Good morning and good afternoon, and welcome to the Novartis Q2 2018 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 and zero. With that, I would like to hand over to Mr. Samir Shah, Global Head of Investor Relations. Please go ahead, sir.
Thank you, and good afternoon, everybody, and thank you for joining us for the Novartis Q2 earnings call. Before we start, I just want to read the safe harbor statement. 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 us at the Securities and Exchange Commission for a description of some of these factors. With that, I'll hand across to Vas.
Thank you, Samir, and thanks everyone for joining today. With me today in Basel, I have Shannon Klinger, our legal counsel, Liz Barrett, our CEO of Novartis Oncology, Richard Francis, CEO of Sandoz, John Tsai, our new Head of Global Drug Development and Chief Medical Officer, Paul Hudson, CEO of Novartis Pharmaceuticals. We have Mike Ball, the Chairman-designate for Alcon, and I'm also proud to welcome David Endicott, the new CEO of Alcon, and Harry Kirsch, our CFO. What I'd like to do today is give you an overview of the results as well as some of the data and some of the other highlights we have for the quarter. I'll turn it over to Harry for a financial review, and then we'll try to move quickly to Q&A. Moving to slide four.
This quarter and really for the whole first half of this year, we've been continuing our transformation into a focused medicines company. When you go back to 2014, pre the transformation, we really had a mixed business, more of a healthcare conglomerate. Now with the actions we've taken over the first half of the year, we've really shifted the company post the proposed Alcon spin-off to 100% medicines company. When you look at it, we completed the divestment of the GSK OTC stake. We proposed 100% spin off of Alcon. We're prioritizing our therapeutic areas as well within Innovative Medicines, including a move out of infectious disease research. We've also made, I think, important strategic moves, completing the acquisition of Advanced Accelerator Applications, completing the acquisition of AveXis, and starting to bring in more platform therapies around gene therapy like Luxturna. Moving to slide five.
In addition to the strategic progress we've made in the first half, I'm also pleased with our operational performance. As you saw in the quarter, we had solid growth with operating leverage. Sales were up 5%, and core operating income was up 7% in constant currencies. You can see strong performance across Innovative Medicines and Alcon. Sandoz was a mixed story with strong performance outside the U.S. and a continued challenging environment in the U.S. Moving to slide six. In Innovative Medicines, we had very good performance across our key growth brands. Cosentyx came in at a $701 million and Entresto at $239. In the subsequent slides, I'll walk through some of the key highlights for many of these brands. Taken together, you can see that we're delivering on our recent launches as well as our key growth drivers across the portfolio.
Moving to slide seven. Cosentyx, our leading IL-17A inhibitor, showed strong growth in Q2 with +40% in constant currencies. When you look at the real drivers of that performance, it's been driven by demand and enhanced access. Paul can comment more about it in the Q&A. In particular, TRX growth was up 81% versus prior year. I also think we're seeing now what we've described in the past that within psoriasis you're seeing a bifurcation of the market into the IL-17A inhibitors and the IL-12/23, and we are the leading IL-17A inhibitor. We're seeing continued growth in rheumatology, where recent clinical data, I think, has only further solidified that IL-17A is the mechanism of choice in ankylosing spondylitis, and therefore enabling us to grow in the medium to long term in rheumatology. Moving to slide eight.
Entresto, which of course is the standard of care now in heart failure, saw sales more than double in the second quarter to $239 million. Underlying demand remains strong in the U.S., but we also had solid ex-U.S. sales and are continuing to see important access decisions around the world in places like China as well as in Europe. The news flow supporting Entresto's momentum is really ramping up now with CHAMP-HF showing improvements in quality of life, and we know the quality of life story is very important to physicians and Entresto patients. We will have the PARAGON-HF interim analysis in Q3 with the completion of the trial in 2019. We'll have a number of phase IV studies reading out over the course of the coming quarters to further create news flow and support the overall profile of Entresto. Moving to slide nine.
We also had an important launch in the quarter with Aimovig, our first in class migraine prevention drug with our partners at Amgen, and it's off to a strong start in the U.S. We really see unprecedented demand for this product, which really reflects the strong unmet need for migraine patients for a better preventative therapy. We believe this bodes well for Europe. Paul can answer more detailed questions on how the launch is going, but you did see we had the CHMP positive opinion in May with an approval expected in Q3. Importantly, we had an Australia registration in July, and we've already received approval as well as Switzerland. Globally as well, Aimovig is starting to ramp up. Moving to slide 10, in oncology, we saw continued growth with our growth drivers, Promacta, Revolade, Mekinist, and Tafinlar and Jakavi.
This is consistent with what we've seen in prior quarters. In particular, we received FDA approval in adjuvant melanoma for TAFMEK, which we think will be important for us to continue to drive this brand, particularly given the competition that, of course, has come up in the class. We think treating patients earlier in the adjuvant setting will enable us to continue to drive Mekinist and Tafinlar. We also have a triplet study, that will read out next year with our PDR001 anti-PD-1 antibody. Taken together, these brands are doing well, and I think Liz and the team are doing a great job driving these around the world. On slide 11, you see an update on our oncology launches, and Kisqali, we've now launched in many countries across Europe and are starting to see some momentum build outside the United States.
In the U.S., we're refining our messages and continuing to work on how best to position Kisqali. I think a real key moment for us will be the approval of MONALEESA-3 and MONALEESA-7 data, which will enable us to have a full label for physicians to then fully consider Kisqali's benefits and overall profile. That will enable us to really fully understand the trajectory of the medicine into the future. Now with Kymriah, we had Q2 sales of $16 million. The pediatric ALL launch is going well. We received FDA approval in DLBCL as well as positive opinions on CHMP in both indications. I'd say it's early days, and we've always said this is going to be a five-year journey with Kymriah to really get it to be the globally successful brand we want it to be. On manufacturing, we have seen some variability in our product specifications.
This is something we're looking at now in DLBCL to make sure that we can continue to ramp up the demand. We feel confident in the overall longer-term outlook for Kymriah . Now with respect to Lutathera, this is a brand we're very excited about. We've seen very strong performance in the United States, both for the NETSPOT diagnostic as well as for the Lutathera therapeutic. It's certainly exceeding our expectations. We're seeing a very fast ramp, that's something we'll keep an eye on and continue to keep you updated on. I think it's already showing the Triple A acquisition is starting to reap benefits for our oncology portfolio. We look forward to bringing forward additional radionuclide therapies using the same platform in the future. Now, moving to slide 12, both Sandoz and Alcon continued in line with their recent trends.
