Novartis AG (NYSE:NVS) Q1 2020 Earnings Conference Call April 28, 2020 7:00 AM ET

Company Participants

Samir Shah – Global Head, IR

Vasant Narasimhan – CEO

Marie-France Tschudin – President, Novartis Pharmaceuticals

Susanne Schaffert – President, Novartis Oncology

Harry Kirsch – CFO

Richard Saynor – CEO, Sandoz

John Tsai – Head, Global Drug Development & Chief Medical Officer

Conference Call Participants

Keyur Parekh – Goldman Sachs Group

Graham Parry – Bank of America Merrill Lynch

Stephen Scala – Cowen and Company

Peter Welford – Jefferies

Simon Baker – Redburn

Timothy Anderson – Wolfe Research

Eric Le Berrigaud – Bryan Garnier

Seamus Fernandez – Guggenheim Securities

Florent Cespedes – Societe Generale

Matthew Weston – Crédit Suisse

Mark Purcell – Morgan Stanley

Richard Vosser – JPMorgan Chase & Co.

Laura Sutcliffe – UBS Investment Bank

Emmanuel Papadakis – Barclays Bank

Kerry Holford – Berenberg


Good morning, and good afternoon, and welcome to the Novartis Q1 2020 Results Release Conference Call and Live Audio Webcast. [Operator Instructions].

With that, I would like to hand over to Mr. Samir Shah, Global Head of Investor Relations. Please go ahead, sir.

Samir Shah

Thank you, and welcome, everybody, to Novartis’ First Quarter 2020 Conference Call. Before we get started, 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.

I’d like to thank you all for participating in today’s call and now hand across to Vas.

Vasant Narasimhan

Thank you, Samir, and thanks, everyone, for joining today’s call. With me today, I have Harry Kirsch, our Chief Financial Officer; Marie-France Tschudin, President of Novartis Pharmaceuticals; Susanne Schaffert, President, Novartis Oncology; John Tsai, our Head of Global Drug Development and CMO; Richard Saynor, the CEO of Sandoz; and Shannon Klinger, our Group General Counsel.

So moving to Slide 5. This quarter, we were able to maintain strong operational performance while supporting the global response to COVID-19. When you look at our operational performance, sales grew 13%, core operating income grew 34%. This included the effect of approximately $400 million of forward buying we saw across a range of brands. When you strip out that $400 million effect, sales grew 9% and core operating income grew 22%. So very healthy and strong growth in the quarter with solid margin expansion both in Innovative Medicines and Sandoz, excluding the COVID effect.

Now moving to our pipeline. We had a busy quarter once again in delivering our pipeline to deliver long-term growth. First, with respect to Zolgensma, positive CHMP opinion and a Japanese approval. With respect to Cosentyx, we had a positive CHMP opinion in non-radiographic axial SpA. ofatumumab and inclisiran had their filings accepted in the U.S. and EU, and both filings are on track with FDA.

Entresto, we submitted the — have passed submission to the FDA. Beovu had its approval in a range of markets. And we also had a priority review for capmatinib and fast track designation for TQJ, our antisense RNA for Lp(a).

Now we also, I think, demonstrated in the quarter a very robust pandemic response. I’d like to walk you through in a little bit more detail how we’ve set up to respond to the pandemic at Novartis. So moving to Slide 6.

Throughout the quarter and through the remainder of this year, we want to demonstrate our relentless commitment to associates, patients, health care providers and society. In each one of these areas, we’ve set up clear efforts, task forces to ensure that we’re really trying to do the right things to ensure our business continuity, but also that we’re serving all of these stakeholders. So taking each in turn, if we move to Slide 7, starting with business continuity and the manufacturing and supply chain operations, we put in place robust plan across our suppliers, our own operations and our dealing with customers to ensure there’s no disruption in our ability to deliver medicines to patients.

With respect to suppliers, we have excellent transparency across the value chain. We’ve been working in real-time to adjust our inventory levels. And it’s worth noting that less than 2% of our sales are supported by APIs that are single-sourced from China and India, giving us strong resilience in that supply chain.

With respect to our own operations, we’ve really put in place excellent plans across our supply network to ensure that we’re able to maintain solid manufacturing operations and are currently maintaining greater than 6 months of inventory on key brands. And then lastly, in terms of supply reliability with customers, we’re achieving currently 99.5% customer service levels across our Innovative Medicines portfolio.

Now moving to clinical trials on Slide 8. First and foremost, it’s important to highlight our regulatory submissions for 2020 remain on track. And our — COVID-19 impact on our clinical trials is largely manageable. You can see here a list of our key regulatory submissions. They are continuing to progress. We’re managing them well with the relevant regulators.

Now with respect to clinical trials, we have over 300 trials currently operating with 96,000 patients. The only disruptions we’re seeing is primarily studies that are in the start-up phase or in the planning phase, where we have some slowdown in new enrollments on ongoing studies and start-up with new studies. But I would say that in studies that are more in a maintenance or closeout situation, we’ve been able to manage extremely well with minimal disruptions.

Overall, across the portfolio, our ability to deploy digital technologies to look at real-time across all of our clinical trial sites across our clinical trial portfolio, enabling us to intervene and to ensure that we minimize the disruption. Some of the highlights include a significant number of remote monitoring visits, which we’re continuing to scale up and we also hope to use post pandemic as an ongoing normal course of business to increase the efficiency of our operations.

We have 2,500 users on our artificial intelligence-driven Sense platform to predict where the issues are, where there are issues in clinical trials and to intervene. And we’re having a very rapid ability across the network to detect, evaluate and respond to any site-level issues.

Now moving to Slide 9. When you look at our approach to ensuring the well-being of our associates, we’ve tried to ensure job safety with no job-related losses to COVID-19. We’ve paused ongoing restructurings, provided additional leave and child care assistance. We have a range of employee well-being programs. And we’re also looking to adapt, and have adapted, our ways of working with our field force, protecting our associates in the field and changing the way we look at incentive comp and schemes to ensure our associates are treated fairly. This is a critically important slide because I believe it’s what enables us to really see the kind of operating performance we’ve seen in the first quarter and expect to see over the course of this year. We have very high engagement levels across our associate base.

Now moving to Slide 10. When you look at our engagement with HCPs and with patients, we’ve moved very quickly to look at digital solutions to enable patients to have online drug refills, access to disease education and access to direct-to-patient services. With respect to HCPs, we’ve scaled quickly on web meetings, WeChat and e-mail in China. We’ve provided a range of tools to our sales associates to be able to engage in real-time and are building additional portals to really try to be at the leading edge of how digital technologies can improve the ability to engage with customers.

Now lastly, I wanted to turn to the important role we’re playing in responding to the COVID-19 pandemic on Slides 11 and 12. First, starting on the left-hand side, you can see with our COVID-19 response funds and donations, we’ve committed $40 million to countries across the globe to really support local efforts and relief local efforts for health care systems to build resilience in the face of this challenging situation. We’ve also committed over 130 million doses of donated drugs with hydroxychloroquine, which are reaching now over 60 countries with 50 million doses shipped to date. And that’s, of course, at the request of the — of ministries of health. We’re working on a range of external collaborations, the COVID Accelerator where, with Bill & Melinda Gates Foundation, I serve as the Co-Chair, and we’re working very hard to accelerate the next-generation of treatments that we hope will come about from our collaborations as well as a range of other partnerships you see here.

From an internal discovery standpoint, we’ve launched our own drug discovery efforts to try to find our own direct antivirals in collaboration with a number of academic and other collaborators. And Jay Bradner and the NIBR team are working hard to bring these efforts forward.

And then lastly and importantly, we’ve engaged in our own clinical investigations with Novartis-sponsored studies and IITs. Going to Slide 12, just to briefly review some of those efforts, with respect to Novartis-sponsored Phase III studies, we have 3 Phase III studies now endorsed by the FDA at canakinumab, ruxolitinib and hydroxychloroquine. Of course, it’s important to note that we have to be humble with respect to anytime we try to repurpose drugs in this kind of setting. And we’ve seen, of course, with the early IL-6 data, this will be a challenge. Nonetheless, we think it’s critical that we focus now on generating double-blind, randomized, controlled, adequately powered studies to really figure out which of these interventions could help patients.

We’ve supported over 30 — 32 IIT proposals from a full range of our portfolio, ranging from drugs like secukinumab, Cosentyx as well as imatinib, valsartan and omalizumab Xolair. And then lastly, with respect to access initiatives, we’ve approved now 697 individual requests and 23 from governments all around the world.

