Novartis AG (SWX:NOVN)

Earnings Call: Q4 2017

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Jan 24, 2018

Good morning and good afternoon, and welcome to the Novartis Q4 and full year 2017 results release conference call and live audio webcast. Please note that during the presentation, all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions by pressing star one at any time during the conference. A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. Should anyone need assistance during the conference call, they may signal the operator by pressing star zero. With that, I would like to hand over to Mr. Joe Jimenez, CEO of Novartis. Please go ahead, sir. Operator, could you hear me? Hello? Change to backup line. Change to backup line. Alicia? The backup line is connected. Please go ahead. Okay. Sorry for the technical difficulties. Good afternoon, everybody, and welcome. To start off, I would like Samir to read the safe harbor statement. Samir? Good afternoon, everybody. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors. These may cause actual results to be materially different from any future results, performance, or achievements expressed or implied by such statements. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. Thanks, Samir. Okay. Since this is my last quarterly earnings call as CEO of Novartis, I am going to have the bulk of the presentation presented by Harry Kirsch, who you know, our CFO. He is going to cover 2017 financial performance. Paul Hudson, Head of Pharma, is going to give us more detail on Cosentyx and Entresto. Vas, incoming CEO, is going to outline his vision and priorities for Novartis going forward. First, I just want to share my thoughts on slide number 4. You will have seen from the press release that we can say 2017 was a good year for the company. We grew sales in constant currency despite the patent expiration of Gleevec. We had a great year in terms of innovation. We executed well on the growth drivers and returned the Alcon business to growth. At the same time, we continued to strengthen the company by implementing the new operating model. As I come to the end of my time as CEO, I am leaving confident that the company is in good hands. Vas and I have worked very closely over the last few months planning and preparing for this transition, and the next phase of this company is all about executing on the growth potential, and I know that Vas and the Executive Committee will be focused on bringing the pipeline to its full potential. Now I would like to turn it over to Harry to talk about the 2017 results in detail. Thank you, Joe. Good morning, good afternoon, everyone. As usual, my comments refer to growth rates in constant currencies and compared to prior year, unless otherwise noted. On slide 6, I want to start with a quick comparison between the guidance we gave in January last year and the final results. As you can see, we came in above or at the upper end of our guidance. Full year sales were up 2% and core operating income was in line with prior year, despite 2017 being our second year of Gleevec generic erosion. Turning to slide 7. We show the quarter 4 and full year results. On the left side, you can see that we had very good performance in quarter 4. Net sales grew 2% and core operating income growth accelerated to +5%. In the full year, sales grew +2% as strong performance of our growth drivers, including Cosentyx and Entresto, more than offset Gleevec generic erosion. Core operating income was in line with prior year as sales growth and productivity fully offset generic erosion and growth investments. Operating income grew 7%, including lower amortization. Net income grew even 12%, driven by higher income from associate companies. Core EPS was $4.86, growing 3%, including the benefit from the share buyback program. On free cash flow, we have delivered a solid full year growth of +10% to $10.4 billion. Now moving on to slide number 8. These are the key brands, as you know, in innovative medicines driving our top-line performance. As expected, the greatest contributions came from Cosentyx and Entresto, and Paul will provide more details on those later. I want to point out that Promacta, Tafinlar Mekinist, and Jakavi continue to grow strongly with sales increasing around 30%. Kisqali was launched during 2017 and contributed full year sales of $76 million. As a result, the total Oncology Business unit sales, excluding Gleevec, were up 10% the full year and 13% in quarter 4. Now let's turn to the margins on slide number 9. As you can see, all divisions grew core operating income in quarter 4, resulting in a marginal improvement to 25% for the group. Innovative medicine sales grew 4%, leading to 9% growth in core operating income. Core ROS increased to 30.5%, driving the overall group margin performance. Sandoz sales declined 4%, mainly due to industry-wide pricing pressure in the U.S. However, core operating income grew +1% as the sales decline was offset by continued strong growth margin improvement, and gains from the divestment of small tail and non-strategic assets. Core ROS increased to 20.9%. Alcon sales grew 6% in the fourth quarter, driving 36% growth in core operating income. Core ROS was 14.1%. To note, in quarter 4, stock and trade movements accounted to approximately one point of Alcon sales growth. So the underlying CC sales growth is about 5% in quarter 4, in line with the underlying growth in quarter 3. On slide 10, you see the Alcon quarterly results throughout 2017. For the full year, sales grew 4% and core operating income grew 5%. Importantly, Alcon grew sales in every quarter based on the actions taken by Mike and his team to fix the basics, improve operations, and customer relations. As a result of this, surgical grew 5% and vision care grew 3% in the year. With the continued progress of the turnaround in Alcon, we expect continued sales growth and improved margins in 2018. Slide 11 shows our strong free cash flow of $10.4 billion in 2017, up 10% versus prior year. This was mainly driven by favorable working capital, lower legal settlement payments, and lower CapEx. On slide 12, you see our improving CapEx trend over the past five years. CapEx was high in 2013 through 2015 as we completed our new campuses in Boston and Shanghai. In 2017, we continued to prioritize our investments in manufacturing projects. On slide 13, you can see that net debt stood at $19 billion at the end of the year. The increase was mainly driven by the $6.5 billion annual dividend payment, net share repurchases of $5.2 billion, mostly offset by the $10.4 billion free cash flow in 2017. On slide 14, we propose a dividend of 2.80 francs per share. This is in line with our policy to have strong and growing dividend in Swiss francs. It is an increase of 2% in Swiss francs and 6% in U.S. dollar. In terms of payout ratio, this dividend represents 87% of our net income and 64% of our free cash flow. Slide 15 shows our full year guidance for 2018. We expect group sales to grow low to mid-single digit. For Innovative Medicines division, we expect sales to grow mid-single digit, driven by the continued uptake of our growth drivers. For Sandoz, we expect sales to be broadly in line with a slight decline versus 2017 due to continued industry-wide pricing pressures we assume in the U.S. For Alcon, we expect sales to grow low to mid-single digits. We are pleased with the 2017 return to growth and look forward to another strong year as the Alcon team completes the turnaround. The transfer of the ophtha OTC products into Alcon will not have a material impact on 2018 top-line growth, but will increase Alcon's margins. We will issue updated segment financials reflecting the new structure toward the end of quarter one. For group core operating income, we expect growth to be in the range of mid to high single digit. On slide 16, let me briefly comment on the expected half one and half two core operating income dynamics. We expect our innovative medicines growth drivers to deliver an increasing contribution throughout the year. Of course, Alcon is also expected to be a growth contributor, but we also expect Sandoz U.S. price pressure to continue, which likely resides in Sandoz sales decline in half one. In half one, we also expect a stronger impact from Gleevec generic erosion, the tail end of it, and investments behind oncology launches. Therefore, we expect core operating income in quarter one to be broadly in line to a low single-digit increase versus prior year. In half two, we expect stronger core operating income growth, which will benefit from expected increased contribution of the innovative medicines launches and new launches at Sandoz. On slide 17, I would like to add some perspective on other key elements of our expected bottom-line performance in 2018 beyond core operating income. We expect core net financial expenses to be about $100 million higher, mainly due to the higher interest cost, including financing the AAA acquisition and for the full-year effect of the bonds we issued for the 2017 share buyback program. On core tax, we expect a slight positive effect from the U.S. tax reform, but how positive is not yet clear, as the details and interpretations of the law still have to be finalized with the IRS. We also expect the shift of profit mix to higher tax jurisdiction. As a result, the core tax rate could stay broadly in line with 2017 or increase slightly to around 16%. We will update you with quarter one results on where we think we will be for the full year on the tax. On slide 18, you see how currencies would impact our results if mid-January rates prevail for the remainder of 2018. Due to the weakening U.S. dollar mainly versus the euro, the full-year currency impact on sales would be +3%. The full-year impact on core operating income would be +4%. For quarter one, the currency impact would be +5% on sales and +6% on core operating income. We will continue to publish every month the expected currency impact on our website. With that, I turn it over to Paul. Thank you, Harry, and