2020 Q3 results presentation

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Slide 1

(Operator Instructions) Good morning, and good afternoon, and welcome to the Novartis Q3 2020 Results Release Conference call and Live Audio Webcast. A recording of the conference call, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand the call over to Mr. Samir Shah, Global Head of Investor Relations. Please go ahead, sir.

Slide 2

Thank you very much, and thank you to everybody for participating in today's call, and we appreciate very busy day for you all as lots of companies are reporting earnings.

Before we start, I just want to read you 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. For a description of some of these factors, please refer to the company's Form 20-F and its most recent quarterly results on Form 6-K that, respectively, were filed with, and furnished to, the U.S. Securities and Exchange Commission. And with that, I'll hand across to Vas.

Slide 3

Thank you, Samir, and thanks, everyone, from my side as well for joining today's conference call. With me today, are Harry Kirsch, our Chief Financial Officer; Marie-France Tschudin, our President of Novartis Pharmaceuticals; Susanne Schaffert, our President of Novartis Oncology; John Tsai, our Head of Global Drug Development; Richard Saynor, our CEO of Sandoz; and Shannon Klinger, our Chief Legal Officer.

Slide 4
Slide 5

So if we move to Slide 5, I'd like to start out by providing some perspectives on the third quarter. As you saw, we delivered very solid results. And I think it's important to put those results in the context of COVID-19 and the impact it's had on health care systems. Despite that impact and despite the impact of those health care system disruptions on some of our legacy brands, because of our key growth drivers, because of our execution on launches, we were able to deliver solid sales performance in line with Q3 of last year and 4% sales growth year-to-date and strong operating income performance, core operating income performance of 11% in the quarter and 16% year-to-date.

As important was our ability to continue to deliver on our innovation agenda. In the quarter, you saw important approvals, Kesimpta® in the US for relapsing forms of multiple sclerosis, multiple approvals for Cosentyx®, Piqray® and then some indication expansions as well for Xolair®. We had multiple positive readouts in Beovu® in DME, ABL001 in CML and importantly, a range of readouts as well for LNP023, iptacopan, our factor B inhibitor, which we believe could be the next -- one of the next major medicines for Novartis. And we also achieved a positive CHMP opinion for Leqvio® in hyperlipidemia and Adakveo® for sickle cell disease. So a solid, strong quarter really for delivering on innovation.

There were also multiple important designations we received both for LNP023 and also for LMI070, an orphan drug designation for Huntington's disease. And I'll say more about that in a couple of slides.

Slide 6

Moving to Slide 6. Turning to our growth drivers. There were strong performance across our key growth drivers. Some of the highlights include Entresto® growing 45%, Zolgensma® having a strong quarter with a strong uptake in Europe growing 79%, Cosentyx® growing 7% ahead of a challenging market right now in dermatology, but still demonstrating its overall strength in both dermatology and rheumatology and exceeding USD 1 billion for the first time. And solid performance across the full range of our oncology portfolio.

You also see Mayzent® beginning to accelerate and continued solid performance for launches such as Piqray® as well as Lutathera®. Now when you look overall at our key growth drivers, they're now accounting for 50% of our sales in the quarter in Q3. And I think that shows the transition from our legacy portfolio to our next wave of Innovative Medicines is well entrenched and continuing at pace.

Slide 7

Moving to Slide 7. I just wanted to say a word specifically on Zolgensma®. Zolgensma®'s cumulative sales since launch now have exceeded USD 1 billion. You can see on the left-hand side of the chart we achieved sales of USD 666 million year-to-date, with strong growth in Europe and also recovery in the US. Just to say a few more detailed words about the geographic highlights. In the US, we saw a rebounding from the pandemic disruptions we saw throughout the summer as well as in the spring. And that, I think, is allowing us to get patients tested again and then on treatment. 74% of newborns are now being screened for SMA, and we see that rate continue to grow. And of course, in states with newborn screening, Zolgensma® tends to have very high shares. We're also seeing overall shift to the incident population away from switches from nusinersen. You can see 83% of our sales in Q3 were switches -- were new starts for -- from an incident population versus 34% in Q3.

In Europe, we're seeing very solid uptake. 9 EU countries have established access pathways that's already covering 25% of the population. The overall dynamic we see in the ex US marketplace is as the country comes on board we see a bolus of patients come on to Zolgensma®, then we move back to the steady state and then we get new countries on board. So in line with that, Germany delivered 50% of our ex US sales in quarter 3. We continue to see very strong uptake in Germany. And now we expect to see multiple other countries start to come online in the coming quarters. The majority of the early patients are coming from prior treatment with nusinersen. And over 30% of patients thus far have been over 2 years of age, given our broader label in the EU.

Now looking ahead, in Japan, we see rapid uptake with the immediate full reimbursement. We've had an approval recently in Brazil, and we're expecting multiple approvals around the world. So we continue to believe ex US will be a key driver. The US should stabilize now post the COVID situation, and we expect to reach a steady state on our US sales, and we continue to expect Zolgensma® to be a strong growth driver for Novartis.

Slide 8

Now moving to Slide 8. Sandoz year-to-date sales were in line with prior year, and there were really 2 sides of the Sandoz story. When you look at the biopharmaceutical sales on the right-hand side of the chart, you see that we grew 13% in Q3. And in the 9 months year-to-date, we've grown 20% with biopharma, but primarily our biosimilars business. But you do see the drag of our retail sales, it was minus 6% in the quarter and minus 4% year-to-date. That's been primarily driven by an oral solids decline in the US as COVID-19 has impacted patient traffic and also some similar dynamics we see in Europe as well as after the Southern Hemisphere flu season. Now importantly, we've been able to maintain our profit trajectory with gross margin increases, both from a product mix and productivity reduced SG&A spend. So overall, we have made some small adjustments to our Sandoz top line guidance. But overall, I feel good about our margin progression in Sandoz over the course of the year.

Slide 9

Now moving to Slide 9. I want to take a step back again and provide some perspective on the overall trajectory of the company and give you some details on some of our pipeline assets. When you look at the outlook for the coming years, we continue to have strong in-market growth drivers. We're in the midst of a range of major launches, multiple novel assets in our mid-stage pipeline. And I've been pleased to see multiple analyst reports now appreciating the depth and breadth of our mid-stage portfolio, which we believe is one of the best, if not the best in the industry, with 80 submissions planned, 50+ late-stage programs. And increasingly coming into focus as well will be our life cycle management program across many of our in-market growth drivers, as you can see on the right-hand side of this chart.

Slide 10

Now turning to Slide 10. I wanted to provide some more detail. And I'll go through the slide in a little bit of a slower pace, Slide 10, 11, just to make sure you have full clarity on where we are in the various pipeline elements. It's important to note that we are seeing on select instances delays due to COVID. And those COVID delays typically are in the range of 3 to 5 months. We're transparently reflecting that in our documentation to all of you so you can see where we are. But overall, I think, relatively speaking, our portfolio has remained resilient and largely on track despite the massive disruption of COVID all around the world.

Now with Leqvio®, you've seen our EU positive CHMP opinion. In the US, we've completed the most parts/elements of the review with the FDA, including the full clinical review. The only outstanding item now is a single manufacturing inspection, which we're working with the agency on, in a facility in Italy. We've provided extensive documentation and currently work with the agency to try to maintain the action date of December 2020.

On ofatumumab, you've seen, of course, the strong US approval, and Marie-France will provide you more context. And EU approval is planned in the first half of 2021.

Now with respect to Entresto®, 2 critical and important life cycle managements in preserved ejection fraction and then the post MI. The FDA has released a notice today that we will have an AdCom for the preserved ejection fraction filing in December. We're fully preparing for that advisory committee and look forward to those discussions. The FDA action continues to be in the first quarter of next year.

Now with respect to AVXS-101 IT on the partial clinical hold, we continue to work on our proposed confirmatory clinical trial study, and we'll plan to engage with FDA. Our hope is that we can come up with a lean program that will enable us to move extremely quickly, but it would be premature to provide any guidance on time lines at this point in time. So we don't have any further guidance on specific time lines on AVXS-101 IT. And we'll continue to provide you updates as we continue those discussions with the FDA.