So Slide 13, thinking about now taking a step back on the dynamics we expect to see on the full year. I think one of the things we’re watching very carefully are — in patient/physician dynamics, on the positive side, we see longer script lengths. We see higher rates of compliance to many of our medicines. But on the flip side, we have, I think, all seen the declines in visits to providers and hospitals over the course of recent weeks, particularly for us in certain therapeutic areas like ophthalmology. So we’re watching those dynamics closely. We’re optimistic that, given the desire of physicians and the health care community not to have the hidden cost of deferral of care for patients as well as these health care systems’ own economic incentives to get their health care systems running appropriately again, we’ll get to a balanced situation in the coming months.

Also, important payer and health care system dynamics. We’re going to see, I think, over the course of the year, shifts in sources of reimbursement in the United States as patients shift their insurance to whether a government insurance and private insurance plans. In addition, in Europe, we may see some delays in reimbursement decisions based on where different health authorities decide to take things in the coming years. So those are dynamics we’re watching. Hard to say exactly how it will play out, but important dynamics.

And then lastly, from a clinical trial/regulatory dynamic standpoint, FDA is working very hard based on all of our engagement to maintain clinical review time line. That is our current expectation. But of course, we need to watch those dynamics very closely as the year unfolds.

So that, I think, summarizes where we are on the pandemic. You can see with stable operations, trying to be a leader in respect to the global response to overcoming this situation and taking care of our associates, people and putting ourselves in the right place to have resilience for the long term.

Now turning to our operational performance on Slide 14. You can see that, in the quarter, we had very strong growth across our key growth drivers. Highlights included, of course, Entresto, Zolgensma and Cosentyx, also with very solid performance. And then across the full range of oncology assets, again, you can see that our medicines are doing well across the key brands in Novartis. And on the right-hand side, now we’ve moved up to 46% of our total Innovative Medicine sales coming from key growth drivers and launches, demonstrating the rejuvenation in our portfolio for the mid- to long term.

Now turning to Slide 15, a few words on Sandoz. Sandoz had an outstanding quarter, benefiting in part from COVID-19-related forward purchasing, but also very strong underlying performance with sales growth of 11% in constant currency. This was driven by a strong biosimilars performance with 31% constant currency growth as well as excellent performance in Europe with 19% constant currency growth.

Now with respect to the U.S. divestment of Aurobindo, we’ve mutually agreed, as we’ve announced, to terminate that transaction. And we’ll be focused now on optimizing that U.S. business, and Harry will have some more comments as well on the overall size and dynamics of that portfolio.

Now moving to Zolgensma on Slide 16. Our U.S. growth momentum continues. You saw, in the quarter, as we guided, our Q1 sales were in line with our Q4 2019 sales. The next catalyst for Zolgensma will certainly be the launches in Japan and Europe. And that’s what’s, I think, going to lead to the next sales ramp for this product. But in Q1, we also announced important data at MDA, which demonstrated the intravenous formulation had outstanding results, both for — in terms of persistence out beyond 5 years as well as in asymptomatic patients meeting their WHO motor milestones. And we also announced in the quarter that FDA completed its review of its August 2019 Form 483 response with no further enforcement actions.

So upcoming milestones, CHMP positive opinion achieved and European Commission decision expected shortly; Japan reimbursement decision expected shortly. And I think, importantly and perhaps underestimated, the launches we’ll have in a range of other countries around the world providing additional opportunities for growth.

Now moving to Slide 17. With AVXS-101 IT, we believe, in the quarter, we also showed, with strong data, very compelling clinical profile using the gold standard Hammersmith score demonstrating a very robust response with a mean 6-point increase in Hammersmith, twice the clinical meaningful threshold, as well as 92% of patients in that study in the 2- to 5-year-old age group achieving a clinically meaningful response. So we’re in the process now of working with FDA to resolve the clinical hold with the ongoing preclinical studies that we currently have initiated. We’ll be meeting with FDA in the course of Q2 to clarify the scope of the data required and then moving to a pre-BLA meeting, where we hope to clarify then our ability to file a BLA for AVXS-101 IT.

Now moving to Slide 18. For 2020, overall, our catalysts remain on track. You can see the full range of catalyst here. I look forward to continuing to provide you updates on the various approval submissions, readouts and Phase III starts.

So I think a very strong start to the year. You can see great operational performance, strong innovation performance and well prepared for the pandemic and showing resilience throughout the coming period.

So with that, I’ll hand it to Marie-France to give you some more details on the pharmaceuticals performance.

Marie-France Tschudin

Thank you, Vas. Q1 was a very solid start to the year for pharma, with strong underlying demand across the board, 14% growth. We did see impact of COVID-19, which was a net positive, and we do anticipate this to reverse later on the year. The forward purchasing and stocking that we saw was mainly in Europe. And as you previously mentioned, Vas, the ophthalmology franchise was the most negatively impacted so far. We’ve seen some new patient starts starting to slow down across the portfolio. But having said that, we also made great progress in our innovation agenda during Q1.

We passed regulatory milestones for Beovu, Mayzent, Cosentyx non-radiographic axial SpA, inclisiran and ofatumumab. Our launches are on track. And of course, we’ll work closely with customers, authorities and health care systems to navigate some of the uncertainties related to the pandemic.

If we move to Cosentyx, our demand for Cosentyx continues to outperform the market in dermatology and rheumatology. We saw some stocking in Europe, very little in the U.S. And our first-line access strategy, which is our focus, is working. The majority of our growth is coming from first line, and this is 70% of the market.

We also continue to strengthen our value proposition. We’re on track for non-radiographic axial SpA, which will be our fourth indication. We continue to release compelling data. And if you look at the example of Ultimate, it’s the first large randomized ultrasound study in PsA, shows rapid impact of Cosentyx on joint inflammation. And this just reinforces our profile as a complete treatment in skin and joints.

We’ve also just received the Chinese approval in AS. So we’re very confident for the year. In the current environment, we expect that Cosentyx will continue to do well in repeat prescriptions. And physicians are asking their patients to stay on therapy. Cosentyx should also be the preferred choice for biologics once patients get back to the office, given its strong safety profile and the rapid regain of response after treatment interruption. We’ve got 5-year data. It’s very compelling.

With Entresto, we saw an impressive growth across the globe in Q1. We’ve reached a tipping point with Entresto, and it’s truly seen as standard of care in the U.S. and Europe. We were seeing pre-COVID NBRxs at an all-time high of 4,500. And China also saw the fastest uptake of primary care to date, which speaks very highly to the unmet need and the strong product profile.

We also expect to launch in Japan in the second half of the year, and we now have a strong local partner. We submitted pEF in the U.S. And our growth in Q1 was demand-driven with only a small boost from stocking. We obviously expect to see a COVID-related slowdown to new initiations in Q2, but the need for a product like Entresto that keeps patients out of hospital is now more important than ever.

If we move to Beovu, Beovu was off to a very strong start, possibly one of our best launches ever. And now we’ve been impacted by the safety signal. It’s confirmed and rare. There are 2 principles that are guiding us in what we’re doing. The first is patient safety. And for us, this is paramount. And the second is transparency with the regulators, prescribers and all stakeholders. The initial investigation is being completed. The labels are being updated, and we are now working with retina experts to find out how to best understand and mitigate the safety concerns.

We see that retina specialists are really keen to help us, and this is a reflection of the efficacy they saw in the real world. We remain totally committed to Beovu as evidenced by our comprehensive Phase III clinical trial program. We now have approval in 9 markets outside the U.S. So for patients all over the world, our priority is to safely deliver the benefits that Beovu can provide.

It’s maybe worthwhile spending a little bit of time on the ophtha franchise because this is clearly the one that’s most affected by COVID. We’ve seen clinic visits and prescription drop in March and April, And week by week, we saw those numbers coming down. It’s clear that, in retina, we’re talking about a very vulnerable patient population. And of course, these are physician-administered products. In addition, if we look at dry eye disease, which is not considered life-saving, we’ve seen a lot of cancellation of appointments and visits being delayed. It’s hard to predict when things will get back to normal. However, it’s also true that retina patients will need their treatments. So right now, our focus is to work with providers to find solutions to the capacity issues once patients start getting back to the centers.

If we move to ofatumumab, we are very excited about the potential of ofatumumab. The opportunity to have a highly efficacious B-cell therapy for a broad population early and the impact that, that could have on disease progression could potentially change the way physicians are treating MS. So we are staying fully focused on bringing ofatumumab to market.

Currently, we do not expect any regulatory delays. And from a launch standpoint, we’re ready for whatever the situation is when we launch, whether we’re seeing prescribers or other stakeholders face to face or virtually on a state-by-state basis. Now more than ever, bringing a B-cell therapy that’s highly efficacious and administered at home is highly attractive. And our goal is that when patients come back, we’ll make it easy for them to start on ofatumumab.

