Novartis AG
Q4 2021 Earnings Call Transcript

Published: 2 Feb 2022

[Operator:]

Good morning and good afternoon. And welcome to the Novartis Q4 and Full Year 2021 Results Release Conference Call and Live Webcast. . 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 very much. And good morning and good afternoon, everybody. A big thank you for joining us today on our Q4 '21 and full year '21 results. 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. With that, I'll now hand the call to Vas.

[Vasant Narasimhan:]

Thank you, Samir, and thank you, everyone, for joining today's conference call. Moving to Slide 3. With me today, I have Harry, Marie-France, Susanne, John Richard, Karen and of course you've already heard from Samir. Now turning to Slide 5. And before moving into the quarter, I'd like to just make a few overarching statements about the company, our direction and our overall profile. We believe we continue to present an attractive profile for investors, a clear strategy as a focused medicines company, powered by technology and technology platforms which we believe will define the future of our sector and the future of medicine; an attractive growth profile, where we're confident in the 4% plus sales CAGR that we've guided to, and with the goal to be above peer median beyond 2026, and an aspiration to be in the high 30s IM margin, which we're well on our way towards; a strong mid- and late-stage portfolio with over 20 assets with significant peak sales potential; platform leadership, which we continue to work towards across multiple defining platforms in the sector; and a balanced approach to capital allocation, which I'll speak more about in a few slides. Now moving to Slide 6. We continued to evolve and sharpen our strategy. We are continuing to look at where to play, with a particular focus now on 4 key therapeutic areas with 2 additional therapeutic areas we're selectively participating in; focus on 4 key geographies while always evaluating our geographic footprint; and aspiration to transform Sandoz; 5 key priorities on how we win, which we continue to focus on and believe, will enable us to outperform the sector over time; and a clear aspiration to be a top 3 innovator; be in the high 30s in terms of our IM margin; an attractive return on invested capital; and continuing to be one of the leaders in material ESG factors in the biopharmaceutical sector. Then moving to Slide 7. When you look at our track record on our financial performance, our track record, particularly on IM, has been solid. IM sales in the last 4 years have grown 7%. IM core operating income has grown 13%, which is amongst the highest in the sector. Our IM core margin has now reached 36.2%. And our group free cash flow continues to perform well, and we continue to look at improving our free cash flow generation as a firm. So I think this demonstrates that we are delivering against the goals we set ourselves, and we plan to continue to do that in the years to come. Then moving to Slide 8. Just as a reminder, over the coming years, we expect to grow that -- at that 4% or better rate, overcoming the estimated $9 billion of potential generic impact that we could have in this period, with a series of strong growth drivers

[Marie-France Tschudin:]

Good morning, good afternoon to all. On Slide 25, I'm pleased to share the quarter 4 results of the Pharma division with you. Our sales grew 9% this quarter. As you know, we're fully focused on our growth drivers and launches and the rejuvenation of our portfolio. You can expect us to continue to drive this shift in 2022 and beyond. So moving on to Slide 26. Cosentyx delivered $1.2 billion in revenues and grew 13% in the quarter. We've seen strong demand for Cosentyx across geographies. We did see some impact in China due to the year-end budget caps. However, we've already seen a strong rebound in Q1. Our life cycle program is starting to deliver, with the positive readout for hidradenitis suppurativa and IV and will start to be a growth driver in 2023. If we look to 2022, our focus is on volume growth in all geographies, especially China. In the U.S., our access position is stable and we plan to grow with the market. As we will not benefit from the price favorability we saw last year, volume growth for us is key. You can expect to see the typical quarter-over-quarter decline in Q1, followed by continued double-digit growth for the full year, fully on track to deliver on our $7 billion plus guidance. If I move on to Slide 27. Entresto grew 34% in the quarter, finishing the year at $3.5 billion in sales. We continue to pull through the first-line recommendations in the U.S. and Europe. And we continue to have good traction with the expanded label in the U.S., which, as you know, includes 5 out of 6 patients with heart failure. In China, we renewed our NRDL listing for heart failure, and we are thrilled that hypertension is now listed. The dip that you see in the ex U.S. sales column is for China, and that is because of the wholesaler compensation for stock given our new price. But again, this is on the back of very good news. Now that we have the listing, we also have access to a much broader population. And if you think about the fact that only 15% of patients in China -- or hypertensive patients in China are well controlled versus, for example, 52% in the U.S., you can start to see the potential. For 2022, we are absolutely confident we can maintain Entresto's momentum in the U.S., in Europe, driving broader and earlier adoption, but we're also very excited about our opportunities in Asia. If I move on to Slide 28. We're now in our third year in the marketplace with Zolgensma, and we've treated 1,800 babies. Because this is a onetime therapy, you will continue to see volatility in the quarters as new markets gain access, as we add the bolus and then move on to an incident population. Our focus is clear. We want to maintain a leading position in the U.S., focusing on the infant population. We want to accelerate newborn screening. We know it's really important to treat SMA as early as possible. And therefore, our plan is to double the rate of newborn screening in Europe. And three, we want to continue on our plan for geographic expansion into emerging markets. In parallel, we're progressing with our IT formulation. We're laying the foundation to bring Zolgensma to patients across the full SMA spectrum. Our STEER study has just opened and just recruited its first patient. And we're also conducting a study in pretreated patients who may benefit from Zolgensma's onetime treatment. If I move on to Slide 29. With Kesimpta, we finished the year strong with $147 million sales in Q4. We maintain a high share of voice. We now reach a critical mass with multiple sclerosis specialists. We continue to onboard new patients, and the majority of those patients continue to be in first line, first switch. There is no question that B-cell therapy is now the gold standard in efficacy. We also know that there have been questions on safety in context of COVID. And this has been a priority for us, to provide relevant answers to our customers. With the reassuring vaccination data that we have, we are building additional confidence in Kesimpta's profile and providing further important clinical differentiation in the marketplace. As we drive additional uptake in the U.S. and continue to execute on our launches across the world, you can expect us to continue to do everything to make this Kesimpta story even better. Moving on to Slide 30. As you know, we've received FDA approval in December for Leqvio, and we've been in the field for 2 weeks. On the system side, we are implementing our strategy. Our focus right now is to support the P&T reviews and the implementation of acquisition or referral processes. We started onboarding alternative injection centers, and we continue to broaden our network. We've also filed for a permanent J-Code as we planned. On the health care professional side, we're educating on Leqvio's clinical profile, the twice-yearly dosing and the breadth of the label. We are really excited about the enthusiasm that we're getting from the market on the clinical aspects, but also seeing the high willingness of physicians to discuss the nonclinical support options. As was said before, the first half of the year will be about laying the foundation to drive the uptake in second half of the year and beyond, when some of the larger systems should be ready for buy and bill, and of course, when our permanent J-Code should be issued. On a separate note, we've also made significant progress with the NHS on the implementation plan and are awaiting the lift on the moratorium of all non-COVID-related communication and initiatives to begin the rollout of the agreement. So in summary, on Slide 31. 2021 was a strong year for Pharma. I want to thank the teams for the focus, the bold thinking and the diligence around customer obsession and market metrics to deliver exquisite execution. You will see us continue to build on that strong foundation in 2022, with the right investments, not only in our products, but also in new partnerships, customer engagement and digital tools. So thank you very much. And now let me pass it on to Susanne.