As I mentioned, Sandoz net sales were down 2%, primarily impacted by U.S. price erosion. Ex-U.S. sales grew 5% in constant currencies. Importantly, our global biopharmaceutical sales continued their momentum. We're continuing to work through some of the regulatory setbacks we had in the U.S., overall, we feel like our biopharmaceuticals momentum is where it needs to be, particularly given the high interest of U.S. policymakers in biosimilars. In Alcon, we continued our strong growth momentum with net sales up 5% and core operating up 14%. Mike, David, and the team are doing a great job continuing to drive very strong growth in surgical, as well as to manage in vision care as we wait for our next wave of vision care innovations to kick in. Now, moving to slide 13, we're advancing our pipeline of potential blockbuster launches.
We've already made good progress in 2018, advancing the three medicines that you see listed. We're preparing now for up to 10 additional blockbuster launches over the coming two years. We were very pleased by the external recognition from Evaluate Pharma, which really, as you know, aggregates across a range of different forecasts. In that evaluation, we were the number one company in value creation between 2018 and 2024 with our existing pipeline, as well as number one in value creation from advanced therapies with AveXis as well as Kymriah. We feel like the pipeline is where it needs to be, and we're really preparing now to launch these medicines well. Moving to slide 14, two projects I wanted to highlight are BAF and AveXis.
BAF312 siponimod is the first and only drug that's shown to reduce disability progression in a true SPMS population, as you all know in the EXPAND study. We have done quite a bit of work to really explain to regulators as well as to the physician community that this impact was independent of relapses. When you look at the left-hand side of this chart, you can see some of the analyses that we've done, which consistently show independent of relapse that you have an effect on disability progression in these patients. Then on the right-hand side, the other element of our discussions has been really showing the quality of life benefit. This is cognitive processing speed, a data we recently presented. You can see over time, clear improvements in patients treated with siponimod versus those receiving placebo. Importantly, the SPMS submission was completed in Q2 2018.
We are awaiting file acceptance. We did confirm earlier today that we have used one of our priority review vouchers with BAF, we anticipate assuming regulatory approvals that happen on time in early 2019 in the U.S. Also post our discussions with the European regulators, we will move forward with a SPMS submission in Europe, which we expect to make in Q3 2018 with a potential approval in Q4 2019. Moving to slide 15 and AVXS-101, our breakthrough therapy for patients with pediatric SMA type 1. We can now confirm our U.S. regulatory submission in half two 2018, earlier today, I put a little bit more clarity on that to Q3 2018. We had a discussion with FDA pre-BLA meeting in which we confirmed the commercial product is comparable to the product used in the phase I trial.
In addition, that our phase I trial data is sufficient to form the basis of the BLA submission. We'll also provide clinical data from the phase III STR1VE data as part of the submission during the submission. Overall, this integrated review of the safety findings was supportive of moving ahead with the filings. This is very positive news and enables us now to advance this towards submission. Another important element that happened in HHS policy circle is newborn screening for SMA is now officially recognized by the U.S. and HHS for inclusion in the recommended screening panels at the state level. I'll explain a little bit more why that's an important part of the longer-term story for AVXS-101 in a moment.
First on slide 16, I wanted to just go through some of the data just to clarify, given the other data that is out in the marketplace. We really believe the data we have now confirm AVXS-101 could be the foundational gene replacement therapy for SMA type 1 because it has rapid onset, sustained efficacy, and that you see those effects regardless of the severity of treatment. This is the phase I study. You can see on the left-hand side of the chart that shortly after the infusion of AVXS-101, you can see rapid increases in the CHOP-INTEND score, which is a measure that is used now across trials for this disease. You can also see that the scores for the CHOP-INTEND get into the 50, 60 range. A perfect score is 64 on this test.
You can also see the dashed line on the chart, which is at least to our eyes, given all the caveats of cross-trial comparisons, where we have seen the oral therapies typically enable children to get to. You can see a highly efficacious therapy at a single infusion that can be given to patients with really profound results. Importantly as well is we really focus on some of the specific quality of life benefits. When you think about the ability to swallow, only four of 12 patients were able to swallow safely in the study, and 11 of 12 now are swallowing safely for oral feeding at month 24. We continue to see improvements in these children as well over time. Very striking data from AVXS-101. We are not stopping with this study, of course.
On slide 17, you can see that we are expanding across first SMA type 1. The START study already has 12 patients enrolled. This is the confirmatory study in type 1 SMA. The STR1VE study has been initiated. This is a single IV dose, and patient enrollment is complete. You can also see that we have initiated now the STR1VE-EU study, which will form the basis of our EU filing. We are moving into SMA type 2. We have started in Q1 2018, the SMA type 2 with an intrathecal dosing. Then, as I mentioned earlier, the importance of newborn screening. We are also now advancing the study in pre-symptomatic SMA.
These are children identified in newborn screening, genetically identified of having SMA, who then can be treated with gene therapy, and at least potentially could have a life in which they never even know that they have SMA, which would then really enable us to potentially eliminate a disease. That is something we are working towards as well, and that trial was initiated in Q2. Taken together on slide 18, AVXS-101 is ready for launch in 2019. We are on track from a regulatory standpoint, EU submission in 2019. We also have Japan pre-submission in Q3 2018. I would highlight in the U.S. that we have orphan designation, we have breakthrough therapy designation. In EU, we have PRIME designation, and in Japan, we have Sakigake designation, all showing how advanced and remarkable this therapy is.
Clinical readouts are along the lines I just said. Importantly, our manufacturing scale-up, our commercial scale-up is already underway in the facility in Chicago. We've now started work on 170,000 sq ft facility in Durham, North Carolina, which should be fully operational in 2020. With that, I'll hand it over to Harry.
