Novartis - Q4 2022

Transcript

Operator (participant)

Good morning and good afternoon, and welcome to the Novartis Q4 2022 Results Release Conference Call and Live Webcast. Please note that during the presentation, all participants will be in a listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions by pressing star one and one at any time during the conference. Please limit yourselves to one question and return to the queue for any follow-ups. A recording of the conference, including the Q&A session, will be available on our website shortly after the call ends. With that, I would like to hand over to Mr. Samir Shah, Global Head of Investor Relations. Please go ahead, sir.

Samir Shah (Global Head of Investor Relations)

Thank you very much, operator, and thank you to everybody for participating on what is a very busy day for reporting in pharma, European pharma. Before we start, just read you the safe harbor statement. The information presented today contains forward-looking statements that involve known and unknown risks, uncertainties and other factors. These may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. For a description of some of these factors, please refer to the company's Form 20-F and its most recent quarterly results on Form 6-K that respectively were filed with and furnished to the U.S. Securities and Exchange Commission. With that, I'll hand across to Vas.

Vasant Narasimhan (CEO)

Thanks, Samir, thanks, everyone for joining today's conference call. I really appreciate your interest in the company and our update for the full year 2022. If we move to slide four. This year, as you saw in our earnings release or in 2022, we delivered what we believe is really robust core operating income growth and margin expansion. From a sales standpoint, you saw Q4 sales up 3% with IM delivering Q4 sales of 3%. Productivity standpoint, we had a 15% core operating income growth in Q4, Harry will go a little bit further through the dynamics that drove that. For the full year, that led to 8% core operating income growth ahead of our guidance.

That leads us to have now a margin for IM in quarter four of 36.4% and on the full year, 36.9%. As a reminder, taken together inclusive of corporate costs, we are well on our way now towards our 40% core margin guidance for the medium term. In terms of innovation, some important milestones. We'll go through those in a bit more detail. We continue our journey on ESG sustainability-linked bond. We continue to progress towards our 2025 targets. We had 31 million patients in our Novartis flagship programs, and we continue to have solid ratings across the key ESG rating agencies. Moving to slide five.

You'll remember that in September at our Meet the Management, we've been diligently implementing this across the company. Five core therapeutic areas, two plus three technology platforms, four priority geographies, a mindset to really focus on high-value medicines to accelerate growth, delivering the return profile we believe the company can achieve. You saw that already in quarter four. A continued commitment to culture, data science, and building trust with society. Now moving to slide six. As a reminder, as you all well know, over the last five years and really over since 2014, we've been on a journey to really focus Novartis as a pure-play innovative medicines company.

Through a number of actions we've taken, most recently with the announced planned spin-off of Sandoz, we're on our way to becoming a 100% innovative medicines company. When you look at the right-hand side of the slide, we believe that simplified organizational model will allow us to have greater focus, leverage our scale, and really uniquely position us as a global pure-play, large-scale innovative pharma company versus our peer set. Over time, hopefully also re-rate the company given the growth profile we intend to deliver. Now moving to slide seven. We've also guided to improve financials with this new focus company with 4% sales growth, a goal of core operating income margin of 40%, as I previously stated, continued improvement on free cash flow, and importantly, an improving and attractive return on invested capital profile.

That will allow us to continue to invest across our capital allocation priorities, which Harry will go through in a bit more detail later on in the presentation. Moving to slide eight. In each of the five therapeutic areas that we've outlined, we have core large-scale commercial assets and multiple pipeline assets that are now progressing. We've focused our R&D organization around these five areas. We're streamlining the pipeline. I think you'll see over the coming quarters us exiting additional assets as we really try to prune out non-core areas and put all of our scientific firepower and ingenuity towards building out, you know, a deep set of pipeline assets in each of these therapeutic areas. We'll look forward to showing that progress over the coming year. Moving to slide nine.

In terms of capital allocation priorities and the strong balance sheet that we have, continue to invest in the organic business and pursue value-creating bolt-ons. We look at, you know, the full range of M&A possibilities, but our focus is on sub $5 billion assets where we believe we have the opportunity to generate strong returns and find the most value when we look at M&A opportunities. We also remain committed to our growing our annual dividend, and Harry will outline that in a little while. We have paid out $7.5 billion in 2022. Our proposed dividend is another growth in the 3.2% Swiss franc and 3.9% U.S. dollar range. Even after the proposed Sandoz spin-off, there'll be no rebasing of that dividend.

We'll continue to grow off of the current base. And we're continuing to implement our $15 billion share buyback program. We have $4.9 billion still to be executed, and we'll continue to look at doing additional share buybacks over the coming years when the opportunities present themselves. Moving to slide 10, I want to turn now to our innovation story and where we are in continuing to improve our overall R&D productivity. I think it's been well-recognized, we are a leader in terms of generating approvals, the leading company over the last 20-plus years in generating drug approvals in the United States and around the world.

Our focus now is to improve the value per asset, identifying assets earlier that have significant potential, investing in those assets more aggressively, pursuing more lifecycle management indications, and with that, a goal to increase the success rate and reduce the cycle times and generate larger assets. Really focus on high-value, high-impact medicines that could impact patients and the company's financial performance. Moving to slide 11, I wanted to walk through some of the readouts that we have coming up in the near term and then in the midterm. I think as you all are well aware, KISQALI continues on track. We'll go through this in a bit more detail in a few slides for a readout in the second half.

Iptacopan is progressing nicely with multiple readouts over the course of this year, a planned FDA submission in PNH, readouts in both IgAN and C3G. PLUVICTO, where we've already read out the top line in the early prostate cancer, early metastatic setting with a planned regulatory submission in the second half. I'll give you a bit more detail on each of these three in a few slides. Going to the next slide, when you look at 2024, 2025, we expect to have an increased pace of readouts of potential multi-million dollar medicines. Medicines such as pelacarsen in patients with elevated Lp(a). Ianalumab, where we have now moved this medicine into multiple hematological indications, first and second line ITP readouts in 2025. We have additional hematology and immunology indications we're pursuing now with this medicine.

You'll see with Ianalumab a broad range of phase III programs initiating over the coming period. remibrutinib, we have a CSU readout in 2024 ahead of our planned MS readouts in the coming years. We continue to progress with OAV101, which is our gene therapy for SMA in the intrathecal setting, as well as the first-line SCEMBLIX program with a readout planned in 2024. Moving to slide 13, going into a bit more detail. NATALEE continues to progress well following the first interim analysis, and we continue to guide to a final readout in the second half of 2023. As a reminder, this is a broad population, including both stage two and stage three patients, so the broadest population studied to date.

We have longer duration with which we provide therapy to patients, three versus two years, a lower dose to try to improve the overall tolerability profile. When you look at where we are on the study, final analysis is expected for with 500 IDFS events at the end of 2023. We've completed the first interim analysis, as we noted earlier this month, and study continues unchanged. The second interim analysis would happen after 85% of IDFS events are complete. Moving to slide 14, and turning to PLUVICTO, where we announced late last year that we demonstrated statistically significant and clinically meaningful radiographic PFS benefits in this patient population. We're continuing to follow these patients towards the secondary OS endpoint analysis in 2025.

We are on track to file in the second half of this year. We have had discussions with the FDA and clarified the OS fraction, the fraction of patients that FDA would like to see has reached a OS endpoint prior to filing. We expect to reach that later around the middle of this year, which would then enable the filing in the second half. With that guidance from FDA, we've made the decision to hold the publication or presentation of further data until the second half of this year. I know some of you have been looking for ASCO GU and some of the other congresses in the first half. We will be presenting this data in the second half after we've reached that next threshold that FDA has outlined for us.

We have alignment consistent with what FDA has told other companies in the prostate cancer space to be able to file in the second half with that data set. Moving to slide 15, why that's so important is, as I'll talk about when we get to the commercial section of the presentation, PLUVICTO is continuing to demonstrate, I think, really impressive uptake in the United States market, and the opportunity is to move first with the PSMAfore study into the pre-taxane setting, which would expand the patient pool from an estimated 27,000 patients to 42,000 patients. With the PSMAddition study, which we expect to read out next year, that would expand us further into the hormone-sensitive setting.