There were a few notes this morning also noting the ligelizumab time line. We do expect the trial to read out on track, fully enrolled and to read out in the second half of next year. However, given the COVID disruption, we are now forecasting that the submission would be pushed into the first part of 2022.

Then moving down the line. The next item I wanted to highlight was canakinumab. Our CANOPY-1, as you know, enrollment is complete. The DMC did recommend a continuation without change after the interim analysis. So we remain fully blinded to that study. The full readout is expected in the second half of 2021. And similarly, CANOPY-2 is fully enrolled, and we expect to read out in the first half of 2021 for that program.

And lastly, I wanted to note on Kisqali® that we did expand our adjuvant NATALEE study by 1,000 patients, learning from the recent readouts from some of our competitors, to ensure we maximize the success of this medicine in the adjuvant setting across both intermediate and high-risk patients. As you know, there's a unique profile here with Kisqali®, the most potent CDK4 inhibitor, which we believe is the most important in this setting, and also 3 years of treatment in this patient population with a 400-milligram dose lower than what we have in the metastatic setting to really ensure patients can stay on therapy. We're optimistic about this program and look forward to continuing to provide you updates as it progresses.

Slide 11

Now moving to Slide 11. On the emerging pipeline assets, and many of these we'll provide more details on, on our upcoming Meet the Management. I had mentioned iptacopan. I'll go through some more details in the next 2 slides. But a range of positive feedback, including positive Phase II results in PNH and C3G. We're on track now to have a single PNH pivotal trial for the front line and combination study to start in 2020 as well as pivotal studies in both C3 glomerulopathy and IgA nephropathy to start in the first half of next year.

Moving down the line, the other asset I wanted to spend a little bit of time on is branaplam, our mRNA splicing inhibitor, which we announced had received orphan drug designation for Huntington's disease. This was based on extensive preclinical data, which we expect to be published in the coming months as well as clinical data from our SMA trial, in which we were able to look at Huntington RNA expression. We believe branaplam's RNA splicing mechanism has a unique profile to be able to tackle Huntington's disease as a potentially once weekly, we'll have to see the final dosing, oral therapy. And we'll plan to start that Huntington's disease Phase IIb in the first part of 2021.

Now in terms of oncology, probably the one asset I wanted to spend a moment to highlight was our SHP2 inhibitor that is in a broad range of combination studies, multiple combination studies with spartalizumab, Kisqali® and nazartinib as well as Mirati's G12C. And we're working very hard to finalize some of those early results, which we hope can inform pivotal studies in the combination path going forward across a range of solid tumors.

Slide 12

So moving to Slide 12. Just briefly on iptacopan in PNH. This was data we recently presented. It demonstrates that we were able to significantly reduce residual hemolysis in eculizumab-treated patients and returning their hemoglobin to normal. It's important to note there is a significant proportion of eculizumab-treated patients that don't reach goal, and we believe as an add-on therapy this is important medicine. But even more importantly, you can see in the black squares, patients that were able to move off of their eculizumab treatment and maintain their overall hemoglobin levels, which is the basis of us going forward as a monotherapy as well in this indication.

Slide 13

Moving to the next slide. Similarly, in C3G, we see a very strong result. This data was presented over the weekend, just recently. It demonstrates a significant reduction in proteinuria. You can see a very impressive p-value as well as, importantly, a stabilization of renal function as measured by eGFR. Again, a very clean, safe, tolerable profile. This medicine with this data was able to receive EU PRIME designation, I think the EU's highest designation with respect to these sorts of medicines. So very exciting data for LNP023.

Slide 14

Now lastly moving to Slide 14. Over the course of the quarter, you saw us making important strides in ESG across all our operations. It is our absolute goal to be a leader in ESG across large companies and in the health care industry. We adopted ambitious targets in terms of access to innovation, our global health programs, committing to full carbon neutrality, that's on top of already committing to full neutrality in our own operations by 2025. We track, we measure, we transparently publish our targets annually, which I really think is unique amongst companies in our sector. We launched the first sustainability-linked bond and linked to social targets, particularly access to medicine. The bond was oversubscribed. And we also received upgrades to ESG scores from a range of third-party rating agencies, now ranked to #1 by multiple agencies across the health care sector. So we have a lot of work to do. We're nowhere near where we want to be, but we continue to make important progress on this front. So with that, I'll hand it over to our Chief Financial Officer, Harry Kirsch.

Slide 15

Thank you, Vas. Good morning and good afternoon, everybody. So I'm now going to walk you through some of the financials for the third quarter and the 9 months as well as provide you with an update on our full year guidance. Now as always, my comments refer to the results of continuing operations and growth rates in constant currencies, unless otherwise noted.

Slide 16

So Slide 16 shows the summary of our performance for quarter 3 and the past 9 months. First, I would like to focus on the year-to-date results on the right-hand side. The 9 months performance was strong, with sales growing 4%, driving core operating income and core EPS growth of 16%. As you know, sales were mainly driven by Entresto®, Zolgensma® and Cosentyx® in the 9 months as well as the rest of our growth portfolio. And the core operating income growth at this significant level was driven by higher sales, improved gross margins from various productivity and cost-saving initiatives. Of course, COVID-related lower marketing and sales spending also contributed to core operating income growth.

Free cash flow was USD 8.3 billion, but down 12% in US dollars, mainly driven by legal settlement cash outs and lower divestment proceeds compared to the prior year. With respect to quarter 3, net sales were in line with prior year due to the increased generic competition, particularly of Afinitor® and Exjade® as well as the impact of COVID-19, mainly on our ophthalmology portfolio, which we will discuss in more detail later. Despite this, we were able to deliver another quarter of double-digit increase in our core operating income, which grew 11%, driven by lower spending and improved gross margin. Overall, a strong year-to-date performance, especially given the challenging business environment that we are all in.

Slide 17

Now next, let's focus on our core margins on Slide 17, broken down both again by quarter and year-to-date. For the year-to-date, on the right side, continuing operations core margin was 33.2%, growing 360 basis points with strong improvements in both divisions. Innovative Medicines margin moved up to 36.3%, up 270 basis points and the Sandoz margin grew 420 basis points to 25.4%.

Innovative Medicines margin is likely to be around the 35% for the full year, reaching our mid-30s margin target a couple of years earlier than planned. Of course, we had a contribution from COVID-related reduced spending, but a significant part of these margin gains were also a result of productivity and cost-saving initiatives that we have implemented. The quarter reflects a similar pattern with continuing operations margin at 33.2%, growing 320 basis points and Innovative Medicines margins at 35.8%. Clearly, we are also well on track to deliver on our Innovative Medicines margin target of the mid- to high-30s margin in the midterm.

Slide 18

Let's now turn to Slide 18. We have updated the chart that we showed last quarter on the impact of COVID on our different categories. As a reminder, the graph shows you Innovative Medicines' weekly sales evolution based on a rolling 4-week average, indexed to quarter 4 of last year. We have used the same classification categories as before to allow you to compare.

Our recent launches, and the detail of what we count in the recent launches you can see at the bottom of the slide footnotes, continue to grow quite strongly. The growth drivers line appears to be flat during the quarter. However, all growth drivers performed well. The flatness of the curve on the center is also a reflection of some seasonality.

Now turning to Cosentyx®. The dermatology and to some extent rheumatology markets continue to see lower new patient starts as a result of COVID-19. Cosentyx® also was impacted by this trend with growth rates declining during July and August. However, there are clear signs of recovery in September.

For ophthalmology, in order to understand the market dynamics, it is important to split the market for the back of the eye and the front of the eye. Back of the eye clinic visits recovered much quicker due to the urgency of treatment. Our key ophthalmology products for the back of the eye, dominated by Lucentis® and shown in the gray line, began to see signs of recovery towards the end of that quarter. The recovery has not been seen in other ophthalmology due to roughly an equal impact from COVID-19 disruptions and the expected generic impact on the US, primarily for Travatan® and Ciprodex®. Similarly, our Sandoz retail business continues to be impacted by COVID, as Vas mentioned, as well as the decline of US oral solids, which we have decided to retain earlier this year. Overall, COVID-19 continued to negatively impact demand in quarter 3, particularly in dermatology and ophthalmology. However, we are pleased to see that our recent launches and growth drivers continue to do well.

