Novartis AG ADR Earnings Call Insights: Declining Markets and Chairman Changes

Novartis AG ADR (NYSE:NVS) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Declining Markets

Tim Race – Deutsche Bank: Quite a lot of market commentary speculated about what Joerg Reinhardt and the change of Chairman is going to do to the Company going forward. The share price seems to suggest that you’re going to slump the strategy into reverse and divest and buyback. Could you just comment on how Novartis is going to be different going forward in terms of capital allocation, et cetera? Then a couple of other questions, just in terms of emerging market growth, it was very good in China but slightly lower for the overall group. Can you just point to which markets you’ve seen declines in and why? And just in terms of the long-term growth, you don’t mention 2016 when you feel the full brunt of Gleevec and Exforge. Will that be a (indiscernible) for decline here in terms of core EBIT margin?

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Joseph Jimenez – CEO: Okay. Starting for the first with the change at the Chairman level. Dan has publicly said that he believes that the strategy of the Company is sound in terms of focused diversification and that we’re navigating through the patent expiration period in a way that is as good as I think we could be expected. So we feel like now it’s a good time to have a smooth transition. Joerg Reinhardt knows the company, so he was with the company for 20 years. He and I have worked well together. I don’t think you should speculate that there will be a change in strategy, some of the way that we execute may be different but I think this is a company that has continuity but we also are focused on ensuring that deliver what we say we’re going to deliver. So I would say you shouldn’t speculate big changes in strategy. We’re going to continue to execute up against those three strategic priorities. We’re going to continue to be driven by research and development and we’re going to invest in research and development. We’re going to focus on translating that into sales and profit that hits the P&L in terms of growth and then we’re going to continue to drive productivity pretty aggressively. In terms of the EGM growth, we did have a couple of the EGM markets that dragged down the total number but partly because of timing of big tenders. So for example, our business in Russia was not robust in the fourth quarter and even in the full-year partly because of the timing of a specific tender that was significant a year ago. But overall our emerging markets business is growing at a significantly faster rate than the business, we still had some of the characteristics of the rest of the business but it is growing at a much faster rate and we would expect that to continue into the future. In terms of long-term growth not going into ‘16, I thought a lot about this but I also agree that when you look at ‘13, ‘14, ‘15 that’s a good period of time and ‘15 does have the U.S. patent expiration of Gleevec. So, I can tell you that we will move through Gleevec in a way that is different than we moved through Diovan. The oncology group has gone on record saying that when you look at their pipeline and their launch brands, they believe that unit itself can move through the Gleevec patent expiration in ‘15 and ‘16 with growth and that’s because – and so you take the oncology unit then you add on top of that the Pharma division in which it sits and then you add on top of that the group and so I think that’s what we are expecting. We are not going out as far as ‘16, but you can see from ‘15, we still expect growth.

Chairman Changes

Andrew Baum – Citi: With regard to your group structure, when I look across that, you have four areas where I think you’d probably acknowledge your sub scale, so animal health, OTC, vaccines and diagnostics and now to your peers in response to shareholder pressure I think considering whether that the right tone of these assets seeking either scale or to divest. Is it reasonable to expect that given the change in the chairman position, these opportunities will be carefully reviewed with an eye to looking at both near-term and long-term shareholder value creation, that’s first question Second question with regard to your CHF drug and LCZ696. Can you just outline, if there is an interim analysis plans for this year relates to 75% driven or something similar to that for the primary end point. And then finally, you have a Phase 2 compound a cell cycle inhibitor, which LEE011, which is competitor to a very high profile Pfizer drug. Just outline your development strategy in breast and indicate how many years you think you are behind Pfizer in bringing this drug to the market in breast, if indeed you are taking it forward in breast?

Joseph Jimenez – CEO: Okay. In terms of the Group strategy, we have been consistent in saying that, obviously, we have three big engines, I think, at Novartis today; Pharmaceuticals, Alcon and Sandoz. These are $10 billion businesses. They have scale. They are driving good results for the Company. And when you think about the other businesses, particularly vaccines and diagnostics, I have said before that I think about this as a business that is in startup phase, especially with the approval of Bexsero that can really transform that business. So we are company that has the ability to look and invest in a business like that with the intent of making it a significant return for shareholders in the long-term and that’s what the objective is. I don’t think the change of Chairmanship would change that. We are constantly reviewing our portfolio. If it looked like those businesses as being less scale than they potentially needed to be successful, we would take action on them. At the same time, you look at a business like Animal Health, it is a small business, ex-Lincoln. It has consistently grown year after year after year because when it operates in a market in a particular category, while it may be subscale on a global basis, it is significant and significant market presence in parasiticides or whatever it competes, and so it’s able to have advantage within that category level and that’s one of the reasons why it grows. So we will continue to review the portfolio. The change in Chairmanship will bring what it will bring, just in terms of how the future is going to look, but I don’t think that really changes the way that we are looking at our portfolio and the standard by which we are holding each of these businesses to return to shareholders in the long-term. David, on the pipeline questions?

David Epstein – Division Head, Novartis Pharmaceuticals: There are two questions, one was on LCZ, so just to remind you there are two indications, ones in hypertension where we are focusing largely on Asia. We’re actually be in a position to submit before the end of this year for hypertension. And I think Andrew your question was mostly about the chronic heart failure indication. We’ll have data in 2014 for that indication. We are particularly excited about it because this will be a chronic therapy which will compliment these serelaxin in the acute setting which will really set up a nice franchise in heart failure for our company. The other question was about our cell cycle inhibitor in breast cancer, I think if you take a step back, we have multiple assets in the breast cancer arena. As you know, we are just launching Afinitor for HER2 negative patients. Hopefully, we’ll have nice data in HER2 positive patients at the end of 2013. We have a series of PI3 kinase inhibitors in clinic. In fact, we are in pivotal clinical trials in breast cancer with our PI3 kinase inhibitors and that should position, that is potentially one of the next launches in the field of breast cancer. And then we have the cell cycle inhibitor which is much earlier. What’s unique about the Novartis strategy is we are in a position to combine these drugs in a way that other companies can’t because we have each of them in our portfolio. And we firmly believe that breast cancer patients will take all these therapies, all these lines of therapies, pushing off chemotherapy as long as possible. And a company that figures out the ideal combination will be best positioned and we think that’s an advantage that we have.

Andrew Baum – Citi: And just to clarify. Is there an interim analysis for LCZ696 during ‘13?

David Epstein – Division Head, Novartis Pharmaceuticals: All I can tell you is, I don’t have in front of me, I don’t recall an interim analysis, if it turns that I’m wrong, we’ll let you know.