We continue to evaluate how best to pursue PLUVICTO further into the biochemical recurrence setting or the localized prostate cancer setting. Stay tuned as we continue to look at the further expansion. I think this really demonstrates the possibilities with radioligand therapy, and we look forward to continuing to generate a broad set of data to support PLUVICTO's use in as many prostate cancer patients that could potentially benefit from the medicine. Moving to slide 16. Turning to iptacopan, as I noted in the second half of last year, we first provided an update that, and provided the full data set at ASH of the APPLY-PNH data set, which I think showed really outstanding efficacy for both primary and secondary endpoints, superiority to standard of care in patients with residual anemia.

In the phase III APPOINT study, where we have demonstrated again a really strong results, we'll be presenting that data at a congress in the first half of this year. We continue to progress across a range of indications, IgAN and C3G, which will read out in 2023. Atypical Hemolytic Uremic Syndrome, where we expect a submission enabling readout in 2025. A number of other indications, IC-MPGN, lupus nephritis, immune thrombocytopenia, amongst others. Moving to the next slide. Just as a reminder, when you look at that data set that we showed at ASH, I think, very impressive data in these patients with residual anemia.

Some of the notable data when you look at increase in hemoglobin from baseline, 51 out of 60 patients versus zero out of 35, so 82.3% versus 2%, against the control arm. Hemoglobin greater than 12, similarly impressive result, 42 out of 60 versus zero out of 35. Again, transfusion avoidance, you can see an impressive 70.3% improvement and a 10-fold lower rate of annualized clinical breakthrough hemolysis. This is in that refractory setting. We'll present the data in the frontline setting. We've also initiated a study of patients who to demonstrate we can switch off of anti-C5 directly onto iptacopan in patients in that frontline setting. Building out a broad data package within PNH. Moving to slide 18. We wanted to also provide a little more clarity on our approach within IgA nephropathy.

In this. Sorry, this is still in PNH. Excuse me. This is the outline of the data set for APOINT, where we'll present this data, you know, shortly. You can see again, you know, the design of the study has the potential to be practice-changing in PNH. As I said, we'll be looking forward to outlining this primary endpoint and secondary endpoint in an upcoming congress. Moving to slide 19. Turning to the IgAN study APPLAUSE for iptacopan. We wanted to clarify that our current filing plan aligned with the FDA is at the nine-month analysis to assess superiority in reduction of proteinuria at nine months. The statistical plan has been agreed. This would support a U.S. Subpart H approval for accelerated approval.

We would then continue to follow these patients to look for, the more definitive endpoints and to look at slowing progression for IgAN, which would take to the end of the study in 2025, enabling the approval to convert to a full approval. That's the approach we'll take with IgAN, and we'll look forward to sharing that data towards the end of this year. Moving to slide 20. I did wanna highlight a couple of earlier-stage assets where we're continuing to progress now, really with a focus on large potential assets in the pipeline. These include drugs like XXB in cardiovascular disease. This is an NPR1 agonist given infrequently, a monoclonal antibody for resistant hypertension and heart failure.

YTB, our T-Charge platform, where we presented additional data at ASH, where we are now pursuing this both in the front line, large B-cell lymphoma, but importantly also in multiple immunology indication on the back of data suggesting that we can take refractory patients into remissions, at least in small scale studies. That's something we're looking at more carefully. Additional radioligand therapies, including in breast cancer and glioblastoma. TPY, which is our gene therapy in ophthalmology for Geographic Atrophy, which we acquired as part of the Gyroscope acquisition. Lastly, DLX, a partnered compound for an oral alpha-synuclein inhibitor for Parkinson's disease. All high-risk projects, as is always the case in this stage of development, but all with the potential, if they were to work, to be very transformational medicines. Now moving to slide 21.

Turning to the growth profile of the company and why we believe we can deliver that 4% growth. We have these six in-line brands, these three major launch assets, PLUVICTO, SCEMBLIX, and iptacopan, and these additional pipeline assets that I've outlined. That's why we continue to believe that we have the firepower in-house with the assets we have to be able to generate that 4% growth with that 40% margin and create a very attractive profile in the coming years. Moving to slide 22. The drivers of our growth in this year, or this past year, were primarily ENTRESTO, KESIMPTA, and KISQALI, with major contributions from PLUVICTO, as well as to a lesser extent, SCEMBLIX and LEQVIO. We expect that those assets to continue to have robust growth over the coming years.

Importantly, we'll discuss a bit more detail COSENTYX and some of the dynamics there. The critical element for our COSENTYX story will be lifecycle management and the next wave of indications, as well as continued growth in Europe and China. I'll go through that in a moment. Moving to slide 23. When you look at ENTRESTO, continued strong performance, 44% growth, quarter-on-quarter. You can see the U.S. weekly TRXs continue to climb, demonstrating that ENTRESTO really now is the treatment of choice for patients with heart failure, meeting the guidelines within the label and the relevant cardiovascular guidelines. You can see the NBRx is up 16%. We continue to see strong growth in Europe. In China and Japan, we also have contribution from ENTRESTO's use in resistant hypertension.

We remain confident in the ongoing growth profile as we continue to penetrate in heart failure, continue to generate additional real-world data, and we see that launch momentum in Asia as well. Now moving to slide 24 and turning to COSENTYX. I think as many of you have already seen, COSENTYX Q4 sales were impacted by a revenue deduction true-up related to prior quarters. This was related to a higher level of Medicaid utilization than we had expected. This is delayed data that we receive from the various Medicaid channel sources. And that led to a higher revenue deduction for the previous quarters, which we took fully in Q4. When we fully neutralized for that, we saw the U.S. actually decline 6%.

When we look at all of the puts and takes, we see the US largely being in line right now with respect to COSENTYX performance in 2022 versus the prior year. We would expect in the U.S. for 2023 to continue to see in-line growth. That's when we look at all of the dynamics. You will see in the 1st half of the year some declines in COSENTYX as we lap the fact that in the previous year you had these deductions which were not factored in. Underlying, we expect COSENTYX to be able to hold its current performance in the U.S.

Then growth that really enables us to get to that mid-single-digit growth will be driven by Europe and China, where we continue to see strong growth, double-digit growth in China overall. That'll enable us to be well set up for what will come next, which is primarily the lifecycle management of this brand. Turning to lifecycle management, when you go to the next slide 25, really for COSENTYX now to continue its trajectory to get to the $7 billion, which we remain confident in, it will be around launching these next wave of indications successfully. For hidradenitis suppurativa, we expect the approvals in Europe in the first half of this year and in the U.S. in the second half of this year. This is a large indication where only one competitor product is approved, the TNFs.

We'll be first to market as a novel agent in this whole setting. It's an exciting opportunity to bring this med, a new therapy to this patient population. We have the intravenous U.S. launch, where we'd be the first novel post-TNF medicine to be available in an intravenous formulation. We expect that launch in the second half of 2023. A new auto-injector, the continued work we have on giant cell arteritis and lupus nephritis. Again, indications where COSENTYX has generated, I think, compelling data. Taken together, when we look at this profile for lifecycle management, the profile we have ex-U.S. and the stabilization of the U.S. business, we feel confident we'll get to that $7 billion peak sales potential over time. Moving to slide 26.

You saw that KESIMPTA is continuing its strong growth trajectory with 28% constant currency growth, primarily driven by the U.S., though we now start to see a pickup as well outside the United States. Importantly, the key driver for this is the ongoing utilization of KESIMPTA in patients who were previously on braces or were naive to any multiple sclerosis therapy. It's important to note that in the B-cell share of the total market is only about 50%. Half the market continues to receive older therapies. Our KESIMPTA exit share was 30%. We plan to continue to grow that with a goal to get to 50% share of B-cell patients over time. It's a really good profile, strong convenience profile. We'll continue to look forward to launching KESIMPTA around the world and driving that dynamic U.S. performance.