Slide 19

Now turning to our full year guidance on Slide 19. We continue to expect continuing operations sales to grow mid-single digits. We are now upgrading core operating income guidance to grow low double-digit to mid-teens. Within the divisions, we expect Innovative Medicines sales to grow mid-single digits, and we have lowered the Sandoz top line guidance to be broadly in line with prior year. This is due to the decline of US oral solids, which we have decided to retain, as mentioned earlier, earlier this year and the impact of COVID on our retail business. The key assumption for this guidance is that we see a continuation of the return to normal prescribing dynamics in the fourth quarter. September and early October, patient visits data in the US point in that direction.

Slide 20

Now I want to go into some of the meaning behind our guidance and the various pushes and pulls. On Slide 20, we show the actual and expected quarterly development and expectations for the full year. During the fourth quarter, we anticipate for sales, which you see on the left side, low to mid single-digit growth. And then for core operating income, it's going to the right side, mid- to high single-digit growth. The core operating income growth is expected to be somewhat lower than year-to-date as we will see some higher investments, including those for the Kesimpta® and Leqvio® launch and prelaunch investments. Still, after delivering 16% core operating income year-to-date, this results in our upgraded full year guidance of low double-digit to mid-teens for core operating income. Of course, if there would be a resurgence of the COVID-19 impact on the health care systems and prescribing behavior in our major markets, there is a scenario of lower sales growth in quarter 4 versus what we assume here, which could also then reduce our full year sales growth to the 3% to 4% range as we have delivered 4% sales growth in the first 9 months.

On core operating income, we would expect this quarter 4 and full year level even with potentially COVID-related lower sales growth in quarter 4 as we are kind of naturally hedged on the bottom line should lockdowns happen again due to the expected lower spend levels in such a scenario.

Slide 21

Finally, on Slide 21. As currencies are constantly changing, I want to bring to your attention the estimated currency effects on our results using the current exchange rates. So if late October rates prevail for the remainder of 2020, the full year impact of currencies on sales would be a negative 1% point, and our core operating income would be negative 4% point. If the same rates prevail for 2021, the full year effect of currencies on sales for 2021 would be a positive 1% to 2% points. And our core operating income between 0 to plus 1% point. And as a reminder, we do update these effects on our website on a monthly basis. And with that, I hand over to Marie-France for an update on the pharma business.

Slide 22

Thank you, Harry. Good morning, good afternoon to all of you. So let's turn to the overall performance for Pharmaceuticals.

Slide 23

The first 9 months saw sales grow 6% with continued momentum from our 2 key growth drivers. Q3 saw sales growth of 2% despite the continued COVID-19 impact. Our focus continues to be on driving Cosentyx® and Entresto®, also leveraging the launch of new indications and geographical expansion. And of course, executing on the launches of Beovu®, Kesimpta® and Leqvio®.

Slide 24

If we turn to Slide 24. For Cosentyx®, Q3 brought us our first USD 1 billion quarter and 7% year-over-year growth, despite COVID-19 impact, intensifying competition, biosimilars and pricing pressure. This is a great testament to the complete profile of Cosentyx®. The market growth has slowed versus previous year due to COVID-19. And today, we still see only an estimated 70% to 90% of patients returning versus the pre-COVID levels. We continue to see delays in diagnosis and slower new starts across the US and the EU, particularly in dermatology. Despite increasing competition, Cosentyx® maintains a strong position in derm and is outperforming the market in rheum. If we look at the US, we saw double-digit TRx growth year-over-year, strong momentum in the second half of this quarter. Our focus is on maintaining value in derm while driving the growth in rheum. If we look a little bit more closely at dermatology, we maintained our market share and our IL-17 leadership. And in rheumatology, we're growing 3x the market year-over-year and leading in NBRx share around 30%.

If we turn to EU, Cosentyx® has stabilized market share in derm and maintains rheumatology despite the increasing mandatory use of biosimilars in our key markets. There is significant opportunity for short- and long-term growth through increasing biologic penetration, something this year has suffered given COVID, and expanding our geographic footprint as well as our future indications. We aspire to maintain a strong position in the dermatology space, and we're set to accelerate in rheumatology. In Q4, we expect to return to double-digit growth, and we see a continued strong growth trajectory for Cosentyx® in 2021 and beyond with a potential of USD 5 billion and beyond for the brand.

Slide 25

If I turn to Slide 25 and to Entresto®, Q3 saw another excellent performance quarter driven by underlying strong demand across geographies. Entresto®'s great momentum is reinforced by how significant the unmet need is and how Entresto® is increasingly used as an essential first choice treatment. The US weekly NBRx has returned to above 4,000 by the end of Q3, despite the seasonality of the summer. And we continue to see strong TRx growth versus previous year. China continues strong growth as well, increasing penetration and account expansion. I think we can say that Entresto® is recognized as standard of care for treatment of HFrEF and delivers on its value proposition of keeping patients out of hospital. This is, of course, especially important right now. We're confident in the future growth of Entresto®. Please remember that about 3 out of 4 eligible HFrEF patients are still not on Entresto®. We're seeing expansion in China and Japan and potential new indications in the near future.

Slide 26

If I turn to Slide 26, Beovu®. So what's new? If we look at 3 post hoc analyses that have recently demonstrated the correlation between the role of fluid in wet AMD and vision outcomes. These recent analyses are showing that more than 50% of the eyes treated with the current anti-VEGF therapies have residual retinal fluid after 2 years of treatment. What we also see is that above 30% of patients at year 1 of follow-up are dosed more frequently than every 8 weeks. There is a clear unmet need for medicines that provide greater fluid resolution, which is what Beovu® offers. We have a full development program that's continuing, and we've recently released the results of KITE, our pivotal DME study, which met its endpoints and confirmed the importance of fluid reduction on vision outcomes.

We now have approval in more than 50 countries with an updated label. Ex US, we see steady uptake in Germany and Japan. We've seen US demand recover and stabilize around 1,200 vials per week. We believe that the rare events can be managed, and we continue to educate HCPs about how to reduce risk as clinical practice impacts the effects of this medicine. With Beovu®'s favorable benefit/risk profile, we believe we can achieve blockbuster status with this product.

Slide 27

On Slide 27, if I turn to Kesimpta®. Kesimpta® has the potential to become our first-choice high-efficacy DMT for patients, physicians and payers. We're launching with an agile approach and focusing our efforts on HCP adoption, patient initiation and access. For us, it's key to have broad HCP engagement and have this translate into adoption. Our field force has reached above 90% of our targets either through face-to-face or through adaptive digital initiatives. And we are now covering over 90% of our field force territories as our field force has returned to the field. We've delivered our first access wins in record time, and we're on track to obtain broad rapid access. Patients are experiencing seamless process in the patient and treatment initiation. This is seen as simple, easy and fast by both patients and physicians. We're fully focused on execution. 2020 is about driving demand to benefit as many MS patients as possible. And we believe this will translate into solid sales growth in 2021.

Slide 28

If I turn to Leqvio® on Slide 28. It's a unique product, and it addresses both clinical and nonclinical barriers. With Leqvio®, we will be providing effective and sustained LDL-C reduction up to 52% with 2 doses a year. Our worldwide launches are progressing rapidly and underway, and we've just received CHMP opinion ahead of schedule for the treatment of primary hypercholesteremia and mixed dyslipidemia. The EU approval is expected in the December-January time frame for all 27 member states and the UK. And the FDA action date, as Vas mentioned, is expected in December 2020.

I wanted to spend just a moment and talk a little bit about the unmet need in this space. It is extremely high for patients and health care systems. We see above 135 million ASCVD patients in the key markets, 18 million deaths a year. 80% of patients treated on statins are not at goal, and more than 50% of patients are not adhering to treatment. ASCVD cost the health care systems over USD 1 trillion a year in health care spend. This is not because they're not good treatments, but because the nonclinical barriers are high, either access, affordability or adherence, which we know will take time and a different approach to resolve. But this product has a long patent life, and we're committed to differentiated approaches to make an impact on ASCVD. With this unique profile and our innovative commercial model, we think we have a real chance of tackling ASCVD at a completely different scale.

