Novartis Q4 Earnings Call Transcript

123jump.com Staff
02 Feb, 2010
New York City

Sales rose 28% to $12.9 billion and net income rose 53% to $2.3 billion or $1.01 per diluted share. Productivity improvements account for the 0.9% point increase of the operating income margin. The net income margin is actually down 0.6% points, but it is all related to exceptional items.

Novartis AG ((NVS))

Q4 2009 Earnings Call Transcript

January 26, 2010 8:00 a.m. ET

Executive

Daniel L. Vasella – Chairman and Chief Executive Officer

John Gilardi – Investor Relations

Raymund Breu – Chief Financial Officer

Joseph Jimenez – Chief Executive Officer, Pharmaceuticals Division

Jonathan R. Symonds – Chief Financial Officer

Mark C. Fishman – President, Novartis Institutes for BioMedical Research

David R. Epstein – Chief Executive Officer, Oncology

Jeffrey George – Chief Executive Officer, Sandoz

Andrin Oswald – Chief Executive Officer, Vaccines and Diagnostics

Trevor Mundel – Global Head of Development, Pharma

Analysts

Fabian Wenner – UBS

Kevin Wilson – Citigroup

Alexandra Hauber – JP Morgan

Graham Parry – Bank of America/Merrill Lynch

Jeff Holford – Jefferies & Company

Timothy Anderson of Sanford C. Bernstein & Company

Dani Saurymper – Goldman Sachs

Florent Cespedes – Exane BNP Paribas

Andrew Baum – Morgan Stanley

Jo Waltham [ph] – Credit Suisse

Michael Leacock – Royal Bank of Scotland

Amit Roy – Nomura Securities Company

Presentation

Operator

Good morning or good afternoon, depending where you are attending from. I am Stephanie, the conference call operator for this conference. Welcome to the Novartis 2009 Full Year Results Conference Call and Live Webcast.

At this time, I would like to turn the conference over to Dr. Daniel Vasella. Please go ahead, sir.

Daniel L. Vasella

Thank you very much, Stephanie. Good day, everyone. Ladies and gentlemen, it''''s my pleasure to welcome you on the annual results conference for the year 2009 and I would like to hand over to John Gilardi to read the Safe Harbor statement and introduce some of our participants here around the table before we go into the presentation. John?

John Gilardi

Thank you. The information presented in this conference call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Please refer to the company''''s Form 20-F on file with the SEC for a description of some of these factors.

Now, on to the participants for the call this afternoon. We have Dr. Daniel Vasella, Chairman and CEO, Raymund Breu, CFO, Joe Jimenez, the CEO of the Pharmaceuticals division, Jon Symonds, the deputy CFO, Mark Fishman, the head of NIBR, David Epstein, the CEO of the Oncology business, George Gunn, the CEO of the Consumer Health division, Jeff George, the CEO of the Sandoz division, Andrin Oswald, the CEO of Vaccines and Diagnostics and Dr. Trevor Mundel, Global Head of Development. Now back to you, Dr. Vasella.

Daniel L. Vasella

Thank you very much, John. So we used the old titles. In the new era, obviously, we''''ll use head of all the CEO titles because we will only have one, which is Joe Jimenez. And with that, let me start my presentation and start on slide number four.

If we look at our 2009 results, I think we had an exceptional year, where we gained market share with all divisions and achieved a great top-line growth. And especially, the fourth quarter it was strong. Of the point of view of innovation, there''''s more than 30 major regulatory product portfolios, we did well. And based on the results, we are able to increase or propose an increase of the dividends by 5% at the next shareholder meeting.

Last but not least, we have announced a leadership change for taking care of the next growth phase in which Novartis will enter, marked, of course, most vividly by the intended acquisition of Alcon.

On slide five, you''''ll see the key numbers. In local currencies, the group grew by 11% and you''''ll see the headwinds in the first three quarters of the currencies. In the fourth quarter, that turned around. Operating income, 11%, net, 4%, EPS, 3%. And as announced previously, we are now reporting the results also of so-called core operating income, core net income and core basic EPS. In there you can see already the big inference of amortization and one-time rate.

Slide six shows you how the different divisions, they''''ve performed. Pharma, I don''''t comment because Joe will go into more details. Then, Vaccines, an exceptional year. I do not anticipate 2010 will be the same. This was so heavily positively impacted by the H1N1, a rapid supply of the very strong demand we saw in a number of countries when the pandemic started. And Sandoz, which improved its performance in the course of the year. And Consumer Health, we''''ll come back to these divisions.

On the next slide, you''''ll see that our growth has been very balanced across all geographic regions growing at double digits.

In slide nine, really, it''''s a recap of the forces which drive on one side the demand and on the other side, the challenges which the high demand, mostly driven by an aging population, is triggering, which we tried to navigate around and we did so successfully last year.

Slide 10 just summarizes some of the achievements in 2009 which correspond to the priorities we had set for the last year in the field of innovation, the portfolio and the markets. And of course, we also work hard on the organizational productivity, while we want to really keep higher track the best talent to invest into learning and development of people. And last, but not least, to contribute to society in which we work and live.

Slide 11, demonstrates that we were able to keep also in 2009, the leading position in new drug approvals by FDA.

And in slide 12, you can see that it''''s unlikely to change dramatically in the future, as we have a very rich and highly valued pipeline with many novel compounds addressing a number of diseases which can only be treated unsatisfactorily today, like, for example, uveitis. And I anticipate and we anticipate that in many of these instances, these drugs will demonstrate that they don''''t only work in a small indication, but that we will discover more effects as they are being used in the clinics.

In slide 13, you''''ll see how our business portfolio evolved over the last 14 years and how we divested the majority of our activities we had in 1996 by divesting chemicals, agribusiness and nutritional businesses. And on the other side, strengthening the generics business, buying the whole of Chiron and strengthening the Pharma businesses, business with many individual smaller deals and product licenses. And last, but not least, of course, the Alcon transaction, which is in the dominion hopefully going forward this year.

In slide 14, you''''ll see how Alcon would be positioned in new portfolio. In fact, it would be the second largest division of all our divisions. And we will be able to strategically integrate our activities with the ones of Alcon which makes a lot of sense from a market point of view, also from a productivity point of view. It would be an even stronger leader, worldwide leader in the eye-care business.

