Strategic priorities of Novartis AG

Sales were up 6% in constant currency. Core operating income was up a point, 1%, in constant currency as was core EPS. The company also made good progress in the pipeline for the quarter. Net income was $2.3 billion for the quarter, up a percent that was down, though, 6% U.S. dollars. Free cash flow was quite strong at $3.5 billion; it was up versus a year ago in U.S. dollars, up by about a percent.

Novartis continues to make progress on its three strategic priorities. In innovation, the company had four key approvals during the quarter. In terms of accelerating growth, the company’s net sales grew in all divisions, driven by the growth products that were up 17% in constant currencies and also by emerging markets.

The pharma division had some important product approvals. Two of the most critical were the Japan and Europe approvals of Ultibro in COPD. This is a new therapy for COPD, and Novartis is right now in the process of launching that drug across Europe and Japan. In vaccines and diagnostics, the FDA approved an indication expansion for Menveo to include infants and toddlers from two months.

Novartis also received FDA breakthrough therapy designation for BYM338. This is antibody for a degenerative muscle disease called sporadic inclusion body myositis. If it’s approved, this will be the first treatment for patients with this disease. And I think the important thing is this designation brings the company’s total to three in terms of new molecules, and that’s the highest achieved of anyone since the program began.

For Alcon, the company has built now a complete refractive surgical suite, with the launches of two new pieces of equipment, Verion and Centurion. This is important because the upfront diagnostic piece, the GPS, is able to take an image of the eye and then it communicates with the other pieces of equipment downstream, from laser incision to cataract removal, and this is now a more automated surgical procedure that will improve patient outcomes for those patients with cataracts.

In Sandoz, Novartis also strengthened its leadership in biosimilars, launching a simple and secure device for Omnitrope. This is the fastest-growing human growth hormone worldwide and it generates about $200 million in sales annually. This is going to help the company differentiate this biosimilar.

Now, the second priority of accelerating growth, you can see the growth rates for all of the divisions, starting with double digit growth in Sandoz in consumer health in constant currency, and good, solid growth in Alcon and in pharmaceuticals. Pharma core operating income was negatively impacted by generics, the generic impact of Diovan and Zometa, as well as investments into the pipeline.

Novartis growth products, though, continued to play quite a key role in driving its performance and were up 17% in the quarter, to just over $4.5 billion, but importantly, they’re now up to about a third of the company’s total group sales.

Now touching on the division highlights; starting with pharma. You can see the growth products grew nicely in the third quarter, particularly Gilenya and Afinitor, with growth that was over 65% versus a year ago. Alcon grew 6% in the quarter, and this was driven by very strong 9% growth in the surgical franchise. This was, again, driven by the cataract segment. It was both an increase in procedures as well as improvements in overall market share.

For Sandoz, you can see that the company had a strong quarter across the globe and really grew faster than market in all regions around the world, for the generics business. And then in consumer health, Novartis continued to show very strong growth this quarter. OTC delivered double-digit growth. This was driven not just by the U.S. relaunch, but also outside the U.S. The company has brands growing like Voltaren and Otrivin growing in the teens. So this is a business that is performing very well. Animal health also has successfully relaunched Sentinel back into the U.S. market.

Now, in the third quarter Novartis’ emerging markets business grew about 9%. China and Russia led that growth with 18% growth in China and 15% growth in Russia for the quarter. And then on productivity, the company is on track to deliver its productivity targets of 3% to 4% of net sales. Novartis is now standing at almost $1 billion in savings for the first nine months of 2013. M&S as a percentage of sales dropped again, about 30 basis points, versus prior year.

Yesterday the FDA completed a week-long inspection of Novartis’ Lincoln, Nebraska manufacturing site. It was a very thorough inspection, and we got the news last night that they have closed out the inspection with zero 483 observations.

Outlook for 2014:

At the start of the year, the management said 2014 and 2015 growth rates would be at least mid-single digits and core operating income growing ahead of sales in constant currencies. This remains intact, but obviously needs to be adjusted for the Diovan mono generic upside in the U.S. Clearly 2014 reported growth rates will be impacted by the timing of Diovan mono generic entry in the U.S.

Let’s take a look at Revised Full Year Outlook for 2013. The company is raising its full year outlook again. This assumes that Diovan mono generic does not enter the U.S. market in Q4. In terms of reported results, Novartis new full year guidance in constant currencies is group net sales rates to grow low to mid single digits, group core operating income to be in line with or better than 2012, and pharmaceutical sales raised to grow low single digits.