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Mersana Announces FDA Clearance of IND Application for Lead Antibody-Drug Conjugate XMT-1522

On October 24, 2016 Mersana Therapeutics, Inc., a biotechnology company focused on discovering and developing a pipeline of antibody drug conjugates (ADCs) based on its proprietary Fleximer platform technology, reported that the U.S. Food and Drug Administration (FDA) cleared the company’s Investigational New Drug (IND) application to begin Phase 1 clinical trials for its lead oncology drug candidate XMT-1522 (Press release, Mersana Therapeutics, OCT 25, 2016, View Source [SID1234515988]). The compound is Mersana’s first pipeline product, and defines a new class of HER2-targeted therapies.

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“XMT-1522 represents a promising therapeutic approach for cancer patients with significant unmet medical needs and we are pleased to be in a position to move this therapy into clinical development.” said Donald A. Bergstrom, M.D. Ph.D., Chief Medical Officer, Mersana Therapeutics. “We have designed a robust Phase I program that will allow us to better understand the potential of XMT-1522 to address the needs of several patient groups who currently have limited options.”

XMT-1522 incorporates a novel, proprietary HER2 antibody, which is conjugated with Mersana’s Dolaflexin platform which includes its Fleximer technology and proprietary auristatin payload. XMT-1522 provides a drug load of approximately 12 molecules per antibody, specifically designed to improve potency while simultaneously increasing tolerability. XMT-1522 has the potential to extend HER2-targeted therapy beyond the current “HER2-positive” populations into patients with lower levels of HER2 expression. The Phase 1 protocol will evaluate XMT-1522 in patients with advanced HER2-positive breast and gastric cancer, as well as advanced breast cancer with low HER2 expression and non-small cell lung cancer.

“Our partnership with Mersana exemplifies our approach of uniting Takeda’s experience in bringing novel oncology therapies to market with promising drug discovery technology like Mersana’s Fleximer to help drive science forward for patients with unmet medical needs,” said Phil Rowlands, Interim Head, Oncology Therapeutic Area Unit, Takeda.

Mersana Announces FDA Clearance of IND Application for Lead Antibody-Drug Conjugate XMT-1522

The drug is being co-developed with Takeda Pharmaceutical Company Limited (TSE:4502) and as part of that agreement Mersana will receive a $20 million milestone payment based on FDA clearance of this IND. In February, Takeda, through its wholly owned subsidiary Millennium Pharmaceuticals, Inc., entered into a strategic partnership with Mersana to co-develop XMT-1522, and Mersana will lead execution of the Phase 1 trial. Mersana will retain full commercial rights in the United States and Canada while
Takeda will have rights in rest of world.

"XMT-1522 represents a promising therapeutic approach for cancer patients with significant unmet medical needs and we are pleased to be in a position to move this therapy into clinical development." said Donald A. Bergstrom, M.D. Ph.D., Chief Medical Officer, Mersana Therapeutics. "We have designed a robust Phase I program that will allow us to better understand the potential of XMT-1522 to address the needs of several patient groups who currently have limited options."

XMT-1522 incorporates a novel, proprietary HER2 antibody, which is conjugated with Mersana’s Dolaflexin platform which includes its Fleximer technology and proprietary auristatin payload. XMT-1522 provides a drug load of approximately 12 molecules per antibody, specifically designed to improve potency while simultaneously increasing tolerability. XMT-1522 has the potential to extend HER2-targeted therapy beyond the current "HER2-positive" populations into patients with lower levels of HER2 expression. The Phase 1 protocol will evaluate XMT-1522 in patients with advanced HER2-positive breast and gastric cancer, as well as advanced breast cancer with low HER2 expression and non-small cell lung cancer.

"Our partnership with Mersana exemplifies our approach of uniting Takeda’s experience in bringing novel oncology therapies to market with promising drug discovery technology like Mersana’s Fleximer to help drive science forward for patients with unmet medical needs," said Phil Rowlands, Interim Head, Oncology Therapeutic Area Unit, Takeda.

Merck Announces Third-Quarter 2016 Financial Results

On October 25, 2016 Merck (NYSE:MRK), known as MSD outside the United States and Canada, reported financial results for the third quarter of 2016 (Press release, Merck & Co, OCT 25, 2016, View Source [SID1234515986]).

"The latest achievements for KEYTRUDA and other recent regulatory approvals across our portfolio show that our innovation strategy is working," said Kenneth C. Frazier, chairman and chief executive officer, Merck. "We are confident that our focus on the science, along with continued commercial execution, will drive long-term results for the company and our shareholders."

Financial Summary

$ in millions, except EPS amounts Third Quarter
2016 2015

Sales $10,536 $10,073
GAAP EPS 0.78 0.64
Non-GAAP EPS that excludes items listed below1
1.07 0.96
GAAP net income2
2,184 1,826
Non-GAAP net income that excludes items listed below1,2
2,989 2,720

Worldwide sales were $10.5 billion for the third quarter of 2016, an increase of 5 percent compared with the third quarter of 2015, including a 1 percent negative impact from foreign exchange. Sales in the third quarter of 2016 include an estimated benefit of approximately $150 million of additional sales in Japan resulting from the timing of shipments in anticipation of a resource planning system Merck is implementing in the fourth quarter of 2016.