So in conclusion, we expect to deliver further growth in Q4 despite the continuing COVID-19 impacts. With our relentless focus on our priorities and with our innovative approaches to deliver customer value, we are setting up ourselves for short- and long-term success. We're driving growth with Cosentyx® and Entresto®, leveraging new indications and geographical expansion, we're executing on the launch of Beovu®, Kesimpta® and Leqvio® and we're preparing the market for our future blockbuster launches. I want to thank the teams for their hard work in these trying times and hand it over to Susanne.

Slide 29

Thank you very much, Marie-France. And let's turn to Slide 30.

Slide 30

The Oncology business remains resilient, delivering 4% of growth for the 9 months with sales reaching USD 10.9 billion. In the quarter, we have seen a very strong uptick of our recent launches, Kisqali®, Kymriah®, Piqray®, Adakveo® and the recently launched Tabrecta®. And also our growth drivers, Promacta®/Revolade®, Tafinlar® + Mekinist® and Jakavi®, continued very strong double-digit growth. The strong momentum across these brands was offset this quarter by increasing generic erosion of Afinitor®, Exjade®/Jadenu® in the US and Sandostatin® LAR in Europe as well as continued COVID impact in some areas of the Oncology business. Due to the pandemic, our radioligand therapy, Lutathera®, continued to experience increased number of cancellations and delays in new patient starts, still achieving sales of USD [119] million. But overall, oncology business remains very resilient, and we are confident about the dynamic into the fourth quarter maintained by the strong performance of in-market brands and recent launches.

Slide 31

Moving to Slide 31. Kisqali® continued its very strong growth trajectory with Q3 sales of USD 183 million and 50% growth from previous year, benefiting from the ongoing impact of positive overall survival data from 2 pivotal Phase III trials. We have seen very strong uptake in market share gain ex US, especially in European markets where both post and premenopausal indications were approved for reimbursement in Germany, Italy, France and Spain, and also in the US, where Kisqali® continued to grow and gain market share in Q3, and this despite patient screening being suppressed and approximately 20% decline in NBRx of CDK4/6. And at the moment, Kisqali® is the fastest-growing CDK4/6 in the US.

We are also pleased to see that differentiation within the CDK4/6 class is increasingly recognized. And just to remind you that Kisqali® has a unique profile versus other CDK4/6 inhibitors with preferential inhibition to CDK4 over CDK6 and a high concentration to inhibit the target. We are very proud to share with you that Kisqali® has received the highest rating as the only CDK4/6 on the ESMO Magnitude of Clinical Benefit Scale, confirming once again the substantial benefit for patients based on significant overall survival benefit.

On the development side, we are expecting a readout with overall survival results from our MONALEESA-2 study in H2 '21. Our NATALEE trial, as Vas mentioned, in high and intermediate adjuvant breast cancer is enrolling well. We have extended the enrollment in the trial in order to enrich the data set generated with the increased sample size and allow more robust assessment of the treatment effect. The NATALEE trial is on track for final readout in 2020. So overall, we are very pleased with the performance of Kisqali®. And with that, I hand back to Vas.

Slide 32

Thank you, Susanne.

Slide 33

So just in conclusion, as you can see, we had a very solid quarter with double-digit core operating income growth despite the impact of COVID on health care systems. Our growth drivers, our launch brands, the key drivers for our mid- to long-term growth, are well intact and performing well. We raised our full year core operating income guidance, as Harry outlined. Our mid- and late-stage pipeline is advancing. And I hope all of you will continue to appreciate the depth and breadth of our mid-stage pipeline in the coming months and years. And lastly, we continue to progress on our journey to become an ESG leader with concrete advances over the quarter. We look forward to taking your questions. So operator, we can open the line.

Q&A Session
  • (Operator Instructions)

Your first question today comes from the line of Mark Purcell from Morgan Stanley.

  • Mark Douglas Purcell - Morgan Stanley, Research Division 

Mark Purcell, Morgan Stanley. Just a couple for me. In terms of Sandoz, I noted on the Meet the Management event, there's going to be a focus on this business. So perhaps could you sort of talk to us about some of the pipeline opportunities you see here.

And over to Harry, in terms of there's a significant opportunity on the global manufacturing footprint within this business, what sort of operating margin targets do you believe you can get? And for the pipeline, I mean things like Gan & Lee and Biocon and denosumab, which you haven't spent much time talking about yet. And then a second one for Harry, on the group margin, 360 basis points improvement. Could you help us understand the underlying improvement and the sort of COVID-related improvement and how sticky that COVID-related part might be going forward. And the last question is on iscalimab. So a little bit like LNP, it's, I guess, a pipeline and a product here. Can you help us understand if there's going to be any more sort of interim analysis from the proof-of-concept data as that matures in the transplantation setting and sort of frame the opportunity in Sjögren's syndrome. I think it's the second most prevalent autoimmune disease. So how significant could that opportunity be ahead of proof-of-concept data in the second half of this year?

  • Vasant Narasimhan – CEO of Novartis

Thank you, Mark. So first, Richard, on Sandoz's pipeline and global manufacturing.

  • Richard Saynor – CEO of Sandoz

Yes. Thank you, Mark. Let's start with the pipeline. We don't generally disclose specific elements of our pipeline, but we have a very strong pipeline across small molecules, but increasingly biologics and more complex products to bring to market with the goal of ideally being at first entry in market at LOE formation, I guess, pretty much all our territories. You raised the point about supply. Actually, first of all, yes, supply this year has been remarkably strong given the challenges that we've had. And also, we've gone ahead and formed Sandoz TechOps over this year. That means that we have far more control over site utilization, investment and strategy that is helping to bring better COG reduction and a greater degree of alignment between the retail and commercial businesses and the supply chain, which, as you know, in generics is a key success factor. So thank you.

  • Vasant Narasimhan – CEO of Novartis

And maybe just to add one point, we have signed a range of deals over the recent years to continue to bolster the Sandoz portfolio, including the Aspen pharmaceuticals business in Japan, which helps us build out our injectables portfolio and pipeline in Japan; the Gan & Lee, as you mentioned, in diabetes; the Biocon collaboration. So our aspiration is both through the internal portfolio and biosimilars, but also with the range of partnerships to not only tackle the kind of largest opportunities in biosimilars, but also the mid – so-called mid-tier opportunities in biosimilars and build a broad and deep portfolio.

I think, Mark, you also asked around margins. We have an aspiration to get to the mid- to high-20s margins in Sandoz over time. This won't be necessarily overnight, and we believe that we have the potential to be in line with the top-tier peers in the generic sector, and that's absolutely our goal.

Harry, on group margins?

  • Harry Kirsch – CFO of Novartis

Yes. First, also on Sandoz, I mean we are in the mid-20s, clearly the mid- to high 20s we see as achievable. And Mark correct, of course, the manufacturing initiatives, transformation initiatives are also in a significant way supporting the Sandoz margin. In addition to, of course, will be the biologics success given that structurally biologics and biosimilars have a higher margin structure than the other part of the business. So very good potential year for the Sandoz business. 

But of course, overall for the Group and Innovative Medicines, also very positive. If you look at the first 9 months, 360 basis points of improvement. And I think we can almost put it 1/3, 1/3, 1/3. One third is driven by the gross margin. Also here, of course, the manufacturing footprint and some mix effects have a positive impact, about 1/3 of that 360-odd percent – 360 basis points. And the other – another 1/3, I would say, will be COVID-related lower spend levels in the line of productivity and sales, 4% sales growth, maybe fixed cost pick-up.

Now we do expect that some of the COVID-related underspend will come back. And by the way, also in the current situation, we do invest into our products where it's possible. Of course, we don't waste money, and some activities are simply not possible or possible only at a lower level. But we do also believe that most of the productivity that we find in this new situation will also stick for the future. And that's, of course, a key element that we work ourselves for next year and the 3- to 5-year plan. So we expect that with this we do increase our core margin on the Innovative Medicines business and the company each of the next years, and that we are very well on track to get to the mid- to high 30s with these margin improvements year-by-year as we continue on our productivity programs and also figure out how we make most of the COVID-related productivity initiatives also stick. So overall, on a very good trajectory there.

  • Vasant Narasimhan – CEO of Novartis

Thanks, Harry. And then John, on iscalimab.