good afternoon, good morning to everybody. It gives me great pleasure to share some of the highlights from the pharma business. Entresto surpassed the $500 million mark in 2017, delivering on our promise for patients and indeed for the business. Q4 recorded the strongest quarter-on-quarter growth this year, +43% worldwide, with a full-year growth of over 195%. Performance is fueled by continued momentum and progress on access and uptake ex-U.S. as well. We are now launched in over 60 countries, just France to come. We will not guide to a specific number this year. I am very pleased with our current trajectory. It is probably worth saying that we have seen and learned that Q2 and Q4 are the areas where we get our biggest volume uptakes. Signposting 2018 is going to be important to establish what we could actually achieve this year. Next slide, thank you. As the underlying dynamics in the U.S. have taken a real positive trajectory, I put on here the January number, first couple of data points at 22,000 on TRX. We broke the 20,000 in December for the first time. We sort of predicted this would happen. We said that our peak productivity per salesperson would really reach optimum impact in November, December, and indeed, that has happened exactly as we hoped. We are picking up over 640 new writers in the U.S. every week. Over 55,000 physicians having prescribed Entresto. Although cardiology remains the bulk of the prescribing, it is fair to say PC adoption is accelerating. The underlying access situation has also improved as well. We regularly get questions on this. Our coverage in Med D is up to 93%. Our coverage in commercial is at 70%. Importantly, no PA restrictions in Med D at 60% and no PA in 48% in commercial. We will improve that slightly in Med D in the first quarter of this year. Looking longer term, I said this time last year that we would try and give some sense of perspective about how big Entresto could be when we had exited Q4 of 2017. Whilst delighted with the performance, we can now see a path for reduced ejection fraction that would take us somewhere beyond $3 billion before LOE. On this chart, you can see we tried to dimensionalize preserved ejection fraction in relation to reduced ejection fraction, whilst no real credible medical treatment in preserved ejection fraction will get our final readout in the summer of next year. We think that with some good education, this is going to provide not only a great benefit to patients in HFpEF, but also have a positive impact on reduced ejection fraction patients. What does that mean ultimately? We think it means that we will be somewhere before LOE a $4 billion to $5 billion at peak medicine in Entresto. Importantly, we expect Entresto to be margin accretive from the very beginning of 2019. Turning to Cosentyx. Cosentyx itself has had also a fantastic 2017. We have seen new entrants launch, but we have seen ourselves become a multi-blockbuster in the full year. Q4 sales of $650 million, which is 11% quarter-on-quarter growth. In fact, we have seen growth in all indications in all geographies. Our ex-U.S. performance, in fact, Q4 results are annualizing now at $1 billion on their own. With new entrants, we have still continued that great performance. Our NBRx leadership out of all of the new entrants in Q4 has been maintained despite Taltz and Tremfya. In fact, our NBRx growth over that period is the leader amongst all of the medicines. Outside of psoriasis in spondyloarthropathy, we continue to maintain market leadership against Humira and Enbrel in AS and PsA, which is a huge statement of the clinical benefits of this medicine. 2018 is an important year, clearly, with Tremfya, Taltz, and of course, with Risankizumab to come at the end of the year. We have been very thoughtful, again, about our rebating at the beginning of 2018. Our access is in very good shape, in fact, for 2018. We recognize what an important year it is to decide who comes through this year in great shape. Because after that, most of the innovation is in the market, and our opportunity to grow for the next half-decade is in play. Let me give you some sense of perspective on my last slide around dimensionalizing the opportunity for Cosentyx. We continually have questions and mainly around psoriasis, and we have tried to share over the last year how big an opportunity PsA, AS, and indeed in the future non-radiographic axial SpA is. The number of PsA systemic treated patients is bigger than that in PSO. The number of AS patients is almost the same size, if not slightly bigger than PSO. You know, I think that the IL-17s have a greater degree of efficacy in AS and PsA and non-radiographic axial SpA. What that does is set us up in a very strong position for our performance over the long term in these indications. Importantly, though, in psoriasis, we still make a breakthrough. We have landmark five-year data. We have head-to-head studies, most recently the CLEAR study versus Stelara, and we feel strongly positioned because the efficacy bar has now been set and probably doesn't need to go any higher. We feel well-positioned to win and to at least preserve and grow share in psoriasis. Right across the indications, we're already deployed in dermatology and rheumatology, so the need to add more investment becomes less, and which is a great opportunity for us given that our overall expectation is that we can become a blockbuster in each of these indications separately. So, in coming to a conclusion, we're delighted with the progress with Entresto, with Cosentyx. I think it's a great statement of our ability to commercialize on the great science from the company. I'll hand over to Vas. Great. Thanks very much, Paul, and thanks everyone for joining the call. As I come into the CEO role, I'd like to share some of my initial reflections on the future direction of Novartis. Over the past five months, I've been getting external perspectives on the company, meeting with investors, meeting with external stakeholders, as well as meeting with our own internal associates and really trying to develop a strong perspective on the company informed by my many years here, but also trying to take an outsider's view. My thinking will continue to evolve, and I look forward to keeping you updated over the coming months and years. But I wanted to share some of my initial thoughts. Now if you go to the next slide, as you all know, we face a dynamic and complex external environment. When you look at the opportunities for a company like Novartis, there are high unmet needs that remain with many people around the world not living to their full healthy life expectancy. We have many new therapeutic modalities and platforms that are coming forward as we demonstrated with our work with Kymriah and cell therapy, and I think there are many more to come. There's increasing demand for curative therapies and improvements in quality of life, and we're clearly in the midst of a data and digital revolution in pharmaceuticals, but also across multiple industries. But we also face challenges that you're also all well aware of: increasing competition, rising and more difficult standard of care to beat, increasing payer and pricing pressure, and an industry reputation which we need to continue to strive to improve. Now when I reflect on where Novartis stands with respect to these opportunities and challenges, I sincerely believe we're well-positioned for the future. We have global scale, we have innovation power, we have world-class talent, and we've really increased our capability in data and digital, which I think will power us into the future. So if you go to the next slide, our aspiration as a leadership team is to lead for the long term. From a strategic perspective, that means continuing to lead as an innovator of transformative therapies, be a leader in data and digital, be a productivity leader in building a lean and agile organization that can confront the challenges that we'll face, and a leader in attracting and retaining the best talent in the industry. From a financial standpoint and for our shareholders, we want to drive solid and sustainable top-line growth, drive ongoing core margin expansion, deliver solid cash flow, and keep improving our return on capital employed. Moving to the next slide. When you think of all of that in perspective, if you go back to the 1920s, Novartis was a medicinal chemistry and industrials company. For most of our history of Ciba, Geigy, and Sandoz, this was the core of the company. In 1996, with the formation of Novartis through 2009, we became a diversified healthcare group spanning a number of different sectors in healthcare. Under Joe's leadership, we've undertaken a portfolio transformation where we've really focused the company in three leading businesses, Sandoz, Alcon, and Innovative Medicines. As I look into the future and look at a more complex environment, an environment that's going to be increasingly competitive with rapidly changing technologies, I believe we have to focus the company as a focused medicines company powered by data and data science and digital technologies. This will allow us to allocate our capital to where our core capabilities are. We'll continue, of course, to evaluate if relevant adjacencies make sense, but we really want to focus our investment in our core. When you go to the next slide, as we look to the future, there'll be five priorities we'll be driving across Novartis for the years to come. First is an increase in focus on operational execution to ensure launch excellence, high levels of productivity, and keep driving that margin improvement. Second is to pivot even harder to breakthrough innovation. Access will also remain important with our Sandoz division, but we need to pivot to high-end transformative innovation, be a data and digital leader, rebuild trust with society, and shift our culture to a more inspired, empowered, and unbureaucratic organization. I also have four specific goals over the next five years related to our longer-term financial performance, and I