[Susanne Schaffert:]

Thank you, Marie-France. And moving to Oncology on Slide 33. You see that the Oncology business grew 4% in 2021, reaching $15.5 billion, with our growth drivers increasing 17% versus prior year. And also Q4 was a solid quarter, growing 3%. As you see, the growth was driven by continued double-digit growth of brands like Kisqali, Promacta/Revolade, Tafinlar + Mekinist and Jakavi. We are very pleased to see a continued strong portfolio rejuvenation, with these growth drivers now representing 54% of the total portfolio. Moving to Slide 34

[Harry Kirsch:]

Yes. Thank you very much, Susanne. Good morning and good afternoon, everybody. So I'm now going to walk you through some of the financials for the fourth quarter and the full year as well as provide you with our 2022 guidance. As always, my comments refer to growth rates in constant currencies unless I would note it otherwise. Turning to Slide 40. Here, we compare briefly our results with our latest 2021 guidance. As you can see, overall, our full year results were in line with guidance, with a particularly strong Innovative Medicines performance. Innovative Medicines grew the top line by 6%, and the bottom line, even double-digit by 10%. We are pleased that despite a challenging business environment during the year, we were able to deliver on our expectations. Next slide, please. We finished the year on a strong quarter, with sales and core operating income growing 6% and 12%, respectively. This resulted in full year performance of 4% and 6% growth in top and bottom line. Net income of $24 billion benefited, of course, from the onetime gain from the Roche stake divestment of $14.6 billion. But even if you exclude that effect, and you see that in the lower line below net income, net income grew a healthy 15%, mainly due to higher sales and productivity gains. Core EPS grew 7%, mainly from a strong core operating income growth, and was slightly impacted by the Roche divestment in quarter 4. Free cash flow was up 14%, reaching $13.3 billion. And I will go a bit into more details about free cash flow a little later. Before we move on, just wanted to highlight that quarter 4 sales growth includes a positive 1 percent point impact from a small reclassification effect of contract manufacturing from other revenues to sales. Slide 42, please. This slide shows you the performance by division for the quarter and full year. Clearly, innovative Medicines had a strong year, driven by our key growth drivers, Entresto, Cosentyx, Zolgensma and the key oncology brands which also Marie-France and Susanne laid out. The Innovative Medicine sales grew 6%, bottom line, 10%. And margins reaching 36.2% points, up from 32% in 2018, so an increase over the 3-year period of 420 basis points. For the quarter, Innovative Medicines sales grew 7% and core operating income 15%. As Vas mentioned, Sandoz is still facing some challenges, mainly from pricing pressures, especially in the U.S., and COVID-related demand impacts. Although quarter 4 showed signs of stabilization. Now let's turn to Slide 43. Free cash flow of the year was mainly driven by the higher operating income and was up 14% to $13.3 billion. There were also lower payments from legal matters in 2021 compared to what we had in 2020. This was offset, as you can see, by the upfront payment for in-licensing of tislelizumab from BeiGene. On the next slide, I'm very pleased to announce that we will propose our 25th consecutive dividend increase to CHF 3.10 per share from CHF 3 last year. This is an increase of 3.3% in Swiss franc and 6% in U.S. dollars, with our dividend reaching 4%. And fully aligned with our dividend policy of dividend increases every year in Swiss francs. Now turning to Slide 45, where we sum up our guidance on top and bottom line. With the divisions, we expect another year of Innovative Medicine sales growing mid-single digits and core operating income to grow mid- to high single digits ahead of sales. The expected Innovative Medicines core margin increase will be driven by the expected good top line momentum and continuation of our productivity programs. For Sandoz, we expect the top line to be broadly in line with prior year and core operating income to decline low to mid-single digit, mainly driven by gross margin pressures due to pricing and product mix. Also on the top line, it's also due to the fact that we do not expect many launches for Sandoz in 2022. With respect to the entire group, we expect both the top and the bottom line to grow mid-single digit. The key assumption for this guidance, as you can see in the bottom box here, is that we are continuing to return to normal global health care systems, including prescription dynamics. And that no Sandostatin LAR generics would enter in the U.S. in 2022. On Slide 46, I would like to add some perspective on other key financial elements of our expected core net income performance. As you can see, we expect core net financial results to be broadly in line versus 2021. And the 2022 core tax rate is expected to be in the range of 17% to 17.5%. This is higher than the 16% core tax range -- tax rate range we experienced over the last couple of years. However, as you can see, approximately 1 percent point of this increase is due to the mathematical impact of the Roche divestment. And there may also be a slight increase due to geographical profit mix changes, which we will monitor throughout the year. Finally on Slide 47. For modeling purposes, we thought it would be very helpful to you to go into some details regarding the currency impact, especially given the recent appreciation of the U.S. dollar. As you saw in quarter 4, currency had a negative impact of 2% on net sales and a negative 3 percent point impact on core operating income. As the U.S. dollar further strengthened, this currency effect, of course, also impacted the sales of our key growth drivers ex U.S. in quarter 4. If late January rates prevail for the remainder of 2022, we would expect the full year impact of currencies on top line to be a negative 3 percent points, and on bottom line, negative 4 percent points. In quarter 1, the impact is a bit more pronounced, and sales would be negative 4, and on bottom line, negative 5 points. As currency rates are quite volatile, as we all know, we update this impact estimate every month on our website. And with this, I will hand it over back to Vas.