GAAP (generally accepted accounting principles) earnings per share (EPS) assuming dilution were $0.78 for the third quarter. Non-GAAP EPS of $1.07 for the third quarter excludes acquisition- and divestiture-related costs and restructuring costs. GAAP and non-GAAP EPS in the third quarter include an estimated benefit of approximately $0.04 from the timing of shipments in Japan noted above.

Pipeline Highlights

Merck significantly advanced the clinical development program for KEYTRUDA (pembrolizumab), an anti-PD-1 therapy. KEYTRUDA is now approved in the United States for the treatment of previously untreated metastatic NSCLC in patients whose tumors express high levels of PD-L1 (TPS of 50 percent or more) and previously treated metastatic NSCLC in patients whose tumors express PD-L1 (TPS of 1 percent or more), as well as advanced melanoma and previously treated recurrent or metastatic head and neck cancer (HNSCC). Earlier this month at the European Society for Medical Oncology (ESMO) (Free ESMO Whitepaper) 2016 Congress, data were presented from 30 studies evaluating the use of KEYTRUDA as a monotherapy and in combination in 23 cancers.

Lung Cancer

Yesterday the U.S. Food and Drug Administration (FDA) approved two supplemental Biologics License Applications (sBLA) for KEYTRUDA in lung cancer.
Based on the KEYNOTE-024 study, KEYTRUDA was approved for the first-line treatment of patients with metastatic NSCLC whose tumors have high PD-L1 expression (TPS of 50 percent or more) as determined by an FDA-approved test, with no EGFR or ALK genomic tumor aberrations. The data from KEYNOTE-024 were published in The New England Journal of Medicine and highlighted at ESMO (Free ESMO Whitepaper).
The FDA also approved a sBLA to include data from the pivotal KEYNOTE-010 study in which KEYTRUDA showed superior overall survival compared to chemotherapy in patients with previously treated advanced NSCLC whose tumors express PD-L1 (TPS of 1 percent or more) as determined by an FDA-approved test.
Data were presented at ESMO (Free ESMO Whitepaper) from KEYNOTE-021, Cohort G, showing superior efficacy of KEYTRUDA plus chemotherapy compared to chemotherapy alone as a first-line treatment for patients with metastatic non-squamous NSCLC regardless of PD-L1 expression. These data were simultaneously published in The Lancet Oncology.
The European Commission approved KEYTRUDA for the treatment of locally advanced or metastatic NSCLC in patients whose tumors express PD-L1 and who have received at least one prior chemotherapy regimen.
Head and Neck Cancer

The FDA approved a sBLA for KEYTRUDA for the treatment of patients with recurrent or metastatic HNSCC with disease progression on or after platinum-containing chemotherapy.
Bladder Cancer

On Friday the company announced that the KEYNOTE-045 trial investigating the use of KEYTRUDA in patients with previously treated advanced bladder cancer (urothelial cancer) met its primary endpoint. In the study, KEYTRUDA met the primary endpoint of overall survival and was superior compared to investigator choice chemotherapy.
Interim Phase 2 data were presented at ESMO (Free ESMO Whitepaper) for the first time investigating the use of KEYTRUDA in previously untreated patients with advanced bladder cancer.

Last week the U.S. Centers for Disease Control and Prevention’s (CDC) Advisory Committee on Immunization Practices voted to recommend a 2-dose vaccination regimen for GARDASIL 9 (Human Papillomavirus 9-valent Vaccine, Recombinant), a vaccine to prevent certain cancers and other diseases caused by HPV, in certain girls and boys 9 through 14 years of age, which followed the FDA’s approval of a 2-dose regimen in this adolescent population earlier this month.

The FDA accepted for review the New Drug Application (NDA) for MK-1293, an investigational follow-on biologic insulin glargine candidate for the treatment of people with type 1 and type 2 diabetes that is being developed in collaboration with and partially funded by Samsung Bioepis.

The FDA accepted for review a supplemental NDA for a once-daily formulation of ISENTRESS (raltegravir) in combination with other antiretroviral therapies for the treatment of HIV-1 infection in previously untreated patients or patients whose virus remains suppressed after treatment with an initial regimen of 400 mg of ISENTRESS twice-daily. The FDA granted a PDUFA action date of May 27, 2017.

Merck announced last week that the pivotal Phase 3 study of letermovir, an investigational antiviral medicine for prevention of cytomegalovirus infection in high-risk bone marrow transplant patients, met its primary endpoint; Merck will submit results from the study for presentation at a future scientific conference.

Third-Quarter Revenue Performance

The following table reflects sales of the company’s top pharmaceutical products, as well as total sales of Animal Health products.

$ in millions Third Quarter Change Change
Ex-Exchange
2016 2015

Total Sales $10,536 $10,073 5% 6%
Pharmaceutical 9,443 8,925 6% 6%
JANUVIA / JANUMET 1,554 1,576 -1% -2%
ZETIA / VYTORIN 944 936 1% –
GARDASIL / GARDASIL 9 860 625 38% 38%
PROQUAD / M-M-R II / VARIVAX 496 390 27% 28%
ISENTRESS 372 377 -1% 1%
KEYTRUDA 356 159 124% 128%
CUBICIN 320 325 -2% -2%
REMICADE 311 442 -30% -28%
Animal Health 865 827 5% 7%
Other Revenues 228 321 -29% 10%
Pharmaceutical Revenue

Third-quarter pharmaceutical sales increased 6 percent to $9.4 billion, reflecting higher sales in vaccines, oncology, the cardiovascular franchise and hospital acute care.