wanted to discuss those with all of you today. If you go to slide 30, when we look out in the next five years, I believe we're well-positioned to drive dynamic sales growth. When you look off of our 2017 base, we will have the generic impact of Gleevec, AFINITOR, and the tail end of Gleevec. But as Paul nicely outlined when you move to the next bar, Cosentyx and Entresto are growing well. In addition, we have multiple potential blockbuster launches coming through the portfolio in the next three years. When you look across that portfolio, I think there are exciting medicines like BAF312, RTH, amongst others. In addition, our onco growth drivers continue to perform well. As Harry mentioned, excluding Gleevec, we achieved over 10% growth in our oncology business. KISQALI, Kymriah, and Rydapt are our key growth drivers for us that we believe will continue to help us deliver on our growth trajectory. Finally, with the leading biosimilars portfolio in the industry and Alcon returning to growth, both Sandoz and Alcon will also contribute to this growth dynamic. Moving to slide 31, we're also committed to expanding our margins. If you take innovative medicines specifically, our full year 2017 margins were around 31.3%. We know our relevant industry peers are in the mid-30s in terms of their core operating margins per our own estimates. We believe we can be in this range by accelerating our key growth drivers, continuing to be aggressive with resource allocation and productivity across our commercial units, and with the new operating model we've set up to drive synergies across Novartis technical operations, NDS, and drug development. This will, of course, be offset by the challenges of generic entries as well as the need to invest in our potential blockbusters. But our ability to drive core margin improvement will be a key priority for us as a leadership team and for myself as CEO. Then moving to slide 32. When you think about our innovation power, our ability to keep reinventing our pipeline is absolutely critical for our long-term success. We've demonstrated over the recent years that we have leading industry pipeline productivity. We have limited binary risk throughout our portfolio where we can counteract a challenge in one TA with performance in another. When you look at some of the highlights on this slide, 21 breakthrough therapy designations, 90 NMEs in the clinic. We think our innovation engine is strong. Lastly, on the longer-term perspective, I wanted to turn to capital allocation. Novartis has been very disciplined in capital allocation under Joe, and we plan to continue that with our four key priorities of investing in our organic business, growing our annual dividend in Swiss francs, pursuing value-creating bolt-on acquisitions, and I'll continue to have a focus on looking at acquisitions that are true bolt-ons, where we believe we'll bring in new technologies and capabilities into our core areas of the company, and then share buybacks when appropriate. An external analysis on the right-hand side of this slide shows the kind of discipline that we've had. When you look at R&D as an investment decision of our cash, you can see that we've consistently invested over the last five years, 35% of our cash into R&D. We have a solid investment into CapEx at 15% and bolt-on M&A at 15%. Then we've returned 35% of that cash to shareholders in the form of share buybacks and dividends. We want to continue to maintain that kind of capital discipline. Moving to the next slide, I'd like to turn to 2018 as well as wrap up and give you some perspective on how we see this year unfolding. Moving to slide 35. 2018 is our return to growth, and it's going to build the foundation for the future of the company. We have multiple priorities across each of the five areas that I described earlier, and they all will enable us to deliver the financial outlook that Harry provided. I'd like to go into a few of these in more detail. Turning to slide 36. In operational execution, our core priority is going to be to continue to drive our key launch growth drivers. With Cosentyx, we want to maintain our competitive edge in psoriasis as well as grow our penetration in PsA, as Paul has nicely outlined. With Entresto, we want to keep the momentum going in the U.S. and drive further uptake in Europe and around the world. In oncology, where we have a broad portfolio, our goal will be to continue to maximize our GSK-acquired brands as well as our launch brands. With KISQALI, we did have a slower start than we had hoped, but we continue to believe with the MONALEESA-7 data coming out positive as well as the upcoming MONALEESA-3 readout, as well as our launches now across the European marketplace, that we can continue to drive KISQALI towards a blockbuster medicine. With Kymriah, we will add our DLBCL launch when approved in the U.S. and Europe. With Rydapt, we have the potential to transform the care of AML patients. Overall, we believe in oncology, we have the opportunity to continue to drive dynamic growth in one of our most important segments. Moving to slide 37. As well in operational execution, it is going to be critical for us, given the challenging environment we are in, to deliver on our upcoming blockbuster launches. You can see that across the next two years, we have six major launches as well as six more potential significant launches in 2020. Our ability to deliver through the registration process, prepare these launches, and execute on them flawlessly is core to our executive team's goals and we will continue to provide you updates as we progress in preparing for these important medicines. On slide 38, we are also progressing on the portfolio review of Alcon, as well as accelerating our review in Sandoz and focusing on a differentiated portfolio. With respect to Alcon, our management is focused on completing the turnaround, as you saw nicely in the performance in quarter 4. We are making progress towards a capital markets exit with dedicated teams working towards that. There is no change on the timing of a potential action. We continue to guide towards a potential action in the first half of 2019. With respect to Sandoz, we have a very strong global Sandoz business, and it is growing well outside the United States, as well as a leading biosimilars portfolio. But we are facing challenges given the U.S. oral solids industry-wide pricing pressure in the United States. We will plan to continue to reshape our U.S. business with a focus on more complex products, and that will include looking at how to best shape that portfolio for us to be successful in the future. We will continue to keep you updated as those decisions evolve. On slide 39, finally, in operational execution, our goal will be to continue to drive the cost savings that we have outlined in the past to deliver over $1 billion of savings in Novartis technical operations, drive flat cost in Novartis business services, and keep our R&D spend in the 20% range, enabled by increasing scale and better digital technology. Moving to innovation, there are a few additional updates I wanted to provide to the group. 2017, as Joe outlined, we had a real landmark year, 16 key approvals, 16 key submissions, six breakthrough therapy designation, and importantly, a rebuilt interface between research and development that allowed 14 new projects to transition into the mid-stage portfolio. Turning to slide 41. What we expect in 2018 is 15 key approvals and 15 key submissions, highlighted by a couple of big ones. Aimovig, our migraine prevention medicine, is on track for approvals in both U.S. and Europe, and we recently released additional data from a trial called Liberty, which demonstrated Aimovig's effectiveness in patients who had failed two to four prior lines of therapy. We believe that's unique data, and it'll be compelling to payers to enable us to build an excellent launch for Aimovig. We also have Kymriah, which continues to progress as well in DLBCL in U.S. and Europe. Two key submissions that I'd want to particularly highlight. RTH258 is on track for a submission in Q4 of this year. We've initiated the bridging study, which we've previously outlined. BAF312 is on track as well for a filing in the first half of 2018. Moving to slide 42, one of the other areas I wanted to provide an update on is on the IO portfolio. When you look at the IO portfolio, we are a leader in CAR T, and I think you're all well aware of that. We've continued to expand our CD19 CAR T presence across a range of B-cell malignancies. We'll be starting a range of pivotal studies in the coming months across those various indications. We also continue to progress our CAR T programs in solid tumors, though, of course, the science is more challenging. Now in our IO combinations and other efforts within immuno-oncology, as we previously outlined, we've in-licensed 19 second generation IO agents. We're now in a position to say that we're initiating, as we've previously outlined, our trials with canakinumab in the non-small cell lung cancer adjuvant and metastatic settings. Our phase III is ongoing with PDR001, our anti-PD-1 with Mekinist and Tafinlar in melanoma. We'll be initiating late-stage studies in three combination programs with our anti-PD-1. One with INC280, our c-Met inhibitor in non-small cell lung cancer. The second with our anti-LAG antibody, LAG-525 in triple-negative breast cancer. Finally, our PD-1 plus our adenosine receptor antagonist in non-small cell lung cancer. We'll look forward to providing additional data on the performance of these agents in upcoming medical congresses over the course of this year. Finally, on innovation, on slide 43, we continue to have strong progress in our mid-stage pipeline. Just wanted to briefly highlight, we have a range of readouts in both the phase II readouts as well as phase III initiations, continuing to build the mid-stage pipeline that will enable us to drive future growth, and be happy to answer questions regarding this in the Q&A. Slide 44, we announced two recent deals, which I wanted