Moving to slide 27. KISQALI had strong growth across all geographies. When you look at that 33% growth, that's driven by a recognition that KISQALI really is the agent with the best datasets in the metastatic breast cancer setting to date. That's, I think, been really captured by the NCCN guideline update that happened just a few days ago, where KISQALI was named the only Category 1 treatment for first-line metastatic breast cancer patients with an aromatase inhibitor, which is the majority of patients in the metastatic setting. With that NCCN guideline update now, and as we continue to communicate that to physicians, this hopefully will give us continued momentum, as you can see with KISQALI now getting to 27% in BRX share.

We'll hopefully see in that metastatic setting that continued climb on the back of the datasets that we presented, NCCN guidelines, broad momentum coming out of the San Antonio Breast Cancer Congress as well. That will flow into, of course, the NATALEE readout, which we've already discussed, and the ongoing HARMONIA head-to-head study we have ongoing versus IBRANCE. Notably as well, we did achieve an approval in China for KISQALI, which will be another growth driver for this brand going forward. Moving to slide 28. ZOLGENSMA maintained a leading share in patients with SMA less than two years of age, but Q4 growth was muted.

this was really because we've now penetrated most of the bolus, if not the entire bolus of prevalent patients in most of our key geographies. growth now is largely dependent on adding additional countries in emerging markets around the world. we expect with this brand to stabilize in the $1.5 billion range until we get the readout and hopeful approval in the intrathecal setting. We'll continue to work to increase newborn screening. Importantly, in Europe, that's at 45%, and we have the opportunity, we believe, to drive that up further, could be a source of growth, as well as adding on additional markets in Latin America, the Middle East, and other parts of the world.

The key next inflection point for ZOLGENSMA will certainly be the readout of the STEER study of intrathecal patients and the STRENGTH study in the use of IV ZOLGENSMA in patients in two to five years of age. Those studies are enrolling on track, and then we'll hopefully have datasets to share in the coming years. Moving to slide 29. I wanted to turn to LEQVIO and give you an update on where we are now as we continue to build a strong foundation for this brand to become a significant cardiovascular medicine for the company. With respect to access, we're now at 76% of patients covered at or near label. In terms of adherence, we're seeing 75% of patients today coming in for their second dose.

We now have 1,700 centers that have ordered LEQVIO, and we've been able to increase between Q3 and Q4 by 50% the number of HCPs who have prescribed LEQVIO either through a paid dose or through our free trial offer to now 7,200 physicians. We continue to build that strong base, continue to generate important data. The ORION-3 data was recently published. Our phase III secondary prevention studies are unrolling well. We've launched now our primary prevention studies, which we'll expect to start in the first half of 2023 and continue to build out a robust data set for this medicine. Moving to slide 30. When you look at where ENTRESTO is, and compare it to where it.

Sorry, where LEQVIO is and compare it to where ENTRESTO was in the U.S., we're largely in line with what we saw in the ENTRESTO launch. A slow ramp as we build up awareness amongst physicians, get all of the various elements in place, and really build momentum in the cardiovascular community for use of a new medicine, or in this case, a new approach to controlling cholesterol. We're on track versus the ENTRESTO ramp, and that's the ramp we would expect to see over the course of the coming months with respect to LEQVIO, with a goal, of course, to accelerate wherever we can. When you look at the U.S., the key accelerators are gonna be new facilities, getting more depth in our existing prescribers, and continuing to educate HCPs on the Part B reimbursement process.

We also would expect over the course of this year to get additional conversion from the free trial offer that we rolled out in the second half of last year. Outside the United States, a big focus at the NHS is to get a broader prescriber breadth in the U.K. Then we'll have the hopeful approval in the back half of this year in China, which will allow us to have a major geography where we can further accelerate global LEQVIO performance. Moving to slide 31. PLUVICTO, I think as you've all seen, is off to an outstanding start in the United States, and this is reflective of very strong demand we're seeing for this medicine. $179 million in quarter four, full year sales of $270 million, almost all of that was in the U.S.

We are seeing NBRx share at 18%. That continues to climb in the post-taxane MCRPC setting. 160 unique accounts. We have very good payer coverage. Permanent A-Code is now in effect. We're approved in Europe. This is a story now where we continue to see very strong demand in the U.S., we see strong demand in Europe, and we're scaling our manufacturing capacity to meet that demand. When you look at the next slide, our PLUVICTO manufacturing capacity is gonna expand over the course of 2023. Our expectations are we'll be able to move across four facilities that we'll have online for this medicine versus a single facility right now that's the primary source at Rieti today.

We're working hard to bring Millburn online by the middle of this year, which will allow us for another capacity expansion. Later this year, an automated, you know, brand-new facility in Indianapolis with substantial capacity. For the rest of the world, Zaragoza, a facility in Spain, which will then further expand our capacity for Europe. We're also evaluating adding additional manufacturing sites in Asia at this time. With the four facilities you have here, we're targeting capacity of over 250,000 doses annually in 2024 and beyond. We'll continue to expand that capacity by adding additional facilities if the demand warrants it. Moving to slide 33. SCEMBLIX's off also to a strong start. You can see the sales here, $150 million on the full year, NBRx share at 29%.

Probably the most important element here of this story will be the ASC4FIRST study, which we're enrolling ahead of plan. We expect a readout in 2024, which will enable us to potentially move this medicine in the first-line setting and potentially be used as an alternative to imatinib or some of the other first and second-generation TKIs. Moving to slide 34. I'll hand it over to Harry now for the financial review. Harry?

Harry Kirsch (CFO)

Yeah. Thank you, Vas. Good morning. Good afternoon, everyone. I'm now going to talk you through some of the financials for 2022, as well as provide you with our 2023 guidance. As always, my comments refer to growth rates and constant currencies unless otherwise noted. Next slide, please. I would like to begin by comparing our performance versus the latest guidance we provided in October last year. As you can see, we generally met our guidance across the divisions and at group level with a notable beat for group Core Operating Income, which was largely driven by Innovative Medicines performance. As you can see, Sandoz top line also returned to growth with Core Operating Income impacted by higher than expected inflationary pressures on input costs. Next slide, please.

Taking a step back for a moment, you'll see that our 2022 performance was a continuation of our strong track record for innovative medicines. Over the last three years, we have delivered a 5% CAGR growth in sales and double of that at 10% CAGR on core operating income. Obviously, this performance has resulted in margin improving from approximately 33% beginning of this time period to now 37%, an increase of 480 basis points in constant currencies over three years. In short, we are delivering consistent performance against our financial targets and intend to continue to deliver improved financials, of course. Turning to slide 37. I will focus on the full year numbers on the right-hand side. For the full year, as Vas has laid out, sales grew 4% and core operating income 8%.

Operating income was down 13%, mainly due to the higher restructuring costs related to the implementation of our streamlined organizational model. Net income was $7 billion, with the comparison versus 2021 impacted by the Roche stake divestment income. Recall we had a one-time gain of $14 billion when we sold the Roche stake in for $21 billion. Core EPS was $6.12, growing 14% excluding the prior year Roche impact. Free cash flow was $12 billion for the full year, of course, also impacted by the currency movements, but overall a solid free cash flow performance. Speaking of free cash flow, let's talk about the next slide. Of course, one of my favorite year-end slides. Given our solid 2022 free cash flow, we are pleased to propose the 26th consecutive dividend increase to CHF 3.20 per share.

This is up 3.2% versus the CHF 3.10 last year, the dividend yield of 3.8%. This increase is fully in line with our policy of increasing our dividend per share every year in Swiss francs. To slide 39, please. Thank you. Let's get into some further details about our 2022 margin performance by division. Overall, full year core margin for the group increased 130 basis points to 33% of sales, driven by IM margin, which also increased by 130 basis points to 36.9%. I will talk about Sandoz in detail on the next slide. Here is the summary of the Sandoz 2022 performance.