Growth in vaccines resulted from higher sales of GARDASIL 9 and GARDASIL [Human Papillomavirus Quadrivalent (Types 6, 11, 16, and 18) Vaccine, Recombinant], vaccines to prevent certain cancers and other diseases caused by HPV, primarily due to the timing of public sector purchases and increased pricing and demand in the United States; and higher sales of PROQUAD (Measles, Mumps, Rubella and Varicella Vaccine Live), driven by the timing of sales activity in the third quarter of 2015 related to the Pediatric Vaccine Stockpile of the U.S. CDC.

Growth in oncology was driven by KEYTRUDA as the company continues to launch the product with new indications globally.

Higher sales in the cardiovascular portfolio were driven by an increase in sales of ADEMPAS (riociguat), a medicine for treating pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension, which the company is now promoting and distributing in Europe; and ZETIA (ezetimibe), a medicine for lowering LDL cholesterol, primarily driven by higher sales in Japan due to the timing of shipments. U.S. sales of ZETIA were $411 million for the third quarter of 2016; in December 2016 the company will lose market exclusivity in the United States for ZETIA and anticipates a significant decline in U.S. ZETIA sales thereafter.

Growth in hospital acute care primarily resulted from higher sales of BRIDION (sugammadex) Injection 100 mg/mL, a medicine for the reversal of neuromuscular blockade induced by rocuronium bromide or vecuronium bromide in adults undergoing surgery, which had worldwide sales of $139 million for the quarter that were driven by the ongoing launch in the United States, higher sales in Europe and the timing of shipments in Japan.

Pharmaceutical sales growth also reflects the continued launch of ZEPATIER (elbasvir and grazoprevir), a medicine for the treatment of chronic hepatitis C virus genotypes 1 or 4 infection, which had sales of $164 million in the third quarter.

Third-quarter pharmaceutical sales reflect a decline in REMICADE (infliximab), a treatment for inflammatory diseases, due to the impact of biosimilar competition in the company’s marketing territories in Europe.

U.S. sales of CUBICIN (daptomycin for injection), an I.V. antibiotic, were $264 million in the third quarter. The company has lost U.S. patent protection for CUBICIN and anticipates a significant decline in U.S. CUBICIN sales going forward.

Animal Health Revenue

Animal Health sales totaled $865 million for the third quarter of 2016, an increase of 5 percent compared with the third quarter of 2015, including a 2 percent negative impact from foreign exchange. Sales growth was primarily driven by an increase in sales of companion animal and poultry products, particularly the BRAVECTO (fluralaner) line of products that kill fleas and ticks in dogs and cats for up to 12 weeks.

Earlier this month, the company announced that the U.S. Department of Agriculture approved a license for Nobivac Canine Flu Bivalent vaccine, the first vaccine to aid in the control of disease associated with both canine influenza virus H3N2 and canine influenza virus H3N8.

Third-Quarter Expense, EPS and Related Information

The table below presents selected expense information.

$ in millions Acquisition-
and
Divestiture- Certain
Related Restructuring Other
Non-
GAAP
Costs (3)
Costs Items
GAAP (1)
Third-Quarter 2016
Materials and production $3,409 $773 $36 $– $2,600
Marketing and administrative 2,393 36 1 – 2,356
Research and development 1,664 13 14 – 1,637
Restructuring costs 161 – 161 – –
Other (income) expense, net 22 12 – (6) 16

Third-Quarter 2015
Materials and production $3,761 $1,184 $70 $– $2,507
Marketing and administrative 2,472 26 17 – 2,429
Research and development 1,500 (71) 17 – 1,554
Restructuring costs 113 – 113 – –
Other (income) expense, net (170) 7 – (283) 106
GAAP Expense, EPS and Related Information

On a GAAP basis, the gross margin was 67.6 percent for the third quarter of 2016 compared to 62.7 percent for the third quarter of 2015. The increase in gross margin for the third quarter of 2016 was primarily driven by lower acquisition- and divestiture-related costs, which negatively affected gross margin by 7.7 percentage points in the third quarter of 2016 compared with 12.4 percentage points for the third quarter of 2015. The increase in gross margin also reflects the favorable effects of product mix.

Marketing and administrative expenses were $2.4 billion in the third quarter of 2016, a 3 percent decrease compared to the third quarter of 2015. The decline primarily reflects lower selling and promotional expenses as a result of prioritizing investments in key brands, the favorable impact of foreign exchange and lower restructuring costs, partially offset by higher acquisition- and divestiture-related costs.

Research and development (R&D) expenses were $1.7 billion in the third quarter of 2016, an 11 percent increase compared to the third quarter of 2015. The increase primarily reflects higher clinical development spending, as well as a reduction in the third quarter of 2015 of the estimated fair value of liabilities for contingent consideration.

Other (income) expense, net, was $22 million of expense in the third quarter of 2016 compared to $170 million of income in the third quarter of 2015, reflecting a gain of $250 million in the third quarter of 2015 on the divestiture of certain migraine clinical development programs, as well as lower foreign exchange losses in the third quarter of 2016.

GAAP EPS was $0.78 for the third quarter of 2016 compared with $0.64 for the third quarter of 2015.

Non-GAAP Expense, EPS and Related Information

The non-GAAP gross margin was 75.3 percent for the third quarter of 2016 compared to 75.1 percent for the third quarter of 2015. The increase in non-GAAP gross margin for the third quarter of 2016 reflects the favorable impact of product mix.