to make sure everyone was aware of, with the acquisition of Advanced Accelerator Applications, which we completed this week. It brings into the portfolio a near-term launch in Lutathera, which is already now approved in Europe, and we're expecting an approval in the U.S. in the near term. That also brings into the portfolio potential therapies in prostate cancer, gastric cancer, amongst other solid tumors. And we also announced a partnership with Biocon in biosimilars. This partnership enables us to broaden our portfolio of the next wave of biosimilars, enabling us to share development cost prints. As I previously stated, we'll continue to look at such partnerships and bolt-on opportunities. Now on the last three points, just to briefly highlight in data and digital, we continue to make good progress in our ability to build core digital capabilities in our R&D operations and our commercial operations, and our technical operations. This will be critical for us to drive further productivity gains, but also enabling us to find new patient populations, new medicines, and we believe drive innovation in the company into the future. Now on slide 46, one of the important priorities for me as CEO will be to rebuild trust with society. We as a company want to hold ourselves to the highest standards in terms of our values, our quality, our compliance. We want to be a leader in delivering value-based healthcare to healthcare systems and continuing to work to expand coverage of our medicines in underserved populations. This will be something we'll continue to focus on, and we believe will be important for investors to consider when looking at a company like Novartis. Lastly, I want to just turn to a brief comment on culture. Culture is what is the DNA of any company of our size with the legacy that we have, and it's increasingly recognized that culture is a factor that can make the difference between a very high-performing organization and a mediocre one. Now at Novartis, we have high levels of engagement, great collaboration, strong commitment to our core purpose and values. We believe we now have an opportunity to focus on culture to drive a more inspired, empowered culture, eliminating bureaucracy to enable the best ideas to come forward. Entering into a world where we have to attract the next generation of talent, getting this cultural transformation in place is going to be also a priority. I'd like to close just on one last comment before the closing slide on a recent appointment. We brought on Liz Barrett as the CEO of Novartis Oncology. We're thrilled to have her on board. She has 20 years of oncology experience across a range of geographies. She'll be succeeding Bruno Strigini, who we thank for his excellent contributions to the company, and we'll look forward to introducing Liz to all of you in upcoming interactions. So to close, we're incredibly excited about the future of Novartis. We're focusing Novartis as a medicines company powered by data and digital. We're entering a next growth phase with a full pipeline to sustain growth into the future, and we're transforming our productivity, culture, and reputation. We look forward to continuing to demonstrate to you the performance of the company in the quarters to come. So with that, I'll hand it back to Joe for the Q&A. Thanks, Vas. Okay, we are ready for any questions that you have. Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star two. You will be advised when to ask your question. The first question comes from the line of Vincent Meunier from Morgan Stanley. Please go ahead. Hello. Thank you for taking my questions. The first one is on corporate and capital allocation. You said earlier today that the stake in consumer is attractive. How should we read this? Does it mean that it has reached the right valuation point, or does it mean you still see upside in terms of generation of synergies? To put it more simple, what will be the rationale for keeping a stake in consumer given the clear picture you just described, dominated by transformative innovation, data-driven medicine, et cetera? Second question is on innovative medicine. Could you make comments on your ability to sustain your operating margins and even maybe improve the margins further going through the wave of patent expiries in the couple of years? Lastly, on Sandoz, the pricing pressure and the commoditization of the U.S. generics has worsened despite the improvements of core margin. What should we expect now? Any stabilization or further improvement for the top line? To which extent can you continue to maintain the profitability at this level? Thank you. Vas? Thanks for the question, Vincent. The GSK stake is a financial stake for us where we put these two businesses together with an expectation we would drive synergies. We have a clear strategic plan we have agreed on with the leadership of the consumer group at GSK. Now, what we see going forward is an opportunity to fully realize the value of that stake as that business plan is executed. We are continuing to monitor that. But we want to, of course, think about our timing of when we might exit that stake based on a value-creating situation. We think that is not been reached yet. It would be some more time before we think our value is fully realized. Hello, Vincent. On the innovative medicines margin, we absolutely think it is sustainable and the improvements also are sustainable. You saw on the slide from Vas that we actually expect over the next years to improve to industry benchmark. I think we have several levers. Vas laid them also out. One of them is, of course, over the next couple of years, less generic exposure. Then the growth drivers that Paul with Cosentyx and Entresto laid out and the whole oncology portfolio outside of Gleevec. Then, of course, all the productivity initiatives we have driven, and which we continue to drive. The majority of the technical operation savings, up to $1 billion, is not yet achieved. We are in a very good way. We are actually slightly ahead on that program, but still a lot to come. I believe both on the top line, on the productivity programs, we have a lot of margin improvement potential for the future. Thank you, Vincent, for the question on Sandoz. There is a few points to that, so I will try and go through them. We anticipate in 2018 the pricing pressure in the U.S. market to continue. Beyond that, we start to see that our portfolio mix starts to play a role as we move the portfolio far more towards the biosimilars, which we have coming through in the differentiated specialty products. Obviously, we filed a number of biosimilars in the U.S., and we will start to see those coming through. It is more of a question of timing. Going on to your core margin, to talk about gross margin, you have seen gross margin improve throughout the course of this year, and that comes down to the strategy we have been executing around geographical focus and portfolio product mix. We have been focused on the geographies which we think will drive long-term profitable growth and making sure that our portfolio mix can also do that. That is why that has continued to improve. We are going to continue executing that strategy. Obviously, with the biosimilars coming through, we are confident that that can happen. I think hopefully that answered your question. I think one of them in there was the top-line growth. Obviously, we forecasted a flat to slight decline, and that is taking into account the fact that we have got a good business, as Vas said, ex-U.S. that is growing in 2017, and we continue that growth in 2018. The pricing pressure in the U.S. is something that is holding back that growth. Although we have the biosimilars coming through, which is a very exciting portfolio both in Europe and the U.S., it is really the timing of that and the impact that can have on the top line for 2018. Hopefully that answers your question. Okay, next question please. The next question is from the line of Jeff Holford, calling from Jefferies. Please go ahead. Hi. Thanks very much, everyone, for taking my questions. First off, Vas, I wonder if you can elaborate a little more on where Novartis has an edge on data and digital. Are these skills and capabilities internal or external, and how and when will we see this manifest in terms of R&D productivity and margins? Is this through machine learning to discover drugs and targets, use of blockchain to increase clinical trial efficiency, or are those things still a way off? Second, just on Sandoz and the generics business, I wonder if you can just give us a bit more color on your thoughts on the future of that business, and if you could potentially give us a score of 0 to 10 of the likelihood of ever separating that would be interesting, I think. Just last of all, on Entresto and Cosentyx, when do you think we're going to reach the point of true stabilization on net pricing, particularly in the U.S., for both products now that access for both seems to have improved and be pretty good? Thank you. Thanks, Jeff. On data and digital, as Joe previously announced, we have now a global head of digital medicine that is reporting into the CEO, so reporting to me, Bertrand Bodson. He comes from actually the tech sector. He's worked in Amazon, he's worked in retail. He brings a very different mindset to thinking about technology and how technology can impact a business like ours. I would say there's three levels of how we're thinking about embedding data and digital. First is automation and how we can bring automation into all elements of the business to drive productivity. There we're really making concrete progress. Whether that's automating our safety case processing, automating our data management, automating our approach to supply chain, automating many of our FP&A and other elements within our financial work. This automation should, over time, deliver real productivity gains in the company. The second is how can we use this technology to help us make better decisions? There as well, we've rolled out a couple of platforms, one