  • John Tsai – Head of Global Drug Development and Chief Medical Officer for Novartis

Yes. Yes. As you know, Mark, iscalimab is our anti-CD40 that we're advancing in multiple indications. Our primary indication that we're pursuing is in renal transplant, and we've shared some of the data previously. And we're moving forward with an innovative approach that we call iBox, which is a risk prediction scoring that combines measurements of the kidney function, and we look forward to bring that to the market, working with the health authorities in the early '23 time frame. That's for renal transplant. You were referring to the Sjögren's syndrome, which is an additional indication that we're exploring. And that is moving forward currently in a Phase IIa study. There is an interim reading out in the Sjögren's syndrome population. That will not come out until the first half of 2022. So those are the general time lines, but we are looking at multiple indications for iscalimab and we're hoping for potential multiple approaches to treating patients. Back to you, Vas.

  • Operator 

Your next question comes from the line of Graham Parry from Bank of America.

  • Graham Glyn Charles Parry - BofA Merrill Lynch, Research Division 

So firstly, on the margin guidance that Harry was just touching on there. So year-to-date, you're almost into your mid- to high 30s margin target, which I think you've previously pitched as being by 2022. So can you just help us understand when does margin – where does margin growth stop? So where is it capped at above that level? Secondly, on Kesimpta®, were there any actual sales in the quarter? Was it all free drug? And how long do you expect the 2-month free drug program to continue? Is that scheduled for all of Q1 or first half of 2021, for example? And then thirdly, on the changes on the NATALEE trial. So you've highlighted you've increased to 5,000 patients. But have you changed recruitment criteria there at all to enrich the population for high-risk patients or amended the statistical analysis plan to allow a primary endpoint readout only in high-risk patients, for example? Or do you think that the differences we're seeing between the Ibrance and Verzenio adjuvant trials were actually product rather than trial population-related?

  • Vasant Narasimhan – CEO of Novartis

Thanks, Graham. On the mid- to longer-term margin, Harry?

  • Harry Kirsch – CFO of Novartis

Yes. Thank you, Graham. Of course, we have to first recognize the first 9 months margin in our business is usually a bit above the full year as quarter 4 margins tend to be, for seasonality reasons, lower. So we are in the first 9 months of 36. I indicated for the full year, we see roughly 35 for Innovative Medicines. So we have some room to grow for the mid- to high 30s. And then we don't put a cap on it. But first, you want to get into that range of mid- to high 30s. I think most of large comparable market cap companies, R&D is mid- to high 30s. But it depends also, of course, on the mix of businesses and the launch cycles. So I don't want to put a cap on it at the moment, but first, you want to get to the mid- to high 30s. And we always, always want to ensure that we have the right investment levels at the same time as we drive productivity and resource allocation.

  • Vasant Narasimhan – CEO of Novartis

Thanks, Harry. On Kesimpta®, Marie-France?

  • Marie-France Tschudin – President, Novartis Pharmaceuticals

Yes. So our focus in 2020 is really just about driving appropriate demand and initiation of patients. In other words, for us, the broad HCP adoption and ease of access and initiation is key. As you know, we have this free drug program, and this will be a significant bridge for a number of patients until we get to paid scripts. So far, our key metrics is going to be NBRx. We're not underestimating the extra lift it takes to launch a product during this pandemic, and that's why we're really focused on driving demand and initiation. We've already seen some early access wins, and we're focusing on broad availability for patients. We've seen that with CVS and Aetna. We've had our first Medicare win, and we want to ensure that patients have preferred single step access. We believe that Kesimpta® has a potential of being the first-choice DMT for patients, physicians and payers because it's highly efficacious, it's safe and it can be administered at home. So that's what we're doing right now in 2020 is really focusing on demand and initiation of patients.

  • Vasant Narasimhan – CEO of Novartis

Thanks, Marie-France. And John, on NATALEE?

  • John Tsai – Head of Global Drug Development and Chief Medical Officer for Novartis

Yes. Thanks, Graham. Thanks for the question on NATALEE. As you know, we increased the sample size from 4,000 to 5,000 patients to allow for more robust assessment of the overall treatment effect. What I will say is, for competitive reasons, we don't want to disclose too much details. But we do believe in the unique Kisqali® profile, and the overall trial design remains the same. So what we can disclose is that the enrollment is continuing and going very well. We also are using a 400-milligram dose here. And what we've seen so far is that this has been well tolerated, which is different from the 600-milligram dose in the advanced breast cancer patients. So overall, it's going well, and recruitment is going very well. So thanks. Vas, back to you.

  • Vasant Narasimhan – CEO of Novartis

And maybe just to build on John's point, I mean, we believe that Kisqali® is unique and it's focused, as I mentioned in my earlier comments, on CDK4. We also believe with a robust trial in which we limit patient discontinuations in the study, which we think hampered some of the other studies. We have the opportunity to have the broadest indication in the entire competitive set, which would be, of course, a unique selling proposition for Kisqali® around the world. So we're quite excited about taking this forward.

  • Operator 

Your next question comes from the line of Andrew Baum from Citi.

  • Andrew Simon Baum - Citigroup Inc., Research Division 

Three questions for Marie-France, please, on inclisiran. Firstly, in terms of the launch and marketing, should I assume that the Entresto® field force is going to do the bulk of the heavy lifting? Second, when would you expect a J code to be issued? I understand they're issued quarterly now. So I'm assuming either first or second quarter. And then finally, just thinking about the degree of cost advantages you have in terms of pricing to payers versus the PCSK9 antibody. Could you just compare and contrast the COGS on inclisiran versus a monoclonal?

  • Vasant Narasimhan – CEO of Novartis

Thanks. Marie-France, if you want to take the first so I can tackle the COGS. So on the field force and the J code, Marie-France.

  • Marie-France Tschudin – President, Novartis Pharmaceuticals

Yes. So I mean, clearly, there are a lot of synergies between the field force that we've built with Entresto® and what we would like to do with inclisiran. I think the approach that we're taking with inclisiran will require us to also build our capabilities in managing different stakeholders such as governments and insurance companies and payers and working with systems. So we will have to build additional capabilities. But overall, I think it's clear that when you look at Entresto®, when you look at inclisiran and when you look into the future of our CVM portfolio, that there are a lot of synergies that we can leverage across the board. When it comes to the J code, yes, you're right, they are giving out J codes quarterly. I think – just to remind you that the lot of cardiologists in this space are not necessarily set up for the buy-and-bill process. But systems of care are and many of these cardiologists are affiliated with systems of care. So we believe that through the system we will be able to overcome this initial hurdle. That being said, we will be building the capabilities for buy-and-bill possibilities for our cardiologists and beyond.

  • Vasant Narasimhan – CEO of Novartis

Thanks, Marie-France. And then on our longer-term strategy and how it links to the cost of goods. We, of course, have the aspiration to take the product broad into the ASCVD secondary prevention market. We have the ongoing secondary outcome study. And then we also have the aspiration to test the medicine in primary prevention, an agreement with the NHS to take that forward and potentially additional supportive studies to get us to a primary prevention, which would open up the patient population quite dramatically. In order to enable that, we, of course, will then have to, over time, be able to provide this in larger volumes and at competitive cost. We believe that as an RNA-based therapy with a small molecule production profile, we have the opportunity to drive these COGS quite low. It's not as low perhaps as a traditional small molecule, but in that range. The way we're going to do that is we are, over time, planning to build up our own internal capabilities to produce this medicine. We're working with collaborative groups also in the UK to look at next-gen technologies. But the aspiration would be certainly to have the cost be a fraction of the cost of a typical monoclonal antibody, and that would enable, I think, that large volume possibility.

  • Operator 

Your next question comes from the line of Laura Sutcliffe from UBS.

  • Laura Sutcliffe - UBS Investment Bank, Research Division

Firstly, on Kesimpta®. You've been clear about your plans to drive some demand in the short term. But could you outline for us what you think the ramp towards profitability looks like for this drug? Is it quicker than usual because you've made ofatumumab historically, albeit in a different formulation? Then secondly, for John, on the factor B and C3G. A view from the regulator on what the appropriate endpoint is for a Phase III trial? Is proteinuria enough? Or will you need eGFR? And then maybe finally, on Zolgensma® sales outside the US, I think you said Germany is playing a very substantial part. But could you tell us what other countries are contributing meaningfully to revenue at this point? Is it just Japan?