Non-GAAP marketing and administrative expenses were $2.4 billion in the third quarter of 2016, a 3 percent decline compared to the third quarter of 2015. The decline reflects lower selling costs and promotional spending as a result of prioritizing investments in key brands and the favorable impact of foreign exchange.

Non-GAAP R&D expenses were $1.6 billion in the third quarter of 2016, a 5 percent increase compared to the third quarter of 2015. The increase primarily reflects higher clinical development spending.

Non-GAAP EPS was $1.07 for the third quarter of 2016 compared with $0.96 for the third quarter of 2015.

Non-GAAP other (income) expense, net, was $16 million of expense in the third quarter of 2016 compared to $106 million of expense in the third quarter of 2015, reflecting lower foreign exchange losses.

A reconciliation of GAAP to non-GAAP net income and EPS is provided in the table that follows. Year-to-date results can be found in the attached tables.

$ in millions, except EPS amounts Third Quarter
2016 2015
EPS
GAAP EPS $0.78 $0.64
Difference4
0.29 0.32
Non-GAAP EPS that excludes items listed below1
$1.07 $0.96

Net Income
GAAP net income2 $2,184 $1,826
Difference 805 894
Non-GAAP net income that excludes items listed below1,2 $2,989 $2,720

Decrease (Increase) in Net Income Due to Excluded Items:
Acquisition- and divestiture-related costs3 $834 $1,146
Restructuring costs 212 217
Gain on divestiture of certain migraine clinical development programs – (250)
Other (6) (33)
Net decrease (increase) in income before taxes 1,040 1,080
Income tax (benefit) expense5
(235) (186)
Decrease (increase) in net income $805 $894
Financial Outlook

Merck has narrowed and raised its full-year 2016 GAAP EPS to be between $2.02 and $2.09. The company has narrowed and raised its full-year 2016 non-GAAP EPS to be between $3.71 to $3.78, including an approximately 1 percent negative impact from foreign exchange at mid-October exchange rates. The non-GAAP range excludes acquisition- and divestiture-related costs and costs related to restructuring programs.

Merck has narrowed and raised its full-year 2016 revenue range to be between $39.7 billion and $40.2 billion, including an approximately 2 percent negative impact from foreign exchange at mid-October exchange rates.

The following table summarizes the company’s 2016 financial guidance.

GAAP Non-GAAP 1

Revenue $39.7 to $40.2 billion $39.7 to $40.2 billion*
Marketing and administrative expenses Lower than 2015 Lower than 2015
R&D expenses Higher than 2015 Higher than 2015
Effective tax rate 26.0% to 27.0% 21.5% to 22.5%
EPS $2.02 to $2.09 $3.71 to $3.78
*The company does not have any non-GAAP adjustments to revenue.
A reconciliation of anticipated 2016 GAAP EPS to non-GAAP EPS and the items excluded from non-GAAP EPS are provided in the table below.

$ in millions, except EPS amounts

Full-Year 2016

GAAP EPS $2.02 to $2.09
Difference4 1.69
Non-GAAP EPS that excludes items listed below1 $3.71 to $3.78

Acquisition- and divestiture-related costs $4,750
Restructuring costs 900
Net decrease (increase) in income before taxes 5,650
Estimated income tax (benefit) expense (955)
Decrease (increase) in net income $4,695
The expected full-year 2016 GAAP effective tax rate of 26.0 to 27.0 percent reflects an unfavorable impact of approximately 4.5 percentage points from the above items.

Total Employees

As of Sept. 30, 2016, Merck had approximately 68,000 employees worldwide.

Lilly Reports Third-Quarter 2016 Results

On October 25, 2016 Eli Lilly and Company (NYSE: LLY) reported financial results for the third quarter of 2016 (Press release, Eli Lilly, OCT 25, 2016, View Source [SID1234515985]).

$ in millions, except per share data
Third Quarter
%

2016

2015
Change
Revenue
$
5,191.7

$
4,959.7

5%
Net Income – Reported
778.0

799.7

(3)%
EPS – Reported
0.73

0.75

(3)%

Net Income – Non-GAAP
931.0

949.6

(2)%
EPS – Non-GAAP
0.88

0.89
(1)%

Certain financial information for 2016 and 2015 is presented on both a reported and a non-GAAP basis. Some numbers in this press release may not add due to rounding. Reported results were prepared in accordance with generally accepted accounting principles (GAAP) and include all revenue and expenses recognized during the periods. Non-GAAP measures exclude the items described in the reconciliation tables later in the release. The company’s 2016 financial guidance is also being provided on both a reported and a non-GAAP basis. The non-GAAP measures are presented to provide additional insights into the underlying trends in the company’s business.

"Lilly’s volume-driven growth in the third quarter was once again led by our portfolio of recently approved medicines including Trulicity, Cyramza, Taltz and Jardiance," said John C. Lechleiter, Ph.D., Lilly’s chairman, president and chief executive officer. "Our pipeline also continues to advance with a wide array of promising treatments for conditions from Alzheimer’s disease to diabetes and cancer. Our focus on innovation and bringing important new medicines to the people who need them is leading Lilly into a new era of growth for the benefit of patients and shareholders alike."