within Global Drug Development to help us choose clinical trial sites, to optimize our patient enrollment patterns, and to figure out when we need to intervene on studies. We've also got, you saw on the slide, a digital cortex at NIBR, which is looking to help us better identify the right target and identify the right molecule using these kinds of technologies and maybe not some of the older technologies which it has historically used. The biggest opportunity where we're still in the early days is to use deep learning and artificial intelligence to identify completely new indications, completely new medicines. There we are investing. We have a series of partnerships with external companies. We have partnerships as well with a number of universities. That is an area of investment because in the longer term, if we can use the power of data to find new drugs that are more high efficacy, find patient populations that are going to respond better, that is going to drive tremendous value for the company and value to society. So I would say we are in the early days, but we have made substantial progress, and stay tuned for us to make more concrete progress and give you real concrete outcomes. Now with respect to Sandoz is a $10 billion global business that is attractive, that has many different, good, highly performing elements. First, I think in biosimilars, we are a leader. We have double-digit biosimilars growth. We have over $1 billion in sales, a broad portfolio, more and more launches coming. Quite pleased with how we are progressing in biosimilars. Then similarly, when you look at our hard-to-make generics business, our work in injectables, inhalables, et cetera, I think this is also very strong performance that we have seen around the world. Also, when you look at retail generics outside the U.S., depending on the geography, but overall, we have had great performance over the recent years in our retail generics business. That ties in as well to the fact that we have a big tail of established medicines as well, as we do like any pharmaceutical company, both in pharmaceuticals and oncology. So there is a clear fit and synergy there. Right now our energy is focused primarily at looking at the U.S. oral solids business where it is a discrete business. It is a unique situation. There are significant pricing declines. At least in the medium term, we do not see a shift to that situation, and so we are assessing how best to optimize that given that dynamic. Paul, on pricing? Yeah, Jeff, thanks for the question. I will answer it mainly relating to the U.S. market. I mentioned earlier that Entresto will take the benefit of some small adjustments just to remove a few more PAs. Whilst we think the national picture is in good shape, there is one or two plans that we want to just make sure that we give the patient the best shot at getting the medicine. So we feel good about that. As for Cosentyx, I also touched on it, that 2018 is quite an important year between the two new entrants already here and one more to come. We felt it was important to be thoughtful, not rash, but to make sure that we had a strong position for 2018. The market will settle down after 2018, we hope, certainly in terms of share, and then we will get to decide how quickly price settles down, too. I think Entresto, I think some stability now really and going forward. I think Cosentyx, probably another year before we really see it settle, but we are pleased with our position. Next question, please. Great. Thank you very much. Thank you. The next question is from the line of Tim Anderson calling from Bernstein. Please go ahead. Thank you. High level question for Vas. As a new CEO, I am sure you are focused on making sure that nothing really goes wrong. But when you look ahead in 2018, can you just identify for us what you think could be the couple of biggest challenges that lay ahead that maybe make you worried? Is it something like the Cosentyx trajectory? Is it making progress on certain pipeline products? What would be the two or three things that are the greatest risk, in your opinion, in 2018? Second question goes back to Sandoz. You had mentioned biosimilars, an important driver today. Year-on-year growth, I think quarterly sales were about $300 million. But when are we going to really see that start to blossom in the numbers with Sandoz? Is that the sort of thing where we will see sharp acceleration in 2019? Is it more like 2020? Is there any way for you to kind of just put a stake in the sand and quantify how many billions of new revenues this could bring into the Sandoz P&L over the course of, let us say, five years? Are we talking a couple billion? Are we talking $5 billion? Anything like that. Okay, great. Thanks, Tim. In terms of what I would say the big risks are for 2018, I would outline three that are top of mind for me. One, we have a couple of binary events within our Sandoz portfolio that we need to go our way, and we are going to be watching them carefully. One is the timing of Copaxone 40, and then the other is the timing of the Advair generics approval. I think these are things that are difficult to predict. We have done all of the right things. I have confidence that our team is approaching this in the best possible way. But these are just items that are difficult to predict and have some volatility in the system. The second is going to be turning KISQALI. We need KISQALI to continue to perform towards where we have it hoped. I think the combination of the MONALEESA-3, the MONALEESA-7 data, as well as the fact that we are not as far behind Pfizer in Europe, should enable us to get pickup on KISQALI. But that is something we are watching closely. I hope that in totality, when you look at Rydapt, KISQALI, and Kyprolis, that those can really enable our oncology division to drive growth, the growth that we all hope for and expect from a business like that. I think those would be the big two on the top line. I think on the pipeline, man, the key is for us to deliver on RTH and VAST in terms of filing timelines. I mean, these are important medicines. We are on track. We feel good about where we are, but these are the two I think we are going to have to deliver on. Now in terms of Sandoz, to give my perspective on biosimilars. We've invested and built a broad portfolio. I think in Europe, it's really a tale of two worlds. In Europe, we're seeing very strong uptake. We're seeing an organization that's able to launch biosimilars with great success across multiple geographies. We're going to be launching more over the course of this year, as Richard can highlight. In the U.S., we have a dynamic where we know eventually there's going to be a significant uptake for these medicines. It's a healthcare system that desperately needs biosimilars to be successful to create fiscal space for new medicines. Payers, the FDA, HHS, are all on the side of biosimilars. We know we do have to overcome first the complexity of the patent hurdle in the U.S., and we have to overcome the complexity of the payer dynamic in the U.S. But we're fully aware of that. We're confident we can do it. I think it's not a matter of if, it's a matter of when. We would continue to expect biosimilars to be a multibillion-dollar business for us. Richard, any other additional thoughts? I think you summed that up really well, Vas. I think the way I look at it is similar. It's not an if, it's a when. If you look at the pipeline that we filed, adalimumab, infliximab, rituximab, pegfilgrastim, and that's all coming in the not too distant future both to Europe and the U.S., which are the largest markets. I think we've set ourselves up really well, and we've shown we can execute. Despite some of the challenging unknown environments, we can pivot well. So I think we're set for the medium term. It's a timing issue in the U.S. that we've got to manage carefully. Next question, please. The next question is from the line of Richard Vosser calling from J.P. Morgan. Please go ahead. Hi, Richard Vosser from J.P. Morgan. Thanks for taking my questions. Just a couple of questions on Sandoz, first of all. Just the assumptions you've taken into 2018 on generic Advair and Glatopa, what contribution you have in the guidance for Sandoz. Then just going back to the Biocon deal, could you go into a bit more detail around the rationale for that deal? Was it driven by gaining new products? I would have thought commercially, Novartis would have more presence than Biocon. I know you mentioned commercial, but that seems a lesser effect. I'm just wondering whether this signifies a thought that the opportunity in biosimilars might be less attractive, perhaps there's more competition. Secondly, on Alcon, could you just talk about the inventory fill that you've had benefiting the last two quarters? Should we think about this reversing, or is this an ongoing fill for the new material IOLs? Then just finally on PARAGON, you sounded quite bullish on the PARAGON trial. So just some thoughts on what's behind that. Do you have increased confidence in the interim readout or in the trial overall? Thanks very much. Richard? Thanks for the question, Richard. So on the assumptions on Advair and 40 milligrams Copaxone. So the assumption for Copaxone 40 milligrams is that we are aligned with Momenta, our partner on this, and we'll launch in the second half of the year. So the FDA and our manufacturing partner, Pfizer, can make that happen. On Advair, we have forecast we will launch that year into a competitive market. So that's the second assumption you asked for. On the Biocon deal and the rationale behind that, to build on what Vas said in his presentation, we are currently the number one biosimilar company in the world. We aim to stay the number one biosimilar company in the world. We believe having a broad and significant portfolio is important to do that. As much as we have the largest portfolio now, and we currently are developing products to increase that, we also see the rationale and the benefit of partnering with a company like Biocon