  • Vasant Narasimhan – CEO of Novartis

Thank you, Laura. So we'll start with the Kesimpta® ramp. Marie-France?

  • Marie-France Tschudin – President, Novartis Pharmaceuticals

Yes. So I think we have to think about what Kesimpta® is, right? So Kesimpta® is a high-efficacy therapy, it's well tolerated, it can be administered at home. And for this reason, we firmly believe that our position goes beyond the current B-cell market. If you think about the fact that 70% of patients are currently on either subcu or oral DMTs and 63% of patients remain on low-efficacy therapies. When you look at what's happening in the marketplace today, it's very encouraging to see the shift to higher-efficacy therapies. We know that there are a number of physicians that are not necessarily – don't necessarily have access to infusion capabilities or patients certainly in this COVID period who are going to be looking for options that don't require them to spend time in an IV infusion center. So we believe that the way we should be positioning Kesimpta® is in a first line or a first switch. And that's why the focus for 2020 is really on the appropriate demand, the initiation of patients. If you look at some of the estimates on what the B-cell market could look like over the next 10 years, there are some estimates that point us to 35% to 40% of the market. We certainly want to be participating in that very strongly. So what the focus is now is broad adoption, ease of access initiation. We've learned a lot from our previous launches in this space, and we know that it's absolutely crucial for us to have strong access and for patients to be able to initiate this drug very easily. We've got, as we said, the free drug program. And our key metrics over the next couple of months is going to be NBRx.

  • Vasant Narasimhan – CEO of Novartis

Thanks, Marie-France. And then John, on the C3G, LNP and Phase III endpoints?

  • John Tsai – Head of Global Drug Development and Chief Medical Officer for Novartis

Yes. For LNP, Laura, I guess, we'll call it, iptacopan, if you guys know the new name for it. In fact, as we look at C3G, as you know, that there's no therapeutic agent designed to really target the underlying disease, which is complement dysfunction here. So we're really encouraged. And you saw the results that Vas shared in the presentation slide. So we're really encouraged by those results. Now as you pointed out, in terms of proteinuria reduction, this is not a validated surrogate marker with the FDA. So we're currently working with the FDA, looking at both the urine protein/creatinine ratio as well as looking at estimated glomerular filtration rate, eGFR. And what we did see in the Phase II studies was that there was benefit in both. So as we move forward, we're capturing both in our studies and looking for the best path forward with the regulatory authorities.

  • Vasant Narasimhan – CEO of Novartis

And then lastly, on Zolgensma® ex US, there's – I would say, maybe four groups of countries that are relevant. The US, of course, Japan, as we continue to launch. In Europe, you have some early adopter countries, so primarily Germany and a few other smaller countries. But then we're now working very hard on expanding access in the UK, France, Spain and Italy. And then the fourth group will be the emerging market countries, which are substantial markets, countries like Turkey, Saudi Arabia and the Gulf Coast countries, Brazil, Australia, not emerging markets, but Australia and Canada. So as the next 12 months unfold, various markets will come online at different points in time, depending on how fast the various access bodies move in providing reimbursement. We do continue to see a reasonable number of patients in self-pay situations as well and also compassionate use, of course, through our compassionate use program. I'd say, overall, the demand is very robust across these markets, both below two years of age, but as I noted also a significant proportion of patients above two years of age as well.

  • Operator 

The next question comes from the line of Kerry Holford from Berenberg.

  • Kerry Ann Holford - Joh. Berenberg, Gossler & Co. KG, Research Division 

Three questions, please. Firstly, in multiple sclerosis, looking at Gilenya®, how much of the sales decline in Q3 is due to pandemic disruption versus the increased competition you mentioned? I ask which competitor you're losing share to? I wonder if this is also a reflection of you promoting Mayzent® and Kesimpta® over Gilenya® and I presume that will continue going forward. ACZ, can I ask is there another interim analysis scheduled for the CANOPY-1 study before the final readout? And if so, when that might be? And then on Lutathera®, I guess I'd like to understand what the risk is here. The disruption we've seen currently due to the pandemic results in a permanent loss of access or interest for the physicians and for new patients. How can you retain that interest in that relationship?

  • Vasant Narasimhan – CEO of Novartis

Thank you, Kerry. So first, on Gilenya®, Marie-France?

  • Marie-France Tschudin – President, Novartis Pharmaceuticals

Yes. So our Q3 Gilenya® decline is as expected, and it's been driven by some inventory decreases, which should bounce back. We have seen, as you know, a significant slowdown in the NBRx, especially in the S1P class. And Gilenya® due to its pretesting and first-dose observation has seen a slowdown in the NBRx market. We've also seen a slower recovery in the S1P market versus the others during this COVID pandemic. We have had a lot lower demand due to increased competition. There are new oral DMTs. And also, we have seen some switches happening with other competitors, higher RDs. And the fact that the full organizational focus is on driving new patient starts for Kesimpta® and Mayzent®. So Gilenya® continues to be a third-most prescribed DMT worldwide. We know it's a high-efficacy oral. It's the only DMT prescribed in pediatric patients 10 years or older. In the US, we'll continue to promote it in this population or patients who prefer orals, but our focus has clearly shifted.

  • Vasant Narasimhan – CEO of Novartis

Thanks, Marie-France. On canakinumab, John?

  • John Tsai – Head of Global Drug Development and Chief Medical Officer for Novartis

Yes. For canakinumab in the first-line non-small cell lung cancer study, Kerry, what Vas did mention earlier in the presentation is that the DMC did meet earlier this month and recommended that we continue the study without modifications, and this was an interim, as noted previously. We continue to have high thresholds for the interim analysis for both CANOPY-1 and CANOPY-2. The end analysis step or plan for CANOPY-1 is in the second half of next year. And for CANOPY-2, the end analysis is planned for the first half of next year. So those are the overall time lines moving forward.

  • Vasant Narasimhan – CEO of Novartis

And we do have, Kerry, additional interim analyses, but we're not in a position right now to predict exactly when those are going to happen based on the statistics. We'll of course keep everyone up to date when we have a better visibility. On Lutathera®, Susanne?

  • Susanne Schaffert - President, Novartis Oncology

Yes. Thank you, Kerry, for the question. So Lutathera® was more or less in line with previous year, reaching USD 119 million. And it is, as you rightly say, impacted by COVID. When you look at the different dynamics, for the US, we had a slight decline of 4%. But on the other side, in Europe, where the situation opened up again, we saw a growth of 10% versus previous year. We remain very confident in Lutathera® given the very strong profile of the product. As you remember, Lutathera® has demonstrated overall survival benefit over somatostatin treatment. And we see still very high interest for the product. We saw some postponement and cancellation of new patient starts, but we're still activating our plan to further growth. We are reaching out to the community level where over 65% of the patients are treated, and we have very encouraging discussions there. So overall, we remain very confident, and the current softness is mostly impacted by COVID. And as soon as the situation is released, we expect to have new patients taking up again.

  • Vasant Narasimhan – CEO of Novartis

Very good. We have a number of questions on the line. So I'll ask the next set of questions to please limit yourself to one question, no more than two subparts. So we could have the next question, operator.

  • Operator 

Your next question comes from the line of Peter Welford from Jefferies.

  • Peter James Welford - Jefferies LLC, Research Division 

Could I ask on Gilenya®, just going back to that, whether you can provide us any visibility now on the timing of potential US generics after I think all the sort of legal cases have now been finalized. And sorry, can I just go back to John, just for a clarification on canakinumab. I know you said that there were other interim analyses, I think you said. But is the second half '21 headline data that you're talking about, is that your best estimate for the final readout of CANOPY-1? Or is that your assessment of when we could next hear, which actually could be one of the next interim analyses?

  • Vasant Narasimhan – CEO of Novartis

Yes. I can take both of these. On Gilenya®, we, of course, are very pleased with the response that the district courts have uphold our patent. We do understand the filer has filed an appeal. So over the next 12 to 18 months, that appeal will now unfold. We continue to stand by our patents, including some of the more recent past patents that have been issued. So we would expect, again, a court case to potentially happen over the next 12 to 18 months. And in the meantime, we continue to operate as planned and continue to aggressively defend our IP. With respect to canakinumab, the final analysis for the second-line study is in the first half of next year. And the final analysis for the first-line study is in the second half of next year. There is an interim, another interim analysis for both studies, both the second line and the first line. Learning from some of the disruptions that have happened with COVID, we would feel more comfortable not providing specific timings until we have a better sense of when exactly those interims will occur. Is that clear, Peter?