It was a good year for the division returning to top line, with sales up 4% driven by the biopharma growth of 9% and retail growing 4%. Core operating income was essentially flat for the full year, disproportionately affected by inflationary pressures on input costs. As we look in the future, we expect continued share gains across geographies and two potential biosimilar U.S. approvals in the second half of 2023. With respect to the planned spin-off, we remain on track to complete this in the second half of the year, pending the required approvals. Next page, please. We anticipate a spin-off of Sandoz in the second half of the year, we thought it would be useful to give guidance for Innovative Medicines, Novartis excluding Sandoz, and Novartis including Sandoz to allow for the respective modeling that no doubt you will do.

For Innovative Medicines, we expect sales to grow low to mid-single digits and core operating income to grow mid to high single digits. Novartis excluding Sandoz has, of course, exactly the same growth guidance as Innovative Medicines because the only difference between the two are corporate costs. Novartis including Sandoz, which is essentially today's group, the group guidance is assuming here that Sandoz would remain with the group for the entire year. We would expect sales to grow low to mid-single digit and core operating to grow mid-single digit. On the next slide, I detail a bit more the Sandoz guidance. For 2023, we expect the top line for Sandoz to grow low to mid-single digit and the core operating income to decline low double digit.

This core profit decline reflects the required stand-up investments and transition costs to separate Sandoz and some continued inflationary pressures. With this setting, 2023 would be the trough year for Sandoz core margin, given the expected added cost to stand up a public company. Looking ahead, with respect to Sandoz midterm potential, sales are expected to grow low to mid-single digit CAGR, and the core margin is expected to expand to the mid-20s%, driven by continued sales growth and operational efficiencies, especially as a standalone lean generic company. On slide 43, I would like to add some perspective on the other key financial elements of our expected core net income performance. In short, we expect both core net financial result and core tax rate to be broadly in line with 2022.

On the next slide, I would like to go into a little more detail about the tailwinds and headwinds facing core operating income growth in 2023. The expected drivers of future core operating income growth include, of course, continued performance of our in-market growth drivers and the acceleration of recent launches such as PLUVICTO and LEQVIO. We also expect China growth to accelerate, benefiting from a return to normal in the second half of the year. Additionally, our simplified organizational structure is expected to continue delivering SG&A savings. Of course, we will continue our ongoing productivity programs. Growth will be partly offset by inflationary headwinds, which are expected to continue in 2023. On inflation, some further details as we saw it in finalizing in 2022.

In 2022, the inflation impact we saw was a bit higher than expected in Q4. For the total company, we estimate that the 2022 inflationary impact was approximately $350 million. However, this was of course more than offset by cost control and productivity savings. In 2023, we expect the inflation impact to be slightly higher, also including some above normal merit increases at approximately half a billion. This has been fully considered in our 2023 bottom line guidance. The other headwinds are generic erosion of Gilenya in U.S., and potentially to Sandoz in the EU, and the stand-up investments as discussed, related to the likely Sandoz spin-offs. Despite the headwinds, we continue to anticipate further margin expansion in 2033 and beyond, due to the expected sales growth and productivity progress.

Finally, on slide 45, we thought it would be helpful to go into some detail regarding the currency impacts expected, especially given the significant fluctuations of the last months. As you saw in Q4, currency had a negative 7 percent point impact on net sales, and a negative 9% impact on co-op inc. If late January rates prevail for the remainder of 2023, we expect the full year impact in 2023 of currencies to be much lower. On the top line, it would be 0% to +1%, and on the bottom line, slightly negative with -1%. As a reminder, we update this given the volatility monthly on our website. With that, I hand back to Vas.

Vasant Narasimhan (CEO)

Great. Thanks, Harry. Moving to slide 47, just wanted to make a note that we continue to focus on our goal to be one of the leaders in impact and sustainability in our approach to ESG, as well as just delivering on our core purpose. 290 million patients reached with our innovative medicines and our global health portfolio. 453 million patients reached with Sandoz. A broad pipeline across various technology areas, numerous new drug approvals, and multiple recent innovation highlights. Just to highlight that we think the greatest contribution we make to the world is based on our ability to discover, develop, and ultimately scale and launch new medicines to people across the planet. Moving to slide 48. In closing, you know, eight priorities that will really determine our path going forward.

We're transforming the company to a pure-play IM company. Five core TAs, five core technology platforms, our core geographic focus is a focus on the U.S. Nine multi-billion dollar potential brands. A real emphasis on improving our R&D productivity towards high impact assets and high value assets. A focus on key DAs and building depth in those DAs. Improving our financials, as you've seen with the margin delivery and the ongoing efforts, we have to continue to improve the overall financial picture. Shareholder-focused capital allocation, as we've shown with our dividend increase share buybacks, and continued approach to how we dispose or move forward with assets such as Sandoz to our shareholders. Continuing to strengthen our foundations with ESG and human capital. With that, we can open the line for questions.

If the colleagues on the line could limit themselves to one question, we'll try to make it through the list a couple of times.

Operator (participant)

Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please limit yourself to one question and return to the queue for follow-ups. We will now go to our first question. The first question comes from the line of Matthew Weston from Credit Suisse. Please go ahead. Your line is open.

Matthew Weston (Managing Director)

Thank you very much. I'm gonna go with a big picture question to start with, 'cause I'm sure others will dig into the detail. Vas, it's on drug pricing. You're the incoming chair for pharma in 2023. I'd love your perspectives on whether the industry sees any success in normalizing the nine versus 13 exclusivity for small molecules versus biologics. Also your thoughts on EU pricing pressures. There seem to be a lot of pressures building in a number of your core markets in Germany and France and others, and also some worrying legislation in front of the European Commission. I'd very much love your thoughts given Novartis' exposure there.

Vasant Narasimhan (CEO)

Thanks, Matthew. First, our guidance already factors in the various headwinds we see in pricing around the world. That 4%, 40%, also the guidance in 2023 already factors this in. That's an important, I think, caveat. To your first question on, in the U.S., there's three core priorities that we have as an industry to take forward now. One is to correct the distortion of the nine versus 13 small molecule or NDA versus BLA. Second is a focus on PBM reform. The third is continuing to improve the 340B program so that it can actually deliver on its intended purpose for patients in low income settings and who benefit from various programs from federally qualified healthcare clinics.

Now on your specific question on the nine versus 13, I think we have very good arguments as to why this creates an unintended long-term innovation distortion, which disadvantages small molecule and related medicines, for the Medicare population, indication expansions in cancer, medicines that take longer to ramp, in cardiovascular disease or in respiratory diseases. All things that need to be considered. I think the key thing will be when in the coming years there's a legislative vehicle, for us to be able to pursue that. It's a top priority of the industry.

I think, at least my belief is our industry when we come together to really focus on a topic and have a very clear, compelling policy case and a relatively small pay for from a congressional standpoint, that we can make it happen, and that's gonna be our total focus as a sector, in the U.S. On the EU pricing pressures, it's a little bit of a mixed bag. Certainly we are concerned, by some of the actions in the U.K., or proposed actions in France. Germany has had some headwinds, but overall, the German environment we'd say is relatively positive and workable.

I'd say broadly speaking, I think we as a sector need to do a better job clarifying to policymakers that in order to invest in innovation in Europe, we need a pricing environment that rewards innovation, particularly when it improves outcomes for patients. This can't be seen as a place to constantly cut costs, especially relative to the rest of the world. That's gonna be our focus to try to educate. For us, I think Germany remains the most attractive market, and therefore, I think from a financial outlook standpoint, we feel comfortable with the guidance that we've given. Thank you, Matthew. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Graham Parry, Bank of America. Please go ahead. Your line is open.