[Vasant Narasimhan:]

Terrific. Thank you, Harry. So moving to Slide 49 and briefly in closing. In '21, we delivered on our goal of mid-single -- our guidance of mid-single-digit top line growth, margin expansion and strong free cash flow. We remain confident in our in-market growth drivers, 6 major brands that are performing well across geographies, supporting our confidence in our outlook of 4% plus sales CAGR to 2026. We've continued to deliver important innovation milestones across the portfolio. And we'll work over the coming 12 to 24 months to deliver important milestones on our 20-plus key assets. And we remain balanced in our capital allocation, continuing to invest in innovation, alongside returning capital to our shareholders. And with that, operator, we can open the line for questions. . Thank you. Operator?

[Operator:]

. Your first question today comes from the line of Graham Parry, Bank of America.

[Graham Parry:]

So just regarding the Sandoz review. Obviously, you're looking there, you're saying all options are still on the table despite there being some recent speculation, again, about there being some private equity interest. And when you're considering a sale versus spin versus keeping the business, how much consideration are you giving to what multiple do you think the market would value Sandoz at versus what an acquirer might view it at? And secondly, in the scenario of a sale, what uses of cash would you consider, given that you're already doing a large buyback? So would the intent there to be to return capital to investors? Or to put it back into the business through M&A and organic investment?

[Vasant Narasimhan:]

Thanks, Graham, for the question. Let me start with where we are on the process. And I think as we guided at the end of last year, the first part of this year is really focused on carving out the financials for Sandoz, being clear on the perimeter, and then being able to provide potential counterparties with the relevant information for them to make concrete formal offers, whether those are private equity or other companies. Alongside that, evaluate the options for a potential spin of the business, and lastly, a potential retention of the business. We are going through the work right now of evaluating those different options. And I expect that to take us to the middle of this year. Before then, we can take the next steps and hopefully come to a decision in the second half of the year. In terms of considerations. We're of course always looking at a few things. One, how to make Sandoz as successful as possible with -- consistent with the aspiration for Sandoz to become the leading generics company in the world. Second, what is most value-creating and also tax-efficient for our shareholders. We, I think, have proven with the Alcon spin that we're able to think through those considerations in a way that is beneficial to the shareholders and really making sure we're thinking about these things in a shareholder-friendly way. And I think it's really premature for us to speculate, if there were a "sale," how we would use the cash. And I think we're still a long ways away from that point in time. And we would of course be able to determine that at that point in time. But we would stay consistent with the balanced capital allocation approach which I outlined earlier, thinking through investing in the business versus returning value to shareholders. So thanks for the question, Graham.

[Operator:]

Your next question comes from the line of Richard Parkes, BNP Paribas.

[Richard Parkes:]

I've got a question on capital allocation. I remember on the last call, you mentioned that you were engaging with investors around the sort of balance of returning the capital from the Roche stake sale between sort of buybacks and M&A. And I just wondered how your thoughts on M&A and business development had evolved based on that feedback. I'm just wondering if more meaningful bolt-ons have moved up or down the priority list, based on that feedback.

[Vasant Narasimhan:]

Yes, thank you. Thank you, Richard. So I think not much more to say on the feedback. I mean, what I can -- I think we can say is that we know that given the strong cash flow that we generate at Novartis, we have the ability to continue to do bolt-on acquisitions, like we've done in the past, when we find attractive assets that fit with our therapeutic area goals and our platform goals. As we evaluated the situation over the course of December, it became clear that at this point in time, we could return significant capital to shareholders through the buyback, while maintaining the ability to also do attractive, accretive M&A if it should materialize. So right now, our focus is, of course, first and foremost, in driving the business and then evaluating the various options that are out there over time. But of course, being very patient to ensure we only do deals where we're confident that we can generate significant returns for the company and also fit with our strategic priorities. So I would say there's nothing imminent. And we're going to continue to evaluate the options and watch how valuations move in the sector and then look for opportunity as they arise. We're quite happy to continue to do deals, like the 4 deals that we've done in quarter 4, that enabled us to acquire 4 mid-stage and/or late-stage assets. Did some various deal structures we think at attractive financial terms. Harry, anything else you want to add on that?

[Harry Kirsch:]

No. I think one element to see, I think, also feedback on the $15 billion share buyback has been quite positive. And also, maybe some analysts and investors are not very familiar with the Swiss system, where we have to buy these on the second line for cancellation. And that takes then unto the middle to the second half of next year, so '23, unlike U.S. situations where you can do this quite quickly. So as we see then -- can monitor the market, we do as much as we can on this $15 billion share buyback as we go forward. So there's a little bit of time to continue to think about the different ways of capital allocation. And then, of course, we have to see, as Vas mentioned, would there be a great opportunistic M&A opportunity here? And otherwise, as we laid out the capital allocation priorities, that's how we're going to allocate continuously our capital.