Yeah. Thank you, Vas. Good morning and good afternoon, everyone. Let's start on the financials on slide number 20. As usual, my comments refer to growth rates and constant currencies unless otherwise noted. As Vas mentioned, we delivered solid performance in the second quarter with net sales of $13.2 billion, growing 5% in constant currency driven by Cosentyx, Entresto, Oncology, and Alcon. Core operating income was $3.5 billion, growing 7%, with margin improvement as higher sales and improved gross margin more than offset growth investments. Free cash flow grew 10% in US dollars to $3.6 billion, driven by strong operating results. The net income number you see here obviously benefited from the sale of our stake in the GSK/OTC joint venture. We recognized a $5.7 billion net gain on completion of this transaction, increasing the group net income to $7.8 billion this quarter.
Slide 21 shows quarter two 2018 core EPS of $1.29, growing 4%. I just want to highlight here again that from the 1st of April 2018, we stopped recognizing core net income from the OTC joint venture in associate companies. As you can see from the slide, in quarter two 2017, OTC joint venture core net income contributed $0.04 to core EPS. If you would take out the OTC joint venture core net income from Q2 this year, core EPS would have grown about 7% in constant currency and 9% in US dollar. Very much aligned with the core operating income growth. On slide 22, we see the quarter two core margins of the group in each of the divisions. Overall, the group core operating margin was 26.9% in quarter two, which is up half a point in constant currency versus prior year.
This was driven by the strong performance of the Innovative Medicines division and Alcon. The Innovative Medicines division core margin increased to 32.2% of sales. This is mainly driven by continued uptake of Cosentyx and Entresto, as well as manufacturing productivity gains. On slide 23, just want to reconfirm our full-year group guidance. Group sales are expected to grow low to mid-single digit. Of course, now assuming continued good momentum, including the launches, sales growth could be at the upper end of the range for the full year. Group core operating income is expected to grow mid to high single digit, driven by the sales performance and productivity programs, partly offset by growth investments and the AveXis development efforts. By division, we reconfirm the Innovative Medicines guidance at mid-single digit growth. For Sandoz, reflecting the first half-year performance, the sales guidance revised downwards to low single-digit decline.
We are revising Alcon guidance upward to mid-single-digit growth, again, following strong sales growth in the first half. With that, I turn back to Vas.
Great. Thank you, Harry. Moving to slide 25, just in conclusion, we're continuing our transformation to a focused medicines company, and we're pleased with the progress we're making on that front. We delivered a solid operational performance in the quarter, advanced our pipeline, including our potential blockbuster launches. As Harry just mentioned, we're on track for our full-year guidance. With that, I think we can open the line for questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypads. If you would like to withdraw your question, please press star two. The first question is from the line of Jo Walton from Credit Suisse. Please go ahead.
Hello. Thank you very much for answering my question. I've got three quick ones, please. You mentioned with Kymriah that you were having some issues with product specification. Could you just tell us what in practice that means? Does it mean that your people are asking you to produce product, but you are saying, "No, we can't at the moment until we understand what the situation is." Effectively, this is actually delaying the growth of Kymriah. Secondly, on Cosentyx, I wonder if you could just tell us a little bit more about any patient assistance programs that you're effectively through not needing, a little bit more on the access side of things there, because we're still seeing that your sales growth is materially less than your prescription growth. There does still seem to be some effective price decline there.
I wonder if you could just tell us a little bit more about how we should be thinking about the recent Gilenya IPR patent decision. Effectively, on the face of it, that suggests that product could have a much, much longer patent. Of course, formulation patents aren't as strong. If you could just guide us as to how we should be thinking about that, please.
Thank you for the questions on Kymriah. I'll hand it to Liz.
Hi, thanks for the question. I think the most important thing to let you know is that the variability that we've seen in the commercial specifications, which isn't unusual with a new therapy as you launch into a new target patient population, is that we have still been able to deliver final product to the majority of patients. It's really more of a specification, and we're working directly with the FDA on trying to solve the issue as well as looking at new ways to improve our output to meet more commercial specification on Kymriah. I think the most important thing to us is that we're able to deliver the therapy to the patients who need them.
Thank you, Liz. On Cosentyx, Paul?
Thanks, Jo, for the Cosentyx question. Nothing new on patient access. We continue to run at a sort of low rate in terms of those that get it. You probably noticed our value per TRX improved actually in Q2 over Q1 and was closer to what we had in Q4. With pricing stable and rebates stable, we hope that will be maintained through the rest of the year. The comment about volume or TRX growth and the dollars. For the quarter, we were 33% up in dollars versus the same period last year, but 65% up in TRX if you normalize the removal of the free drug programs that we had in last year. It's exactly where we expect it to be. We're very pleased with where we are as we go through Q2.
Remember the enhanced position we took in the first line setting in Q1, plays out throughout the whole of the year. You make an adjustment in Q1, you know this, I think already, but then you gather momentum on volume. We're exactly where we said we would be. I'm looking forward to the remainder of the year, and I think it's probably worth reiterating that we're very committed to delivering on consensus, which we feel is particularly up to Q2, is well within reach.
Great. Thank you, Paul. On Gilenya, the guidance we've given is that, the composition of matter patent goes off, in Q3 of next year, as you all are well aware. The dosing patent that was recently held up in the IPR process goes off in 2027. We believe strongly to defend our IP, and we have taken action to defend our IP against the generic companies that intend, or have at least stated they intend to launch, versus Gilenya next year. That's as much as we can say on this topic at this moment in time. I think we could realistically provide more updates mid next year, but until that point in time, this is what we know, and all I can say is we are vigorously defending our patents that have been now upheld at the IPR. Operator, next question.
Thank you, Jo. The next question is from the line of Richard Vosser from J.P. Morgan. Please go ahead.
Hi. Thanks for taking my question. Three, please. Firstly on Gleevec. Could you talk about the trends you're seeing rest of world and how we should think about the growth in emerging markets and with the potential declines in the EU? What are the relative magnitudes of the movements in those two discrete geographies? Second question on Afinitor. Pretty much substantial pickup in Afinitor for 2 quarters in the U.S. Perhaps you could talk about where the growth is coming from and how sustainable it is. Finally, one question on Alcon. Obviously, very strong implantables growth. Perhaps you could give us some more detail on the breakdown of the contribution from CyPass and normal IOLs and AT IOLs to the growth of implantables. Thanks very much.
Thanks, Richard. I'll hand it to Liz for Gleevec and Afinitor.