Last but not least, inclisiran. We’re moving full speed ahead towards launch. Our regulatory files have been accepted in both the U.S. and EU. We’ve published our data in the New England Journal of Medicine. We’ve completed our integration of The Medicines Company. Our teams are being recruited and trained. Our agreement with the NHS is progressing, and we’re excited about this asset because it has the real potential to change CV mortality in a very broad patient population. We continue to expect U.S. approval in December.

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So overall, it’s been a strong quarter. Clearly, this year, we will have challenges with COVID. But despite all of that, we will have strong growth across the portfolio, our growth drivers and our launches. Over to Susanne.

Susanne Schaffert

Thank you, Marie-France. Moving to Slide 28. So also for Oncology, we had a very strong quarter 1. We reached sales of $3.6 billion and delivered a strong growth of 12%. And we have seen very good momentum across our portfolio, mainly driven by excellent performance of our recent launches, Piqray and Adakveo, and continued double-digit growth of our growth drivers. Kisqali delivered 82% growth, making it the fastest-growing CDK 4/6 inhibitor in the quarter. And also, Revolade/Promacta and Tafinlar + Mekinist as well as Jakavi continued with very strong trajectory. These growth drivers more than compensated for the impact from generics entry of Afinitor and Exjade in the U.S. and Sandostatin LAR in Europe.

From COVID-19 pandemic, we have seen some additional demand across our portfolio driven by forward purchasing, mainly across Europe, China and U.S. Obviously, these days, as care practitioners and patients are trying to minimize hospital and office visits, which will have potential impact on products that require hospital stay, like Kymriah and Lutathera. But overall, the oncology field is very resilient, and we remain very positive with the full year performance.

Moving to the next slide. Piqray continued to perform very well with Q1 sales of $74 million. This is a first-in-class PIK3CA inhibitor indicated for 40% of HR+HER2- metastatic breast cancer patients with a PIK3CA mutation. The product had a great start in 2020 with expanded formulary policies coverage and continued Rx momentum in the U.S. We are expecting a continued uptake in PIK3CA testing, and our goal is to reach 40% by year-end 2020 and also anticipate the plasma test of Foundation Medicine be to approved by Q2 2020.

Also this quarter, we have expanded geographical footprint ex U.S. with Piqray now being approved in 13 markets globally, including Switzerland, Canada and Australia, which is expected to drive additional growth from second half of 2020. We expect CHMP approval later this year. So overall, we are very — progressing also with our very broad development program called EPIC. And we are very pleased to share with you that study protocols for the HER2+ advanced breast cancer indication, for triple-negative breast cancer, for ovarian cancer and for PROS has been aligned with the FDA.

Moving to the next slide. Our most recent launch, Adakveo, also had a very strong start, reaching $15 million of sales in Q1. Just to remind you, Adakveo is the only approved monthly therapy for the reduction of vaso-occlusive crises in sickle cell disease. In the U.S., there are more than 54,000 patients suffering from sickle cell disease and having more than 1 VOC per year. Therefore, a huge medical need.

Our focus was on access, and that is paying off with more than 320 accounts ordering Adakveo, including over half of the largest sickle cell disease centers. We have received positive feedback from hematologists and are very pleased to see a very high brand awareness. Already, 12 state Medicaid agencies from the top 23 high-prevalent states published their guidelines for Adakveo. We have received C code on April 1, and we expect to receive J code on July 1, which will further drive reimbursement confidence.

We continue to expand our global footprint with 2 ex U.S. approval and expect EMA decision in the second half of 2020. Clearly, as for all HCP-administered treatment, amidst COVID ’19, we expect some delays in new starts as physicians are trying to avoid putting patients at risk of infection. But overall, we remain very positive for the full year performance of Adakveo.

So with that, I will hand over to Harry.

Harry Kirsch

Thank you, Susanne. Good morning, and good afternoon, everybody. And as always, my comments refer to results of continuing operations and growth rates in constant currencies, unless otherwise noted. So on Slide 32, this shows the summary of our quarter 1 continuing operations and performance. The table shows a very strong reported number — set of numbers. And sales grew 13%, core operating income grew 34%. There were 2 main factors contributing to these results. Clearly and mainly, very strong underlying operational performance; and secondly, some COVID-19-related forward purchasing and lower spending. We estimate the favorable financial impact of COVID-19 in quarter 1 to be approximately $0.4 billion on sales and about the same on core operating income. Excluding these impacts, we estimate that sales would have grown 9% and core operating income would have grown 22%. Clearly, our quarter 1 operating income and sales performance was very strong; as anticipated, when we provided our full year guidance in January.

Net income growth was mainly impacted by higher legal provisions. Cash flow was also strong, increasing 8% in U.S. dollars to $2 billion, and I’ll give a bit more detail later on in the presentation. We expect the COVID-19-related financial benefits in quarter 1 and in sales and core operating income to reverse later in the year.

On Slide 33, you see the quarter 1 sales growth and core margins by division and for continuing operations. On the left side, you see sales and core margins as reported. On the right side, you see underlying sales and margins, excluding our estimated financial impacts from COVID-19 in quarter 1.

I would like to focus on the underlying financial performance on the right side. So if we exclude there the COVID-19 impact, sales for quarter 1 have increased about 10% for Innovative Medicines, 7% for Sandoz and 9% for continuing operations. Continuing operations margins have improved by approximately 3 points to 32% of net sales. Our Innovative Medicines core margin has improved approximately 2 points to 35% of net sales. Sandoz, as Vas already mentioned, had a really outstanding quarter and significantly improved the underlying core margin by approximately 6% points to 25% of sales. Great work on productivity programs further improved the Sandoz gross margin and SG&A cost structures. Also, Sandoz quarter 1 benefited from lower pricing impact and first-to-market launches in the U.S.

Slide 34 shows the dynamics of how we expect to bridge from the very strong reported quarter 1 numbers to the full year guidance. First, we expect the COVID-19 impact, as mentioned, to reverse later in the year. It’s, of course, hard to say when exactly. It’s probably a mix of quarter two and quarter 3. But also please keep in mind, $0.4 billion forward buying is in the end, only 2 shipping days for us, so unwinding could also fully happen in quarter 2.

We also expect greater generic impacts mainly on Afinitor, Exjade and Travatan. In quarter 1, we have seen some effect of the respective generic impacts, but expect those to become bigger as the year progresses. Additionally, we will start lapping the Xiidra acquisition and a couple of other prior year launches in the second half. Lastly, we plan to increase launch and prelaunch investments for ofatumumab, capmatinib and inclisiran in the remainder of the year.

On Slide 35, I want to share our key assumptions which we have based our full year guidance on. The prior guidance in January excluded the Sandoz U.S. oral solid and dermatology portfolio. As we are now retaining this portfolio, we expect both the growth on sales and growth of core operating income to be about 1% point lower than the guidance provided under the previous assumption. Of course, the base we grow from is also about $1 billion higher in 2019, exactly $1.074 billion, as we retain the business now.

We continue to assume that no Gilenya and no Sandostatin LAR generics enter in 2020 in the U.S. Also, I’m sure you have seen this, we just got news of a positive Gilenya IPR appeal ruling. Of course, we closely monitor the District Court decision, and we’ll let you know when we know more.

Now to some rough assumption as it relates to COVID-19 impacts. Of course, nobody knows exactly what will happen over the next months and quarters. Here’s what we have roughly assumed for our unchanged guidance.

We do include the forecast assumption that health care systems return to normal prescription and consumption dynamics during quarter two in our major markets. So not economies, but health care and prescribing. We assume that quarter 1 benefits of forward purchasing and lower spending reverse later in the year. Of course, we will closely monitor those business dynamics, and we’ll update you also on the guidance, if needed, at quarter two earnings.

With these assumptions, on Slide 36, we confirm our full year outlook, continuous operation sales expected to grow mid- to high single-digit and core operating income expected to grow ahead of sales and increasing the margin at high single to low double digit.

For Innovative Medicines division, also unchanged. We expect sales to grow mid- to high single-digit and for Sandoz to grow low single-digit. Let me add a few words on quarter two dynamics. Of course, quarterly growth rates are likely more volatile in this COVID-19 situation. For us, quarter two sales growth is likely to be low to mid-single digits. This mainly depends on how much COVID-19 forward buy of Q1 unwinds in Q2 and how sales of our ophtha portfolio is impacted by significantly lower physician visits, as Marie-France also has laid out.