[Operator:]

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

[Laura Sutcliffe:]

A question on Leqvio, please. You talked a lot about the hard work you've done in removing access and reimbursement hurdles in the U.S. But do you think you need any specific guideline inclusions or recommendations to start driving use there? And is there the possibility of sort of trying to protocolize this in any way in your centers of interest to get sales going?

[Vasant Narasimhan:]

Yes. Thanks, Laura. Marie-France?

[Marie-France Tschudin:]

Yes. So the first thing I'd say is that LDL lowering is already widespread across the guidelines, and we already have Class 1A in Europe. So when you asked your question, the intent philosophically of us going or concentrating on the 200 systems of care is exactly that. It's around, how do you protocolize the use or the management of lipid lowering within the system? So how that looks like concretely will probably depend system by system. But as you know, we've just launched a cooperation with the AHA, which is around -- it's not necessarily specific to Leqvio, but it is around how do you better monitor and control cholesterol lowering for patients. So the intent is there, it's about making sure that we can identify the care pathways and then also support the centers in how they can specifically identify patients who come in when their LDL is not at the level that it should be or not at goal. So you're absolutely right. That's the intent. That's the way we're looking at it. Locally, it's going to look very different, country by country, system by system, but that's the goal. And ultimately, we'll change the landscape in ASCVD, because today, even though there are medicines on the marketplace, patients are not being treated and they're not at goal, and therefore, you see 18 million deaths worldwide because of ASCVD.

[Operator:]

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

[Andrew Baum:]

Could you just outline for us the differences between this 15,000 VICTORION-2P and the ORION-4 trial for Leqvio? I'm assuming this is just a sort of marketing base Phase III to expand clinician experience, but maybe I've missed something different about the patient populations apart from the subtleties. And maybe if you have a second, perhaps you could comment on the ligelizumab surprise, given how robust the pretty large Phase IIb data was. Is this that the Xolair arm did better than expected? If you have any insights, it'd be great to hear.

[Vasant Narasimhan:]

Yes. Thanks, Andrew. John?

[John Tsai:]

Yes, sure. Thanks for the question, Andrew. Specifically on Leqvio, as you know, the study ORION-4, which is being conducted in the U.K., is more of a population-based approach to looking at secondary prevention. And that is mostly in the U.K., with some patients in the U.S. The V-2P is a broader patient population where we're going globally, not only in the U.S., but across major geographies throughout the world. So -- and we know that there are differences in practice patterns throughout the world. So what we intend to do is ensure we follow these patients and make sure that we have a clear understanding of the treatment for secondary prevention for Leqvio. So those are the approaches that we're taking difference, of ORION-4 versus -- Leqvio. And back on your question for ligelizumab and what we've seen. We started the Phase III study, PEARL 1 and PEARL 2, which were designed against the active comparator, which was omalizumab. These studies were based on primary endpoints that we saw through our Phase IIb study. And those -- that Phase IIb study had 380 patients and 80 patients per arm. And as we've actually demonstrated or showed during the fourth quarter, as we shared at the R&D Day, we did achieve the primary endpoint of superiority versus placebo, but we did not demonstrate superiority versus omalizumab. We're currently reviewing that data and we're evaluating the best potential for moving that forward. And as Vas stated earlier, we're advancing the studies in CIndU and food allergy, and they're continuing as planned.

[Vasant Narasimhan:]

And maybe, Andrew, just one additional point to John's comments. To your specific point, we did see omalizumab perform better in the Phase III study versus the Phase II study. So that is a leading hypothesis we have. But I think still more work to do to fully ascertain why we saw the difference between the Phase IIb in the New England Journal and the result that we saw in Phase III. So as soon as we have a better understanding, we'll of course share it. In the meantime, ligelizumab, we continue to develop it in food allergy and CIndU, given the lack of an IgE drug for those indications.

[Operator:]

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

[Simon Baker:]

It's a question on the impact of COVID, specifically to -- in 3 areas for you. Firstly, could you give us an update on the dynamic MS market as this affects Kesimpta? And also recruitment into the Phase III remibrutinib study that started in fourth quarter. And also, for Leqvio in the U.K., Marie-France, you mentioned the NHS non-COVID block is about to be released. But I just wondered how the significant backlogs within the U.K. health care system could potentially impact the rate at which you will accrue the target number of patients over the next few years.

[Vasant Narasimhan:]

Thank you, Simon. So first, Marie-France, on the MS market and Leqvio, NHS.

[Marie-France Tschudin:]

Yes. So maybe I'll just start off by saying that we're all getting used to COVID. And I think not only the industry, but also health care systems in general, we're sort of learning to become more and more agile. But it is true that there are areas that are disproportionately impacted. And clearly, the dynamic multiple sclerosis market, if you look at it, it is still below pre-COVID levels. And we are also seeing, as you said, a delay in our Leqvio launch in the U.K. given this moratorium on anything that's not COVID related. So ultimately, yes, it's true. I don't think for Kesimpta, it slowed us down. I can already say, for example, that in the beginning of the year, we already have all of our patients reverified. We've tried as much as possible be out there with physicians. Our share of voice is high. We have absolutely doubled down on patient services to make sure that patients are not left out in the cold in this whole sort of pandemic era. So I do think it's almost allowed us to basically rethink some of the way that we approach the market and do better. However, it's a clear reality on certain areas, and not only those. For the U.K., as I said this morning, it hasn't really slowed us down on the implementation. I mean, we've been working really diligently in the background on things that we would have had to do anyway, right? So NHS guidelines, making sure that the communication is ready to go out. Looking at, for example, the patient digital identification. The NHS guidelines have already been written. So I think when this moratorium is lifted -- and of course, yes, remember that this is all in the primary care sector. So our entire plan for the NHS is centered around the primary care physician, and that's where the moratorium is. So we're waiting for that to be lifted. But I do want to reassure the audience that we're not at a standstill. We're doing the things that we would have to do anyway and laying the groundwork for the future. And with -- maybe a last word on Kesimpta. We're bullish on our ability to double sales in the U.S. We've got approval in 63 countries around the world. We're working through reimbursement. And so we believe it's going to be a good year for Kesimpta despite the local, let's say, lockdowns or pandemic influence that we see across the globe.