Yes. Hi. On Gleevec, I think the way to think about it is that in the U.S. and Europe, we are continuing to see declines as you would expect to see in both of those markets. We are seeing growth, as you state, in a lot of our emerging markets. At the same time, it's good to know that China, we received approval for reimbursement of Gleevec in China, so we're seeing some growth of Gleevec there. I think that's all I can really say on what we expect to see on the growth of Gleevec or how we expect Gleevec to play out.
I think the most important thing with Afinitor is a few things. One is we're starting to see where we saw some decline originally in the U.S. based off of the CDK class, you're starting to see now as those progress, you're starting to see that decline level off. We also received, we have approvals and growth in emerging markets with Afinitor. We have a small indication for TSC, and we're actually seeing some nice growth in that area. That's really driving the Afinitor.
Great. David, on implantables?
Yeah, thanks for the question. On the surgical business, we had a good quarter. The multifocal implantables grew slightly, mostly built off our Clareon AutonoMe launches in Europe and kind of a stability in emerging markets. The mix went favorable to AT IOLs, where we showed really strong growth. PanOptix leading that as we move that around the world, but also ReSTOR active focus in the U.S. The CyPass piece is obviously an exciting market for us. We're continuing to train physicians. We trained up to 1,000 so far. We intend to train another 1,000 by year-end. We're excited about what's going on there. We were fortunate also to roll out the CyPass Ultra system. I think we've got good momentum on CyPass, kind of as expected.
Great. Thanks, David. Next question, operator.
The next question is from the line of Michael Leuchten from UBS. Please go ahead.
Thank you. It's Michael from UBS. One question for Harry and one for Richard, please. Harry, Q1, you were very clear that in Q2, you were looking for a slower growth than the company was able to deliver. Outside the drivers that you outlined, was there anything else that actually allowed you to come in significantly ahead the predicted low to mid-single-digit EBIT growth that you had sort of proposed for Q2? On Sandoz, we're seeing a sequential worsening of the, at least at the EBIT performance, especially if I take out the reversal of the litigation provision. Is that still a scenario where you think pruning of the portfolio is enough, as you outlined at the Capital Markets Day, to reposition the company, or is there a slide now in the U.S. where maybe more drastic measures are needed?
If I could tag one on Cosentyx, Paul, you said in Q1 there was some low inventory levels. Has there been a rebuild of inventory that contributed in Q2, or is it a clean number? Thank you.
Thank you, Michael. First, Harry on Alcon.
Yeah, Michael, thanks for the question. I would say overall, across our portfolio, we had a slightly better growth momentum. Also, our productivity efforts in manufacturing paced up very nicely. On the other hand, of course, we also have to offset the AveXis piece. That's why good sales momentum, bit better Q2 core operating income. That allows us also to stay then the core operating income guidance
For the year as AveXis comes in.
Thanks, Richard. On Sandoz?
Thanks for the question, Michael. The way we think about gross or return on sales or EBITDA as you talk about it is obviously we're seeing a decline in the U.S. of 17% for this quarter, and as Vas pointed out, a growth in the rest of the world. Within that decline, we have already started and done some significant pruning, and we continue to do that. With the biosimilars coming into our portfolio more and more across the world and into the U.S., we see our portfolio shifting. Now, that's leading us to have a better gross margin. As you know, our gross margin has improved now, I think, for six or seven quarters on the trot. I think the strategy is playing out.
I do believe we're going to be in a position to start growing margins again, but we obviously have to manage our portfolio through this downturn in the U.S., which we are doing. We will come out of that, but we have to be realistic about the time that's going to take.
Thank you, Richard. Paul, on Cosentyx.
Michael, thanks for the question. Yes, there was an inventory effect in Q1. Actually in Q2, it didn't bounce right back, so our days on hand remain very low against the historical data. What we know from that is pretty much the entire kick-up in demand is literally that, just demand. Hence why we're very pleased with the underlying performance and what it means or could mean for the rest of the year.
Thank you.
Thank you, Paul. Next question.
The next question is from the line of Andrew Baum from Citi. Please go ahead.
Three questions, if I may. First, could you address your move to decline to take price increases, following Pfizer's lead, and more broadly, if you could share with us your expectations for movement, following the announcement of the blueprint in terms of shifting away from the rebate structure. Second, for John, Novartis has an enviable portfolio of immuno-oncology assets and combinations. You must have some significant data from some of those trials in-house. Could you give us some indication of when we may expect early indication of data, both safety and efficacy from some of those combinations beyond the LAG-3, which I think is the only one I've seen presented publicly. Finally, in the wake of the generic valsartan withdrawal from some of your generic competitors, should we anticipate any uptick in brand Diovan as physicians seek alternatives for patients? Many thanks.
Thank you, Andrew. First on the topic of price increases, we looked in June at the overall situation, the blueprint coming out, and made the decision prior to some of the recent events that we were going to withdraw any further price increases and make a commitment internally that we're not going to take any further price increases for the remainder of 2018. We thought that was prudent given the dynamic environment that we're currently in, a lot of discussions around how to shape policy. Of course, our net prices overall are flat to declining in the U.S., in any case. We think this was a prudent approach given the dynamic environment.
I think given the various discussions on the blueprint and the various levers, we are supportive as a company on reforming Part B, reforming 340B, enabling broader and faster access to biosimilars, reforming the rebate structures and how rebating works in the United States. I think there's going to have to be a lot of discussion, of course, and a lot of input I'm sure the administration is going to receive before actually being able to enact any changes. What we plan to do is watch how this evolves over the remainder of this year and then chart a course going forward for 2019 moving ahead. I'm certainly fully engaged in trying to be involved in those discussions at the pharma level as well as in D.C. generally. On IO, John, your perspectives?
Yeah, just a couple of things. Thanks for the question, Andrew. Just regarding our approach for IO therapy as well as some of the products in oncology that we have in our portfolio. First in our portfolio, as you know, we have a BYL719, which is planned indication in combination with fulvestrant for post-menopausal hormone positive, HER2 negative advanced breast cancer in patients with PI3 kinase mutations. That's something that we're looking forward to getting the results on before the end of the year. In addition, I know Liz had mentioned earlier in terms of our filing with the FDA and Kisqali and getting results from the MONALEESA-3 and 7 results from the FDA. We're hoping to hear back fairly soon on that filing, as well as starting the trial in adjuvant breast cancer in Kisqali.