Graham Parry (Senior Pharmaceuticals/Healthcare Equity Analyst)

Great. Thanks for taking my question. It's on PLUVICTO. It's now annualizing over $700 million, which I think was pretty close to your peak guide for the VISION-labeled indication. Is that a steady state number, or can you see growth expanding from this quarter on quarter? Have you hit your supply capacity constraints now until you get more supply coming online? And could you have just underestimated the VISION population here, given it's penetrated so quickly? On your capacity into next year, you said the number of doses around 250,000. Correct me if I'm wrong, but that would equate to around 50,000 patients, which is over $8 billion of revenue potential at U.S. prices.

Perhaps just give us a feel for what you think the top peak numbers for this, this drug could be in the context of the $2 billion that you've been putting into the slides for PSMAfore and PSMAddition. Thank you.

Vasant Narasimhan (CEO)

Yeah. Thanks, Graham. First, I think from a demand standpoint, I would say our initial estimates of the VISION population have underestimated the potential of this population. The demand would suggest to us that there are a greater number of patients and providers interested in this, in this medicine. We certainly have not fully penetrated the VISION population in the United States. Really, it's a question of us continuing to expand our capacity to meet what is a much larger, interested population than we initially expected. We're working towards that.

As I mentioned, we're working with multiple sites to have online over the course of this year, ideally, and if all went according to plan by the middle of this year, but that's dependent on regulatory action, and then additional sites towards the end of this year as well. We would expect if we can meet the demand, that there would be continued growth from the VISION population in and of itself. I think beyond that, with the PSMAfore, PSMAddition, we certainly see this medicine becoming a very significant medicine for the company, assuming the data reads out positively over the coming readouts. That will take, of course, the readouts have to come through, but we're preparing from a capacity standpoint to have this be a very large medicine for Novartis.

You see that I also mentioned we're preparing as well to add additional facilities in Asia. We have advanced already planning on those two additional facilities. We'll be ready to make this medicine around the world available to as many prostate cancer patients as we can.

Graham Parry (Senior Pharmaceuticals/Healthcare Equity Analyst)

Just to be clear, have you reached capacity already, or is there further capacity that you can still fill with increased demand?

Vasant Narasimhan (CEO)

We have further capacity versus Q4, we certainly need to continue to work to further expand the capacity given the size of the opportunity, size of the demand that we're seeing. We have some limited additional capacity versus Q4, but we need to expand further to fully meet the demand for sure. I think from how you model this, in the first half of this year, it should be modest growth as we work to expand the facilities. Assuming we get the facilities online, we would hope a ramp up in the second half as that additional capacity comes online. Moving into next year, of course, we have the additional capacity, additional geographies, and hopefully as well, the PSMAddition population as well.

Graham Parry (Senior Pharmaceuticals/Healthcare Equity Analyst)

Very clear. Thank you.

Vasant Narasimhan (CEO)

Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Steven Scala from Cowen. Please go ahead. Your line is open.

Steven Scala (Managing Director)

Thank you very much. We noted that the phase II data for your obesity agent, MBL949, is due in May. I don't believe Novartis has stated the mechanism other than it's not an incretin.

Can you confirm that it targets anti-ACTR3? Is it the same as or similar to the molecule you previously out licensed? I'm also curious on the same topic why you didn't highlight it on slide 20. Are you not excited about this target, or are you not excited about obesity? Thank you.

Vasant Narasimhan (CEO)

Yeah. Thanks, Steve. It's I can say definitively it's not related to BYM, the molecule that we out licensed. We're not disclosing the mechanism of action. You are correct that we do expect the readout in quarter two. It's been a simple reason we didn't highlight on the slide is we view it as a high-risk, high-reward program. They're all high risk, high reward, but I think particularly for agents of obesity, the key is can we find a dose and schedule that leads to both profound weight loss and a tolerability profile. I don't know. I've not seen the data, so I don't know.

I mean, that's the key question and that's why we didn't choose not to put it on the slide until we have further data, which we'll have in the second quarter. Then, of course, we'll provide an appropriate update at that time.

Steven Scala (Managing Director)

Thank you.

Vasant Narasimhan (CEO)

Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Tim Anderson, Wolfe Research. Please go ahead. Your line is open.

Tim Anderson (Managing Director)

Thank you. On COSENTYX, what's driving the higher Medicaid channel mix? Could that somehow increase further, or might it actually reverse out as Medicaid enrollment numbers potentially shrink with the US declaring that the pandemic is over? Then an update on formulary positioning in 23 in terms of lives covered in a preferred spot. Also, if you can comment on whether there's any new access restrictions and what the rebating was like in 23 relative to prior periods.

Vasant Narasimhan (CEO)

Yeah, thanks. Thanks, Tim. All great questions. First on the Medicaid increase. First, it's important to note, you know, with a brand like this, $3 billion of net sales, significantly more gross sales, the actual percentage variation here is not huge. Nonetheless, we don't have a great handle on why exactly the Medicaid came up a bit more, but one of the drivers was certainly we had certain special higher discount agreements with certain Medicaid plans. Those have now expired. Those would no longer be in play for the coming years.

I think overall, we expect to see this, you know, the mix goes up and down year to year, but overall, we expect to see the mix stabilize back to what we've historically seen prior to this situation we had in 2022. In terms of formulary, it's largely in line with what we had in 2022. We've seen no significant shifts or changes in terms of formulary position, access. Overall, given the overall scheme of things, when we look at growth to net, they're in line with 2022. That's why we feel good in the U.S. that on an annual basis we will be able to deliver sales that are in line with what we saw in 2023, with what we saw in 2022.

The growth would come from the new indications. Again, I just wanna highlight that for the first half of this year, because of the fact we took all of that Medicaid charge in Q4, and when you lap the prior years, the base is not fully adjusted. You are gonna see a lower relative COSENTYX sales in Q1 and Q2 because of the base effects of taking all of that Medicaid rebate into quarter four. I think that the bigger picture on this brand is our ability to deliver new indications, new formulations. That's really where we have to focus, and then the continued expansion in Asia and China, as well as in Europe. Thank you, Tim. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Florent Cespedes from Société Générale. Please go ahead. Your line is open.

Florent Cespedes (Senior Sell-Side Equity Analyst)

Good afternoon. Thank you very much for taking my question. On slide 30, on LEQVIO, there is a chart showing the sales versus, and ENTRESTO sales as well, the monthly sales. Do we have to understand that the LEQVIO should continue to trend with the same pace as ENTRESTO? Or, as you suggested last year, we should see an inflection later this year given the fact that we expand the number of sites that would prescribe the product. Some color on that would be very helpful. Thank you.

Vasant Narasimhan (CEO)

Thanks, Florent. I think that we just wanna overall indicate that the launch is in line with other major cardiovascular launches where we've been able to generate very large medicines, and you've seen how ENTRESTO continues to perform. I don't. We continue to hope for the inflection point, certainly in the second half of the year. It's hard to predict exactly when it would happen. There are a few things that give us confidence we should see some acceleration in the back half of this year. One is the free trial offer program that we had rolled out will expire, and we hope that those patients will convert into paying patients in the second half.

Second, with that 7,000+ physicians that I mentioned, we expect to get greater depth in those physicians over time, which should also drive greater growth as well. We also see an increasing comfort with buy and bill versus the alternative injection centers. As that happens as well, we generally see physician sites prescribing more of LEQVIO because they can do it in-house without having to refer a patient out. All of those would be the positive tailwinds we would see towards the second half of the year. I think broadly speaking, you know, we feel comfortable with where consensus is on LEQVIO for the full year 2023. Our goal remains to make this into a very significant multi-billion dollar medicine over the coming five to 10 years. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Peter Welford from Jefferies. Please go ahead. Your line is open.

Peter Welford (Research Analyst)

Oh, hi. Thanks. I have a question on oncology. Just obviously, there was a lot of emphasis on radioligand therapies, and that was highlighted some of the new and upcoming ones you have as well that are coming through phase I and II. There are relatively few other sort of priorities in oncology highlighted within the pipeline. I wonder if you could still say, first of all, if you're still enthusiastic on your KRAS and the opportunities there, given also what we've seen develop in that market. But also ociperlimab, is that now discontinued or is it just delayed as you continue to evaluate TIGIT? Sort of more broadly, is this still an area which you could see further business development, or do you think this is an area perhaps obviously less focus from Novartis? Thank you.