[Vasant Narasimhan:]

And then, John, on remibrutinib recruitment, any insights yet?

[John Tsai:]

Absolutely. Thanks for the question, Simon. The MS space is one that we know very well from our experience in the studies that we conducted across Gilenya, Mayzent as well as Kesimpta. We announced earlier in the year in 2021 that we were advancing with remibrutinib, which is our selective molecule BTK inhibitor, in the space. We had discussions in the middle of the year to late in the year with regulatory authorities. And we've already started recruiting at the end of the year. And we know the space well. We're confident that we can recruit in the MS space. And that we're excited to continue to fulfill the criteria in terms of advancing the recruitment for the MS patients for remibrutinib.

[Operator:]

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

[Unidentified Analyst:]

Yes. It's Richard Wagner , Wolfe Research, for Tim Anderson. My question on M&A, whether you can say definitively that you won't do larger M&A, meaning something that would be, say, $30 billion or larger.

[Vasant Narasimhan:]

Yes. Thanks for the question, Richard. We don't have plans to do "larger M&A." Hard to sign up for specific threshold given the dynamics in the market. But our focus is not larger M&A. Our focus is bolt-on. Bolt-on deals, most of the deals we've done, as I mentioned earlier, have been sub-$1 billion upfront with payouts for the total deal value of less than $2 billion, as in recent times, including the 4 deals that we recently signed. And we continue to focus our energies there. We look at larger assets. Valuations are stretched, expectations remain high. Harder to make the numbers work to create value for shareholders and an attractive profile for Novartis. But we continue to assess those, let's call, the larger bolt-on deals. And then beyond that, we are not looking at large M&A, no, at this time.

[Operator:]

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

[Kerry Holford:]

Question please on Sandoz. In your presentation, Harry, you're speaking of stabilization in Q4. But the 2022 guidance in this division is somewhat disappointing. I wonder if you can walk us through the drivers on your guidance for operating profit decline this year. Is that predominantly price pressure? More of the same? Could be disruption? Or is there some element of more investment required to see the top line of this division return to growth? I guess, specifically, I'm looking what you expect to get more difficult for Sandoz this year since last, given this time stabilization sign you mentioned in Q4. And then just a very quick follow-up. Can we assume the contract manufacturing revenue reclassification you mentioned in the quarter is a one-off event?

[Vasant Narasimhan:]

Thanks, Kerry. So maybe first on Sandoz. Richard, do you want to start? And then maybe Harry can chime in if anything...

[Richard Saynor:]

Yes. Sure. Thank you, Vas. And thank you for the question, Kerry. Yes, as I said, look, Q4, we saw things returning back to a more normal state of affairs and a nice, I guess, solid performance in quarter 4. As we go into 2022, I mean, we're seeing good growth from the rest of the world. And really, the challenge continues to be the U.S. And that's slowly -- the impact of price clearly drives the issues in the U.S., but we're slowly stabilizing. And so really I see 2022 is a year where the rate of decline in the U.S. does stay low, but it does drag down the overall business. Price still is a significant impact. And also bear in mind, 2022, we don't see many significant launches. It's still a fairly quiet year in terms of LOE launches. So really, the impact on bottom line is really a mixture of price and mix. And we expect that then to slowly start changing as we come out of '23 into '24 as the biologics pipeline starts to kick in again and the U.S. continue at its stabilize journey. And we see accelerated growth then in Europe and the rest of the world.

[Vasant Narasimhan:]

Thanks, Richard. And then Harry, on contract manufacturing? And I don't know if you have any other comments on Sandoz.

[Harry Kirsch:]

No. I think Richard said it all on Sandoz. In terms, Kerry, of contract manufacturing, we have reported relatively small contract manufacturing business within other revenues. And now that we may increase over the next years a little bit that business, we basically chose to change representation, split up the sales and COGS. And we also transparently show that, actually, on Page 13 of the condensed financial report, in established medicines, you see under the contract manufacturing line, $108 million in quarter 4, which is kind of the full year '21 as we decided in the year that maybe over the next few years, this may increase. So that's why we changed that. It doesn't change the full year number for the company. It changes in the quarter basically by one point on the company and the 2 divisions. And so we will -- you will see that as we go forward, how this is developing. And from that standpoint, we thought it's a better representation as we go forward.

[Operator:]

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

[Keyur Parekh:]

Two if I may. First, kind of, Vas, in your introductory comments, you spoke about your aspiration to be a top 3 innovator. I was wondering if you might be able to give us some more details around kind of how do you define a top 3 innovator. Is that in terms of number of new drugs approved? Is that commercial value of the pipeline? Just any -- just your thoughts around kind of how do you define that. And then secondly, as we look forward to the Phase III study readout for iptacopan, what should be our kind of expectations around the profile for that? Should we be looking at superiority? Should we be looking at something else? Just kind of your confidence around that and where should our expectations be for that molecule.