On the bottom line, please remember that, in quarter two of 2019, we had roughly a $0.1 billion benefit from prelaunch inventory provision releases, mainly for Zolgensma — upon Zolgensma approval. This is, of course, considered in our full year 2020 guidance, but please include this also in your quarter two core operating income modeling.

On Page 37, just a quick word on cash flow. Of course, cash flow remains very important for us, particularly in view of the current situation. And you see here strong cash flow growing 8%, mainly driven by higher operating income. We do have higher working capital in the quarter, mainly impacted by higher accounts receivables as the forward purchasing mostly happened in March. But no worries here. We are absolutely on track to collect that. And that’s also what we see overall. Our cash collections remain very strong. It’s, of course, a big focus of the organizations. And days sales outstanding remain totally in line with year-end 2019, so very good cash collection discipline and cash flows.

Finally, on Slide 38, I want to bring to your attention the significant change in the estimated currency impact on our results. Since last time we spoke 3 months ago, we do update each month, but maybe not everyone looks at the website every month. And it’s, of course, the result of the dollar — U.S. dollar strengthening versus most other currencies. So if late April rates prevail for the remainder of 2020, the full year impact of currencies on sales would be negative 3% points and on core operating income negative 6% points. For quarter 2, it would be negative 4% and negative 7% respectively. And again, as a reminder, we do update this monthly in our website. I do recommend that you look at it, not only business situations or the currencies, of course, are volatile and it’s worthwhile watching.

So with that, I’ll turn it back to Vas.

Vasant Narasimhan

Great. Thank you. [Technical Difficulty]. In Q1, and we’re maintaining our full year outlook, as Harry has nicely outlined. So we remain excited for the future, optimistic about 2020, and we look forward to taking your questions. So with that, operator, we can open the line.

Question-and-Answer Session


[Operator Instructions]. Our first question comes from the line of Keyur Parekh.

Keyur Parekh

Two, please, if I may. One, Vas, for you. From a big-picture perspective, would love your thoughts on how you see the current pandemic impacting the way you were doing business in the longer term. How do you think the value of the broader health care system kind of within the health care system changes? And what do you think kind of a new CEO like you can do to make the industry at a better place given previous public perception of the industry? That’s kind of question number one.

And then question number two, for Marie-France. Kind of given the new findings on Beovu, would love to hear your views on where you think Beovu should be used if there’s a patient subset where you think this might be better fitted? Or do you still see this as a broad therapy across the entire patient population base? How should we think about the peak sales opportunity for Beovu today?

Vasant Narasimhan

Thank you, Keyur. So first, I’ll divide my comments into big-picture comments for the sector or the industry and then some specific comments on new ways of working, I think, will reshape how we think about running our company in the years ahead. First, this is, I think, a remarkable perhaps once-in-a-generation for a company — company opportunity to reset our reputation in the broader public mind. When you look today, we’re in a moment in time where our industry, combined with the work of academia and the broader ecosystem, has stepped up to make unprecedented, I think, collaborations with over 170 now drug candidates somewhere in the clinic or in preclinical testing, over 90 vaccine candidates, well over 500 clinical trials now running massive efforts to do this in a nonprofit or donation basis to really lead the charge in trying to overcome this pandemic. And I think what that’s leading to is, you see already in survey data, a shift in the perception of the value of this sector.

I hope we can seize this moment to remind the world that this industry is why we’ve seen such remarkable — part of the reason, at least, why we’ve seen such remarkable gains in life expectancy over the last 100 years. It’s why we’re able to withstand pandemics of the past and we’ll be ultimately able to withstand this pandemic. So I think it’s a remarkable opportunity to reset our reputation as an industry. And also, I think, for Novartis, part of the reason we took the time to walk you through all the things we’re doing is we take it as a significant opportunity to make a major contribution around the world and also completely reposition ourselves as a company that’s truly trying to be valued, maybe most valued by society.

And specifically, I think 3 things will shift health care systems. I think the rise of telemedicine, the rise of digital technologies, all the physicians we talk to clearly are seeing a big shift in how they engage with patients. Alongside that, of course, we’re going to have a short-term impact of the shifts because of unemployment. But longer term, I believe that the digital technologies have now really taken hold in health care systems. And then on the same side, within our company, digital technologies and how we run our sales force, manufacturing lines, our R&D operations, have now also been forced to go to scale. I mean all of our AI and data science efforts are now being taken to scale simply because we have no choice.

And that, I think, will ultimately lead to more distributed ways of working across large companies, which if companies can embrace distributed ways of working shift from just taking office space work and moving it into an auto office setting, but really rethink how we work, you could see dramatic increases in productivity, margin — further margin expansions and, hopefully, a better output and innovation from our company longer term. So that’s just some brief perspectives. Marie-France, on Beovu.

Marie-France Tschudin

So as you have noted, Beovu is off to an incredible start in our launch, and we still believe that this product will be a blockbuster. Of course, safety does come first, and we have a signal, it’s rare, but the benefit/risk profile for the product remains positive. We have to understand the root cause. This may take some time. But we also have a long exclusivity in the U.S. and EU, and so we will play the long game on this one. What we’re seeing in the marketplace from physicians is that physicians are in two camps. They’re either pausing and waiting to understand more or they’re actually taking a more cautious approach with their patients. We see approximately half the centers continue to order. Of course, now with the COVID situation, it’s hard to say what is impacting what, but we are — I think the fundamental point is that we’re committed to resolving this issue. We have approval across 10 markets. And as we launch this product across the world, we will learn also about different treatment practices and how these have an impact on outcomes.


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

Graham Parry

So firstly, you expressed confidence in meeting your PDUFA date on ofatumumab. But I think at your last update, you said the FDA hadn’t inspected the manufacturing site in Stein yet, and that is obviously, an international inspection, which they had to at least temporarily shut down. So do you have a date for that inspection? Or has it already happened? Perhaps an update on your confidence in achieving that prior to the PDUFA date.

And then secondly, when you talk about the $400 million COVID benefit to sales and EBIT, is that just purely an inventory calculation? And have you also included in there impact of the surge in prescriptions for chronic therapies like Entresto and Cosentyx as people rush to get their prescriptions filled?

And also, in your full year guidance, to what extent have you factored in the reduction we’re seeing in new-to-brand on those drugs and the lack of new patient starts? Or are you just thinking these are getting warehoused and you should see them actually pick up with a new surge in end of Q2, Q3 as patient visits start to return?

Vasant Narasimhan

So thanks, Graham. So I’ll make a general comment on our engagement with FDA as an industry, and then John can comment specifically on ofatumumab. And we’ve had — and I shared the FDA BRC for the pharma industry organization. In all our interactions with FDA, FDA has stayed committed to their view that they can meet their PDUFA time lines, and they will be using technology, virtual inspections, paper inspections, et cetera, to do their best to meet their PDUFA time lines. And in particular, when they look at prioritizing, priority reviews would, of course, be the ones they want to ensure they hit their time lines on. And it’s worth noting that ofatumumab has a priority review with the priority review voucher. And John, specifically on ofa.

John Tsai

Yes. Thanks, Graham. Specific to ofatumumab, we’ve had good discussions with the regulatory agency, FDA specifically. In terms of inspections, as you noted, we had a clinical trial site inspection in the U.S. very recently, and that went very well. In terms of the manufacturing inspection, the manufacturing site is in Switzerland, and we had that site inspected about a year ago. And that went well. Now as Vas said, that sometimes they’re granting waivers or asking other agencies to do the inspection. And we’ve not heard anything else in terms of the current inspection. But the most recent inspection that occurred a year ago was — went very well.

Vasant Narasimhan

And then, Harry, on the guidance on the $400 million?

Harry Kirsch

Yes. Thank you, Graham. So the $400 million, roughly, right? It’s never easy to approximate these, but that’s why we did it at company level as well as a division level, but not further down, easier to triangulate at a higher level. And the $0.4 billion is very little actually at the wholesalers. So we actually also had back orders where we felt they just would fill the wholesaler pipelines. And in good discussions with our customers, we reassured them that our supply chains are extremely robust and customer service levels are at normal record high. So most of this effect, we see longer scripts and basically maybe patients filling early or getting longer scripts, depends on the country and the payer allowing that. It is only 2 days on average, but it’s majorly at the patient level, not so much at the wholesaler level.

And so we do expect that this unwinds. On the other hand, could have a positive effect on more adherence to chronic medicines. And so that’s a positive. On the other hand, of course, depending on the therapeutic areas, we also expect — and that’s also needed for the full year guidance, that systems return back to normal physician visits. That’s certainly on new patient starts, in the launch area. And then on the other hand, of course, in ophthalmology where injections are necessary. And there we see, in April, a bigger impact. You don’t see it yet so much in Q1, and that’s also where we need this assumption that the systems start back up. Vas mentioned that there’s a big urge and also health care systems looking at the unintended consequences of COVID, which means other diseases may be neglected.