Key Events Over the Last Three Months

Regulatory

The U.S. Food and Drug Administration (FDA) granted approval of Lartruvo (olaratumab), in combination with doxorubicin, for the treatment of adults with soft tissue sarcoma with a histologic subtype for which an anthracycline-containing regimen is appropriate and which is not amenable to curative treatment with radiotherapy or surgery. Lartruvo’s indication was approved under the Accelerated Approval process and is based on data from a Phase 2 trial. Continued approval for this indication may be contingent upon verification and description of clinical benefit in a confirmatory trial.

The company and AstraZeneca received FDA Fast Track designation for the development program in Alzheimer’s disease for AZD3293, an oral beta secretase cleaving enzyme (BACE) inhibitor currently in Phase 3 clinical trials. The FDA’s Fast Track program is designed to expedite the development and review of new therapies to treat serious conditions and address key unmet medical needs.

The European Medicines Agency’s (EMA) Committee for Medicinal Products for Human Use (CHMP) issued positive opinions recommending:
Conditional marketing authorization for Lartruvo (olaratumab), in combination with doxorubicin, for the treatment of adults with advanced soft tissue sarcoma not amenable to curative treatment with radiotherapy or surgery and who have not been previously treated with doxorubicin.

Marketing authorization for Glyxambi, a single tablet combining Jardiance (empagliflozin) and Trajenta (linagliptin), for use in adults with type 2 diabetes. Glyxambi, Jardiance and Trajenta are part of the company’s alliance with Boehringer Ingelheim.
Clinical

Following a pre-planned interim analysis, an independent Data Monitoring Committee recommended continuing a Phase 3 trial of abemaciclib without modification as the interim efficacy criteria were not met. The trial will continue into the first half of 2017. The trial compares abemaciclib with fulvestrant versus placebo with fulvestrant in women with hormone-receptor-positive, human epidermal growth factor receptor 2-negative locally advanced or metastatic breast cancer.

Taltz met its primary endpoint of ACR20 response rate in a Phase 3 study investigating the treatment of psoriatic arthritis. Taltz showed improved signs and symptoms in adult patients who have previously been treated with a biologic disease-modifying antirheumatic drug. Lilly plans to submit to the FDA during the first half of 2017.

Earlier this month, last patient visit was achieved in the Phase 3 trial evaluating solanezumab in patients with mild Alzheimer’s disease. As a result, the company plans to issue a top-line press release before the end of the year.
Business Development/Other

The company announced an agreement to acquire Boehringer Ingelheim Vetmedica, Inc.’s U.S. feline, canine and rabies vaccines portfolio, as well as a fully integrated manufacturing and research and development site, for approximately $885 million, including the estimated cost of acquired inventory. The acquisition is anticipated to close by early 2017, subject to approval by the U.S. Federal Trade Commission and also subject to both antitrust approval of and the closing of a previously announced asset swap transaction between Boehringer Ingelheim and Sanofi SA.

The U.S. Patent and Trademark Office determined that the method-of-use patents for Effient are invalid. The patents would have provided intellectual property protection until 2023. The owners of the patent, Daiichi Sankyo and Ube, have appealed this ruling.
The company announced that John C. Lechleiter will retire as president and chief executive officer from the company effective December 31, 2016. Lechleiter will continue on Lilly’s board of directors until May 31, 2017, serving as non-executive chairman. David A. Ricks, currently senior vice president and president, Lilly Bio-Medicines, will assume the role of president and chief executive officer and join the board on January 1, 2017. He will become chairman of the board on June 1, 2017.
Third-Quarter Reported Results

In the third quarter of 2016, worldwide revenue was $5.192 billion, an increase of 5 percent compared with the third quarter of 2015. The increase in revenue was driven by a 4 percent increase in volume and 1 percent favorable impact of foreign exchange rates, partially offset by 1 percent due to lower realized prices. The increase in worldwide volume was driven by new pharmaceutical products, including Trulicity, Cyramza, Taltz and Jardiance, as well as Humalog and Erbitux (due to the transfer of commercialization rights in North America to Lilly), partially offset by lower volumes for Zyprexa, animal health products, Alimta and Cialis.

Revenue in the U.S. increased 12 percent to $2.838 billion, driven by increased volume for several pharmaceutical products, including Trulicity, Humalog, Taltz and Jardiance, as well as Erbitux (due to the transfer of commercialization rights in North America to Lilly), partially offset by lower volumes for animal health products, Zyprexa and Cialis. Higher realized prices in the U.S., primarily for Cialis and Forteo, were largely offset by lower realized prices for Humalog. When the Cymbalta patent expired at the end of 2013, the return reserve was increased to reflect expected product returns. As a result of lower-than-expected return volume, a reduction of approximately $145 million in the Cymbalta return reserve increased U.S. revenue in the third quarter of 2016, favorably impacting both volume and price.

Revenue outside the U.S. decreased 3 percent to $2.354 billion, as lower realized prices and volume, primarily from the losses of exclusivity for Cymbalta in Europe and Canada, Zyprexa in Japan and Alimta in several countries, more than offset increased volume for several recently launched pharmaceutical products, including Trulicity and Cyramza, and the favorable impact of foreign exchange rates, primarily the Japanese yen, partially offset by other foreign currencies.

Gross margin increased 2 percent to $3.791 billion in the third quarter of 2016 compared with the third quarter of 2015. Gross margin as a percent of revenue was 73.0 percent, a decline of 2.1 percentage points compared with the third quarter of 2015. The decline in gross margin percent was primarily due to a lower benefit from foreign exchange rates on international inventories sold and, to a lesser extent, the transfer of Erbitux commercialization rights in North America.