Vasant Narasimhan (CEO)

Yeah, thanks, Peter. I think on oncology, I mean, remains a huge focus for the company. 40% of our R&D budget is focused on developing the next wave of oncology medicines. Within solid tumors, in addition to the radioligand therapies, where we have now a growing portfolio across neuroendocrine prostate, we have a range of other indications we're taking LUTATHERA into. We have the anti-integrin, the bombesin. We recently are hopefully bringing in a folate as well. We have a broad portfolio within RLT where we see a significant opportunity. We continue to also pursue the TIGIT through the deal we have with BeiGene, we have that as an option deal. We also are assessing what other lines of therapy to take that TIGIT into, given the competitive landscape. That's something we're actively evaluating.

In terms of other active programs that are in phase III, certainly the KRAS and the KRAS G12C are continuing. Our overall perspective is the critical thing now is to demonstrate efficacy in a combination setting. We think we've seen now from the sales performance of the mono G12C inhibitor as well, important for a certain group of patients that have the mutation. Much more important is can you ultimately demonstrate tolerability and efficacy of the G12C with a PD-1, with a SHP2, with other agents. That's something now we're working through to see. That would really, I think, give us more confidence that this could be a very significant medicine. Earlier stage within the NIBR portfolio, we have a range of different assets that we're pursuing.

We have a few targeted protein degradation agents that are advancing now into phase I-II, a couple of novel targets in non-small cell lung cancer, as well as other solid tumors. That whole space continues to progress. As you know, oncology has a high level of failure rates, so I don't wanna oversell it, but I think we're certainly working to continue to find the next wave of solid tumors. We are active in the BD&L space, and I think if we could find attractive assets within our core cancers, lung cancer, prostate cancer, you know, the gastric GI cancers, et cetera, those are certainly things we would actively look at.

I would say in hematology now between SCEMBLIX, iptacopan, ianalumab, we have some pretty, building on the legacy, of course, of Gleevec and Tasigna and PROMACTA/REVOLADE. We have a pretty good portfolio in hematology. Of course, with now YTB moving into the first line setting in large B-cell lymphomas, a nice portfolio to continue to keep maintaining our strength in hematology over time. Thanks, Peter. Next question.

Operator (participant)

Thank you. Your next question comes from the line of Seamus Fernandez from Guggenheim Securities. Please go ahead. Your line is open.

Seamus Fernandez (Senior Managing Director)

Great. Thanks for the question. Can you maybe just give us a sense of what the team is doing to extend the IL-17 franchise beyond COSENTYX exclusivity in 2029? There's obviously a number of, you know, high-value immunology assets out there in development. We're just interested to know what Novartis is doing beyond that. Maybe if you could, would you mind commenting on, you know, how you see the HS landscape evolving going forward, given some of the data that we've seen for bimekuzimab and then potential competitor, Moonlake as well? Thanks so much.

Vasant Narasimhan (CEO)

Yeah. Thanks, Seamus. You know, first on IL-17A and the COSENTYX portfolio overall, of course, something we're actively working on and looking at COSENTYX LOE 2029. We have additional patents that go into the 2030s, which will, of course, actively prosecute as well. We have a range of oral anti-immunological agents we're pursuing in-house, so, oral IL-17A as well as other oral agents. Of course, actively looking at external opportunities as well in that space if we see compelling data. I think that's gonna be really critical for us to look at, but of course, we have time, and that's something we'll work through over the coming years.

I also would say that in immunology, between Ianalumab, remibrutinib, as well as other programs we have now advancing through the pipeline, we're also prepared to pivot, not just focused on psoriasis, PSA and AS, but also try to move into, really be a leader in areas like Sjögren's, SLE, and other immunological illnesses, as you mentioned, like HS. HS, our view is that our 52-week data is very compelling. We think this will really be a space where a long-term data is what really matters. We think our 52-week data relative to the TNFs are very good. We're aware of other IL-17A's coming. I think what's important to note is this is a very, very undertreated patient population. These patients generally have given up and generally are not coming in for therapy.

The real opportunity here is to get these patients to know that there are better therapies available, and that will create, I think, a large market opportunity where multiple players can be successful, given that these agents are looking like they have better efficacy and safety than the anti-TNFs. Have anything to say about other mechanisms at the moment. We in-house are pursuing other mechanisms as well against hidradenitis suppurativa to try to make sure that we cover our bases. We have evaluation of our anti-CD40 ligand. We're evaluating remibrutinib, our BTK inhibitor. We have a range of efforts looking at hidradenitis suppurativa and of course we'll see which ones pan out in-house. Next question, operator, I've been advised to really remind everyone, please limit yourself to one question. Appreciate it. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Andrew Baum from Citi. Please go ahead. Your line is open.

Andrew Baum (Managing Director and Head of Global Healthcare)

Thank you. Questions on PLUVICTO. Looking at your patient access map, demand clearly materially exceeds supply currently for the product in the U.S. Could you just outline your confidence of FDA approval for the mid and end year for the new facilities? Just given the recent track record of LEQVIO, plus you have a new facility, what is the risk of that dragging on? Connected to that, how should we think about the future competition from Point and Lantheus with their lutetium isotope and prospect? Thank you.

Vasant Narasimhan (CEO)

Yeah. I think with respect to the files, we're ready to file the site since we're in discussions with FDA to file the Millburn site. From the time we get the okay to file is a four-month review clock for that additional facility. Our Indianapolis facility with multiple large scale automated lines, we plan to file in quarter three as well to the NDA. Again, it would be an addition of additional sites. We would expect a four-month approval time. We're doing everything we can to make that a reality. We plan right now for those sites. Our base plan is for those sites to come online this summer and then later on this year.

We'd have adequate supply to fully meet the demand of the VISION population as well as the PSMAfore population. I think in terms of the competition, it's important to note this is extremely difficult manufacturing. This is just-in-time manufacturing that requires really logistics expertise. We currently source the entire U.S. market out of an Italian site and do it successfully. We believe we've built up substantial know-how and expertise with the relevant sites to give us a strong competitive position. Other players, of course, are gonna come in and try to launch. The question will be, do they have the same scale and expertise that Novartis does to be able to navigate that complexity and really ensure that they can meet the demand? That's, that's kind of our outlook right now.

We feel good about it. By the middle of this year, we'll be in a very strong position to meet the supply. I would also note for LEQVIO, 'cause I noted your comment on that product. I mean, we have a large scale line now that's up and running in Switzerland, which makes us the largest producer of siRNAs in the world. I think we're good on gene therapy, RLT, and siRNA manufacturing. We feel very good with the approach we've taken, and I think we're in a very good place on all three of them. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Keyur Parekh from Goldman Sachs. Please go ahead. Your line is open.

Keyur Parekh (Managing Director)

Hi. Thank you for taking. One big picture one for you, Vas. With the proposed separation of Sandoz, Novartis will become a focused innovative medicines company. Once that transaction is done, are you done with the process of changing the shape and structure of Novartis? Or do you think there is more you want to do relative to the size and the shape of the innovative medicines company that will be left at the end of the Sandoz transaction? Just linked with that, I know Ronnie's team has been hiring, they've hired some people like Dr. Yang, et cetera. Just more broadly, how far along the process of building that growth and strategy function settled under Ronnie is Novartis today?

When do you think that might be done? Thank you.

Vasant Narasimhan (CEO)

Yeah. Thanks, Keyur. You know, broadly speaking, our strategy was to get to become a pure play innovative medicines company, design the company in the right way. We started that journey in a principled way five years ago. Of course, there was a pandemic for 2.5 years in the middle of that, so it got a little more, you know, complex. Now I think we have the right setup post the Sandoz spin with a geographic focus on the U.S. and ex-U.S., and from a commercial standpoint, really committed and renewed leadership in R&D, and then the strategy and growth function to really identify external and internal opportunities that can drive the growth.