Next question comes from the line of Steve Scala.

Stephen Scala

I have two questions. First, why didn’t Cosentyx appear to benefit from forward buying and it even fell a bit short of your guidance provided on the Q4 call? And then secondly, one theory for Beovu safety issues is a contaminant or impurity in the formulation. I’m curious, was the delay in filing Beovu several years ago due to the need to purify the formulation? I don’t recall the company ever actually being specific on why the filing was delayed.

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Vasant Narasimhan

Thanks, Steve. On Cosentyx, Marie-France?

Marie-France Tschudin

So as we mentioned before, there’s a very strong performance across the board both the derm and rheum markets. We did see some small stocking, but it was mostly in Europe. There was no stocking in the U.S. It was very demand-driven results. We did see, obviously, Q1 seasonality around the reverification and our further strengthening of our first-line access strategy. But we continue to grow and be strong. And clearly, we do anticipate a COVID effect on our NBRxs. But we have a very solid TRx base, strong market share, so we’re confident on our trajectory.

Vasant Narasimhan

And I’d just say on Cosentyx, we’re confident that this brand will continue on its trend to exceed $5 billion. And so we’re very confident in where Cosentyx is heading. These small variations quarter-to-quarter that get so scrutinized, I think, miss the bigger picture that this is a brand that’s on its way to 9 indications, that has an outstanding market share position across its various therapeutic areas and a very unique positioning in rheumatology. So it’s important to take a step back, I think, for our investors and not always focus on these small variances on the quarter.

Now with respect to Beovu, just to remind everyone, we — this is a history to see you’ve got a good memory, if you go back in time, we — the original Phase III program took into Phase III the Phase I/II formulation. And then after Phase III, we did bridging study to final marketing image that ultimately went into the market. So we are doing a very detailed technical analysis just to understand was there anything that happened in that process. We have not identified anything to date that would be causative. But nonetheless, we are very carefully assessing that to fully understand that. and These are very rare events. I mean if you look at these numbers, we’re talking about 1 to 2 cases per 10,000. So this is not easy to find causative relationships. The other nuance to note is in — outside the U.S., we’ve launched in a prefilled syringe. In the U.S., we launched in a vial. How that might impact the dynamic, we think, is something as well we’ll have to watch.


Next question comes from the line of Peter Welford from Jefferies.

Peter Welford

I’ve got two, please. Firstly, just on the cost base, I wonder if you could just comment perhaps on how we should think about COVID-19 potentially impacting that. Obviously, significant efforts by you, both on supplying drugs like hydroxychloroquine as well as obviously investing in new studies and perhaps also having to increase costs on existing studies to keep them going. But at the same time, obviously, like us, travel budget is significantly down. I wonder if you could just — you could sort of talk us through the varying dynamics there we should think about for cost this year.

And then secondly, just on marketing. I guess with all the efforts now that have gone into digital marketing and some of the significant changes that have been there starting in China and now other major markets, have you got any data so far in-house that can point to how effective that digital marketing is or could be? And how could this potentially shape your thinking in the future? Or do you think things will largely return to normal once the COVID situation finishes?

Vasant Narasimhan

So Harry, on the cost base?

Harry Kirsch

Yes. Thank you, Peter. So on the cost base, as you have seen in quarter 1, it’s roughly, right, I mean, $400 million top line, $400 million bottom line. We have a little over 20% cost of goods. So that’s roughly $80 million of the cost base. And that’s basically effect of 2 weeks. So you can imagine that there’s never a formula, don’t now take the $80 million times how many weeks. But there’s quite some variable spend. That, of course, has to do with what is the possibility, how much is working from home, how much are the lockdown procedures basically also impacting the cost base in a positive way it would, right? Of course, we rather don’t have it and have the top line be extremely dynamic. But there is clearly quite a potential, which is partly a natural hedge for some of the top line, if there would be a slowdown.

And then in the overall scheme of things, of course, we do a lot as a company, but it’s not so material in terms of $50 billion company roughly, right, and our significant amount of profit and cash flow. So we are in a range that is manageable within our forecast. And we also make very good progress, slightly even ahead of target on our productivity efforts. So what — I would not see that our COVID-related efforts would hinder us from margin progression or would [indiscernible]. More important is to see how is the top line developing and are health care systems for the areas, therapeutic areas, that point to us starting to work normal again as we go through quarter two.

Vasant Narasimhan

And then Marie-France, on digital marketing?

Marie-France Tschudin

Yes. So we’ve clearly had to pivot very quickly to a very, very different way of working. And we’ve seen some remarkable initiatives across the globe. We’ve been able, for example, in China to reach 900,000 HCPs through WeChat and web-triggered e-mails. We’ve seen in the U.S. 1,500% increase in telemedicine. And so clearly, digital is going to take a new role in the future if we think about online drug refills, education, direct-to-patient and, of course, how we can enhance our face-to-face interactions with physicians.

So one of the clear opportunities that we see is really in this stage is to understand what physicians prefer, what the markets prefer and then really clearly understand what are the most effective tactics that we have out there. The goal is to really just increase our effectiveness or our productivity in the marketplace, the efficiencies of the system, such as diagnosis and maybe adherence. And clearly, we’re seeing opportunities also on how quickly we can bring products to market. So we’ve seen, for example, in the case of Xolair, home delivery being accelerated across different markets. So yes, there are some challenges, but there are clearly opportunities for us in the future.

Vasant Narasimhan

And Peter, I’d say, overall, our goal is how can we make these changes stick and really now accelerate that transformation, not go back, I think, to your point, to the old ways of working.


Next question comes from the line of Simon Baker from Redburn.

Simon Baker

Firstly, on Zolgensma, you talked about the next catalyst for growth being Europe and Japan. But I wonder if you could give us an update on the potential growth sources in the U.S., given the current level of state testing and Medicaid reimbursement. And then a question for you, Vas, going back to Keyur’s opening question. Rather than just thinking about the long-term potential benefits for the perception of the industry from COVID-19 and the industry’s response, I wonder if you could give us any thoughts on your interactions with governments here and now and how the perception of the industry has changed or…

Vasant Narasimhan

Great. Thanks, Simon. I think you’re breaking up. I think we lost you. But I think I got the gist of the second question. So first, on Zolgensma, in the U.S. right now, we are at a steady state of around 100 patients quarter within the current indication. That’s in part as we grow in newborn screening, we, of course, also have the aging-out of the older kids and the older cohort. I think the other element that did dampen a little bit Q1 was with the COVID pandemic, fewer patients were coming in for switches. And we see that dynamic as well in the early part of April. Nonetheless, we feel confident we’re in that steady state of approximately 100 patients a quarter within the current indication.

Now when you look at Europe, as a reminder, we have a very broad indication within Europe. We’ve already seen early access agreements announced by German — a few German sick funds that would be available as soon as we’re approved in Europe. So we expect to see very rapid uptake in some countries within Europe on launch. So that will give us the next, I think, inflection point is our launch across a range of European markets. And our teams are working hard to get early access agreements in place to enable patients to receive the therapy even ahead of the final reimbursement agreement and then of course, Japan and a range of other markets around the world. So that will be the next set of inflection points for the brand and then following on that, the U.S. expansion beyond 2 years of age. So when you take each of those in turn, we’re still well on track to a multibillion-dollar product with respect to Zolgensma.

I would say on government, I would say broadly within a range of stakeholders, if you look at the engagement from government groups ranging from the G20, individual governments reaching out to industry and asking for our support in a very positive way, a range of collaborations that involve the biopharmaceutical industry, the nonprofits, government, academic institutions, I certainly feel that the overall tone is very positive towards the industry at this time. I think if we can do our part and behave in a way that is really supportive to the overall pandemic response, this is an opportunity as well to reset, I think, the overall relationship between the industry and government. So I am hopeful on that front. But of course, it’s still early days, and we’ll have to see how the situation evolves over the coming year.


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

Timothy Anderson

A couple of questions, please. On Entresto and the filing for HFpEF, that was on a primary endpoint that technically failed. And FDA is usually quite stringent on how they interpret cardiovascular trials. So I’m wondering what you’re realistically hoping to accomplish with that filing. And if you could just kind of identify what you think is the subgroup of most relevance there.

And then a second question on inclisiran, you’ll be launching that years ahead of having outcomes data. I’m thinking one potential strategy, especially with this very novel type of product, would be to be disruptive on price if you’re positioning it almost as a vaccine-like product. So I’m just wondering if you can comment on launch dynamics in the absence of outcomes data and how price may play a role.