Operating expenses in the third quarter of 2016, defined as the sum of research and development and marketing, selling and administrative expenses, were $2.802 billion, an increase of 3 percent compared with the third quarter of 2015. Research and development expenses increased 8 percent to $1.236 billion, driven primarily by higher late-stage clinical development costs. Marketing, selling and administrative expenses decreased 1 percent to $1.565 billion, as reduced spending on late-life-cycle products was largely offset by expenses related to new products.

The company recognized asset impairment, restructuring and other special charges of $45.5 million and $42.4 million in the third quarters of 2016 and 2015, respectively, primarily related to integration and severance costs for Novartis Animal Health.

Operating income in the third quarter of 2016 was $943.5 million, a decline of 2 percent compared with the third quarter of 2015, driven by higher research and development expenses, partially offset by higher gross margin.

Other income (expense) was income of $27.2 million in the third quarter of 2016, compared with income of $86.5 million in the third quarter of 2015. The decline in other income was driven by lower net gains on investments in the third quarter of 2016 compared with 2015.

The effective tax rate was 19.9 percent in the third quarter of 2016, compared with 23.7 percent in the third quarter of 2015. The decline in the effective tax rate for the third quarter of 2016 is primarily due to the benefit of certain U.S. tax provisions, including the R&D tax credit, reinstated for 2016.

In the third quarter of 2016, net income and earnings per share decreased 3 percent to $778.0 million, and $0.73, respectively, compared with $799.7 million and $0.75, respectively, in the third quarter of 2015. The declines in net income and earnings per share were driven by lower other income and lower operating income, partially offset by a lower effective tax rate.

Third-Quarter 2016 Non-GAAP Measures

On a non-GAAP basis, third-quarter 2016 gross margin increased 3 percent to $3.967 billion. Gross margin as a percent of revenue was 76.4 percent, a decline of 1.4 percentage points compared with the third quarter of 2015. The decline in gross margin percent was primarily due to a lower benefit from foreign exchange rates on international inventories sold.

Operating income decreased $10.7 million, or 1 percent, to $1.167 billion in the third quarter of 2016, as higher operating expenses were largely offset by higher gross margin.

The effective tax rate was 22.0 percent in the third quarter of 2016, compared with 24.9 percent in the third quarter of 2015. The decline in the effective tax rate for the third quarter of 2016 is primarily due to the benefit of certain U.S. tax provisions, including the R&D tax credit, reinstated for 2016.

Net income decreased 2 percent to $931.0 million, and earnings per share decreased 1 percent to $0.88 in the third quarter of 2016, compared with $949.6 million and $0.89, respectively, in the third quarter of 2015. The declines in net income and earnings per share were driven by lower other income and, to a lesser extent, lower operating income, partially offset by a lower effective tax rate.

For further detail of non-GAAP measures, see the reconciliation below as well as the Reconciliation of GAAP Reported to Selected Non-GAAP Adjusted Information table later in this press release.

Third Quarter

2016

2015
% Change
Earnings per share (reported)
$
0.73

$
0.75

(3)%
Amortization of intangible assets
.11

.10

Asset impairment, restructuring and other special charges
.03

.03

Novartis Animal Health inventory step-up
—

.01

Earnings per share (non-GAAP)
$
0.88

$
0.89

(1)%

Numbers may not add due to rounding.

Year-to-Date Results

For the first nine months of 2016, worldwide revenue increased 6 percent to $15.462 billion compared with $14.583 billion in the same period in 2015. Reported net income and earnings per share were $1.966 billion and $1.85, respectively. Net income and earnings per share, on a non-GAAP basis, were $2.722 billion and $2.57, respectively.

For further detail, see the reconciliation below as well as the Reconciliation of GAAP Reported to Selected Non-GAAP Adjusted Information table later in this release.

Year-to-Date

2016

2015
% Change
Earnings per share (reported)
$
1.85

$
1.81

2%
Amortization of intangible assets
.34

.29

Asset impairment, restructuring and other special charges
.19

.15

Venezuela charge
.19

—

Acquired in-process research and development
—

.20

Novartis Animal Health inventory step-up
—

.10

Net charge related to repurchase of debt
—

.09

Earnings per share (non-GAAP)
$
2.57

$
2.65

(3)%

Numbers may not add due to rounding.

Select Revenue Highlights

(Dollars in millions)