Slide 15, we had set an objectives of 1.6 billion of savings over three years. We achieved 2.3 billion in two years. We closed the program. But that doesn''''t mean we will close our eye on productivity. This, in fact, is more an ongoing exercise now. But especially in procurement, it''''s quite amazing how much we could achieve in a relatively short period of time and there''''s more to do.

Page 16, the details of the access to medicine programs we have. We supported almost 80 million patients in 2009. And the various programs between Coartem, the leprosy program, the Glivec program and the research centers, we contributed almost 3% of the net sales. And the programs are valued at 1.5 billion.

Next slide shows you that not only since it has become fashionable are we really engaged in the environment but where we want to be the least possible impact. But we, since many years, have invested notably in carbon-absorbing initiatives like planting trees now, also, by generating power with solar panels, as some of the examples. In the yearly -- in the annual report, you can see that every year we have set targets and we have measured the outcome, which I think makes it a trackable system, which in our understanding, is the basis for achieving progress.

With that, I would like to hand over to Raymund.

Raymund Breu

Thank you, Daniel. I can complement now the assessment that you have heard from Daniel Vasella by some comments on financials. I''''m on slide 19. The takeaways for 2009 are one, a strong currency headwind for the first nine months has reduced the reported numbers. So strong double-digit growth numbers are then reduced to 7% sales growth and 11% operating income growth in U.S. dollars. Despite this currency headwind, we achieved record earnings and we had an excellent performance for our free cash flow initiative. Free cash flow before dividend is up 24%.

We achieved the purchase of the EBEWE specialty generics business. And we announced our intention to gain 100% ownership of Alcon. Finally, total shareholder return in 2009 was 12%.

On the next page, I show again the overview of the key financials because I want just to comment on the increase of EPS and net income, which are 4% and 3% or slightly below normal.

There are only two reasons for this -- two major reasons for this. One is, the higher financing cost related to the Alcon transaction and much the reduced income from the associated company, Roche, because of the Genentech transaction. Underlying core net income, which corrects all these Roche effects but not total financing, underlying core net income is then up a solid 8%.

On the next slide, we showed the same numbers for the fourth quarter. It''''s very visible and striking that the year ended on a strong note with very high growth rates in the fourth quarter for sales, operating and net income as well as free cash flow. This reflects progress in operations and the acceleration in all divisions. And it also reflects the 1 billion sales in the Vaccines and Diagnostics division related to the pandemic H1N1. And finally, it reflects a positive currency impact in the fourth quarter.

I have to say that the numbers are very strong in operating income despite an increase in the provision of 318 million that we made in relation to the U.S. Federal investigations into the marketing practices of Trileptal.

You saw that we introduced, at the end of 2009, now core figures. We have finally accepted to do this to be more or less in line with our peers or are all using this effect of performance metrics. And you know that to provide you with more guidance or more insights, as you''''ll say, into the underlying performance of our businesses.

When we go from IFRS earnings to core earnings, we eliminate unusual acquisition accounting impacts, purchase amortization of intangibles or purchase price allocation impacts, we eliminate all impairments. Then we eliminate the same items for associated company income. And finally, we eliminate other exceptional items exceeding $25 million on a case-by-case basis.

On slide 23, we provide an overview of the margins development of operating and net income. Productivity improvements account for the 0.9% point increase of the operating income margin. The net income margin is actually down 0.6% points, but it is all related to exceptional items. Correcting for these, the core net income margin is also up 0.2% points despite the Alcon financing.

On slide 24, the productivity gains that I have mentioned are mostly focused on two expense areas, marketing and selling and general and administrative. Marketing and selling as a result of these programs, could be reduced as a percentage of sales by 1.5% points and general administrative by 0.2% points. These two cost categories grew only at 2%, clearly at a much lower pace than sales, which was up 7%.

You can see that we didn''''t cut investments into marketing and selling or research and development, but rather used part of the productivity gains to finance the necessary investments in emerging growth markets, sales infrastructure or late-stage development objects in Pharma, Vaccines and Sandoz.

Slide 25, core net income grew 8%, less than our operating income, which was up 11%. This is entirely due to the financing of the first 25% stake in Alcon, which cost $10 billion and related to $8.5 billion partial pre-financing of the now announced additional 52% stake.

Financing as a result dropped from a 94 million income in 2008 to a 353 million expense in 2009. Core taxes, on the other hand, grew only 7%. And they are virtually at the same rate as in the comparable period in 2008, so they stood at 15.4%.

Moving on to slide 26, cash flow management clearly is a success story of 2009. The project implemented across the divisions to improve cash flow from operating activities and reducing investments in capital and intangible assets had a very positive impact. Free cash flow before dividend improved 24% from 7.6 to $9.4 billion. It amounts now to 21.3% of sales versus only 8.4% of sales a year ago.

As a result, the 9.4 billion free cash flow easily covered the 18% increase in dividend related to the 2008 dividend of 3.9 billion and allowed us to return from a net debt position of 1.2 billion at the end of 2008 to a net liquidity position of 3.5 billion at the end of 2009.

Finally, on slide 28, a few comments about the Alcon financing. This recently announced transaction to gain full ownership of Alcon has obviously had a significant impact on our financial standing. Overall, the acquisition will cost some $50 billion or roughly 40% of our market cap. The second 52% stake, which amounts to 28 billion will be financed by a mix of cash and debt. And as you know, the $11 billion for the 23% public shareholding, we intend to finance via the issuance of Novartis shares.

This mix of 77% cash debt and 23% equity financing for the entire acquisition of Alcon represents a balanced compromise. Paying, we could have paid everything as cash and debt, it would have been feasible, but would lead to a downgrading of Novartis from AA to single-A. And it would have stripped out exitbility for future acquisitions [inaudible].

Given the very strong free cash flow, we expect to be able to pay down our extra debt within four years. The impact of these transactions on the EPS will be 9% dilutive in 2011 to EPS, as reported under IFRS and immediately accretive to core EPS. Then I hand over to Joe.

Joseph Jimenez

Thanks, Raymund. Okay. Starting on slide 30, the Pharma division had a good fourth quarter. Our sales were up 13% versus year ago in local currency. Our core operating income was up 23% in U.S. dollars behind the strong sales growth and also the productivity gains. And we had some good pipeline news that I will talk about in a minute.

The next slide shows the full-year results. If you look at the far on the right, 28.5 billion in sales, that''''s up 12% in local currency. And core operating income up 10% for the year or 16% in local currency, showing some nice margin improvement.

The best part, though, is that the strength is broad-based, as shown on 32. All therapeutic areas are up double digits, as you can see on the chart.