In addition, as we look forward, we also have the INC280 single phase II study that's underway in non-small cell lung cancer. That's currently in our portfolio.
Maybe I'll step in, Andrew, just on the IO portfolio. I mean, John's only been here for a few weeks. Just where on the immuno-oncology portfolio specifically, we are of course, continuing to hold ourselves to a high standard looking for single agent activity, or if it's in combination, we need to see something pretty incredible to really want to take it forward unless we're sure of a single agent effect. We are seeing some promising things on one or two of the compounds, but it's still very early. The most promising opportunity we have right now, as I mentioned, is the triplet MEK/Taf/PDR001 , which is now in a pivotal study, which we expect to read out next year.
I think we'll probably have additional updates in the back half of this year on some of the other single agents and to see whether or not they're active enough to then take in to further clinical trials. I think the overall sentiment I'd want to say is we're holding ourselves to a high bar. We want to see single agent activity or quite significant combination activity before we take it forward. Anything you'd want to add, Liz?
No, I think just the fact that some of the early data we will start to see, I think, in 2019, some of the other IO combos. I think we'll see more coming out in 2019 around some of our earlier compounds.
And then we'll start with Paul?
Andrew, thanks. I think, if I've got this and understand this correctly, first of all, there's no negative impact on branded Diovan, it's worth saying that. Secondly, there could be an opportunity depending on whether patients are reviewed, depending on the geography. Way too early to tell. I think it might be worth adding that we are prepared to meet an unexpected increase in demand if that was to occur. Maybe just as a sidebar, it's also worth clarifying that this has absolutely no impact on Entresto at any point in any process. We are confident in how we go forward in preparation with Diovan and indeed with Entresto for the rest of the year. Yeah.
Great. Thank you. Thanks, Andrew. 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 Harry, on pharma margin. Could you give us more color on what is behind the much better than expected performance of the pharma margin this quarter? Maybe, Vas, if you could give us your thought, knowing that as Gilenya should benefit from a potential additional exclusivity. Any update on your goal in terms of margin expansion for the pharma division? Second question for Paul on Entresto. The performance ex-U.S. is extremely good. Is it because of a stronger penetration in Europe or is it more a geographical expansion? If there is a stronger penetration in Europe, is there anything you could learn from the European performance that you could use in the U.S.? My last question is more on research for John. QGE031, this product's entering phase III.
Could you share with us why you're quite confident that this product could work in chronic urticaria, knowing that this product failed in asthma? How could you position and differentiate this product versus Xolair? As far as I understand, this is a kind of follow-up of Xolair. Thank you.
Thanks, Florent. First on the margin, Harry?
Yeah, Florent, thank you. It's really down to three key points, as I mentioned actually in my earlier discussion. Let me give you a little bit more flavor. As you can imagine, the uptake of Cosentyx, the significant uptake of Cosentyx and of Entresto is happening at a very high gross margin, very high incremental margin as a lot of the marketing and sales is already, or most of it is already in place. Significant margin contributions, especially from those two key growth products. Now we see the manufacturing footprint initiative that we talked about a couple of years ago really gaining momentum. As you know, we talked about a four-year program with $1 billion plus by 2020. We are now in the middle of that program and see significant gains from it.
The first couple of years, as you would expect in manufacturing supply chain, it is a bit slower. It gains more momentum. Our Technical Operations teams do a fantastic job here together with the business, and we get very nice manufacturing gross margin pickup as well.
Just on the impact of Gilenya LOE changes on our margin. We've said, and I think we've reiterated at Meet the Management, our goal is to get our Innovative Medicines margins into the mid-30s in line with the overall competitive space. That remains our goal. We're not changing that at this point in time until we have more certainty on the Gilenya outlook. We believe it'd be premature given that there's so many steps in the process now that still have to happen for Gilenya LOE to be further extended. Entresto ex-U.S., Paul?
Thanks, Laurent. In some ways, Europe has benefited from the learnings of the U.S. coming online. We're almost 100% up in the U.S. on last year and 150% up in Europe. China coming online as well. Q2 sales were around about $6 million. We're gathering momentum. In answer to your question about penetration and new markets, yes, there is a few new markets to come. We hope to update you on France in Q3 positively. We're very pleased with the learnings that get shared globally and regularly. The overall performance of more than doubling the sales is a direct result of shared learnings, new markets, and real excellent discipline. Final point, may I just add, we've got good news flows well accumulated this year, transition hopefully to start earlier initiation. We just keep rolling forward on news flows.
Sharing the best practice, bringing the news flow.
Thank you, Paul. John on QGE.
Thanks, Florent, for the question. QGE and many people would know this as ligelizumab, is a high-affinity anti-IgE that forms complexes with the free IgE. We believe that there's differences in the pathophysiology between asthma and CSU, and that pathophysiology is distinct in these two different disease states. We recently did share some results in May that showed the improved efficacy versus Xolair in patients who are inadequately controlled, in these patients who have chronic spontaneous urticaria. We believe that this would be a path forward in terms of ligelizumab. Thank you.
I might add as well, that would allow us to have access to the U.S. market as well, fully in CSU with QGE. Next question. Thank you, Florent.
Thank you.
The next question is from the line of Steve Scala, calling from Cowen. Please go ahead.
Thank you. I have three questions. First, how will the manufacturing issues with Kymriah impact Kymriah trials to move up into earlier lines of therapy and development of the BCMA CAR program? That's the first question. Second is back on Cosentyx. Is the second quarter performance a full manifestation of the efforts to enhance access, or is that still a work in progress, so future quarters will be even better? Lastly, for Harry, just to clarify, did you say that group sales will be at the upper end of the low to mid-single digit range? It makes sense given the H1 strength, but that being the case, why not raise that range now? Thank you.
Thanks, Steve. First on Kymriah trials, Liz?
I think, the easy answer is that no, we don't expect there to be any changes to clinical trials of Kymriah in the earlier setting or at this point, the BCMA.
Thank you, Liz. On Cosentyx, Paul?