[Vasant Narasimhan:]

Yes. Thanks, Keyur. On the first one, a few measures on our minds. One is the replacement power and can we be a leader in consistent replacement power of our sales? I think replacement power and/or freshness index are valuable measures of the power of an innovation engine to replace sales within our sector and then ultimately to grow the sales of the company. Second, we're very focused on the value per NME that we are able to deliver. We over the last 5 years, have been the leading company in the sector in the number of NMEs approved, but we'd like to be the leader in the value per NME or peak sales per NME, put in another way, that we're delivering to the market. And of course, ultimately, this all leads to long-term sales growth and our ability to have an innovation engine that can drive that sales growth where we want to consistently be. But I would say replacement power and value per NME are high measures on our mind. In terms of the Phase III profile of iptacopan, John?

[John Tsai:]

Yes. Thanks, Keyur. As we look at the iptacopan and the way that we're looking at the overall profile, obviously, we're looking at the overall unmet needs of the patient. As you know, this is a factor B that is actually targeting the alternative complement pathway. We're looking at both extravascular and intravascular hemolysis for PNH in this specific indication. Also, as we think about the renal indications, we're looking at it from the standpoint of reduction in terms of proteinuria. And it could be in a couple of different ways as we know that these patients have a significant unmet need as, one, that they actually may need something more than what's the current standard of care, which is through ACE inhibitors and ARBs. So this could be a combination approach moving forward. The second way of looking at this, not only in terms of unmet medical need, is also the route of administration or in terms of the convenience for the patients. As we think about the approach, many patients actually are requiring the subcu administration, which could take up to 60 minutes. And having an oral administration twice a day would be much easier in terms of the approach. And thirdly is evaluating the safety profile as we look moving forward. And we'll find out more about the safety profile as we read out in our study. So that's the way that we're looking at iptacopan overall across the indications for PNH as well as C3G, IgA and other renal indications.

[Operator:]

Your next question comes from Wimal Kapadia from Bernstein.

[Wimal Kapadia:]

So I just want to touch on PSMA. So you have an interesting readout, PSMAfore, potentially late 2022. I mean, how should we be thinking about the incremental efficacy with these current benchmarks? And then, in particular, how should we be thinking about the pre-taxane setting from a potential perspective versus the post-taxane setting? And then just tied to that, the launch of -- from the VISION study. Is it fair to assume Lutathera trajectory is a fair benchmark? Or just given prostate is a larger indication, the trajectory should look a little bit different, with more sustained growth beyond the initial ramp from saturation of clinics with capability?

[Vasant Narasimhan:]

Yes. Thanks, Wimal. So maybe, Susanne, first on the overall story with Lu-PSMA and the launch of the VISION study. And then I'll hand it to John on the specific questions on pre- and post-taxane. Susanne? Susanne, are you there?

[Susanne Schaffert:]

Sorry, I was on mute. So lutetium-PSMA has demonstrated very strong data in the metastatic castrated-resistant prostate cancer population, as you know, with significant radiographic PFS and OS. So we know in this population, there's basically no alternative and lutetium-PSMA has demonstrated superiority versus the standard of care. So we expect there, quite big interest. And we have started managed access programs where we already see quite high demand. So therefore, when you ask me about the uptake, it will be probably steadily going up. We don't expect a big bolus. This is fourth line prostate cancer patients. But of course, incidence of prostate cancer is much higher than, for example, neuroendocrine tumors. And therefore, I think we see different dynamics in the uptake. Of course, it's a smaller part, it's the last line of prostate cancer. But we expect continued growth, and not like a bolus and then stability. It's a very different population than GEP-NET. And maybe just a comment before I hand over to John on the setting. I mean, the current indication that we have filed for would really in last line after androgen therapy and taxane chemotherapy. And therefore, of course, with the profile that we see on lutetium-PSMA, we would aim to go earlier. And certainly, the pre-taxane setting is one of the settings that is significantly bigger than what we have filed for in the current indication. So with that, John, maybe over to you. Maybe a few words on PSMAfore.

[John Tsai:]

Sure. Happy to talk about PSMAfore. Maybe to start off, just to think about prostate cancer. As we know, 80% of prostate cancer is actually express PSMA. So that's a starting point in the pathophysiology. What we saw in the third line, as Susanne expressed, is we saw that they had 38% improvement in overall survival and 60% in terms of radiographic progression-free survival as well as combination of OS. That is the starting point. We know that there are a number of patients that are in need of additional treatments, whether that's in the pre-taxane setting or in the first-line setting, especially given the toxicity of the taxanes and chemotherapy. And what we know is radioligand therapy has less adverse events than compared to chemotherapy. So we've already started recruitment in the pre-taxane study, and we're hoping to read out before the end of the year for the second line treatment. And then we're also looking at first-line treatment in terms of hormone-sensitive population. And that study is also advancing. And we're -- in addition to those studies, we're also looking at studies in terms of patients who have not had metastases in terms of prostate cancer. So I think this is going to be a very broad program as we move forward for the lutetium-PSMA.

[Vasant Narasimhan:]

Thank you, John. Thank you, Wimal. So we have still quite a few people in the queue. . Next question, operator?

[Operator:]

Your next question comes from the line of Matt Weston from Credit Suisse.

[Matthew Weston:]

My question is on ensovibep. And Harry or vas, I'd be very interested to understand how you've integrated it into guidance. I can see from your slides that you've given it a $1 billion on probability of just peak sales potential. And obviously, if you're able to achieve regulatory emergency use authorization, we could see significant bolus orders. And so I'd love to know what you've taken into account when you set guidance for 2022, too.