The new launches, as shown on the next slide, 33, delivered 1.4 billion in the quarter. This was 18% of our total. So the transformation of the portfolio ahead of the Diovan patent expiration is underway.

The next slide shows that we had some very good pipeline news in the fourth quarter, starting with Lucentis and the filing for diabetic macular edema. We had very strong Phase III results. And just for perspective, there are 500,000 DME patients outside the U.S. that are treated. And that compares with 600,000 patients for wet AMD, so you can start to dimensionalize the opportunity that we see in DME.

We also filed FTY720, as shown on slide 35, in both the U.S. and the EU. And I would say that our move into MS started last year with the commercialization of Extavia. And we are getting very good experience on the commercial side of the business in this disease area, which I think will benefit us when we launch Gilenia.

Next slide shows that we launched QAB in Europe under the Onbrez brand name and the early feedback in Germany is positive. We are targeting submission in the U.S., resubmission in the second half of the year following the completion of an additional dose finding optimization study.

And we also filed Tasigna for the first-line indication in CML. Tasigna is turning out to be an even more potent compound than Glivec for CML, so we''''re looking forward to having this first-line setting.

Now other news for the full year. If you flip to slide 38, you can see that we continue to be one of the fastest-growing pharma companies in 2009 at IMS growth rates of about 12%. I also wanted to call out one of our regions that''''s driving this growth, on slide 39.

In Europe, IMS shows us up 11% versus year ago. This is three times faster than the average of the top 10 pharma companies in Europe, so it''''s a great performance.

We also had very strong performance in development. Slide 40 shows that we had 25 key approvals in our major geographies. And this is important because it didn''''t benefit 2009, but it will benefit ''''10, ''''11 and ''''12 as we go forward.

We also had a record number of in-license compounds as shown on slide 41. So, six new compounds as supplements to the internally-developed pipeline. Compounds like Elinogrel, our new antithrombotic. And also down at the bottom, Relaxin, which is a compound from the Corthera acquisition that we announced in December for acute decompensated heart failure.

We''''ve able to grow our margin, on the next slide, while also investing heavily in the launches. And I think this is a story that the market has not yet fully digested. You can see over the last two years, core return on sales up 220 basis points and reported up 410 basis points at a time of pretty significant investment.

So the outlook for 2010 is mid-to-high single-digit sales growth. So I believe that the momentum that we have will continue into 2010. Now the pricing environment will be less certain, which is why the guidance is mid- to high-single digit. But with U.S. healthcare reform with Japan by annual price cut and with some European cost containment measures, I think given the momentum of the business, this will be a very good performance. Operating income growing ahead of sales, so margin improvement in 2010 and strong pipeline news flow.

Now I''''ll turn it back over to Dan.

Daniel L. Vasella

Thank you. We''''re coming to slide 45. I''''m going just to comment briefly on the other divisions. And since my colleagues are here, if you have any further questions, we can go into it.

But slide 45 shows you the acceleration of growth in the generics business, Sandoz. And the 10% obviously have been also positively impacted by the acquisition of the EBEWE. But I think that creates a new growth platform, which is very promising and important.

The next slide shows the free cash flow generation and how well Sandoz did contribute in this area with over $770 million.

The biosimilars, on the next slide, also grew dynamically by ever 70% and are proving now their position in the marketplace and gain more and more acceptance. And I think that is a train which cannot be stopped anymore. In the future, we have a leading position and we will did the utmost to keep that leading position in the future.

Consumer Health, on the next slide, was really facing a market where we saw that the recession had a major negative impact. You see the negative development of the growth rates in the industries in which we compete and really contrasting our own performance which is positive and shows how we gained market share in all three businesses.

At the end of the year, OTC had the most important project realized which is Prevacid24HR, the launch, sold over 120 million and had a blitz campaign. And also the uptake in the marketplace has been good. So we''''re optimistic that this brand can reach a very substantial number, maybe in a few years, up to 0.5 billion.

The really big challenge last year was to respond to the high demand of H1N1 vaccine. We had numerous demands by governments who pressured us to deliver more and faster than we could. But that said, Novartis Vaccines was the first one to get the approval of an H1N1 vaccine. The first one to publish large studies and expand the clinical trials and by year end, had sold 116 million doses and had been paid for most of them.

So going into the new year, I think we have limited exposure. Obviously, the demand in 2010 will not at all match the one in 2009. I hope that this pandemic is broadly over. It''''s a little bit early to say because we have now the southern hemisphere and there''''s still a risk of mutations. But we hope for the best.

As more important, it becomes that in view of the cyclicality of the flu business, the Vaccine division builds a much more solid base. And we believe that the Menveo and MenB franchise will offer this opportunity, covering really kids with a very effective vaccine and creating a basis.

We also in the recent years have invested much more into R&D than in the previous history of the company. And I think that in the future will pay off. But as we know, it takes a long time to show.

What we can show in slide 53 is a continuous growth over the past years of the top line and the bottom line. And in the next slide, as a result, we were able to increase dividends continuously over 13 years by an average of 12% in Swiss francs and over 14% in dollars.

Also total shareholder return, slide 25, was better than [inaudible] pharma that Novartis appears in the world market in the recent past. But also if you look over the entire 14-year period since 1996, total shareholder return reached 9% per annum and did exceed the other comparators, clearly.

Slide number 57, the board decided to introduce a few new things as we went through this whole succession planning. First of all, in the context of the financial crisis, we decided to introduce “clawback clauses” in all contracts, which will be impacted implemented now across the world, which really means if anybody has received its incentive, thanks to loading the trade or misstating the financial results or making the sales by unethical business behavior, he or she will have to pay back incentives.

Secondly, the board did create a new risk committee last year. And we are going to propose to our shareholders at the next AGM to vote in a consultative mode, prospectively on our compensation systems and to incorporate that in our statutes. That is something which has not yet been done. It''''s different from current practice, where, retrospectively, shareholders express their view on the compensation system or absolute compensation. And we don''''t believe this is a really productive discussion. It''''s much more important to be able to integrate the view of the shareholders in the divisionary process looking forward.

Slide number 58 shows you the new organizational structure. Joe Jimenez, the coming CEO as of February 1, 2010. All the changes are effective by February 1 or at February 1.