Vasant Narasimhan

Thanks, Tim. First, on Entresto, HFpEF, John?

John Tsai

Yes. Thanks, Tim. Thanks for the question. On HFpEF, as you know, we narrowly missed this statistical significance for the broader population. We’ve had good dialogue with the agency on this. I think, as you know, a p-value of 0.05 versus 0.06 is a 6% chance versus a 5% chance that, that was by Type 1 error. So given that, we see the benefit in the broader overall population. We’ve also readjudicated and looked at the endpoints with another group, this time with DCRI. And we’re having good conversations with the FDA in terms of looking at these endpoints. So we are moving forward and have had good dialogue with the agency. And we look forward to having these discussions with them.

Vasant Narasimhan

And then Marie-France, on the inclisiran?

Marie-France Tschudin

So clearly, the idea with inclisiran is to bring the product to a very broad patient population. We know that there’s a huge unmet need in the cardiovascular area. We know it’s a leading cause of death, and we know that this is hugely costly to health care systems. What we want to do is price this product responsibly. And what we’re learning from payers is that there is an interest in entering much broader agreements with us on this product. So it’s early to talk about what that would potentially look like. But certainly, the idea behind the acquisition of this product was to bring it to a broad patient population who can benefit from it and potentially bend the curve of life.

Vasant Narasimhan

Thanks, Marie-France. Just one more comment I’m thinking on HFpEF. I think maybe 3 nuances, one, that the study this under central adjudication missed the primary endpoint, but on physician adjudication actually was statistically significant. And then there were 2 groups, women as well as patients with ejection fraction less than, I think, 68% or 69% that also had positive results. So there’s a lot of dynamics, I think, here. But as John pointed, most important, great dialogue with the FDA to agree on a readjudication approach. We’ve completed that and we’ll submit the full data package. I’ve already submitted the full data package to the agency.


Next question comes from the line of Eric Le Berrigaud from Bryan Garnier.

Eric Le Berrigaud

Yes. Two questions. First is after the impressive operating margin for Sandoz in Q1, excluding COVID-19 effect of 25%, maybe to understand what was behind that in terms of mix of different businesses but also productivity gains and the sustainability of that going forward. And the second question is maybe to talk a little bit about the dynamics behind the MS market and maybe for the different classes and the S1P class, in particular.

Excluding COVID-19 impacts, how is Gilenya doing, especially in the U.S.? Mayzent was pretty much in line. How are they doing versus other products in the class? How do you see them going forward? And is it fair to expect a significant shift in your resources when ofatumumab is available? And since you reiterated confidence in reaching $1 billion with Beovu, would you say the same for Mayzent, please?

Vasant Narasimhan

Thank you, Eric. So first, on Sandoz margins, Richard?

Richard Saynor

Thank you, Eric. Yes, it’s pleasing to see such a strong quarter for Sandoz really across all geographies and most of the portfolio. The margin growth really came from a number of places, a good cost control, which washed out through our excellent work that we saw last year. Mix, the portfolio has evolved, particularly around strong performance around the biologics, which have generally have higher margins. And pricing has not eroded to the same degree. Plus we saw a delay of some of the pricing reforms that we expected in quarter 1, which we’ll expect later into the year. Clearly, margin is always variable in the generics business. So clearly, we’re still focusing on maintaining cost control and driving margin forward, and we’ll continue on that basis.

Vasant Narasimhan

Thanks, Richard. And on MS market dynamics, Marie-France?

Marie-France Tschudin

So if I start with Gilenya, just remind you that Gilenya remains the second-most prescribed DMT brand worldwide. It’s still a strong product. And it’s actually doing very well in this COVID period due to, obviously, the very strong TRx base. So we expect relatively stable performance with Gilenya. If I can make some comments on Mayzent, we actually saw very good momentum in Q1. So we had a 76% quarter-over-quarter growth and NBRx of plus 16% in the U.S. So that was the highest growth of any DMT with a prescriber base that’s growing steadily.

Again, we have a strong value proposition in this space. We’re the only product that has been studied and has shown data in a typical SPMS population. We still believe that Mayzent has blockbuster potential. But we do acknowledge that this is going to take time as we try to identify patients and make sure that we have the right positioning in the marketplace. As we’re in this COVID period, clearly, the MS space is being affected, especially the dynamic side of the market. So we do expect a slowdown. But as things get back to normal, we believe we have a good foundation for Mayzent in this patient population.

Lastly, on ofatumumab, that’s clearly the focus, bringing a highly efficacious B-cell therapy, which is safe, which can be administered at home. And particularly now in a post-COVID period, this is going to be absolutely paramount for the market and for patients. So we’re very excited about this prospect. And clearly, we’re focusing for a big launch in this area.


Next question comes from the line of Seamus Fernandez from Guggenheim.

Seamus Fernandez

So just wanted to get a couple of updates. One, could you guys just update us on timelines for your factor B inhibitor? I know that, that’s one agent that many investors are really interested to see updates on. Just hoping to get a better understanding of that and perhaps data presentations that could occur later this year or timelines for completion of some of the Phase II studies.

And then second, can you just help us understand a little bit better the relative impacts of the Gilenya settlement opportunity? We saw the successful conclusion of the IPR. Just wanted to get a quick sense of how you’re thinking about the duration of Gilenya going forward.

Vasant Narasimhan

Thanks, Seamus. So first, on LNP023, our factor B inhibitor, John?

John Tsai

Seamus, thanks for the question. On LNP023, our factor B inhibitor, as you know, we’re going for multiple indications. First, in the PNH, paroxysmal nocturnal hemoglobinuria, we’re moving forward. The approach that we’re taking is a mixed Phase IIa/b approach with interim analyses. And we’re looking to get results at the end of this year. This is tracking on time, and we’ll be seeing those results and moving forward with a Phase III at the close of this year.

The second set of indications is in our nephropathy. So we’ve got C3 glomerular nephropathy, membranous and IgA nephropathy. Those are also combined Phase IIa/b studies. Those are moving forward also. We expect to see results early part of next year and those also are on time. And once we get those results, based on the interim, we could either file with the interim or we would move forward in terms of a full Phase III at the beginning of next year.

Vasant Narasimhan

Thanks, John. And on Gilenya, it’s worthwhile noting there’s really 2 separate — there were two separate paths, one is the IPR hearing, one is the district court. The IPR case, as you saw and Seamus reported in his note, was dismissed. That was based on procedural grounds for the standing of the claimant. And so on the district court, there really is no read-across from the IPR to the district court hearing. There is single filer still remaining in the district court, and we expect a ruling in the mid this year. And we stand fully behind the IP of Gilenya, both the current patent as well as the additional patents that we’ve subsequently been granted. And so we’ll look forward to keeping you up to date on that and, of course, give the market clarity as soon as we have clarity ourselves.


Next question comes from the line of Florent Cespedes from Societe Generale.

Florent Cespedes

Florent Cespedes from Societe Generale. Two quick questions. The first one for Marie-France on ofatumumab, a follow-up on ofatumumab. Marie-France, could you share with us how do you see the launch of this important product mid-year, given the current environment and also given the fact that MS is pretty competitive? You have given some examples during your — on your presentation. But if you could share with us a little more detail, that would be great.

My second question for John and Susanne. It’s on Lu-PSMA-617 on prostate cancer. As this year, we anticipate and you expect the Phase III trial, could you maybe share with us the opportunity for this product and the positioning on the prostate cancer market?

Vasant Narasimhan

So first, on ofatumumab, Marie-France?

Marie-France Tschudin

So the first thing I’d say is that we have very well-established relationships with physicians in this area. So we have a very strong portfolio across MS and bringing ofatumumab to a physician population that we know and we’re familiar with. Having said that, clearly, this is going to be a different launch from what we’re used to. And that’s exactly what we’re preparing for. We’re looking at this from a prescriber and other key stakeholder perspective, whether there are going to be digital interactions at first. We’re playing it flexible, whether we have different approaches, country-by-country, state-by-state.

But clearly, what we’re not going to do is slow down. Because if there was any time for us to bring a highly efficacious product to a broad population in a setting where patients don’t have to be in the hospital, it is now. So we’re going to continue to work with payers. And our first priority is clearly we understand that there is going to be a slowdown in the dynamic market in MS. But our clear priority is to make sure that we make it as easy as possible so that when patients do go back to their physicians, they can easily transition to ofatumumab.

Vasant Narasimhan

And then on the PSMA-617 opportunity, Susanne?