to make sure we have an even more extensive portfolio. I think that's the rationale behind the Biocon deal. Mike? Just addressing the inventory position. With respect to what Harry Kirsch said earlier on, it's about 1% of our net sales in Q4. That was a underlying 5%. As we go forward, it's tough to predict the different shifts, et cetera. One things can offset the other. I won't predict things moving forward. What I will say is what I said in the last call, which was that most of the inventory adjustments took place in 2016 relative to our surgical business in the Asia market. Again, there's a lot of offsets going back and forth. Vas? Then on Entresto. The thing we've always highlighted about the PARAGON study is it's our unique endpoint that we've taken repeat hospitalizations. We've really learned from all of the past failed trials within preserved ejection heart failure. Now, the interim readout in 2018 is just that. It's an interim readout. I think the reduced ejection fraction study was a very unique situation where we had an astonishing P value, which enabled the study to be stopped earlier. I think in this case, because it's going to be likely an endpoint driven less by death and more by repeat hospitalizations, we're going to need all of the endpoints in order to demonstrate efficacy. So that's why I think the interim readout will be useful, but we really would still guide to a mid 2019 firm readout on the study. In terms of the opportunity? Yeah. Richard, as Vas has outlined, there is nothing specific that is getting us more excited or less. We will just go through the normal results. The only thing I would add is, in terms of executing with that indication, I think that is where we are much more confident than we have been previously. You have to remember that by the middle of 2020 or early 2020, when we would be campaigning, our working knowledge of the cardiology community, the patient populations, these things that are really an absolutely critically high level. So we think we can do more with it when we get it than we thought previously. And I think that is why we are excited about it. After all, there is no medical treatment, and we are the only real credible alternative in this space. Next question, please. The next question is from the line of Andrew Baum calling from Citi. Please go ahead. Morning. Three questions, please. First, I note you have an SGLT1/2 inhibitor in phase II. It is a 1,000-patient program, which is fairly substantial. Could you just help us to characterize the profile of this molecule versus the existing SGLT2 inhibitors, both in terms of weight loss, nausea, and I am assuming you would be able to do a phase III start as early as the beginning of next year. Then finally, is there any risk to your Entresto outlook from the established SGLT2 inhibitors given the anticipated data? Second, could you comment at all on whether you have seen any abscopal responses with your STING agonist in combination with your PD-1? You have been dosing it for a while now in combination. Then finally, for Vas, and I may have missed this, in which case I apologize. Following your ascension to CEO, who takes the head of development CMO spot? Thank you. Thanks, Andrew. On the SGLT1/2, this is a unique drug that targets equally SGLT1 and 2. The SGLT1 is expressed on the gut, whereas the SGLT2 is expressed in the kidney. Both transporters are involved with glucose transport into the intracellular space. What we saw in a phase II-A study with this medicine is a significant weight loss over a relatively short period of time of 12 weeks. We saw an extrapolated value that would indicate we could get from 15% to 20% weight loss, perhaps, out at one year. What we've done is we've enrolled a phase II-B study, which was one of our fastest enrolling studies that I can recall. That's now fully enrolled, and we're now waiting for the phase II-B result. We should have that result over the course of this year. If it was positive, we would then look to move it forward in obesity in a phase III trial that could start at the end of this year or early next year. Overall, the side effect profile is good. One of the things we are looking at is to mitigate any of the mild diarrhea with split dosing in that phase II-B study. With respect to the STING agonist plus PDR001 and the abscopal effect, I don't believe we've publicly disclosed anything further. I think our partner, Aduro Biotech, will plan to disclose more about the STING molecule's performance soon. I would prefer not to comment on that at this time. In terms of GDD, we've named an interim head. His name's Rob Kowalski. He's a PharmD. He's our global head of regulatory affairs. He's been our global head of regulatory affairs now for over six years. One of the most well-respected people in the space, knows all of the key regulators, knows all of our key programs. He'll be continuing to guide the ship as we complete the search for a successor. Paul, the risk to Entresto? To my understanding, the SGLT2 studies are on top of standard of care in heart failure, so we wouldn't expect anything other than an add. Next question, please. The next question is from the line of Graham Parry calling in from Bank of America. Please go ahead. Great. Thanks for taking my question. Vas, going back to slides 30 and 31, I wonder if you could help quantify the sales upside you're expecting by 2022 and just confirm the relative proportions. I'm afraid I did get my ruler out, and it looks as if you're proportionally expecting about half of your incremental to growth to come from Cosentyx and Entresto and new launches and about a third from oncology. Could you just confirm that it is representative? Secondly, on pharma margins, when you're talking about industry margins in the mid-30s, is that a target or an ambition? What absolute operating cost progression are you expecting to see to get to that sort of level? Are you thinking flat? Are you thinking inflationary growth? Then the rest coming from top-line leverage. Do you expect to grow margins each year through GILENYA and AFINITOR patent expiries in the pharma business? Thirdly, could you help us understand how to read the lack of renewal of the $5 billion buyback this year in terms of your appetite for M&A? Thank you. Thanks, Graham. We figured everyone would be taking out their rulers on slide 30. I think it would be it's not our intention to provide specific guidance when you look across those next five years, only to indicate we believe we can deliver solid growth over that period of time and we'll, of course, continue to keep you updated. I would say proportionally, we do believe the key growth drivers will be Cosentyx, Entresto, and the launches as the number one growth driver in the company, followed by the growth of the existing onco and recently launched portfolios. I think the relative contributions are accurately depicted because these are based on our own current forecast. The graph is based on our own forecast of our outlook. Now, in terms of the margin, I'll take a stab at it, and then Harry can add. When we look at this mid-30s, this for us is a goal to get to the mid-30s, and we believe we can deliver a margin improvement between now and 2020, and that's what we previously stated, and we continue to stick to that aspiration to deliver consistent margin improvement between now and 2020. Now, the way we do that is in part, we get through some of the patent expiry, particularly Gleevec. We have strong growth in terms of our key growth drivers, which now are getting to be accretive, as Paul mentioned, as well as continuing to drive strong productivity measures and resource allocation as the slide outlined. Harry? No, fully agree. I think it will be also a combination of very accretive top-line growth. As you know, many of our growth drivers are our own products or fully acquired, so there is no royalty burden, or very limited. Whilst the generic erosion, for example, GILENYA, there's a royalty on it. So we have also from a growth margin standpoint, I think some good opportunity and overall a combination of sales uptake and good cost management and all the productivity initiatives that we have set up for the company. So I think therefore, we are well established for sales growth for the five years as well as margin growth in the years. As you know, 2020 from a sales growth standpoint, will be a little bit challenged with GILENYA U.S. and AFINITOR U.S., but we believe with our growth drivers, we will also get through that. Buyback. On the buyback. So we have completed our up to $5 billion share buyback program in 2017. Under that program, we bought back $4.5 billion. We did buy another $700 million worth of shares back from employee participation programs as we have an ongoing commitment to always avoid any dilution from employee participation programs. Then, as now the AAA bolt-on acquisition has to be financed, we simply adjust our capital allocation priorities, and we don't finish the $5 billion, so to say, but we stop at $4.5 billion in 2017. Vas, I think Graham's question also was about your appetite on M&A. Does this signal a higher appetite for M&A? Yeah, we continue to have the focus on bolt-on acquisitions like AAA that build into our core therapeutic areas and that bring in new capabilities into the company. So we're actively and continually looking at those kinds of opportunities. I think as you all know, valuations in the sector continue to be quite high, so we are only going to pursue things where we are clear we can create value for the company and our shareholders. But nonetheless, that is the focus. Next question, please. The next question is from the line of Florent Cespedes from Societe Generale. Please go ahead. Good afternoon, gentlemen. Thank you very much for taking my questions. Three quick ones. First, for Paul Hudson, on Cosentyx. You explained that the product enjoys a strong potential beyond psoriasis, but could you give us an idea of the current sales breakdown by indications? Second question on immuno-oncology. Could