It's sort of both, I guess. You take the opportunity to have the enhanced access in Q1, you see a benefit in Q2 for sure, when you take the access, it affects the whole book of business at the beginning of the year, you have to build volume throughout the remainder of the year. Very much like our position going into Q2, as long as we keep doing what we're doing and building the volume, we should see a continued improved performance. Let me just add again that we're very committed to consensus for the year, it would imply that we do continue to do that.
Thanks, Paul. On guidance, Harry?
The first quarter was 4%, second quarter 5%. As you mentioned, around 5% on the first half. We expect continued good momentum. You may see us raise those guidance in quarter three. We feel it's a bit too early now. I'm quite confident it will be at the upper end of the guidance on sales.
Thanks, Harry. Thanks, Steve. Next question, operator.
The next question is from the line of Michael Leuchten calling from MainFirst. Please go ahead.
Hi there. Thank you very much for taking my question. Just briefly on Sandoz, if I may, and for Richard. Biosimilars seem to have settled into a sort of steady trend. Do you think this will continue, or do you see an inflection point? If so, when? I see that some guidance was removed by the FDA recently on some biosimilar analysis. I think it was statistics. What do you read into that? Does that make it easier or more difficult in general? What about any refiling of Rituxan? Then thirdly, have you applied for any interchangeability with any of your biosimilars? If you were to apply for interchangeable, could you still get the biosimilar designation if you sort of fall short of the interchangeable hurdle, or would you need to put in a new application? Thank you.
Richard, on all three questions.
Thanks for the questions. Let me start with the growth rates. Obviously, we've got a 34% growth rate in biosimilars in quarter two, which we're very pleased with. As you say, that's a steady trend, but I think that's a high trend. I think that's one where, as you think about our portfolio, we have portfolios that we're launching, whether Rixathon on Erelzi and other ones that are mature and be in the market, and other ones are starting to potentially get competition. I think we have to think about that when we're looking at our growth rates. I wouldn't really talk about inflections. I'd continue to talk about just solid growth of the biosimilars that will be seen by acceleration, and sometimes lower numbers based on when products come to the market and when competitors come to the market.
I hope that helps sort of think about that going forward. With regards to the FDA guidance, I think generally if I step back, I would say all the guidance, all the discussions, all the comments coming out of the FDA, I think are extremely positive towards their approach to biosimilars. When it comes to some of the recent communication, I think it's been comments. I don't think they've actually changed policy yet. We're looking to see actually what they do around some of the things they've been mentioning. It sounds very positive. I think the second part of that question was that does that impact Rixathon and our rituximab profiling in any way? What I'd say, it's way too early to say. We still have to meet with the FDA. Once we meet with the FDA, we'll have a far better understanding of that.
Then moving on, I think to your final question around interchangeability. Once again, there's just a lot of commentary and narrative coming out of the FDA, all positive, about potentially making interchangeability something which is easier for potentially people to show, or potentially less of a barrier, depends how you interpret it. All in all, I think these are all very positive statements, but nothing has been documented or finalized. I feel very cautious about giving any sort of strong opinion on, apart from it seems to be heading in the right direction towards, I think, more vast than the market really starting to become positive and open up towards biosimilars.
Thanks, Richard.
Thank you.
Thank you, Michael. Next question.
The next question is from the line of Tim Race from Deutsche Bank. Please go ahead.
Hi there. Thanks. First question, very quick. What was the milestone income in Innovative Medicines in other revenues? Could you just explain what that was for? Perhaps just explain a little bit, maybe I'm being thick, but in terms of Kymriah, the manufacturing issue in the U.S. Is that actually limiting how many patients can go on the product at present? What is the actual issue? Second, in Europe, you've sort of out-licensed the manufacturing or you've got a partner for the manufacturing with CellforCure. What is that? Is that a temporary agreement before you build up your own infrastructure there, or is that a permanent agreement? What's that signal about your expectations for ex-U.S. sales? Thank you.
On the first question on milestone income, Harry?
That was basically a minor amount from a prior product divestment, which had a few other time-barred, basically milestone payments. Not significant, but still in the core results.
Sorry. The two questions on Kymriah, Liz?
On Kymriah, I guess the easiest way to explain it is really cell variability. After manufacturing, you have a percentage of cells that are viable, and so what we have in our commercial label, and this is what's really important, commercial label is slightly more stringent than what was in our clinical study. What happens is some of them are out of spec because they're not at the same level. We are working very closely with the FDA, and so it's hard, and we actually have a perspective of what we think it is. At the same time, we're not sure, so we wouldn't want to speculate right now. I think the most important thing is that we are continuing with pediatric and young adult ALL and being able, not seeing the same level of variability there.
It's really around DLBCL, and again, our ability to bring the therapy to the patients in the end of the day through mechanisms that we have of being able to provide those therapies back to patients in the majority of the cases. I think that's the most important thing. The other thing I will note is when you think about long-term manufacturing, we have a lot that we're doing around building long-term manufacturing and capacity, working on improvement, continuous improvement of our processes. We see it as Vas talked about earlier, we're here in the long game in cell therapy and believe that we ultimately will be able to provide product and therapy to patients around the world, which is ultimately what we wanna do.
Just to add to Liz's comments, just on the ex-U.S. front, we have a facility in Leipzig, Germany, which is used in the clinical trials, which will also be used in the commercial manufacturing. We also announced last week it will be opening a facility in Paris with a partner, CellforCure, to ensure we have adequate capacity fully for ex-U.S. markets. We're also exploring additional capacity in Asia, which we hope to provide an update on at the appropriate time. Thanks, Tim, for the question. Next question, operator.
The next question is from the line of Naresh Chouhan from New Street. Please go ahead.
Hi there. Thanks for taking my questions. Couple of questions. Firstly, on Tasigna. The ex-U.S. growth rate is slowing quite materially. Are there certain countries where generic Gleevec is now being used on a more wholesale basis instead of Tasigna? How should we be thinking about Tasigna ex-U.S.? That would be helpful. Secondly, on the Sandoz gross margin. The margin was very strong despite significant price cuts. Is it fair to assume that biosimilars are driving the majority of that 190 basis point improvement, or have you exited some unprofitable products and that's driving some of the favorable product mix as well? Thank you.
First on Tasigna, Liz?