I think post that time period and post seeing through the transformation program we announced last year and the relevant restructuring, I think we'd be then in a position to really just focus on execution. We need to execute on our launches, execute on our pipeline, execute on our productivity, continue to generate that mid-single digit sales growth. And that attractive core margin over time, and then that becomes the core of what we do day in and day out, continuing to look at attractive external assets to add on over time. Ronny's team is getting built out, I think, off to a strong start, a much more integrated, the most integrated approach now that we've had that I'm aware of, at least in 20 years.

To R&D portfolio management, it all falls under one roof now in terms of how we look at the R&D portfolio, an integrated approach to taking commercial input into the earliest stages of research, much more focused on key TAs and being much more disciplined and saying no to projects that are off strategy. I think, all of that's coming together. It's been four or five months for Ronny. It's been two months for Fiona Marshall. I feel really good that this is a great team that can deliver that innovation horsepower we're gonna need as a pure-play company. Thanks, Keyur. Next question.

Operator (participant)

Thank you. Your next question comes from the line of Emily Field from Barclays. Please go ahead. Your line is open.

Emily Field (Director and Head of EU Pharmaceuticals Equity Research)

Hi. Thanks for taking my question. I just wanted to ask a question about iptacopan. You know, will this U.S. filing in the first half of this year include both PNH trials? Then 'cause I know you mentioned that you're running the switch study for the frontline patients as well. Just trying to get a sense of commercialization strategy across the PNH spectrum. Then just I know you have BTD for this asset, just, you know, how long of a regulatory review you might be expecting. Thank you.

Vasant Narasimhan (CEO)

With iptacopan, yes, we'll be filing both studies, both the refractory and frontline study as part of the package, and that's aligned with FDA. We have used a Priority Review Voucher as well for this asset to really ensure that it's approved in a rapid timeframe. Even though we had Breakthrough Therapy Designation, we don't wanna take any risks with respect to this particular filing to make sure that it happens as fast as possible.

With respect to our overall strategy with iptacopan, I mean, when you look at this market, we believe that it's 60%-70% of patients who on current anti-C5-based therapies are not adequately controlled, and those patients could be switched to iptacopan based on the data we presented at ASH and assuming the final label supports it. That's a substantial opportunity for the medicine. We know that potentially up to 60%-70% of diagnosed PNH patients are not on a therapy to date, and they come on, I think, a few different categories. Some are subclinical or not quite clinically severe enough. The question is, with a twice-a-year safe oral, is there an opportunity to get more of those patients on therapy?

Because it's maybe physicians or patients were holding off wanting to be on in regular infusions, so could an oral therapy open up that market? I think there's a set of patients also who have gone back to taking transfusions, having now failed prior therapies. That's another opportunity. Then there's probably a set of patients as well that are just in the watch and wait mode. That'll be an opportunity for the medicine as well. We think there's multiple places. It will take us time to drive this launch, so this will not be fast given the strength of the incumbent position, and then also that this significant group of patients not on therapy has to get mobilized.

We believe over time, with the compelling data that we have and the recognition that a twice-a-day oral could be a really compelling option, we can build a very significant medicine on PNH, then expand into C3, IgAN, aHUS, IC-MPGN, and then subsequent indications thereafter. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Richard Vosser from JPMorgan. Please go ahead. Your line is open.

Richard Vosser (Managing Director and Senior Analyst)

Hi. Thanks for taking my question. Just going back to KESIMPTA and obviously very strong. We're gonna see another launch for another CD20 this year and coming around now from TG Therapeutics, obviously an IV but lower price. How do you see that impacting KESIMPTA this year? Maybe also, we're gonna see subcutaneous Ocrevus data. How do you see that as well in the future around the launch? Thanks very much.

Vasant Narasimhan (CEO)

Yeah. Thanks, Richard. The way we look at the MS market, one, as I mentioned, you have 50% of patients that are not on B-cell therapies and 50% on B-cell therapies. There's a substantial market opportunity just to get more patients in the first line, first switch setting onto high-efficacy B-cell therapies. There's plenty of room for growth, just for KESIMPTA and getting to more of those patients. The second thing, based on our understanding of the market, is that there are sets of facilities and health systems that prefer infused medicines and there are those that prefer providing patients sub-Q medicines, and we see those as very stable. Really this market is a split market.

You have a market of physicians who want to give infused medicines. There's a large proportion of the market who want to give patients the opportunity to have at-home sub-Q administration. Within that sub-Q, we don't see any at-home administration relevant competition for the coming years. That's very much our focus area. Within the IV segment, there is now competition. I think that competitive dynamic will be an important one for us to observe. I think to your point, Richard, will the opportunity of having sub-Q physician-administered medicines expand the number of centers that might be interested in a physician-administered approach? We don't know.

Nonetheless, the market opportunity ahead of us with the 50% of patients not on B-cell therapies and the substantial number of physicians who prefer providing an at-home administration, that's the opportunity for this medicine, and that gives us plenty of room to grow over the coming period. Thank you, Richard. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Simon Baker from Redburn. Please go ahead. Your line is open.

Simon Baker (Partner and Head of Global Biopharma Research)

Thank you for taking my question. Just going back to LEQVIO. Vas, you briefly touched on buy and bill. I just wonder if you could give us a little bit more detail on the progress you're making there. I ask because on one hand there was a fairly negative article earlier in the month on LEQVIO's buy and bill. On the other hand, we see in September and December last year, quite a significant uptick in traffic to the LEQVIO Access website. I just wondered if you could give us the latest picture then. Thanks so much.

Vasant Narasimhan (CEO)

Yeah. Thanks, Simon. Look, look, there's no question that buy and bill is a new approach that cardiologists need to understand and get implemented to their office. That said, we know there are many specialties that have successfully done that. Ophthalmology, oncology, rheumatology, neurology. This is something that can be done. Does it take time? Yes. Do you have to work through many hurdles? Yes. Do you have to get office staff to understand a new approach? Yes, absolutely. It can all be done. As I noted, now that we have over 7,000 physicians that have taken action on LEQVIO, 1,800 facilities ordering LEQVIO, a steady increase in conversion from facilities that were previously using alternative injection centers to now implementing buy and bill in their facility for LEQVIO.

I think we're getting to a place now where physicians are getting more and more comfortable with the concept. What we generally see is once a physician has one patient go through the process and they understand that it is something that's manageable, then it becomes something relatively straightforward for their office, and then they take it on relatively quickly. We have to get up that curve, but we're seeing, I think, positive trends. We'll just keep working through it. Keep also, hopefully, having clinics be able to educate one another about the experience of how buy and bill ultimately works and get that further implemented. You know, I wouldn't read too much in. You can always find probably a physician to tell you any process is onerous and terrible.

I think broadly when we look at a large scale data set, we see steady progress on this front. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Michael Leuchten from UBS. Please go ahead. Your line is open.

Michael Leuchten (Managing Director)

Thank you. Question for Harry, please. just going back to the Sandoz operating expenses into 2023. I think that's the biggest delta to consensus, really looking at the composition of numbers for this year. Harry, how much of these expenses are stand-up costs and how much is sort of prepping for manufacturing shift as well? it just seems a meaningful amount that is coming into the P&L. Is that purely just separation costs, or is that already including sort of longer term expenses that already hit 2023? Thank you.

Harry Kirsch (CFO)

Yeah. Thank you, Michael. Overall, I would say if you take out these, stand up and transitionary costs, the Core Income Sandoz in 2023 would be flat. It's this low double-digit decline comes from that. If you think about, right, Sandoz delivered $1.9 billion Core Income in 2022. We talk about roughly ±$200 million of cost block. Out of that $200 million, about $70 million-$90 million will be real standup costs, corporate costs, and so on, that Sandoz needs to operate as a separate public company. The other half, if you will go away over time as the fully transition to a public company. That would naturally go away as these transition costs are not anymore needed after a couple of years.