Secondly, you see that succeeding to Joe, David Epstein has been appointed as Global Division Head of Pharma, that Jon Symonds has been appointed as Global CFO of the group. And this gives me the opportunity to formally thank Raymund. I think it''''s your last analyst call after many, many years. So Raymund, I''''m sure, not only my colleagues, but many of the analysts would congratulate you and thank you for the way you have handled them. So in their name, I''''m expressing my thanks.

And then we have no changes in the division and the leadership of research. But two colleagues are missing on the chart. As we went through this whole planning, we, meaning the board, we decided to eliminate the position of Chief Operating Officer because it would layer -- we had too many layers. So delayering was right if we separate Chairman and CEO.

And secondly, we distributed some of the responsibilities which were under Thomas Wellauer and Andreas Rummelt into the divisions or as it relates to control and risk management or risk systems, maybe I should say, to the auditing compliance option.

So, I''''m extremely grateful to the colleagues who have now decided to leave because their jobs were either eliminated or they didn''''t want to take what was available. I fully understand and the board understands their decision. I think they have a good track record in all cases. Joerg Reinhardt has led our development organization successfully for many years before taking over Vaccines and Diagnostics and then becoming the COO.

So with that, I think we complete a chapter in the company history and are happily looking forward, full of confidence that the next team will lead us to new horizons and new successes.

With that, I come to the priorities. And you see there''''s not a lot of change, of course. The executive committee has discussed these priorities, so there should be no surprises. There''''s not much change. Certainly, in the short term, once we get approvals and agreements, the integration of Alcon will be crucial while continuing to invest into innovation.

And finally, in the outlook, we are projecting growth at the group level of mid-single digit. We believe we can improve the operating margin on the group level. We haven''''t put a projection on net income because the question about Alcon and the impact of Alcon is so important that we will know that as we move forward in the course of the year. But I would say excluding Alcon, of course, we could be very confident to have record bottom-line results.

And with that, I''''ll open for the Q&A. Thank you.

Question-and-Answer Session

Operator

The first question is from Mr. Fabian Wenner, UBS. Please go ahead.

Fabian Wenner – UBS

Thank you very much. Good afternoon. Getting your strong free cash flow improvement and the large upcoming acquisition, can you just detail what you view as the optimum gearing level maybe in terms of net debt to EBITDA? And how you want to use the free cash going forward apart from acquisitions, obviously?

Secondly, on Gilenia, do you still see a chance to get priority review in the U.S.? And what does that depend on?

And then lastly, on MenB, can you just remind us what the latest discussions with the FDA are about exactly? Thank you very much.

Jonathan R. Symonds

It''''s Jon Symonds here. If I can take the first question on financing and cash flow. I think as Raymund has already announced, a particularly strong feature of this year''''s performance was the growth in cash flow, which was significantly ahead of the rate of earnings, which is clearly part of a set of initiatives that have been established in the last two years and one that will become even more important as we think about [inaudible] going forward.

Raymund has also talked about how we selected the financing of Alcon through the mix of cash and equity. Indeed, we could have funded the entire purchase with cash and debt, but judged that it was right to introduce an element of equity, thereby, preserving the AA rating, which we believe to be very important going forward in order to ensure that we have the right disciplines around financial management, but also are able to avail ourselves of opportunities that arise and obviously within that rating.

There are a series although they are different depending on rating agencies a series of financial metrics and characteristics that enable us to keep in that range. So that''''s where we will be targeting our financial performance going forward.

Fabian Wenner - UBS

Can I just follow up on that? I probably meant more like how quickly are you going to pay down the debt? What''''s your target there?

Jonathan R. Symonds

No. I think, again, Raymund said this that we should be able to pay it down within four years based on the cash flow as we foresee it, of course. How we use that cash flow will depend on the opportunity mix as it comes forward. But the underlying cash generation within the business should enable us to move through the current debt burden very quickly.

Trevor Mundel

On Gilenia, so we will get feedback from the FDA in February on two issues. One is around acceptance of the file and the other is on our request for priority review. On the front of the file, we''''ve been very careful with this, so I think that there are no issues with the file itself. And in terms of the priority review, I think we have a very strong position being the first oral therapy under review with the FDA at this point, so I think that is very likely to come in February.

Daniel L. Vasella

So MenB, to recap, in Europe, we have involved all our patients in our Phase III trials. We expect the results mid-2010 of this year and then we aspire to file at the end of the year. In the U.S., the FDA had asked us for two things before we could discuss our Phase III program. One was incremental safety data in addition of what we already had for end of our Phase II program. This has been collected and is available.

Secondly, they wanted us to develop a more scientific model by which we could prove that this vaccine would really cover most of the about 500 different MenB strains who are circulating in the United States.

And we have developed that model. That was quite an impressive scientific effort. And we have now requested the end of Phase II meeting with the FDA, which will happen in the next few months. And there we will discuss our proposal and how to start the Phase III.

Fabian Wenner - UBS

Thank you very much.

Daniel L. Vasella

Thank you. Next question, please.

Operator

The next question is from Mr. Kevin Wilson, Citi. Please go ahead.

Kevin Wilson – Citigroup

Thanks very much. The first question is also related to cash generation, but thinking about the opportunity to be more efficient going forward. Relative to what you''''ve achieved so far with Project Forward, perhaps, Jon, you could give us some sense of whether you can see the same again coming from other areas?

And secondly, how you will use that cash in terms of reinvesting in the business and some philosophical discussion about revenue growth versus margins because you''''ve clearly indicated that margins chosen but margins would improve in Pharma? Do you think that''''s a gradual progression driving better revenue growth? So we''''re perhaps underestimating the opportunity for top-line growth in the business in the medium term?

Secondly, on financial, could you give us some sense of, if you have a sense of, what market penetration you''''ve achieved in second and third-line renal cancer and whether there''''s any inventory issues there? That seems a very strong quarter.

And lastly, on the Lucentis versus Avastin trial, the cap trial, 12 months data during February when might we hear the results from that?

Jonathan R. Symonds

Okay. Kevin, on the first batch of questions, I think Project Forward has significantly exceeded its original targets. And as Daniel has said, is now being closed. There won''''t be a new program open because what Project Forward has enabled us to do is to embed the philosophies and the principles around the efficiencies and productivity in business as it goes forward. And that''''s the right place it should be. But the fact that we are not announcing a new program does not mean that we are not taking the opportunities that we see for further efficiency, seriously. Indeed, the cost base is clearly somewhere at 30 billion. And so there are still plenty of opportunities.

You are right in saying that the objective of improving profitability is to give ourselves more options in the business, one of which is to invest in sales and marketing and improve the top line going forward. That will always be a high priority, as indeed, will be investing in good scientific opportunities.