Yeah. On Tasigna, that what you were seeing in Europe this quarter was really around phasing in Germany. The other thing is we presented data at ASCO around treatment-free intervals, we expected to see a slight drop-off due to that. What we are seeing is actually some nice new product share increase because of that new data. I think the way I would think about Tasigna is, yes, you do continue to have patients moving to generic Gleevec. At the same time, I think we see a very stable performance of Tasigna really around the world with some growth markets and in and out, some up, some down, but at the end of the day, a fairly stable market.
Thanks. Sandoz gross margin, Richard?
Thanks for the question. What is driving the gross margin? I think it's a number of factors. Obviously, the biosimilar growth rates are definitely helping at 34%. That's becoming a good and significant business. We've also got other factors, as Harry mentioned, productivity improvements and NTO. The plan is starting to come through, and that's obviously helping us there as well. Two other factors, as we focus and we've been focusing the last three years geographically on the countries which we know will drive profitable growth with the right portfolio, we've been doing that. Finally, we've obviously been continuously pruning our portfolio to make sure we take out the products which we don't see as growth drivers going forward.
Terrific. Thanks, Naresh. Next question, operator.
The next question is from Kerry Holford from BNP Paribas. Please go ahead.
Thank you. Three questions, please. Firstly, on AVXS-101. On the slides, you mention manufacturing, and as I understand it, you're manufacturing today from one facility, but a new facility should come online in 2020. My question here is there any risk that your supply constrained during the first year of launch? How should we think about the sales ramp in that initial year before that new facility comes online? LIK066, I see the decision's been made to discontinue that product. Can you tell us why? What did you see in the phase III data that has led to that conclusion? Also, can you confirm whether you are continuing with the heart failure study, which I believe continues? I think that's a phase II study. Or if you are dropping that project completely. Lastly, a quick one on Gilenya.
Following the approval of the pediatric dose, the 0.25 mg dose, can you confirm when you expect to launch that dose in the U.S.? Thank you.
On AVXS-101, Paul?
We're not anticipating any supply constraints at all. If you look at what we should get at approval, it would be IV and for the patients that will benefit most, the young infants, that is will be well-positioned in terms of supply. As we bring on intrathecal in 2020, then the much bigger patient populations, of course, materialize too, and we'll be well-positioned for that. Not expecting any supply constraint.
On LIK, I'll just take that one. We ran a study in obesity, and what we ultimately saw in the study, which we'll of course present at an upcoming congress and ultimately publish, was a reduction in weight loss, but not a reduction we believe that was significant enough to warrant further development. With that now, we're reevaluating how we might take an SGLT1/2 forward in heart failure. I think we can provide an update once we've made that decision. Then lastly, on the launch of Gilenya pediatric, Paul.
Yeah, we launched the low dose for pediatrics on May the 11th. We expect it to make a very small percentage of the overall. It is already available.
Great. Thank you. Thank you, Kerry. Next question, operator.
The next question is from the line of Marietta Miemietz from Primavenue. Please go ahead.
Yes, good afternoon. Thanks for taking my questions. I have one financial question on Sandoz and then a couple product questions, please. On the Sandoz guidance downgrade, I just wanted to check, is that entirely due to greater than expected pricing pressure in the U.S., or are you actually also slightly more negative for Glatopa and/or your other biopharmaceutical products than you were at the beginning of the year? In that context, following on from Michael's question, am I right in assuming that your marketed biosimilars in Europe have not actually had any material growth sequentially, i.e., Q2 over Q1? That they're likely to stagnate for the foreseeable future due to your capacity constraints? I'm not talking about new launches or the U.S., but really just about the end market products in Europe. The product questions.
On canakinumab, please, with the cardiology opportunity around the corner, can you just give us an update on your thinking around patient stratification? Do you expect first dose response to remain the best patient stratification tool for the foreseeable future? Have you had any feedback from regulators and payers, how they think about that? A question on nazartinib, please. Why was the phase III study in first-line lung cancer withdrawn? Was that mainly recruitment issues, or were there any other reasons? How does that affect the compound's prospects as a combination partner for your other assets, such as capmatinib and PDR001, if it's never going to be approved on a standalone basis? Thank you very much.
Great. First on Sandoz. Richard, both on the guidance and the biosimilars.
Okay. Thank you for the question. As Harry pointed out, we are revising the guidance down. To be very clear, this does not reflect any changes in the fundamentals we believe in the business, but it takes into account some factors which we are now aware of. One is obviously we have a Rixathon delay in the U.S. Two, the 40 mg launch and ramp-up has been slow, and the market is under more pricing pressure than anticipated. Also, there has been significant de-stocking in Russia in the first half of the year. Those are the factors. Going into your question around biosimilars in Europe, I hope I've understood it correctly, but if not, please tell me. We're seeing biosimilar growth both in the U.S. and in EU.
We're seeing strong growth in the EU, both from our base business that we've already got there, but also the launches, which continue to perform well. We continue to roll out Rixathon and Erelzi in new markets. Within the markets they are in, they continue to gain market share and perform well. We're seeing good momentum and good growth in Europe for our biosimilar business. I hope those both answer your question.
Is that on a year-over-year basis? Because just basically looking at your numbers, the 10% growth we're talking about for the biosimilars, the 10% growth you talk about in Europe and the biosimilars numbers, unless I get the currency completely wrong, just suggests that there was not really much growth in the European biosimilars between Q1 and Q2. I was just trying to see if that is correct, if it's due to capacity constraints, and if that's going to stay.
Yeah, no. Once again, reiterating, we do have good growth quarter-on-quarter in Europe. Maybe to answer the capacity, where we launch our products, both Rixathon and Erelzi, we launch them with the mindset that we can actually supply those markets and be competitive and grow market share. We think about how we launch, where we launch, where we have launched, we can actually supply the markets and grow and become competitive. In Germany, we are number one now with Rixathon. We have overtaken the other biosimilar competitor, we are market leader and continue to grow. We continue to grow Erelzi in market share in every market we've launched in. I think the message I'm giving is the performance of the biosimilars in Europe is growing quarter-on-quarter.
Now obviously things can change on that as and when competitors come into the market or where we see pricing degradation suddenly happen. Right now we feel very confident in how we're performing.
On EGFR, then I'll cover canakinumab, on EGFR, Liz?