we have some color on when we will have more visibility on the program, and in other words, when we should have meaningful clinical results, although early stage could be good to have such update. Last question on Sandoz. You explained that you want to focus your company on the more differentiated portfolio, but could you share with us what is the proportion of your business which is coming from difficult-to-make products, value-added drugs, beyond the biopharma sales that you disclosed? Thank you. Paul? Florent, thanks for your question. We do not disclose the sales by indication, by geography, but I can tell you we are growing in all indications in all geographies. I think one point that you know specifically from the publicly available data sets, I mentioned it earlier, is our performance in spondyloarthropathy, PsA and AS in the U.S. It does get a little bit overlooked, but to be market leader on new patients in the U.S. against Humira and Enbrel gives you some indication about our ability to execute, particularly in the indications outside of psoriasis. We do extraordinarily well in psoriasis too. Vas, may I? In terms of the IO results forum, we'll expect to release those results in the upcoming medical congresses. We would target ideally ASCO, but it might be at other congresses later in the year. You'll be hearing the results from those three combination studies in that timeframe. Richard? To give you an idea of the makeup of the business, I think, first you have to understand the business archetypes we've got. As Vas pointed out, we have the biosimilar business, which is over $1 billion now. We have a significant OTC business. We have a branded generics business, which is a business which we promote, which in itself isn't differentiated apart from the fact that we create brands. Those are significant aspects of our business. I think when you look at the U.S., our exposure to more of the commoditized business, I think Vas and Joe have already highlighted, is around $1.5 billion, where we're seeing that commoditized pricing pressure. But as I said earlier, we are aiming to move that business with the launches of our biosimilars significantly away from that portfolio makeup, as well as we will be introducing products that go through the 505 pathway, which by definition will also have a level of differentiation. Okay. Thank you very much. Next question, please. The next question is from the line of Steve Scala from Cowen. Please go ahead. Many thanks. I have a few questions. First, on generic Advair, if it were approved tomorrow, would you be ready to launch in the U.S.? What proportion of demand could you satisfy? You mentioned it would be a competitive market. Are you implying you expect other generics? That is the first question. Second, Vas, you did not mention the Roche stake. At least I did not hear you mention it. Any updated thoughts? Lastly, on Entresto, Harry, you mentioned Q4 adjustments. Would you please quantify? Thank you. Sure. We do not actually give guidance on when we are going to launch and assumptions around possibilities. What we are anticipating is we will launch it this year into a competitive environment. We anticipate other people will come to the market with Advair, just based on other communications from other companies with that product. That is how we have assessed and modeled our sales for 2018. On the Roche stake, there is no change really. It continues to be something we view as a strategic stake that we continue to evaluate on an ongoing basis. As soon as there is a change in our perspective, of course, we will let everybody know. Harry? Steve, actually, I did not mention anything on Entresto. Just to also make it clear, there were no adjustments. This is pure demand. Also, no stock and trade movements or anything. Thank you. Okay, next question please. The next question is from the line of Matt Weston calling from Credit Suisse. Please go ahead. Thank you very much. Two questions if I can. The first on Cosentyx. You highlighted how important access on growth is this year. The one thing that we had noticed is that one change to a number of healthcare plans, which has kicked in that manufacturers' co-pay assistance will no longer be allowed to contribute to a patient's deductible. I guess my question is, how do you expect that to impact growth, not only of Cosentyx, but in the whole of the specialty category going forward, given how significant that is to the pharma industry? The second question on Entresto, Paul. I note that in Q4, the release highlights that you launched in China. In terms of the underlying, or in terms of the growth we saw in revenue in Q4, can you walk us through how much of that was underlying patient demand versus channel filling? Thank you. Paul? Thank you, Matthew. Two quick points on Cosentyx, and the first one is, yes, I do think access is important for 2018. Like I said, this next 12 months has all the major players in the market. We want to come out of this year in a strong position in terms of preferred by dermatologists, rheumatologists with great access. We have made great progress there. I think you are referring to the co-pay accumulator that is a sort of emerging trend in the U.S. Just a first initial observation on that. The affordability and co-pay we put in to help patients in the U.S. is for patients. The biggest loser in any change across the sort of pharmacy benefit design would be the patient in this situation. It is causing a lot of confusion. It is an industry-wide phenomena, and it would affect everybody, give or take, where their medicine is in the benefit design, more or less. We have picked it up. We understand what the implications are. We clearly consider all scenarios. We are comfortable with where we sit. The industry has picked it up. Really the biggest loser in the short term is the patient, and that is not a good situation for anybody. Entresto China? Yes. Entresto China. We did get approved in China. Whilst we are not reimbursed, the team have done a rather excellent job. We have 2,000 patients approximately that have been initiated drug in the few months since launch, and that has meant that we have about $4 million worth of demand pulled inventory. There are no non-demand generated stocking effects. In fact, if you look at December's outturn from an inventory perspective, it is consistent with all previous months and the December before that. We feel very good about the underlying demand for Entresto. Next question, please. Next is Michael Leuchten from UBS. Please go ahead. Thank you for taking my question. If I could ask about the value of the volume, both for U.S. Entresto and U.S. Cosentyx, and I am looking at the quarterly sequential development here, where we seem to have seen a soft spot in Q2, Q3 for Entresto and another strong uptick of the value to volume in Q4. Whereas for Cosentyx, we have sort of seen a slide throughout the year. Could you comment on channel mix? Could you comment on rebate adjustments? Could you try to explain what that fluctuation in those two products, what is driving that? Thank you. First, I mentioned in the upfront presentation that what we've learned over the last year to two years is where the demand to bring in, and the appetite to bring in chronic patients who consider themselves well controlled but aren't. We see, during the summer, just a staffing and cardiology staffing point that bringing in and reviewing and titrating patients slows down on a chronic med on somebody that's thought to be but isn't well controlled. That sort of slowdown as we came out of Q3 is a phenomenon you see with new entrants with chronic diseases, particularly in cardiovascular. The step-up in Q4, is really just about our ability to execute and all the plans pulling through, no least productivity from the sales force. Cosentyx is interesting again. Remember we said at the beginning of last year that we do some thoughtful rebating. We had to grow volume throughout the remainder of the year because that's what makes rebating make sense, because you've bought the access. We've done that also this year. We intend to do that this year. The bit that I think gets missed also is that free drug programs got rolled in in the second part of the year, and patients that were on, that we were supporting, then became part of the overall, which of course has a small impact on the value per TRX. But we're really pleased and the evolution of the value is exactly as we predicted. Next question, please. Your next question is on the line of Kerry Holford calling from Exane. Please go ahead. Thank you. Just a couple of questions remaining, please. Firstly, a question for Harry Kirsch. Just looking at the disposal gains and the milestones that were booked in Q4 that fell within core earnings. I wonder if you could quantify those, so the vaccines milestones from GSK and the Sandoz disposal gains, please. Then just quickly on Praluent and Tasigna, I think Praluent was a little stronger and Tasigna a little weaker than we had anticipated in Q4. Just looking to understand whether there were any unusual items within the mix there, any rebate reversals or anything else to be aware of. Thank you. Harry? Yeah. Thank you, Kerry, for the question. First, the GSK milestone was a $450 million milestone, and any gain or loss above $25 million of one-timers is core adjusted. So, that was one of the reasons why Op Inc. was growing ahead of core Op Inc. The gain that we recorded on that milestone was net of what we had already in the books as a contingent receivable, so it was in the $340 million range, but again, core adjusted. Adjusted out. Adjusted out, yes. And the disposal gains. Overall, Sandoz had some small tail end strategic, non-strategic assets. As we have sometimes financial impairments or legal settlements on the negative side, also when we have small positives, we don't core adjust to not make it too complicated. So above $25 million, we do core adjust. When you compare year-over-year, it's a $25 million basic gain, which is 5 points of the