[Vasant Narasimhan:]

Yes. Thank you, Matthew, and I can take that. So we've not included ensovibep in our guidance -- any of the guidance that we've provided today. I think as we understand better, as we move through the emergency use authorization application and review process, ultimately, understand the FDA's decision and then the potential contracting we would have with the U.S. as well as other interested parties around the world. We've had discussions with a number of other governments around the world around the medicine. But I would say most of those governments have centered their view on how the FDA ultimately views the EUA application, if they were going to make emergency orders. So we think it's prudent right now not to include it. And then once we understand the dynamics better over the course of Q1, we hope, or into Q2, we would then update accordingly.

[Operator:]

Your next question comes from the line of Richard Vosser from JPMorgan.

[Richard Vosser:]

So just a question on price pressure from ex U.S. governments, et cetera. I mean, they've been pretty hit by COVID and COVID expenses. After the great financial crisis, we saw some increased pressure on drug prices. Are we going to see something like that? Are there any murmurings from governments on pricing pressure generally?

[Vasant Narasimhan:]

Well, I can start and say as far as my discussions have gone on with various health officials in Europe, not heard an increased focus or a shift in terms of the support for innovative medicines and enabling medicines that have broad access or improved access. Certainly, that's a priority for President Macron and his European Commission President. But maybe Marie-France, do you have any thoughts or insights on this?

[Marie-France Tschudin:]

Yes. I mean, I just think in general, we always have to be prepared. I mean, we do more and more have to make the case, or we see limitations on reimbursement in terms of line of therapy, et cetera, et cetera. Obviously, we have a lot of experience, and we're very used to that in the European landscape. You see a lot of tough negotiations happening in China. So I would say it's a little bit almost like the ticket to entry is making sure that the value of our products is recognized, that we're focused on value-based pricing, which I think is something that Novartis has been very diligent about, and making sure that access is really top of mind on any strategy when it comes to product launch or making sure that more patients can reach products faster.

[Operator:]

Your next question comes from the line of Emmanuel Papadakis from Deutsche Bank.

[Emmanuel Papadakis:]

Maybe I'll take one on ianalumab and the decision to progress into Phase III. I guess, question around design and timing. You've published data that look, I would say, better in patients with less advanced disease. So have you reached a decision yet about the Phase III design? At what breadth of enrollment is that likely to include in terms of the patient population? And therefore, what proportion of the Sjögren’s population, which is pretty large, that might -- that Phase III trial might apply to? And then just in terms of timing, you, I think, told us at the R&D Day, 2026 was the likely timing for a potential Phase III readout. Is there any way that could be accelerated, for example, an interim surrogate or biomarker data? Since that would imply a pretty long Phase III time line.

[Vasant Narasimhan:]

Thank you, Emmanuel. Very good questions. John, on ianalumab Phase III design for Sjögren’s?

[John Tsai:]

Yes. As we think about ianalumab, and as Vas said earlier, we're excited about a number of indications in Sjögren’s syndrome, lupus nephritis and SLE. Specifically, as you asked about Sjögren’s syndrome, as you know, we've advanced based on results that we've seen from our Phase II study. These are patients who actually have had high STI scores. And that's the specific population that we're targeting, moving forward in this population. We are going to start recruiting patients in the second half of this year. In terms of advancing, I think the balance here is the largest Sjögren’s syndrome Phase III study that's been conducted -- actually, I should say, the largest study, not Phase III, but the largest study that's been conducted has been conducted by us. And we want to ensure that there is consistency in terms of these patients that we're recruiting because Sjögren’s is a very diverse population of patients. We've guided the results in 2026, and we will update as we find the patients and how recruitment goes. But we are using strict criteria for inclusion to ensure that we get the best results moving forward. Currently, we are expecting results in '26.

[Vasant Narasimhan:]

I mean, I think one of the dynamics I've learned is how important it is to have well-trained centers here that really ensure that they apply the STI and some of the other measures in a consistent way. So I think we want to be appropriately cautious on our time line. And then, of course, as we learn more, as John said, we'll provide updates on ianalumab across all of the indications that we take it forward in.

[Operator:]

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

[Mark Purcell:]

Entresto China, can you help us understand the size of the opportunity in hypertension? But when the LOE timing is going to kick in? And on the basis of that, the pivot opportunity within the retail pharmacy setting to maintain your momentum in China? And then just quickly, Vas, in terms of clarification. In terms of the Sandoz considerations for counterparties, what should we expect next in terms of biosimilar data? And what are the key LOE launches coming up in '23 and beyond?

[Vasant Narasimhan:]

Yes. Absolutely, Mark. So first, on the Entresto China, Marie-France?

[Marie-France Tschudin:]

Yes. So the opportunity, certainly from a volume perspective, is significant, right? So we're moving the population from 7 million to 8 million heart failure patients to about 240 hypertension patients. And as I said before in my comments, hypertensive patients in China are really not well controlled. So there is a big opportunity. Obviously, there was a significant price concession as we listed NRDL. But we do think that it is a worthwhile proposition just because there's an opportunity to just expand to such a broad, broad population of patients. So we are -- we have broadened our footprint as well. We're making the necessary investments. We also want to make sure that we have the right digital tools in place. As you know, we have a cooperation with Tencent where we're looking, of course, Entresto-independent, but looking at making sure that heart failure patients can be more in control of their own monitoring. So there are a lot of activities in this space. As you know, in China, CVD is a major -- cardiovascular disease is a major problem with massive costs. And when it comes to the patent situation in China, China is hard to give a definitive answer. We are obviously working to secure RDP in China, and I think that's an industry-wide initiative. So there are some question marks around until when. And it certainly -- couldn't give you guidance on that here today. But the opportunity is significant. We're thrilled about it. This was, as we said, a potential upside for us, and could be up to about 1/3 of our, let's say, growth in Entresto for this year.

[Vasant Narasimhan:]

Thanks, Marie-France. And then on Sandoz biosimilars upcoming launches, Richard?