Susanne Schaffert

Yes. Thank you. Thank you, Florent, for the question. So actually, prostate cancer is the second-most commonly diagnosed cancer in men. There’s an incidence of 1.3 million globally. And for the U.S., you have to assume around 175,000 patients. And what we know is that about 10% to 20% of patients with prostate cancer become castration-resistant with a 5-year follow-up — and 80% 5-year follow-up, so — and 80% of these patients become metastatic. So there’s a very, very high unmet medical need and very much looking forward to have Lu-PSMA-617 moving out later in the year.

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And plus regarding positioning, so the VISION trial that is fully recruited is in treatment of patients with metastatic CRPC after 1 line of novel antiandrogen androgen-receptor-directed therapy and 1 line of chemotherapy. So it means third and fourth line of therapy. As said, the VISION trial is fully recruited. It’s an event-based trial, and we expect readout versus the end of the year.


Next question comes from the line of Matthew Weston from Crédit Suisse.

Matthew Weston

Just two quick follow-ups, please, on previous questions. The first on ofatumumab, Marie-France. You made it clear a number of times how confident you are on taking the launch to market irrespective of the underlying circumstances. Can you just remind me, is it correct that the first dose has to be administered in the clinic and therefore, we do at least need some degree of normality within the health care system before we can see patients getting dosed? Or do you expect that there’s going to be some waiver around that requirement?

And then the second question regarding Sandoz margins. You clearly set out the positive drivers. Can I just check, particularly given that we have seen a meaningful impact of generics in the oncology setting, was there any benefit within the Sandoz business of you launching generics against your own product at the beginning of this cycle and therefore we’re in a very positive mix environment of U.S. exclusivity launches, which should erode rapidly in the second half of the year?

Vasant Narasimhan

Thank you, Matthew. So on ofatumumab, first up is Marie-France.

Marie-France Tschudin

So as I mentioned before, clearly we do see some disruption happening in the multiple sclerosis market, certainly in the dynamic sector. And we can’t say that, that’s not going to affect us. But regarding the first dose observation, it can be done by the observation of a health care professional. So technically, we could be sending nurses home. So we think that, that’s definitely an opportunity to basically, let’s say, address the current situation as it is. Clearly, we’re very ambitious about the value proposition that ofatumumab brings to market. And like we said, we feel that there’s no reason for us to slow down, even though clearly in the dynamic sector, we will see fewer switches to new therapies in this marketplace.

Vasant Narasimhan

Thanks, Marie-France. And Richard, on the Sandoz generic dynamics on Novartis products?

Richard Saynor

Thank you, Vas. I mean nothing really significant. I mean the bulk of its margin growth has really come from biosimilar project launches, the first-to-market launches that we saw in the end of last year and the beginning of this year rather than generics of the oncology business. So we don’t see any really material link between the two things.


Next question comes from the line of Mark Purcell from Morgan Stanley.

Mark Purcell

It’s Mark Purcell from Morgan Stanley. Two questions. Firstly, on digital and a bit of a follow-up. Vas, could you help us understand which regions and therapy areas are most ready to adapt to your new digital initiatives when it comes to HCPs and patients and which have the greatest upside over the long term? The reason why I asked the question is that, I guess, if you look at U.K. and Germany, over 60% of patient initiations are remote already, whereas in Italy, where it was very low, you’ve seen 146% increase in remote initiations over the last 30 days or so. Clearly, in oncology, telemedicine, new penetrations at around 5%, whereas neuroscience has always been in the 20% to 30% over time. So some thoughts on that would be fantastic.

And then secondly, in terms of pricing in the U.S. At the beginning of the year, you guided to net prices declining by around 2.5% in the U.S. with the U.S. list price increases you put through. Given there’s less pricing pressure, it seems, in Sandoz and when we look at the implied list price — implied net price increase on Cosentyx, it looks pretty stable in 1Q despite the fact we’ve seen a lot of new entrants and a perception that there’s going to be increased pricing pressure with that. So if you could help us understand the evolution of price in the U.S., that would be fantastic as well.

Vasant Narasimhan

Yes. Thank you, Mark. I think on digital, there’s a few dynamics I would highlight. And you rightly point, different countries are in different places. But in my mind, for us, Germany being, I think, a relatively positive outlier. But there are 3 markets, in particular, where we have an opportunity to make significant inroads. First and foremost, of course, the United States, where all of our conversations with physicians and health care systems indicate a sudden and dramatic shift to telehealth. And as long some of that can stick as well as digital — use of digital tools, digital engagement, that could be a significant upside. China, as Marie-France already noted, we’ve taken this now to scale ourselves. We have partnerships with Tencent, partnerships with other companies. We’re now reaching many thousands, tens of thousands, sometimes hundreds of thousands of physicians outward from ourselves to reach our customers but then also enabling patients and physicians to interact on digital channels at scale. And we have a few examples of this already with Tencent and a plan to add others.

Probably one of the most striking ones, as an example, would be Japan. In Japan, prior to COVID-19, it was unheard of for physicians to engage via digital channels with medical teams or sales representatives. Now it’s been forced upon the system and that has to happen digitally. And the uptake is actually quite rapid and quite striking. And that could be a market that sees now a complete switch in the dynamic in terms of the use of digital technologies. Therapeutic areas, of course, I think not a fair of time to get into all, but there’s a lot of variations. And of course, across therapeutic areas, some are more digitally savvy than others. In our mind, the key is to build platforms, integrated datasets. And we invest a lot on our data plumbing, the hard work, the unsexy work of just getting your data straight and then trying to build scalable platforms around that. And we’re trying to collect talent from outside of this sector, whether from the digital consumer health, consumer, other places that have really cracked this at scale and then trying to deploy that within Novartis. And so we’ll look forward to keeping everyone up to date as we progress on that. On price dynamics, Harry?

Harry Kirsch

Yes. So just a few words. Fundamentally, for Innovative Medicines, nothing has changed versus what we have seen 3 months ago. You see this also reflected in our overall pricing effect in quarter 1, which is minus 3% on prices on Innovative Medicines and the total company. Where we potentially have a bit of an upside, and this, of course, what Richard also alluded to, is the Sandoz pricing negative impact is much lower than usual. It’s minus 4% on a worldwide basis. But there, we have to watch, is this a temporary effect because maybe other supply chains are a bit more stressed than ours? Or what — how will that develop? So there maybe in Sandoz maybe a little bit less negative pricing. But overall, also Innovative Medicines at the moment, we see in quarter 1 minus 3%. And nothing from our initial assumption has changed there.


Next question comes from the line of Richard Vosser from JPMorgan.

Richard Vosser

Two, please. Just to get your thoughts on second waves. Clearly, not in your guidance, but we’re seeing second waves come through in Asia, in Singapore and other areas. And it’s, I suppose, reasonably likely that we’ll see them across Europe and the U.S. So just your thoughts of that impact maybe over the overall business and maybe particularly with ophthalmology division. And then linked to that, in ophthalmology, I think there was some idea that patients could — there could be some catch-up dosing of patients maybe in the retinal space. Just a thought in terms of capacity there and how you might do that, given stretched capacity previously and, of course, COVID being the greatest morbidity and mortality in the above 65.

Second question just on Ultibro, clearly benefiting from being a respiratory product in this space and up a lot. Do you see a new level for Ultibro going forward? How much of that was stocking? How much do you think you’ve got a new level?

Vasant Narasimhan

Thanks, Richard. First, with respect to second wave, the way I like to think about how these things happen and especially in this instance is human beings tend to be caught off guard by the exponential nature of outbreaks in general and especially in these kinds of global viral outbreaks. So the exponential curve hits us. Health care systems have to respond. We’re not always well prepared, and we have to then as society then have to scale up to respond. Now for subsequent waves, what’s going to happen, I believe, over the course of the coming months is there’ll be an exponential expansion of our knowledge of the underlying epidemiology of the virus, how do health care systems need to respond, how the public health systems need to track rates and responses, outbreaks, the improvement, of course, in medical technology if we are able to repurpose drugs or identify better technological solutions.

So all of that makes us think and make me think that if there are future waves, we can manage them more effectively without having hopefully the same level of disruption to the health care system. Because I think one of the things that will become more clear, and we hear this from our conversations with physicians and health care systems, is there is a hidden cost, a significant hidden cost to all of the averted and delayed care that’s happening for patients with chronic diseases all around the world. That’s okay for a little bit of time, but it’s not something that’s sustainable. And there will be significant morbidity and mortality associated with that. So I think we’re aligned with health care systems, physicians and patients to get people back into the clinic in a safe, sustainable way and hopefully keep it that way, independent of future COVID outbreaks. Now specific on ophthalmology, Marie-France, thoughts?