The third manifestation of it will be in improved profits. And I think we need to keep in balance all of those ingredients. And the fact that we are continuing to going forward with productivity improvements does not mean that we are stating profit maximization as an objective. It is not and it never will be as part of this three-pronged approach to ensuring that we have sustainable business over the longer term.

Joseph Jimenez

And Kevin, this is Joe Jimenez. On the Pharma part of that question, if you think about the trade-off between revenue growth and margin improvement, this is a business that is fundamentally about innovation. And that we must continue to invest in the top line to continue to drive revenue growth. That doesn''''t mean that that''''s going to come at the expense of margin. I think over the last two years, you can see that we were able to improve margin at a time of very heavy investment to create best-in-class top-line growth at the same time. And it''''s the productivity opportunities that we have down to the territory by territory level across the entire globe that will be continued, continually mined to show that we are able to provide the top line and also drive margin improvement.

David R. Epstein

In terms of Afinitor, thanks for recognizing the very good start. We''''re very happy with the direction of [inaudible]. Just remember that the sales are still predominately coming out of the U.S. and just the first European launches.

In terms of your specific question, we only have data right now for the U.S. and it is fairly dated. It goes back to really the end of the summer. At that point in time, we had abruptly 20% of the third-line patients, renal cell patients, on drug and roughly 15% of the second-line patients. I suspect that''''s significantly higher in the U.S. by now.

Joseph Jimenez

So on the CAT trials, we expect some data from the CAT trial to come out in 2011 and also from the corresponding small study in the U.K. Just remember that these studies are not powered to show any definitive differences between Lucentis and Avastin. But nevertheless, it does rate the priority and that has been our focus on the DME indication and the RBL indications which are two new indications where some of the risks associated with the use of Avastin certainly favor one''''s tendency to use Lucentis.

Kevin Wilson – Citigroup

Thank you.

David R. Epstein

Thank you. Next question.

Operator

The next question is from Alexandra Hauber, JP Morgan.

Alexandra Hauber – JP Morgan

Thank you very much. The first set of questions targets Raymund or Jon. And maybe I should start with saying thank you to Raymund for the last 14 years. I''''ve always enjoyed immensely your discussions since ''''96, since the creation of Novartis.

So the question is you have significantly reduced your inventory just during the fourth quarter. And you''''re now down to five months inventory on hand. And I was wondering whether you could specify the impact that had on your cost of goods, either on the group or on the Pharma levels? And also specify, I think the effect was most pronounced in Pharma but it seems like Sandoz was also affected by that.

Second question on the same line is how do you expect this to play out going forward? Do you think you can reduce inventories further? Inventory benchmarks seem to suggest you may be able to squeeze out another month. So, is that going to happen in the next one or two quarters of the corresponding hit to the COGS? And, how do you generally approach this whole issue? Do you maximize cash at this stage? Or do you sort of balance a trade-off of cash generation versus profitability targets?

And finally, just taking again a shot at a question, I sort of asked earlier, could you just give us a rough idea how much that you intend to raise for step two? In other words, just give us an idea, I mean what''''s sort of the minimum level of operating cash you feel comfortable running the business with?

I have also just a question on Vaccines and Diagnostics. And that is if I just looked at the fourth quarter costs, it''''s quite hard to say how much of those costs bags are related to H1N1 and how much is sort of the underlying run rate. So I was just wondering whether you can give us any color on that on looking at things like the marketing and sales and the R&D charge? Thank you.

Joseph Jimenez

Alexandra, this is Joe Jimenez. I''''ll start on the inventory question because most of the impact was in Pharma. We did see a significant reduction in inventory over 2009 and particularly in the fourth quarter. I think in great Novartis tradition, when we get focused on something, we really go after it.

And we took 69 days of inventory out of the system from the beginning of the year to the end of the year. And there was a corresponding hit regarding margin due to that.

Now, we do expect to continue to reduce inventories going forward. I won''''t say it''''s in the first two quarters. This is going to be a longer-term continued inventory reduction so that we can do it on an orderly basis.

And if you think about the productivity initiatives that we have behind the technical operations group, expect to be able to offset additional inventory reductions with improved cost reduction.

Alexandra Hauber – JP Morgan

Is there anyway how you can give us some color about the margin impact of those 69 days?

Joseph Jimenez

I''''ll tell you that it is included in our margin improvement year to date. So we, I guess the point is that we are more than offsetting that hit with productivity elsewhere. Our cost of goods year on year, if you look at the hit, was about a point and a half and that inventory was most of it.

Alexandra Hauber – JP Morgan

Okay.

Raymund Breu

And Alexandra, I take the question on the step two financing. As you rightly noted, it depends a bit on the free cash flow generation as we go forward. And it depends on the closing date for this step two. The later the closing, the more free cash flow we accumulate. At the moment, we think that approximately $12 billion to $16 billion could be financed via debt. Obviously, we hope that it will be more at the lower end, given the free cash flow generation.

Financing, the term of the financing is still very much open. We obviously monitor market developments very carefully in order to decide whether we should take out three to five-year debt or whether we should rely more on the commercial paper market in the U.S. Obviously, at the moment, the rates at the shorter end of the curve are much more attractive but that we''''ll have to see how this develops. So this mix is still very open and that''''s the mix between commercial paper and term financing or bonds.


Alexandra Hauber – JP Morgan

So no level of sort of minimum operating cash you need which you want to disclose?

Raymund Breu

No. I can give you a hint, Alexandra. I think we currently have the target of approximately 8% of sales as a minimum operating level of cash.

Daniel L. Vasella

Okay. Thank you very much. Can we go to the next? The next is vaccines.

Andrin Oswald

Yes, so to get back to your question on COGS in V&D, if you look at the different line items in COGS, clearly the incremental spend is for the massive ramp-up of H1N1 production. On marketing and sales, we had no incremental significant spend over the previous year with exception of the preparation of the Menveo launch. This is no repeat that we have built up in the U.S. And on R&D, it is a combination of two things. One RS of course is a disciplined trial for H11 but also incremental spend for our late-stage meningitis pipeline, as well as the early development projects that we are now moving ahead. If you look at the total here and the profitability that we had this year, then I can say that the majority of the incremental profit over 2008 comes from our flu franchise.

Alexandra Hauber – JP Morgan

Okay. Thank you.

Andrin Oswald

Thank you. Next question, please.