Third Quarter

Year-to-Date

Established Pharmaceutical Products
2016
2015
% Change
2016
2015
% Change

Humalog
$ 640.8
$ 705.0
(9)%
$ 1,949.0
$ 2,043.3
(5)%

Cialis
588.2
566.1
4%
1,795.3
1,672.3
7%

Alimta
570.4
628.5
(9)%
1,741.7
1,865.8
(7)%

Forteo
391.2
348.9
12%
1,077.5
970.4
11%

Humulin
322.0
316.7
2%
1,010.6
948.8
7%

Cymbalta
313.5
242.9
29%
748.7
804.0
(7)%

Strattera
198.8
196.9
1%
611.5
562.4
9%

Zyprexa
148.9
237.9
(37)%
572.3
711.2
(20)%

Erbitux
184.6
85.9
115%
533.3
308.8
73%

Effient
127.7
132.1
(3)%
394.3
382.7
3%

New Pharmaceutical Products

Trulicity
243.6
73.7
NM
588.5
136.2
NM

Cyramza
159.0
111.2
43%
437.0
266.4
64%

Jardiance(a)
47.5
15.4
NM
125.8
45.7
NM

Taltz
32.5
—
NM
51.9
—
NM

Basaglar
19.4
3.8
NM
46.6
3.9
NM

Portrazza
5.3
—
NM
11.0
—
NM

Subtotal
507.3
204.1
NM
1,260.8
452.2
NM

Animal Health
706.2
778.8
(9)%
2,320.5
2,369.3
(2)%

Total Revenue
5,191.7
4,959.7
5%
15,461.6
14,583.1
6%

(a) Jardiance includes Glyxambi and Synjardy
NM – not meaningful

Selected Established Pharmaceutical Products

Humalog

For the third quarter of 2016, Humalog revenues decreased 9 percent compared with the third quarter of 2015 to $640.8 million. Revenues in the U.S. decreased 14 percent to $378.8 million, driven by lower realized prices, partially offset by increased demand. The decrease in realized prices for the third quarter of 2016 also included changes in estimates for rebates and discounts. Revenues outside the U.S. decreased 1 percent to $262.0 million, as the unfavorable impact of foreign exchange rates was largely offset by higher realized prices.

Cialis

Cialis revenues for the third quarter of 2016 increased 4 percent compared with the third quarter of 2015 to $588.2 million. U.S. revenues of Cialis were $348.5 million, an 11 percent increase compared with the third quarter of 2015, driven by higher realized prices, partially offset by lower demand. Revenues of Cialis outside the U.S. decreased 5 percent to $239.7 million, driven by decreased volume and the unfavorable impact of foreign exchange rates, partially offset by higher realized prices.

Alimta

For the third quarter of 2016, Alimta generated revenues of $570.4 million, a decline of 9 percent compared with the third quarter of 2015. U.S. revenues of Alimta decreased 7 percent to $277.0 million, driven primarily by decreased demand due to competitive pressure. Revenues outside the U.S. decreased 12 percent to $293.4 million, driven primarily by the loss of exclusivity in several countries, partially offset by the favorable impact of foreign exchange rates.

Forteo

Third-quarter 2016 revenues of Forteo were $391.2 million, a 12 percent increase compared with the third quarter of 2015. U.S. revenues of Forteo increased 29 percent to $206.7 million, driven by higher realized prices. Revenues outside the U.S. decreased 2 percent to $184.5 million, driven by lower realized prices, partially offset by the favorable impact of foreign exchange rates.

Humulin

Humulin revenues for the third quarter of 2016 increased 2 percent compared with the third quarter of 2015 to $322.0 million. U.S. revenues increased 5 percent to $195.6 million, driven by increased demand, partially offset by lower realized prices. Revenues outside the U.S. decreased 4 percent to $126.4 million, driven by the unfavorable impact of foreign exchange rates and lower realized prices, partially offset by increased volume.

New Pharmaceutical Products

Trulicity

Third-quarter 2016 revenues of Trulicity were $243.6 million. U.S. revenues of Trulicity were $188.7 million, driven by growth in the GLP-1 market and increased share of market for Trulicity. Revenues of Trulicity outside the U.S. were $54.9 million.

Cyramza

For the third quarter of 2016, Cyramza revenues were $159.0 million, an increase of 43 percent compared with the third quarter of 2015. U.S. revenues were $67.0 million, a decrease of 12 percent, due to competitive pressure primarily in the non-small cell lung cancer indication. Revenues outside the U.S. were $92.0 million, primarily due to strong uptake for the gastric cancer indication in Japan.

Jardiance

The company’s revenues for Jardiance during the third quarter of 2016 were $47.5 million. U.S. revenues were $32.9 million, driven by growth in the SGLT2 class and increased share of market for Jardiance. Revenues outside the U.S. were $14.6 million. Jardiance is part of the company’s alliance with Boehringer Ingelheim, and Lilly reports as revenue a portion of Jardiance’s gross margin.

Taltz

For the third quarter of 2016, Taltz, a treatment for moderate-to-severe plaque psoriasis, generated revenues of $32.5 million. Taltz launched in the U.S. in April 2016 and began launching in Europe in July 2016.

Basaglar

For the third quarter of 2016, Basaglar, a treatment to control high blood sugar in adults and children with type 1 diabetes and adults with type 2 diabetes, generated revenues of $19.4 million, driven by early uptake in Japan and various European countries. Basaglar is part of the company’s alliance with Boehringer Ingelheim.

Portrazza

For the third quarter of 2016, Portrazza, a first-line treatment for metastatic squamous non-small cell lung cancer, generated revenues of $5.3 million.

Animal Health

In the third quarter of 2016, animal health revenues totaled $706.2 million, a decline of 9 percent compared with the third quarter of 2015. U.S. animal health revenues decreased 14 percent to $338.6 million, primarily due to wholesaler buying patterns for companion animal products and decreased revenues for food animal products due to market access pressures. Animal health revenues outside the U.S. decreased 5 percent to $367.6 million, negatively impacted by food animal products, primarily due to macroeconomic conditions in Latin America.

2016 Financial Guidance

The company has revised certain elements of its 2016 financial guidance. Full-year 2016 earnings per share are now expected to be in the range of $2.66 to $2.76 on a reported basis. On a non-GAAP basis, full-year 2016 earnings per share are still expected to be in the range of $3.50 to $3.60.