Marie-France Tschudin

Yes. So maybe — I mean it’s a very good segue because clearly retina patients are not going to the centers, but that cannot last. They’re going to have to go back to their therapies. So we do anticipate capacity issues for sure and clearly as social distancing rules will probably continue in this space. But what we’re doing right now is we’re trying to work with clinics and health care centers to improve, first of all, how that capacity can look like, how we can work with centers to help them with their flow of patients. We’re also looking at home monitoring solutions for patients to track their own vision and connect with HCP from home, so they’re really only going to the centers when they need to go. There are some remote care solutions, where HCPs can move nearer to the patient. We’re looking at sort of mobile units in the U.K. and trying to just address some of these capacity issues post the confinement period.

Vasant Narasimhan

Yes. And the only thing I would add is the conversations we have had with specialist physicians in ophthalmology, dermatology, neurology in the U.S. all point to a readiness and that preparation to have weekend clinics, after-hour clinics to kind of rapidly catch up on the backlog of patients. Now on respiratory, I’ll just briefly answer that Ultibro, I think, continues in a very steady way. We did have a positive CHMP opinion for Atectura. And hopefully, we’ll soon be launching a triple in asthma. So really for us, the next inflection point in inhaled respiratory will be the launch of our triple combination.


Next question is coming from the line of Laura Sutcliffe from UBS.

Laura Sutcliffe

Firstly, on Beovu, we know you’ve instigated new sort of safety monitoring investigations and so on. But what is it that you actually need to see from that activity to get this back on track commercially? Is it a specific data point? Is it a publication? Is it just looking at it over a long time? So that’s the first question.

And then the second question is on Sandoz. You’ve mentioned that terminating the Aurobindo agreement provides you with an opportunity to optimize the U.S. business. So could you just tell us maybe a little bit more about that and what you think is the right sort of shape for Sandoz in the U.S.?

Vasant Narasimhan

Yes. So just in the interest of time, I’ll take the remaining questions because we only have a few minutes left. So on Beovu, right now, the goal is to reassure physicians on the clinical profile, ensure that we are only injecting the product in patients who don’t have inflammation in their eye. As we — we believe as we continue to get more experience, we’ll have a better sense of these rates and get physicians more comfortable. It’s notable that outside the U.S. there is slit-lamp examination for any inflammation in the eye, which doesn’t always happen in the U.S. So we’re hopeful that, that could potentially mitigate any of these rare signals outside the U.S. In the medium term, we have a full team that’s working around the clock to try to find any of the specific determinant, either from a patient standpoint, a product standpoint or a setting in the clinic standpoint that might be leading to these rare events.

And if we can find any insights, including potential treatment with steroids or other interventions, we’ll, of course, then roll that out. And then in the longer term, we have a full range, the largest range of Phase III head-to-head studies and other studies to fully characterize the product, which we hope will demonstrate the clear clinical benefit and overall profile of the product to support its significant use. And we continue to stand behind our belief that we can make this a blockbuster medicine. I would note we had similar challenges with Gilenya, other products in other classes have had challenges. But based on a strong profile, it can ultimately overcome them.

With respect to Aurobindo, I think, as been highlighted on the call, we’re still — important to see really the pricing dynamic — the Aurobindo business or the oral solids business that we’re now retaining, important to see the pricing dynamics in the U.S. And Richard and team are investing now in a full-scale portfolio longer term that will bring hopefully a steady flow of Sandoz into the U.S. market. And this will form a base for that. But really, the key now is really to look at the pricing dynamics. We’ll be able to formulate a clearer strategy over the coming months and provide you a clearer outlook alongside that at that time.


Next questions come from the line of Emmanuel Papadakis from Barclays.

Emmanuel Papadakis

I’ll try to be brief. Maybe a couple on Piqray. Great initial momentum seems to have slowed a little bit. The testing ambition for 40% by the end of this year seems a little on the low side. I think it was 25% by the end of Q4. So just what’s the hurdle there? Is that the main gating factor on driving the commercial uptake? Any thoughts on competitive risk from the Akt inhibitors would be welcomed as clear overlap in terms of the biomarker selection of population? Could you just confirm you’re not planning to do a combination study with Kisqali as part of the EPIC program?

And then Vas, maybe just your thoughts on business development. You’ve been pretty clear in the past on saying that the envelope planning to remain relatively active. Does the current situation offer opportunities? Or does it rather force you to concentrate your time in terms of internal situation at Novartis? And then if I may, a quick follow-up on inclisiran. You’ve flagged the costs in the second half. Are you actually planning to put a primary care resource behind the product at this stage?

Vasant Narasimhan

On which — Emmanuel, your last question was on which product, inclisiran?

Emmanuel Papadakis


Vasant Narasimhan

On inclisiran. Sorry. Okay. Thank you. So Susanne, on the two Piqray questions?

Susanne Schaffert

Yes. Thanks a lot, Emmanuel, for the questions. So we were actually quite pleased with the performance of Piqray. And we see really continued strong momentum and uptake in Rx. I mean, as you say, testing is critical, and we believe it’s realistic also, particularly in Foundation Medicine, a plasma test to be approved in Q2, that we will reach these numbers and testing will continue.

Maybe just a quick comment on the Akt inhibitors. I mean we have to be clear, it’s a fundamentally different MOA. So it’s really a very different mode of action. And just not to go too much into science, PI3K is mechanistically upstream of Akt, so we would expect a potential greater inhibition of the pathway. And just to emphasize, there is no, study as far as we know with an Akt inhibitor specifically designed for PIK3CA mutation cohort. And so far, Piqray is the only product approved for patients with this specific mutation. So we still remain very confident with Piqray and very optimistic.

Vasant Narasimhan

And we don’t have — we’ve already, I think, completed earlier-stage studies of combinations of our PI3 kinase with CDK 4/6 and aromatase inhibitors and are not taking forward that combination as part of the EPIC program. With respect to BD, we are continuing our business development program. Capital allocation priorities remain in place. You’ve seen us conduct early stage deals out of NIBR, our research unit, over the course of the first quarter.

So we continue to look at business development opportunities that fit our overall profile. I think, overall, as you can imagine, with the current turmoils in the market, there is a sector-wide decline in M&A activity. And I think that’s going to be true for the foreseeable future until things stabilize a bit more. But I think from a business development and licensing standpoint, still active and remains a lot of opportunity. And on inclisiran primary care, Marie-France?

Marie-France Tschudin

Yes. Just to say that clearly we see a lot of synergies with Entresto. We’ll have a very clear focus on cardiology, lipid clinics but also looking at government and systems of care.


Last question comes from the line of Kerry Holford from Berenberg.

Kerry Holford

Just one left, COVID-related. Vas, you mentioned briefly earlier, I wonder if you can help us understand the potential risk to [indiscernible] the rising U.S. unemployment. Where do you see those risk across your portfolio? I know in relative terms, you have a lower exposure to the U.S. But it’s good to get your thoughts on where there could be a pockets of risk. And if you’re able, can you remind us of the broad split of your U.S. sales base by channel?

Vasant Narasimhan

Well, thanks, Kerry. So on U.S. unemployment, I mean I think — first, I think, of course, we’re all saddened to see the incredible tide of rising unemployment in the United States and around the world. So I think this will, of course, have disruptions to the provision of health insurance. I think it’s important to note there’s a lot of uncertainties right now. First, of course, extended coverage through COBRA and similar policy initiatives. Second is the ability of patients to potentially get coverage through the various care consortia that now exists in states through Obamacare and then ultimately, to see how many patients move on to Medicaid. Then there’s an additional dynamic that different products have different exposure in terms of the rebate gap between what we have in the private markets and in Medicaid and related segments.

Newer products have, of course, a much smaller split because there have been fewer price increases. Older products, of course, have a much bigger gap in terms of differences on gross to net. So all of these dynamics are in there. Overall, I would say, we don’t expect significant impacts in 2020. If we saw impacts, that would be in 2021. And we expect those impacts to be limited based on all of the assessments that we’ve done. I don’t have a specific breakout in hand. But we view this as a manageable topic. We, of course, monitor it, doing all the assessments. But from what we can tell within our portfolio, worth noting, we’re roughly 1/3 U.S., the remainder ex U.S. Within our U.S. business, lots of new product launches. And within our overall portfolio, relatively limited exposure to Medicaid versus our peer set.

Good. So thank you all for joining. Apologies we went a few minutes late. We hope you found the updates informative. Thank you for investing in Novartis, and we’ll look forward to keeping you updated in the year to come. Please stay safe and healthy, and wish you all the best.


This concludes the conference for today. Thank you for participating. You may all disconnect.