Operator

The next question is from Mr. Graham Perry, Merill Lynch. Please go ahead.

Graham Parry – Bank of America/Merrill Lynch

Okay. Thanks for taking my questions. A questions for both Joe and Jon just as you''''re moving into new roles. I think, Joe, you''''ve previously said you would really like to target sales and marketing ratios. And you talked and I appreciate this is in the forecast but you talked I think about an ambition is heading into the mid to low 20''''s as a percent of sales of Pharma. Now based on your comments before, do you still think that''''s a realistic long-term target? And do you think you can continue to grow margin through Diovan underneath the patent expiries?

And Second question on Onbrez, you''''re now indicating discussions with the FDA relate to what clinical trials are needed. Can you just confirm you will definitely need the lower dose in the Phase III trial? Give us an updates on what you''''ve done with the combo products so if you actually started Phase III trials there yet?

And then, just a quick update on the merger and acquisition of Alcon, could you just give us the latest expected timetable for the Alcon shareholder and Board vote on your initial proposal? Thanks.

Joseph Jimenez

Okay. Starting with the sales and marketing question, as you could see from the full-year results, we were able to reduce our sales and marketing expense as a percent of sales 150 basis points this year. So we will continue in the years ahead to pull that ratio down as we what we call geo-tailor our field forces in ways that we''''re looking down to the territory level and improving profitability, redeploying. And as markets also become more restrictive, we are pulling total number of reps out. So I think you can continue to see that going forward.

Regarding that aspiration, obviously, I must have been very bold to say that, because that''''s quite a low number versus where we are today. But if you just look at our progress that we''''ve made in the last two years and project that we believe that we can continue to become best in class from a sales and marketing efficiency standpoint, I think that''''s where we will end. Regarding Onbrez?

Raymund Breu

Yes, so Graham, as you indicated, we have this short-duration package of work that does involve lower doses. In particular, 75 micrograms dose that we will be resubmitting in the second half of 2010. In terms of the combination programs, the QVA program is going to start on track or maybe even a little early in May of this year, the Phase III program for QVA. And the doses there are the doses that we''''ve been successful with ex-U.S. and that program should be fine. But of course the readout from this dose program that''''s going forward now would put into the QVA program for the U.S. going forward.

Graham Parry – Bank of America/Merrill Lynch

Okay. So can I just clarify that? So you would potentially start an extra 75-microgram combination on once you get feedback from the FDA? Or that you are starting that in May?

Raymund Breu

No. We''''re not, because we have the doses that we''''ve already successfully registered ex-U.S. at this point. It remains to be seen what the efficacy is of the 75 versus the already registered doses. The 150 and the 300 doses which were approved in Europe, look to be highly effective. So we will see what the outcome is of this short program that we have in the first half of 2010, before adding anything to the QVA program at this point.

Graham Parry – Bank of America/Merrill Lynch

Okay. But there''''s flexibility in the trial to add an extra day, so they''''re online should you need it?

Raymund Breu

Yes.

Graham Parry – Bank of America/Merrill Lynch

Thanks.

Daniel L. Vasella

And then, Graham, on the timing for the merger transaction with Alcon, first, I have to tell you that''''s a step two transaction, obviously subject to regulatory review in the U.S, in Europe and in a number of other countries. That''''s why we expect that this step two transaction will close sometime in the second half of 2010.

The merger transaction is contingent on the closing of this second step. That''''s why I mentioned you will appreciate and understand that at this point in time, we do not comment on or do not speculate on the timeline for this merger transaction because too many things are up in the air.

Graham Parry – Bank of America/Merrill Lynch

Okay. Thank you.

Daniel L. Vasella

Thank you. Next question, please.

Operator

The next question is from Mr. Jeff Holford, Jefferies.

Jeff Holford – Jefferies & Company

Hi. Thanks for taking my questions. It''''s got two. Firstly, on generic Lovenox, about which we''''ve been hearing quite a few bits of commentary in the market both from the sales and a few of the people and it just appears that you are growing more confident versus your commentary last year on an approval in the U.S. of a generic Lovenox.

Can you give us any more clarity on this? And why are you more optimistic now than you indicated last year?

Secondly, just on Pharma margins, trying to think about this slightly differently. Through the period sort of 2009 to 2013, do you have any kind of aspiration to keep Pharma margins flat through that period with some of the significant patent expiries? How are you thinking about that to help us shape the curve for margins there? Thank you.

Jeffrey George

So on enoxaparin, as we''''ve said in the past, we aspire to launch as soon as we get FDA approval. In all candor, we''''ve been wrong in the past and approval timing is often difficult to predict.

What I can say is that we''''ve satisfactorily resolved each of the specific outstanding issues we faced in the past, legal, technical, regulatory. And we are awaiting FDA''''s ruling on two remaining citizen''''s petitions and remain cautiously optimistic.

Joseph Jimenez

Regarding Pharma margins, it would be premature to comment beyond 2010. We have said that we expect to grow operating income in 2010 ahead of our sales growth. And, obviously, that would be our aspiration every year. Some years, there may be events that would prevent that from happening, but our action is directed towards improving productivity in a way that will allow us to leverage the revenue growth to help us grow margin.

Jeff Holford – Jefferies & Company

Okay.

Joseph Jimenez

Next.

Operator

The next question is from Mr. Tim Anderson, Sanford Bernstein. Please go ahead.

Timothy Anderson of Sanford C. Bernstein & Company

Thank you. A few questions if I can. On the meningitis B vaccine, if you look on clinicaltrials.gov, you guys are running trials looking at different formulations of that vaccine. That suggests you may not have found the ideal formulation perhaps because of tolerability issues. So, my question to you is are you happy or is FDA happy with the current formulation and the tolerability of that product? The second question on generic Lovenox, can you either confirm or deny that you may have already shipped product, embargoed product, to the trade and are starting to fill the channel?

And the last question goes back to, I think it was mentioned as part of the Pharma sales guidance, I believe Joe talked about uncertain pricing in the U.S. in 2010. And I guess from my perspective, I don''''t see there as being hardly any uncertainty on pricing power in the U.S. So I''''m wondering what you see differently versus what I might see.

Andrin Oswald

So on the meningitis, I think as we had previously reported, we have seen in our Phase II trials a fever rate, which we also see in our Phase III trials. Now, it''''s not a fever rate that has led to any adverse events that are worrisome. And we are confident that the risk-benefit profile based on what we know today is very positive. And remember it''''s a deadly disease that kills children and there is no vaccine available to protect against it.