Also the corporate costs, there will be corporate costs, but clearly Sandoz has plans, you know, to reach in the mid-term, the mid-20s margin by then streamlining the overall operations, SG&A structures as they are a standalone company. I hope that gives you a bit more flavor, you know, on that guidance for this year, which really should be a trough year. After the separation, relatively quickly come off that including, of course, taking over transitional service costs like for IT over time quite quickly, usually maximum two years on such services.

Vasant Narasimhan (CEO)

Thanks, Harry. Thanks, Michael. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Emmanuel Papadakis from Deutsche Bank. Please go ahead. Your line is open.

Emmanuel Papadakis (Managing Director)

Thank you for taking the question. Perhaps I'll take one on KISQALI. You've reiterated the over $3 billion peak sales potential for the adjuvant indication. Perhaps you could just help us understand how important you think a clinically meaningful benefit in both of the two key subpopulations in the trial is, are intermediate risk and higher risk, in terms of realizing that potential, assuming the study is positive, and how would you define clinically meaningful in terms of either absolute or relative IDFS benefit in that population? Indeed, is that something you'll actually disclose with a headline or we'll have to wait until details are presented? Thank you.

Vasant Narasimhan (CEO)

Thanks, Emmanuel. The trial right now is overall designed for an endpoint across both patient populations. In order to hit the primary endpoint, we need to hit across all populations. The question would be, would FDA parse the data and say that it was driven by the high-risk population and then potentially take a different approach? We can't judge. The way we've designed and powered the study is across the entire group. From a pre-specified analysis on the primary endpoint, it would be for both the intermediate and the high risk, of course, with the relevant secondary endpoint. Also note that we've aligned with FDA. The key for us is to show no detriment in OS.

As long as we can demonstrate no detriment in OS at the time of that readout, that would be the case. I think you could expect a headline on whenever it comes on the IDFS, and then if relevant, the OS, if not relevant, the OS. We would not say anything on the OS, and then we'd have to have the discussion with the agency to determine how they would like us to cut the data. You know, from our competitor data, there was, you know, a threshold that was applied for a certain subpopulation Ki-67, and then later adjusted. These are all things we would have to determine as part of the review process. Next question, operator. Thanks, Emmanuel.

Operator (participant)

Thank you. Your next question comes from the line of Mark Purcell from Morgan Stanley. Please go ahead. Your line is open.

Mark Purcell (Managing Director)

Yeah, thank you. Mark Purcell from Morgan Stanley. Thanks for taking my question. On iptacopan, first can you help us understand when you said it's the 9-month analysis could potentially support U.S. Subpart H filing, how should we think about the sort of probability of moving forward at that point versus obviously out to sort of 2025 or so and slowing progression of IgAN before you can approach the FDA with your package? Related to that, obviously a much bigger population in IgAN versus PNH and C3G, aHUS, et cetera. Should we think about a sort of subpopulation of the 185,000 patients you estimate with IgAN, which would be a target hill?

Would you sort of launch this as a completely separate brand? I'm trying to think about what Novartis' broader ambitions might be to build out a portfolio of primary care and rare renal assets given your commercial capabilities across the platform.

Vasant Narasimhan (CEO)

Thanks, Mark. First on the endpoint for IgAN. You know, we saw in the phase II data, phase II-B data, you know, I think, reduction in proteinuria across, you know, the very statistical analysis that we've done. That's the basis for us designing the phase III study. We feel good that if we hit the required slope of reduction that we target, that would allow us to file with the FDA. Though I imagine it'll also come down to the totality of the data. Certainly our base case is that if we hit the primary endpoint on proteinuria, that should give us the basis to file. Then, of course, we would look at EGFR and other endpoints in 2025 that would be more meaningful after further follow-up.

Broadly speaking, for our factor B, a focus on PNH, C3G, aHUS, IC-MPGN, MPGN, cold agglutinin disease, and the related spectrum of illnesses. When we're in a more common illness like IgA nephropathy, our focus is on more severe patients to be able to maintain the ultra-rare pricing. We do have follow-on factor B inhibitors that we plan to take forward in broader indications. You'll note that we do have a program for iptacopan to evaluate it in geographic atrophy and related retinal diseases. If successful, we would actually use the backup compounds for those broad indications, and that's how we're thinking about splitting out across the whole factor B enterprise. Thank you. Next question, operator.

Operator (participant)

Thank you. Your next question comes from the line of Richard Parkes, BNP Paribas. Please go ahead. Your line is open.

Richard Parkes (Pharmaceuticals and Biotechnology Equity Analyst)

Hi. Thank you very much for taking my question. It's just another one on PLUVICTO. You've outlined obviously you'll have manufacturing capacity to allow you to address the majority of the PSMAfore population by 2024. Could you talk about the other hurdles and limitations on your ability to penetrate that population, including referral patterns, proportion of patients cared in the community, and access to nuclear medicine facilities, just so that you can help us scope out the opportunity? Thank you.

Vasant Narasimhan (CEO)

Yeah. You know, Richard, what we've seen thus far is there's about 500 facilities we believe we would need to be able to provide PLUVICTO, at least in the U.S. market, to reach the demand, the potential patient population across the three indications that we have. We're able to currently servicing a little over 200 of them, and we expect that to expand over time. I think what's gonna be the next challenge, because the demand is, as we've noted throughout the call, much higher than we expected, than I think folks on the call expected, frankly, is actually having the centers have enough infusion chairs to be able to provide the therapy to enough patients.

That's the next constraint, beyond once we relieve our supply constraint later in the middle of this year, to then work with the centers to have a better estimate of what the number of patients they think they will need to provide radioligand therapy to a day and ensure they have adequate chair or bed capacity to be able to do that. I think that will be as we get into broader and broader patient populations, that will be the next constraint we'll have to then work through. There seems to be a lot of enthusiasm in the urology and nuclear medicine community to do that, so I expect it will happen, but that's something we're gonna have to work through over the coming quarters. Next question.

Operator (participant)

Thank-

Vasant Narasimhan (CEO)

This is the last question. I think it's Steve. Steve?

Operator (participant)

Thank you. Just opening Steve's line. Steven, your line is open.

Steven Scala (Managing Director)

Hi. I assume you're calling on Steve Scala. I'm just wondering, what is your specific assumption for the profile of Merck's oral PCSK9, for which data is coming very near term, in terms of both its LDL lowering and its safety? I assume your view is very cautious, which supports your high enthusiasm for LEQVIO. What sort of role do you think an oral PCSK9 ultimately could have in this marketplace? Thank you.

Vasant Narasimhan (CEO)

Thanks, Steven. I'm glad you asked that question. You know, our view, we had an oral PCSK9 program, which we've de-prioritized. We are pivoting cardiovascular research in Novartis into infrequently administered siRNAs, ASOs, et cetera, to get to first, you know, as you know, we have PCSK9, we have combination programs. Of course, we have Lp(a), follow-on programs with various combinations. The goal would be to say, can you get to combinations at six months or long-actings at one year with the belief that over the last 25 years we've learned that compliance to orals in this market is low. Statins are at 30%. Other therapeutics are in a similar range. If we really wanna tackle cardiovascular disease at scale, we need to get to infrequent administration. We have LEQVIO as a starting point.

we're gonna work very hard to extend past the 9, get the 9-13, but we're anyway gonna have lifecycle management working on long-acting LEQVIO, working on combinations with LEQVIO. Our goal will be very much to have a combination siRNAs that can cover the relevant mechanisms of action for cholesterol lowering so that patients won't need oral drugs anymore because we think that's where medicine is heading, and we think that's what siRNAs and long-acting ASOs and similar technologies can deliver. Hence we deprioritize orals systematically at cardiovascular at Novartis and focus on these, this next wave of technologies and therapies.

Steven Scala (Managing Director)

Very interesting. Thank you.

Vasant Narasimhan (CEO)

Thanks, Steve. All right. Very good. Thank you all for joining. We'll look forward to updating you further at quarter one. Take care.

Operator (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.