Oh, yeah. On EGFR, we decided to rethink the strategy given TAGRISSO and the approval of TAGRISSO and a standard of care and what was the best way to differentiate. What we really thought it was important to stop the single agent study. Right now we're looking and waiting on data with combination, and we'll rethink the strategy of how we launch EGFR in the future.
Lastly on canakinumab. On canakinumab, just first taking a step back, we have the file in with the FDA in cardiovascular risk reduction. We also have started the adjuvant study, are in the midst of starting the second line study in lung cancer, and then also, well, ultimately, a first line study. We'll have three studies ongoing. Maybe to Andrew's earlier question on IO, that's clearly a place now we're making a significant step forward in taking forward canakinumab based on the data we presented in the New England Journal on canakinumab's oncology effect.
With respect to cardiovascular disease, all of our discussions that Paul and his team have had with payers and as well as physicians clearly indicates we need a very clear indication statement that demonstrates we could target a patient subpopulation that would reflect the estimated relative risk reduction of 24% for CVRR in the subpopulation of the patients who had a CRP response after the first dose. We are taking that forward to the FDA. We are currently continuing discussions with the FDA in terms of what they would find ultimately appropriate in the label. That's going to really determine our approach on canakinumab. If we don't get the label we need to be successful, we'll have to rethink our strategy with the product in cardiovascular disease.
Thank you.
Next question. I think we have a few more.
Is from the line of Keyur Parekh from Goldman Sachs. Please go ahead.
Good afternoon. Thank you for taking my questions. Two on Sandoz and then one on AveXis, please. On Sandoz, Richard, can you just help us think about what was the actual price impact decline you saw on the U.S. business? Clearly it's 9% globally, but just give us some magnitude of how much of it was in the U.S. and if there were any particular categories where that pressure was higher than in other parts of the business. Secondly, again on Sandoz, any thoughts on, we believe, Mylan's price to Copaxone at 60% list price discount? How do you think that market evolves over the next couple of years, and where do you think biosimilar pricing for the U.S. goes as we go through 2019? On AveXis, clearly you're coming close to filing given the debate in the U.S. around high-priced medicines.
Vas, any thoughts from your perspective on what might be considered a reasonable price for this medicine? Thank you.
On the first two questions on Sandoz, Richard?
Yeah. Thanks for the question. We don't actually call out the actual prices declines we see across the different regions. We just give the global price decline. I would say what you're seeing in the market generally is a continued price decline. I do think we see this as slightly lower than in previous years, but not dramatically, so I still see this as a challenging market. With regard to the other pricing question around Mylan and the 40 milligrams of Copaxone, I don't really want to comment on what they've done. I think obviously that's something for them to talk about. I would say that we've been in the Copaxone market with our 20 milligrams for nearly three years, so we're well aware of the changes in prices and the different tactics that people use.
I think we've proven with the 20 milligrams we're pretty good at navigating that. That said, obviously we have a competitive situation here where pricing is playing into that, and we've got to be mindful of that. As I said, with regard to the guidance, that has put pressure on that opportunity for us, and we've got to see how that plays out.
Great. On pricing for AVX, Paul?
It's too early to talk about pricing in general. I mean, just to remind everybody, we always try and strike the right value proposition for payer patients and health systems alike. I think it is worth just reminding people of what the existing costs are to have them in mind for perspective. The current treatment option is over $2 million over a five-year period, and the cost of not treating at all is also significant, depending on where you are, can be between $1 million and $2 million over five years for supportive care. Clearly, it's way too early for us, but just so you know the current sort of perspectives that are in the market.
Thank you, Paul. Thank you, Keyur. Last question, I believe, operator, on the line?
Yes, the last question is from Emmanuel Papadakis from Barclays. Please go ahead.
Thank you. Thank you for taking the question. A couple. Maybe one on BAF312. You've now filed with a priority review voucher. Not sure if you had any further discussions with the FDA. Any thoughts on the precise label word in there would be extremely helpful in terms of an update. Are you still expecting or hoping for an explicit SPMS indication? Second one was on Promacta. Seems to have been one of the greater successes from the original GSK transaction. What are you doing differently there, and how sustainable is that growth we're seeing in the ITP indication? Maybe a quick follow-up on Sandoz, just if you could revisit for us, substitutable ADVAIR filing timelines in the U.S. That would be very helpful. Thank you.
Thanks, Emmanuel. On BAF312, just to remind everyone, the EXPAND study, which we completed, was the first study ever conducted in a secondary progressive MS population. You had patients with relatively high EDSS scores, older patients, at least relatively, for an MS population. A very unique study population that, in the past, we've shown is very distinct than any other study population that's been studied in the past in relapsing MS studies.
Our goal with the U.S. FDA is to reflect that unique study population, in effect, to get as close as we can to a secondary progressive MS population. We'll ultimately have to have the label negotiations with the FDA to get the precise wording and see how FDA would like to characterize "secondary progressive MS," primarily because it's not a straightforward diagnosis.
There's multiple components in how you ultimately identify a secondary progressive MS patient. Our goal is to very clearly delineate that BAF312 is for this unique patient population studied in the EXPAND study. In Europe, it's more straightforward, at least relatively speaking, in that case, we will be advancing a file with secondary progressive MS in the proposed labeling. Promacta, Liz?
Yeah, I think I agree. We're very excited about and happy with the performance of Promacta. We do see that growth continue, we expect that growth to continue. I think it's important, about one year ago, we made a decision to increase our reach and frequency, really the commercial focus on Promacta, as a result of that, we've seen it grow around the world. I also think it's really important to note that we still actually have a lot of room of a lot of ITP patients that are not being treated. We think that there's opportunity to continue to improve and increase penetration around the world. We're happy about it so far.
Richard on Advair.
Thanks for the question on ADVAIR. I think to answer your question, the aim is to be able to position to file and launch in the second half of next year. I think we highlighted in the quarter one earnings, the aim would be to be able to launch this product around about quarter four of next year.
Great.
Thank you very much.
Thank you, Richard. Thanks, Emmanuel. Thanks everyone for joining today's call and your interest in Novartis. For the investors in the call, thank you for investing in our company. We'll look forward to catching up with you on the Q3 conference call. Have a great day.
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