core operating and growth of Sandoz. When you look at a year, and by the way, I also ask to look at the other income expense for the company. There's no change on a full year basis. Also Q4 over Q4, there's nothing. We had some small divestment gains, which we didn't core adjust, and had some small negatives, which we didn't core adjust on a corporate level. And Bruno. On Tasigna, we continue to see some good growth with a high single-digit growth. We updated rather our label both in Europe and the U.S. with the TFR indication, and we do not see a change in the dynamics between Tasigna and Praluent. Next question, please. The next question is from the line of Seamus Fernandez from Leerink. Please go ahead. Thanks very much for the question. The question is around immuno-oncology and some of the progress that we are seeing there, as well as the research portfolio advances in lung cancer. Can you just give us a general sense of what you have learned about the mechanism of action for ACZ885 that has the company moving forward so aggressively with a costly program there. I have to assume that you are learning quite a bit about the mechanism of action to drive that forward, so just love to know when we might learn more about that. Second, there are three programs that are listed on one of your slides as advancing into different settings from phase I to phase II, LAG-525 with triple negative breast cancer, the c-Met program with a PD-1 combination in lung, and then your adenosine receptor product as well. I guess what I am trying to understand is, when I look at value creation, at least investor-related value creation, there is probably a limited number of assets that have gained significantly, one in particular being a pegylated IL-2 that has gained a lot of investor attention. Your company knows IL-2 very well, knows IO well. Can you just help us understand how we should think about perhaps those data relative to the kind of metrics that are bringing you forward into phase II? Thanks so much. Yeah. First, just general perspectives on IO. I think when you take a step back, you see that the only agents we have seen with significant efficacy in getting towards patients are the CAR T therapies, anti-PD-1, and anti-CTLA-4. Across the broad spectrum of other agents, a lot of activity, historic levels of activity, over 1,000 trials, but in terms of actual hard data that suggests that there is going to be a significant breakthrough is still limited. I think that is the overall context that we have to take when looking at IO. So we hold a very high bar, and when we look at all these programs, we do not feel like we want to rush in and just chase small signals. We are really looking for something compelling before we take it into later stages of development. To take the questions in turn. With canakinumab, what we have been able to do, in addition to looking at preclinical work that is quite extensive and is part of the reason both FDA and EMA felt comfortable with us going forward, we have been circulating tumor DNA work on the patients who had cancer in the course of the cancer study to understand better their profile, what was their potential stage of disease, how did the drug act on this patient. So it is based on that understanding we are moving forward, in the adjuvant study and in the second line where we feel clear on our path forward. In the first line, we are going to have to carefully now think about what is the best study design in light of the Keytruda recent data, and that is something we are reflecting on. So I think we will keep you updated as we think through the first-line trial design. Now, when you think about the second-generation IO programs, the three you mentioned, we have seen early evidence of efficacy in the clinic, which is why we take those into later phases. When we look at data such as the pegylated IL-2 as well as the IDO, which is of course out there, we are very interested to see, again, with control arm data when there is a PD-1 mono arm, what is the incremental effect of the added agent? That is something we have to just all carefully look at. The agents we have taken forward here, we have tried to be rigorous about trying to look at, is this PD-1 alone, or is this really a combination effect? Of course, we cannot answer definitively from small studies, but that is in the back of my mind as I look at all these programs. Given the variability in the patient profiles, the variability in the biomarker profiles. Without good control arms, it is always difficult to really ascertain what is the additive benefit of the new medicine. I think we have time for one final question. The last question is from the line of Marietta Miemietz from Primavenue. Please go ahead. Good afternoon. Thanks for taking my questions. I have one clinical question on your EGFR blocker, nazartinib. Can you share the design of the phase III trial with us that will be the basis of your 2020 submission in lung cancer, and maybe speak about positioning more broadly? I haven't actually been able to find any phase III trials on clinical trials, and it looks like you're still playing around with all sorts of different combos. I wasn't quite sure what to make of your pipeline chart there. Then a commercial question on Kymriah. In the press release, you spoke about the progress you're making with the treatment centers. Can you just give us a little more color on the characteristics of the centers that do and don't get certified, I.E., what are the triggers for getting certified, or what are the reasons for holding off on certification? Is there actually much overlap between the centers that get certified for Kymriah and those that get certified for Yescarta on the grounds that once you have the expertise and infrastructure in place, you may as well go for both? Or is it just more economical for the centers to just go for one and operate on the assumption that sooner or later both drugs will be licensed for similar indications? Then finally, I just wanted to clarify with Harry Kirsch on the core tax rate. The one-off effects that you mentioned in your press release that affected the reported tax rate, have they also been included in your core tax rate? If so, what would the core tax rate have been in 2017 without these? That brings me onto the core tax rate for 2018. I'm actually very surprised to hear it may go up. On my math, the U.S. tax reform could give you a boost of 5 percentage points or so at the group level. I appreciate some of that may not materialize, and you have incomplete visibility, but your guidance really suggests a massive increase in the underlying tax rate, even though it doesn't seem that the shift of your product mix to high tax jurisdictions is more pronounced this year than in the past. So are you just being conservative and don't want to guide for, let's say, a low teens rate until the dust settles from U.S. reform? Or is your base case really that mix effects largely wipe out the benefits from U.S. reform? If so, should we expect your tax rate to keep on creeping up over the coming years and ultimately move into, let's say, the twenties? Thank you very much. Yeah, let's start with tax, because that's a big question. Go ahead, Harry Kirsch. Yeah. No, thank you very much, Marietta. First of all, we have one adjustment, I think you refer maybe to that, because of U.S. tax rate, where we had to assess our deferred tax assets and liabilities. That's a $61 million tax expense. Yeah. Very much lower than some of the other U.S.-based companies who have billions, because we have a very different structure, IP and headquarter in Switzerland, very limited, not really earnings, not repatriated, so all of that, very limited, and that is not in the core tax rate because of the one-off. In terms of our, I don't want to quantify what we think as the range of potential U.S. tax benefit. It's certainly not up to the number you mentioned. It's a smaller benefit that we see. But as I mentioned, many details have to be first clarified with the IRS before we can be here more specific. That's why we guide to either it's in line with what we have or 16%. Over the years, I see a range overall between 15% and 17%. The tax, it's very hard to predict, but I don't see that it would go outside of that range. Bruno on Kymriah. So, 33 centers have been REMS certified, and about 25 of them are fully operational. Fully operational means that there is a contract in place. And we're very pleased with the launch. Our plan was, given the small population in DVT/K, allow it to cover 30 centers, and we are there or there about today. In terms of certification, it's very product specific, and therefore, we are going for certification of the sites for our products while the competition has to do exactly the same. Now, I can't comment on what the centers, each and every centers will do in terms of certifying different products or just one. And overlap, are you seeing a high level of overlap? Not really, no. Okay. Vasant? Finally on the EGFR, we have a third generation EGFR, as I think many of you know. I know the EGFR landscape has been shifting now given some of the recent challenges for some of the players in the space. Our core goal in pursuing a third generation EGFR is to use it in combination with INC280, our c-Met inhibitor, which is one of the primary resistance mechanisms to third generation TKIs. The EGFR study will get posted in due course, but I think our overall strategy is to assess can we get differential efficacy with the combination with INC280. Thank you very much. Thank you all very much for joining the call. A big thank you to Joe. This is Joe's last conference call. We are grateful for all that he has done for the company and wish him well on all of his future endeavors. I look forward to speaking to you at our next quarterly call and continuing the dialogue on how we drive Novartis into the future. Thanks very much. Thank you for joining today's conference. You may now replace your handset.

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