  • Peter James Welford - Jefferies LLC, Research Division 

That's great. Thank you.

  • Vasant Narasimhan – CEO of Novartis

All right. Perfect.

  • Operator 

Your next question comes from the line of Keyur Parekh from Goldman Sachs.

  • Keyur Parekh - Goldman Sachs Group, Inc., Research Division 

Hopefully, you can hear me okay. Vas, would you mind just setting the tone for the upcoming advisory committee for Entresto® in HFpEF. Based on your conversations with the regulatory agencies, what should we expect to be the focus of the advisory committee? That's one. And then very quickly, secondly, for Harry. Harry, can you just remind us for your priorities for capital allocation as we get into kind of next year? And especially, how are you thinking about kind of stock buybacks versus business development?

  • Vasant Narasimhan – CEO of Novartis

Yes, Keyur, thank you for the questions. On the advisory committee, we'll see ultimately what the FDA focuses on. I think our expectation is two major areas of focus. One, on the primary endpoint, as you know, the centrally adjudicated result was narrowly missed. The investigator adjudicator result was, in fact, positive and met statistical significance. A reanalysis by an independent group also indicated a positive result. So parsing those various results, I think, will be one major topic. And then looking at the various sub group analysis. There was a clear trend for benefit in patients with an EF up to a certain cutoff, roughly 57%, as well as in women and how the FDA might navigate all of the above from a labeling perspective. We expect those to be the major topics. So from a safety perspective, don't expect major discussions. Harry, on the capital allocation?

  • Harry Kirsch – CFO of Novartis

Yes, Keyur, thank you. As you probably imagine, there is no change in our capital allocation strategy. First priority always has to be investment in the organic business. The second priority being an attractive growing end year dividend in Swiss franc, which we again expect to pay out in usually March of next year, should AGM, as always approve. Third priority, value-creating bolt-on M&A. And fourth, share buybacks. So it depends very much what opportunities do we find. We all know, usually on M&A bolt-on, quite heavy premiums have to be paid. And so we are super selective on them. And so let's see if we find them up to 5% of our market cap. And should we not find them, of course, share buybacks, I expect always to be part of our capital allocation, but the fourth priority. Having said that, we always do some share buybacks to avoid any dilution from our employee compensation programs, but that we don't announce – the ongoing commitment to not dilute our shareholders.

  • Operator 

The next question comes from the line of Simon Baker from Redburn.

  • Simon P. Baker - Redburn (Europe) Limited, Research Division 

Firstly, a question on Sandoz. I wonder, Richard, could you give us an idea of how important label carve-outs of generics are for you in light of the recent ruling that potentially renders them illegal in the Glaxo-Teva case earlier this month. And then secondly, I noticed on the slides, the mention of Luxturna® in a few of the footnotes, but no other comment. So I'm looking if you could just give us an update on where you stand with Luxturna®.

  • Vasant Narasimhan – CEO of Novartis

Thank you, Simon. On Sandoz label carve-outs, Richard?

  • Richard Saynor – CEO of Sandoz

Yes. No, it's a really important and interesting topic. I mean clearly we're watching the progression now with Teva, I think, going to appeal on the GSK Coreg case. Clearly, the use of skinny labels has been a routine route to market, particularly in the US. It really goes against really the provision that we put in place. And clearly, as an industry, it's something we need to explore and consider how we challenge.

  • Vasant Narasimhan – CEO of Novartis

On Luxturna®, Marie-France?

  • Marie-France Tschudin – President, Novartis Pharmaceuticals

Yes. So as you know, we have the rights for Luxturna® ex US, and we have certainly made a lot of progress in making sure that we prepare centers from a training perspective to manage the product. I will say that during this COVID period, we did see a complete stop to those surgeries as they were considered non-urgent. What we are seeing is we are seeing pickup happen now. So the hope has to be that we can continue to see these children getting use of Luxturna®. We've seen an increase in approvals overall. We're working on reimbursement and making sure that centers are basically apt and trained to administer the product. So definitely a slowdown, but hopefully, for the rest of the year, we'll get as many children treated as possible.

  • Operator 

Your next question comes from the line of Florent Cespedes from Société Générale.

  • Florent Cespedes - Société Générale Cross Asset Research 

Two quick ones. First for Marie-France. On Mayzent®, could you please elaborate on what is behind the acceleration of the product? And if it is sustainable? My second question on ligelizumab for John. Could you share with us how you believe you will differentiate these products versus your BTK inhibitor, which is in Phase II?

  • Vasant Narasimhan – CEO of Novartis

Thanks, Florent. Mayzent®, Marie-France?

  • Marie-France Tschudin – President, Novartis Pharmaceuticals

Yes. So I mean we have seen an acceleration in Mayzent®. We're very happy to show 41% quarter-over-quarter growth. This is a unique set of patients, and Mayzent® has unique data in this population showing really great results in the SPMS population. We've seen growth despite COVID, and this is just a tribute to the fact that physicians are identifying these patients and are bringing these patients to treatment. We've got breadth in our Rx, patient onboarding is happening and it's easier. So we've improved when it comes to that. And also, we have a clear positioning. We've also launched in additional markets. So we've seen that Germany has about 1,000 patients. We've also recently seen the nice nod from the UK. And we're preparing to launch in China and Japan. So I think you can continue to see this growth quarter-over-quarter and year-over-year with Mayzent®.

  • Vasant Narasimhan – CEO of Novartis

And John, on ligelizumab.

  • John Tsai – Head of Global Drug Development and Chief Medical Officer for Novartis

Yes. Yes. Thanks, Florent. Thanks for the question on ligelizumab. As you know, ligelizumab is our anti-IgE that forms free complexes and binds up the free IgE. We did have a publication earlier in the year in New England Journal, which compared ligelizumab in CSU, where we showed significant benefits at 42% versus 26% in Xolair®. So based on that, we are moving forward, obviously, and are fully recruited in our trial for ligelizumab. We expect the readout to be in the second half of next year. You asked about differentiation versus remibrutinib BTK inhibitor. Currently, we're still looking at – we're awaiting the full results for remibrutinib in CSU. So obviously, for remibrutinib, this is an oral versus ligelizumab being a subcu formulation. So as we get more information on remibrutinib, I think we'll be able to clarify what the differentiation is between the two agents.

  • Operator 

The next question comes from the line of Richard Vosser from JP Morgan.

  • Richard Vosser – JP Morgan Chase & Co, Research Division 

One, please. You talked, Vas, in the opening remarks about continued improvement in the US prescriptions. We've seen in terms of COVID coming back with a vengeance maybe in Europe. So just your thoughts on how new patient starts and your therapies are going in Europe and outside the US to just give us a flavor going into Q4.

  • Vasant Narasimhan – CEO of Novartis

Yes. Thanks, Richard. I think it's a very variable situation. What I do believe is that it's variable by country and jurisdiction. What I think is clearly the case, though, is health care systems have, one, gotten better at managing COVID, severe COVID cases, understanding when to hospitalize, when to bring patients into the ICU and, therefore, better manage the load. I think, second, there's a broad recognition broadly also published in the academic literature, that there is a substantial impact of this pandemic on non-communicable diseases at large. And there's, I think, a broadening desire in the public health community not to see that expand. So trying to maintain patient visit schedules from – in oncology in all of the various non-communicable disease categories, rheumatology, cardiology, pulmonology, dermatology, ophthalmology, et cetera. And then third, from just the economic financial sustainability, health care systems are quite motivated based on my conversations to also maintain their normal activities to the extent possible. I think, for all those reasons, we certainly are seeing an impact of the second – next wave in Europe, but there hasn't been thus far as severe as what we saw in April and May. And as Harry noted, we're hopeful that, that will remain the case. Now if we do see significant disruptions, of course, we'll have to adjust accordingly. And I actually think that's a similar situation in the US. So the US appears right now to be a bit more resilient in making sure the health care systems operate also, I think, because of the financial strain, those systems have been under. Thank you, Richard.