[Richard Saynor:]

Thanks, Vas. Really, the next launches are really adalimumab and natalizumab coming in, I guess, late '23, into '24. So as I think I commented earlier, that, that's really the start of the next wave of biosimilars that should start accelerating both our top line and clearly the margin expansion for the business. And clearly, we'll update as we file and move those products forward.

[Vasant Narasimhan:]

Thanks, Mark. Thanks, Richard. Thank you, Mark. I think we have time for -- I don't know how many more we have in the queue. But operator, let's take the next question, and we'll keep going till the mid of the hour.

[Operator:]

Your next question comes from the line of Florent Cespedes from Societe Generale.

[Florent Cespedes:]

A quick follow-up on China, please. Could you please elaborate on, beyond Entresto, which are the growth drivers there and potential risk? And how you see the momentum in China?

[Vasant Narasimhan:]

Marie-France, do you want to take that on Pharma China?

[Marie-France Tschudin:]

Yes. So we've got 3 main growth drivers for the Pharma business in China

[Vasant Narasimhan:]

Thanks, Marie-France. So next, we'll go to -- I think we have 2 more first-time questions. Next question, operator?

[Operator:]

Your next question comes from Peter Welford from Jefferies.

[Peter Welford:]

One for Harry, really, the outlook for Innovative Medicines, the outlook for the core operating income, mid- to high single digits is sort of slightly above sales growth. Obviously, this year, you started similar, but you delivered close to 10%. Wondered if You could talk a little bit about what we should be thinking about the greater investments, I guess, you're making this year, which, if you like, constrained perhaps the margin expansion versus the benefit we saw in '21, the result in that mid- to high single-digit growth. Or is it just conservatism on your part?

[Vasant Narasimhan:]

Thanks, Peter. Harry?

[Harry Kirsch:]

Yes. Thank you, Peter. So of course, always a fine balance, right? As we know, in pharma companies, one can get almost any kind of core margin one would like to have. But it's always this very delicate balance between investing and also driving, of course, productivity as we do. And so overall, we have made significant strides on the core margin improvement. As Vas shared in one of his earlier charts, the 180 basis point in '19, 220 basis point in '20 and then 130 basis point last year. And a part of that was also some restricted investments, if you will, due to the pandemic situation. So we always ensure that we invest appropriately in the R&D line, certainly. And we have to ensure that the launches are getting very well supported. And we have fantastic launches that Marie-France, Susanne and her teams -- and their teams are driving. So I would expect each of the next years in Innovative Medicines, some good margin improvement, but of course, not to the level we have seen over the last 2, 3 years. So it's a balance and the investments are clearly in the pipeline and the launches. Thank you.

[Vasant Narasimhan:]

Thanks, Harry. And then we have time -- thanks, Peter. Last question, operator?

[Operator:]

Your last question today comes from the line of Seamus Fernandez from Guggenheim.

[Seamus Fernandez:]

So just wanted a couple of pipeline questions very quickly. Just in terms of the differentiation, what makes ianalumab unique from other APO or BAFF compounds that have failed in similar type indications, particularly in lupus? I think we've seen a number of challenges there. And then just separately, on ligelizumab versus remibrutinib in CSU, can you just help us understand the decision points as it relates to ligelizumab for filing? And then how, if you do launch there, you'll trade off your expectations for remibrutinib in a similar setting?

[Vasant Narasimhan:]

Yes. I think, John, are you still there? Do you want to take the ianalumab?

[John Tsai:]

Sure. Absolutely. And thanks for the question, Seamus. As we look at ianalumab, this is our anti-BAFF agent. And we really see 2 different modes of action with ianalumab. It's a direct lysis of B cells by ADCC as one path, and the other is BAFF receptor blockade that interrupts the BAFF-mediated signaling for B-cell maturation, proliferation and survival. So the difference here is there are dual modes of mechanisms of action versus what has been seen with previous BAFF receptor blockers. And what we've seen is actually this counterbalance of the 2 mechanisms that allows us to see -- and we've actually seen good responses, as we said earlier, in our Phase II studies, and that's why we're moving forward in these various indications. On your second question in terms of -- go ahead. Go ahead, Vas.

[Vasant Narasimhan:]

I think -- I was just going to chime in on -- I think some of the competitor of historical molecules only targeted the BAFF ligand, and then only in certain subtypes of the BAFF ligand, so not completely comparable to previous results. Go ahead, John, on remibrutinib.

[John Tsai:]

Yes. So in terms of looking at remibrutinib versus ligelizumab. As we look at both combinations, we've seen good results in both. And as you know, for remibrutinib, for the BTK-selective oral inhibitor, what we've seen is also good results in CSU with an oral compound. So as we're moving forward, we're looking at both approaches, and we'll make decisions as we further analyze the results from ligelizumab. And then as we move forward with remibrutinib, we'll continue recruitment in these studies.

[Vasant Narasimhan:]

I think, Seamus, the idea of ligelizumab, I guess the question, is there value in getting the medicine on the market ahead of the potential future launches in food allergy and CIndU? Or is that not a sensible strategic approach? And we just haven't come to a determination yet. Our current view is that we -- with the superiority to placebo, it is potentially fileable. And of course, we'll review it with the FDA. So we're going to make those assessments carefully and then decide what the right approach is to take ahead. Very good. So thanks, everyone, for joining today's conference call. We hope it was helpful to get a perspective on both the near term, but also the longer-term outlook of the company, the pipeline, the products and the things we're excited about. We're excited about delivering a strong 2022. And we'll look forward to keeping you up to date through various interactions, and then of course in our next quarterly conference call. We wish you a great year, and we'll look forward to speaking to you soon. Thank you.

[Operator:]

Thank you. That does conclude today's conference call. Thank you for participating. You may all disconnect.