That being said, of course, we''''re looking at other formulations by which we will be able to make the vaccine even better going forward. But one has to keep in mind that fever of course is a natural response to immune to create immunity. So to find the right balance having no fever but still good protection is not that easy but nevertheless we are trying. It''''s not because we do not believe in a good risk-benefit of the first vaccine now that we have in Phase III.

Jeffrey George

Jim, this is Jeff. As you can imagine for competitive reasons, we don''''t comment on any pre-launch commercial activities.

Joseph Jimenez

And just in terms of the uncertain pricing, Tim, what I was referring to was really more on the rebate side with U.S. health care a little bit less certain now and the Massachusetts Senate race decided. The point was not pricing power, but really where will healthcare end up in the U.S. regarding Medicaid rebates, regarding the doughnut hole, regarding some of the other elements that will cost us in terms of net price. And really, the U.S. is probably the most certain of the regions. If I think about Europe and I think about that there is a biannual price cut in Japan.

So if you look at the cost-containment potential, in some of the places outside the U.S. and you compare that with what happened in 2009, that''''s what led to the comment about the pricing uncertainty. Our 12% growth, about 9.5 points was volume and about 2.5 points was price. And you could see that price maybe flip the other way if there is more aggressive cost containment in the U.S.

Timothy Anderson of Sanford C. Bernstein & Company

If I can just go back to the meningitis question, just to be clear, so the one aspect you are trying to optimize is fever. Is that how I should interpret those comments?

Jeffrey George

That is correct.

Timothy Anderson of Sanford C. Bernstein & Company

Thank you.

Jeffrey George

Okay. Next question, please.

Operator

The next question is from Dani Saurymper, Goldman Sachs. Please go ahead.

Dani Saurymper - Goldman Sachs

Hey, Good afternoon. I wanted to ask in regards to Sandoz, but can you maybe talk through what the situation is with regards to getting Toprol-XL back onto the market? And then maybe more sort of longer-term with regards to Sandoz in terms of for the year in 2010, you are launching Prevacid generic, Prograph generic. You will include EBEWE for the full year. Can you maybe talk through the growth outlook in terms of top-line for Sandoz in 2010 and on a sustainable level going forward?

And then secondly may about consumer healthcare, in particular as it relates to Prevacid 24-hour, just trying to understand the 20% market share after two months. What would that imply on an annualized basis for sales? I appreciate you''''ve shipped about $100 billion, but just curious to know what that would equate to already given the rapid uptake it would seem?

Jeffrey George

So first, on the question of metoprolol succinate for Sandoz, the generic for Toprol-XL, there was a supplement that required FDA approval, which we submitted in September of 2009. And the guidance is that approval can take up to 12 months. So we are again cautiously optimistic to bring the product back to market later this year.

In terms of the 2010 outlook, we expect continued acceleration of our growth across regions, with the exception of Germany, where the market is projected to decline double digit. We are targeting to outgrow the market in every region.

And as you mentioned, EBEWE will also help accelerate our growth, as will the key launches that we had in the U.S, notably, tacrolimus and lansoprazole, which were two of the 25 products that we launched in the U.S. in 2009 versus 17 in 2008. So we continue to look for top-line acceleration.

Daniel L. Vasella

So the Prevacid number, we have a 20% market share and that is the proton pump inhibitor market which of course, it was the competitive product plus private-label. So 20% takes you to a reasonable number in that market. It''''s difficult inaccurate data. And we would anticipate a higher number as the year goes on.

Daniel L. Vasella

Next question, please.

Operator

The next question is from Mr. Florent Cespedes, Exane BNP Paribas. Please go ahead.

Florent Cespedes – Exane BNP Paribas

Good afternoon, gentlemen. Thank you for taking my questions. A few quick questions. First on vaccines, excluding H1N1 contribution in 2010, what is your view of the finances of this division? And second question again on vaccines, it is possible to have some depreciation of inventory of H1N1 in 2010? And last one on vaccines on MenB, will you disclose the Phase III data in 2010 before the European filing? Thank you.

Daniel L. Vasella

The first question, with regards profitability and our accounts business performance. What I can say is that it''''s difficult to exactly say how the year has evolved, given that of course we had some impact on our seasonal flu business because we produced more lots with H1N1. I think that overall we saw good growth in many of our products. We would have expected to grow in business with a profitability probably similar to previous years given that you invest more in our R&D pipeline and into the launch of MenB.

The second question with regards to inventory, we do expect I think inventory impact in terms of write-offs for H1N1 in 2010. And for the last question with regards to MenB, yes, I think once the data is available and is well analyzed, we would expect to publish it.

Florent Cespedes – Exane BNP Paribas

And do you anticipate to be mid year or second half of 2010?

Daniel L. Vasella

It would be more towards the end of 2010.

Florent Cespedes – Exane BNP Paribas

Thank you very much.

Daniel L. Vasella

Thank you. Next question, please.

Operator

The next question is from Mr. Andrew Baum, Morgan Stanley. Please go ahead.

Andrew Baum – Morgan Stanley

Good afternoon. A couple of questions for Joe and Daniel, please. When I look at your business, you now clearly have a critical mass in pharmaceuticals in ophthalmology and in generics. But the two areas that stand out and particularly the one area is vaccines where you look distinctly light versus your large competitors in scale. So my question is, are you willing to cancel the potential JVs or other routes to potentially gain scale, particularly in the - I would argue the likely event that MenB doesn''''t see commercialization in the current form in the U.S. So that would be the first question.

The second question on Lovenox. And I appreciate that you don''''t address any of the stocking questions that have been put to you. I would be interested in your thoughts regarding how many biosimilars do you think will be approved? Do you think it''''s an all or nothing phenomenon? Or are you anticipating that there will be differentiation between the various companies?

Daniel L. Vasella

Joe, I think you should answer.

Joseph Jimenez

Obviously, you drew the right conclusion around critical mass. I believe that if you look at the portfolio right now, it''''s broadly right, especially with the Alcon which will create a new growth platform for us, eyecare. What we need to do, though, is we need to go deeper with some of the businesses to gain global scale. And Vaccines and Diagnostics is one of those areas. We will grow Vaccines and Diagnostics through organic growth, through local acquisitions. And we wouldn''''t rule out other strategic options beyond that. I think Andrin probably could best add to that in terms of ways to gain scale in the Vaccines business.

