of ideas and projects that also, some how presents an advantage of presence.

Unidentified Analyst


Daniel L. Vasella

Board changes, yeah we will of course send out the invitation and there every thing will be detailed but we will propose that Mr. Rudloff, who is Vice Chairman to be elected one additional year then he reaches the age limit. And then [Martin Young] and myself up for the election and I think that's it, for today.

Yes of course, we have a relatively large flexibility on the size of the Board and what we try to do as a Board is to really have diverse boards, so we are very diverse. We have from the U.S. to China, we have almost all geographies represented and we have also diversity in gender because we believe they understand then the market, where the market really is.

And secondly it gives more lively discussions. We can integrate more diverse views on things and that's something where we are not at the end, so that's something which is going to continue. At least, that's what we think today.

Unidentified Analyst

Excluding acquisitions, how high is the organic growth rate, overall in the pharmaceutical business?

Joseph Jimenez

The acquisition, actually it's 100% organic growth so the 12% growth rate is from no acquisition, it's all organic.

Daniel L. Vasella

Raymund, if you look at the group overall.

Raymund Breu

In the last few years we had almost no impact from acquisition. It was minimal in generics with the acquisition of EBEWE, I think it was less than 1%. So, the rest is all operational, normal growth internally generated growth.

Daniel L. Vasella

Yeah, we believe that it's very important that you having keep visibility to grow organically and so not to become dependent on acquisitions. So that your phases where you really grow organically then you can do an acquisition again, you grow organically, you do an acquisition again. But the companies who constantly acquire get almost acquisition-addicted. So, they lose the ability and capability to grow organically and to innovate in-house and we believe that is the core that has to be the core. The rest is addition. Yes?

Unidentified Analyst

In regard to the Pharma growth, how, I mean, could you specify what really triggered the growth at the moment and how far are you in regard to compensating for Diovan's expected patent expiry, thanks?

Joseph Jimenez

Yes. If you look at the 12% growth rate on a local currency basis, about 9.5 of the growth is volume and only about 2.5 of the points are price. So, it is quite organic and it is across the base businesses, for example, Diovan this year grew 6% and Gleevec grew 12%. So this is base brand and then on top of that, we have the new product launches like Lucentis, like Galvus in Europe, Aclasta that are adding on top of that base. The additional about $4.7 billion in sales this year, so you put those two together and you get a substantial growth rate for Pharma.

In terms of the patent expiration for Diovan, we look at Diovan as a three year process for the patent expiration. Starting in 2011 in Europe, 2012 in the U.S. and then 2013 in Japan. So rather than a cliff which many of our competitors will see because they are overweight U.S. which is where you see a patent decline of that magnitude we are going to see more of slope over the 11, 12, and 13. And so if you look at our growth trajectory with the new products and the 25 new approvals that we had in 2009, we are quite optimistic that we can get through this period in a way that I think we'll surprise some people.

Daniel L. Vasella


Unidentified Analyst

Why did you never surprise

Joseph Jimenez

We never surprise. We are very predictable. Any other questions? Doesn't seem the case, let's go for coffee. Thank you.

Unidentified Analyst

One last question.

Daniel L. Vasella

One last one.

Unidentified Analyst

If I look at all the gentleman here, English will be the mother language of most of you in the future. If Mr. [Oswald] will be the last

[Multiple Speaker]

Unidentified Analyst

So to say, how is this going to impact the company in I mean after all its still a Swiss company it's a based of Basel, what kind of impact do you foresee? May be Mr. Vasella can…

Daniel L. Vasella

No, you have to give a very diplomatic answer.

Joseph Jimenez

No, it's a good question but the funny thing is that we don't even think of it like that and we don't notice it because Novartis is quite an international company, it's a global company. We have seen the Executive Committee go through many phases with many foreign nationals, with Swiss nationals, and what we have found is that the diversity of background on the Executive Committee in terms of where you come from in terms of around the world and what your upbringing was, what your experiences were, brings a lot of great diversity to the company. So, we really think about Novartis as a global and international company definitely Swiss based with our heritage here, that's very important it's a critical part of the company but in terms of the way that we run the company quite a international approach.

Daniel L. Vasella

I may just add one comment, I totally support what you said first of all. Secondly, I think it's very important based on your remark that we, in Switzerland, are fully aware that we need to maintain Switzerland as an attractive place to conduct business. There are many initiatives which endanger that detractors of that. The catastrophe would be if one would follow these seduction in what ever feelings and the result would be a really, deep price to pay for the population. And that's something I really hope doesn't happen, that to me is right now a danger for Switzerland and after the financial industry has had great difficulties and is not out of the difficulties, life sciences and particularly pharmaceuticals, have become really, really very important for this country.

And while our shareholder base is international and our teams are international and the Board is international, we Swiss, I am not talking about me and my position but we, Swiss may not forget that we have to take care of that. Thank you.

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