  • Operator 

The next question comes from the line of Tim Anderson from Wolfe Research.

  • Richard Wagner – Wolfe Research 

This is Richard Wagner for Tim Anderson. My question – one please, regarding LAG525, your LAG-3 inhibitor. In Q2, it was shown as a 2023 submission. It's dropped off of the submission slide. Wondering if you had some underwhelming data with this and if novel and the way it's changed its prioritization. I know it's not a high-priority program, but it's relevant to one of your IO competitors, Bristol Myers Squibb, who have a more advanced LAG-3 program.

  • Vasant Narasimhan – CEO of Novartis

Thanks Richard. John, I don't know if you have the latest on LAG-3. I certainly don't. So John?

  • John Tsai – Head of Global Drug Development and Chief Medical Officer for Novartis

Yes, based on portfolio prioritization, Tim, we made some decisions, and the area that we were looking at was LAG in triple-negative breast cancer. And we decided not to move forward in that indication. So that's why it's dropped off.

  • Operator 

Next question comes from the line of Jo Walton from Credit Suisse.

  • Jo Walton - Crédit Suisse AG, Research Division 

Two quick ones. Do you have any visibility on Sandostatin® LAR generics? And do you – I believe it was mentioned that Sandostatin® generics in Europe were a factor? Are there more countries? Is that becoming a more serious issue? And the second one on Cosentyx®, please. I know that you say that there's been a drop in visits to derm. But we are seeing in the first three quarters of this year substantially higher prescription than sales growth. So there's obviously some increased competition here. And I wonder if you could address the competition angle as much as the lack of derm patients in the US. And I believe in Europe, you said there's now mandatory use of biosimilars. I wondered if you could expand on that comment, too.

  • Vasant Narasimhan – CEO of Novartis

Thanks, Jo. So first on Sandostatin®, Susanne?

  • Susanne Schaffert - President, Novartis Oncology

Yes. Thank you, Jo. So as you saw Sandostatin® sales were declining, and this was mostly driven by generic erosion in Europe. At date, there is one generic that has received marketing authorization in Europe and has started commercial activities in limited countries, mainly Germany, France, UK and a few other small countries. On the US side, we know that there's one generic application going through regulatory process. But at the moment, we have no further update.

  • Vasant Narasimhan – CEO of Novartis

And then on Cosentyx® competitive dynamics, Marie-France?

  • Marie-France Tschudin – President, Novartis Pharmaceuticals

Yes. So I'll just start off by saying that it's a very competitive class, and it's getting more competitive by the quarter almost. But despite this, Cosentyx® continues to deliver very strong growth. And if I could just take you through it. We have – first of all, we had our first USD 1 billion quarter, which I think is definitely something to celebrate. And we have seen a slowdown in the market. So if we look at the expansion of the market this year versus last year, I mean, there's clearly been a slowdown. There's been more competition. We'll get to the biosimilars question in a second. And what we have seen is we've seen a faster recovery in the rheumatology space versus the dermatology space. If we look a little bit more carefully at the US, we're maintaining TRx share and NBRx share in derm, even though you see this lower recovery and the increased competition of IL-23s. In the rheum space, we're actually growing 3x TRx versus the market year-over-year.

So what our aspiration is, is to maintain our share in derm and accelerate in the rheumatology space. If I look at EU, where biosimilars have entered and where there's mandatory use, so it's exclusively in some of the markets in the EU, and namely Germany, Spain and the UK, what we've done is we've actually maintained the share in dermatology after the initial entry of biosimilars. And the same with the rheumatology space where we've seen the biosimilars being more used. So what this means actually is that we're just seeing a delay in use for Cosentyx® in Europe. We still maintain a #1 or #2 position in most EU major markets.

And then with China, we're outperforming incumbent biologics, and we expect NRDL listing in the first half of this year. So this all leads us to believe that through the complete treatment approach of Cosentyx®, we see very broad indications from the PsO space to the actual SpA spectrum. The fact that we believe that we and others will continue to grow this market, if you can consider the market penetration rates or the biologic penetration rates in both rheum and derm, they're still relatively low. And the fact that Cosentyx®, we're investing in future indications, you can anticipate three additional indications in the rheum space, three additional indications in the derm space. This will address approximately an additional 3.5 million patients. So for these reasons, we believe that Cosentyx®, despite the slowdown of COVID, despite the competition, despite the biosimilars, we have the potential to go beyond USD 5 billion in sales.

  • Operator 

The next question comes from the line of Naresh Chouhan from Intron Health.

  • Naresh Chouhan - Intron Health 

Just one big-picture one on ESG. It's obviously been a big topic when discussing Novartis with investors, and you clearly made a concerted effort to improve the rating. To what extent have those efforts surprised you and that they actually led to better financial or operational outcomes? And is it unfair to assume that all the ESG efforts currently expense on the bottom line? Just a bit of color around what you've seen?

  • Vasant Narasimhan – CEO of Novartis

Thanks, Naresh. I think the ESG efforts have had multiple benefits for us. It's been a big focus for us. We're really pleased not only to have gotten important ratings, the #1 ratings across many of the agencies, also in various specialty agencies in climate and diversity also moved off of the red list for MSCI, which I think a lot of investors had on their minds. So all of that is cleared off the table. But I see a few fundamental benefits for ESG. First, with our own associates, it's a huge motivator to be a leader in the space. I think for our people, more than 50% millennials, this is a huge topic. So we see it as an element of our own story internally. I think, second, with a broader stakeholder group, the issuance – as indicated – the issuance of our bond led to me to get very positive feedback from a range of stakeholders, ranging from ministers of health, very senior people in government, the Gates Foundation. And so I think it creates the ability to have a broader conversation about your company and the impact you're trying to have. And then lastly, we do believe that getting much more efficient on how we use energy, much more diverse in how we source and bring in people into the company, getting – to be a leader in building markets in emerging markets and low-income and low-middle-income countries through our work in Africa, all of these things will benefit Novartis strategically for the long term from a talent market and all of the fundamentals of the business. So I actually think it's totally sensible. We talked about it as a leadership team in a committee that I chair. We systematically have the targets, which we publish transparently. I think we have a leadership team that's very passionate about it. And again, in the long run, it will – it won't show up in the quarters, but it will show up in the long-run trajectory of the company, that I'm convinced of. Thanks for the question, Naresh.

  • Operator 

And the final question comes from the line of Richard Parkes from Exane BNP.

  • Richard J. Parkes - Exane BNP Paribas, Research Division

Just one on iptacopan. It looks like you're also initiating a Phase III in IgA nephropathy. So I know you might not want to talk about those Phase II data until it's published, but maybe you could compare your experience with the Phase II trials in C3 glomerulopathy and IgA nephropathy to the previously reported anecdotal experience with eculizumab. And also, how you're thinking about the safety of the drug in terms of infection risk and how that's developing. I hear conflicting opinions from experts whether there's likely to be a greater or lesser risk of serious infection with factor B inhibition? So I'd be interested to hear your perspective.

  • Vasant Narasimhan – CEO of Novartis

Thanks for the question, Richard. John?

  • John Tsai – Head of Global Drug Development and Chief Medical Officer for Novartis

Yes. So thanks for the question, Richard. Across the board, as you know, for iptacopan, we're looking at multiple indications, PNH as well as C3G, IgA as well as idiopathic membranous nephropathy. As we're looking across the board for C3G, what we see is, obviously, the data that we shared recently. For IgA, the full data set is going to be available early part of next year. As we look at the opportunity, it is a – there's no disease-modifying treatments out there currently. And so the profile that we're seeking is one where we do believe there's benefit. You asked specifically about infection risk. So far, based on our Phase II studies, we see that it's well tolerated. We haven't seen significant increases in infections across the board. And that's across both IgA, C3G as well as in the PNH. So I think with all of that information, we will have a large pool of safety information as we move forward in all of these indications. So I'll leave it there. Hopefully, that answers your question.

  • Vasant Narasimhan – CEO of Novartis

Perfect. Thanks, everyone, for joining the call. I hope everyone stays safe and healthy and energized in these difficult times. We'll continue to drive the growth of Novartis. We're confident in the long-term outlook of the company. I hope increasingly all of you will be as well. And we'll look forward to keeping you up to date. Thank you.

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