Andrin Oswald

I think the priorities Joe has outlined or effectively the way that we pursue them. We grow internally what we have. And I think we have good growth opportunities, also geographically. And then we look at opportunities to expand with local acquisitions. I think in China, this acquisition of Tianyuan would give us an excellent platform to expand further in Asia, pending government approval, which we expect in the first half of this year. And we are pursuing other opportunities while we lead.

And on MenB interest, add one comment which is that the biggest disease where are we right now that we see for MenB is not in the U.S. So I would not underestimate the potential that the vaccine would have in Europe and also in other parts of the world.

Daniel L. Vasella

I don''''t think I need to add anything. We''''ll go to Lovenox.

Jeffrey George

With respect to enoxaparin, again, I can''''t really comment on competitors'''' product profiles or the FDA''''s intentions from a regulatory perspective. What I can say more broadly to the topic of biosimilars, as Daniel mentioned already, we had 73% growth in this business to reach nearly $120 million in sales, making us the clear leader in follow-on biologics and biosimilars with three approved and marketed products in Europe. And we continue to forecast and target significant growth expansion in follow-on biologics.

Andrew Baum – Morgan Stanley

Thank you.

Jeffrey George

Thank you. Next question, please.

Operator

The next question is from Ms. Jo Walton [ph], Credit Suisse. Please go ahead.

Jo Waltham – Credit Suisse

Thank you. I have three questions. Looking at Diovan, particularly in the U.S, one of the biggest elements and debate amongst investors is how sustainable that franchise will be in the face of Cozaar generics later this year. Can you tell us if you''''ve seen any activity by purchasers to try and encourage patients to start on a drug that will more quickly go generic? And whether you had to respond in any way in terms of higher levels of discounts?

On the Vaccines business, just looking at the core R&D, that''''s gone up from $327 million to $465 million, was any of that opportunistic in the sense that you could increase costs on a pretty much one-time basis because you had someone time income in vaccines? Or is that the level of ongoing R&D costs that we should expect? Because if it is and you haven''''t got any of the pandemic flu income, presumably, we''''re going to see a pretty poor result of vaccines and diagnostics of that division this year.

And finally, I wonder if Joe could tell us a bit about his vision for the other businesses, the Consumer Health business. You''''ve got $5 billion-odd of sales that we rarely hear about. It''''s an area where he has perhaps more experience than other pharmaceutical executives. I wonder if it''''s an area that he feels is right for further expansion?

Joseph Jimenez

Okay. Starting with your question about Diovan in the U.S. and how sustainable it is, as we''''ve said before, when we think about our hypertension franchise as a franchise. So Diovan, Tekturna, Tekturna HCT, now Valturna. So many of the combinations, Exforge.

And if you look at that total hypertension franchise, this year in the U.S, we grew 8%. And in the fourth quarter, we grew 10%. And so, we fully expect Diovan to be impacted by Cozaar generic.

I think you can assume that we will increase rebate levels to maintain formulary access as that occurs. But you can also see, you''''ll also see a significant shift in resources towards some of the other compounds in that hypertension portfolio so that we can continue to grow it through the Diovan patent expiration. Now that I''''m still on, I''''ll talk to the third question that you had, which is the vision for Consumer Health.

I do believe we have a very good Consumer Health business. But if you look at it today, particularly the OTC business is sub scale, meaning from a global standpoint, we have to go deeper and make that a bigger and stronger business.

And I think the strategy, as articulated by that business unit is smart. And that is that we are going to continue to build our key brands in key geographies. We are going to acquire opportunistically, as those opportunities provide themselves. But as you know, that''''s a very difficult space in terms of assets that come on the market.

And then, finally, we''''re going to increase our activity around switching from patent expiry to over-the-counter. If you look at the number of compounds that are coming off patent over the next five to six years, it''''s substantial. And we believe that will provide a substantial opportunity.

Andrin Oswald

So with regards to your questions on the R&D spend on vaccines, the large majority of the impact that you see is H1N1 related. We had beyond the commitments that we made for licensure, significant commitments for post-licensure clinical trials. Several all 10,000''''s of patients that we have to execute over the coming year. And of course, we have to accrue these costs when we sell the vaccine because it''''s really links to of course the H1N1 revenues that we have.

That being said, I would expect the underlying R&D expense to increase in the coming year because of Menveo and MenB. These are large-scale trials that of course will provide significant investment. In a small division that we are, we cannot compensate that by productivity in one given year. But definitely we would not want to compromise on this promising access that we have. And we really do what it takes to make them as successful as possible.

Jo Waltham - Credit Suisse

Thank you.

Andrin Oswald

Thank you. Next question, please.

Operator

The next question is from Michael Leacock, RBS. Please go ahead.

Michael Leacock – Royal Bank of Scotland

Thanks very much. I have a couple of questions if I may. Firstly, I''''d like to ask on the free cash flow generation for Sandoz, a particularly dramatic improvement. I wonder if you might be able to highlight what the working capital component of that improved free cash flow was.

Secondly, trade receivables increased by I think $1.3 billion. And yes, if I heard you correctly, you look to the seller you said that you''''ve been paid for most of the H1N1 sales. So I wonder if somebody could just comment a little bit on why the trade receivables rose the way they did. And finally, perhaps, your free cash flow increased by 24% this year for 2009. You''''ve got Alcon, which will surely give you a dramatic increase in free cash flow. Yet the dividend only increased by 5%, much more in line with your core EPS. Should we be using free cash flow as a guide for your dividend growth longer term or core EPS?

Jeffrey George

So first on the question of Sandoz free cash flow, as Daniel mentioned, we saw free cash flow growth of 72% or about $775 million over the previous year on 5% sales growth. That was driven by three factors. The first was much tighter cost control. We set out at the beginning of the year to achieve operating cost savings of $250 million. We achieved well over $350 million. We achieved well over $350 million of realized end-year cost savings in 2009 as part of Project Compete. So that was quite successful.

Second, we''''ve been more targeted in our CapEx expenditure. And I think third, you alluded to it from a working capital perspective, we''''ve been able to reduce inventories to improve our payable position and to improve our position with respect to days outstanding. So improvement in a number of areas in working capital. On the inventory side, since that was the question from Alexandra, I believe earlier, we took targeted reductions in Poland, Turkey and Mexico. And we''''ve been working on driving inventory down in the U.S. and Europe as well.

Daniel L. Vasella

I think with regards to Accounts Receivables as far as HINI is concerned, we had of course shipped a signif