2016
Expectations

Earnings per share (reported)
$2.66 to $2.76

Amortization of intangible assets
.42

Asset impairment, restructuring and other special charges, including Novartis Animal Health integration costs and closure of an animal health manufacturing facility in Ireland
.23

Venezuela charge
.19

Earnings per share (non-GAAP)
$3.50 to $3.60

Numbers may not add due to rounding.

The company now expects 2016 revenue of between $20.8 billion and $21.2 billion. Excluding the impact of foreign exchange rates, the company expects revenue growth from a number of established products including Trajenta, Cialis, Forteo, Strattera, Erbitux and animal health products, as well as higher revenues from new products including Cyramza, Jardiance, Trulicity, Portrazza, Basaglar and Taltz. The company expects this revenue growth to be partially offset by lower revenue from Alimta as a result of increased competitive pressures.

Gross margin percentage is still expected to be approximately 73 percent on a reported basis, and 76 percent on a non-GAAP basis.

Marketing, selling and administrative expenses are now expected to be in the range of $6.2 billion to $6.4 billion. Research and development expenses are still expected to be in the range of $4.9 billion to $5.1 billion.

Other income (expense) is now expected to be in a range between $150 million and $100 million of expense on a reported basis. On a non-GAAP basis, other income (expense) is now expected to be in a range between $50 and $100 million of income.

The 2016 tax rate is still expected to be approximately 21 percent.

Capital expenditures are now expected to be approximately $1.0 billion.

The following table summarizes the company’s 2016 financial guidance:

2016 Guidance

Prior

Revised
Revenue
$20.6 to $21.1 billion

$20.8 to $21.2 billion

Gross Margin % of Revenue (reported)
Approx. 73%

Unchanged
Gross Margin % of Revenue (non-GAAP)
Approx. 76%

Unchanged

Marketing, Selling & Administrative
$6.1 to $6.3 billion

$6.2 to $6.4 billion

Research & Development
$4.9 to $5.1 billion

Unchanged

Other Income/(Expense) (reported)
$(200 million) to $(125 million)

$(150 million) to $(100 million)
Other Income/(Expense) (non-GAAP)
$0 to $75 million

$50 million to $100 million

Tax Rate
Approx. 21.0%

Unchanged

Earnings per share (reported)
$2.68 to $2.78

$2.66 to $2.76
Earnings per share (non-GAAP)
$3.50 to $3.60

Unchanged

Capital Expenditures
Approx. $1.1 billion

Approx. $1.0 billion

Non-GAAP adjustments are consistent with the earnings per share table above.

Novartis delivered solid third quarter with Growth Products[1] offsetting Gleevec patent expiration; several positive readouts for potential blockbusters

Q3 net sales (-1% cc[2] and USD) broadly in line with prior year due to strong performance of Growth Products
Gilenya (USD 790 million, +15% cc) continued double-digit growth
Cosentyx (USD 301 million) on track for blockbuster status in first full year after approval
Oncology growth drivers including Tafinlar + Mekinist (USD 172 million, +29% cc), Promacta/Revolade (USD 168 million, +44% cc) and Jakavi (USD 149 million, +47% cc)
Sandoz Biopharmaceuticals[1] (USD 262 million, +41% cc) delivered strong growth

Q3 core[2] operating income down 3% (cc and USD), reflecting generic erosion and growth investments, partially offset by productivity initiatives
Core M&S up 0.8 percentage points (cc) to 24.3% of sales, supporting new launches and Alcon
Core operating income margin declined 0.6 percentage points (cc)
Core EPS was USD 1.23 (-3% cc)
Free cash flow[2] was USD 2.6 billion (-7% USD) in Q3; USD 6.5 billion (+3% USD) in 9M

Q3 net income up 7% (cc and USD) from higher operating income and income from associated companies

Strong pipeline progress with key data readouts, filings and regulatory decisions in Q3
LEE011 plus letrozole demonstrated superior PFS as first-line treatment of HR+/HER2- advanced breast cancer vs. letrozole alone; granted FDA Breakthrough Therapy designation
BAF312 in SPMS[3] met primary endpoint, significantly reducing risk of disability progression
AMG 334 met primary endpoint in first Phase III episodic migraine study
Ilaris received three new FDA approvals for Periodic Fever Syndromes
Sandoz biosimilar etanercept, Erelzi, received FDA approval

Entresto (USD 53 million in Q3) grew steadily; FY sales guidance of ~USD 0.2 billion confirmed

Continuing to invest in Alcon growth plan
Contact lenses delivered another quarter of growth; Dailies Total1 Multifocal launches in US and EU expected to continue growth trajectory
Innovation continued to accelerate in Surgical with FDA approvals for CyPass, UltraSert Toric IOL

2016 Outlook confirmed
Net sales expected to be broadly in line with prior year (cc)
Core operating income expected to be broadly in line or decline low single digit (cc)

Key figures[2]
Continuing operations[4]
Q3 2016 Q3 2015 % change 9M 2016 9M 2015 % change
USD m USD m USD cc USD m USD m USD cc
Net sales 12 126 12 265 -1 -1 36 196 36 894 -2 0
Operating income 2 269 2 234 2 1 6 813 7 300 -7 -3
Net income 1 945 1 812 7 7 5 762 5 974 -4 1
EPS (USD) 0.81 0.75 8 8 2.42 2.48 -2 2
Free cash flow 2 591 2 788 -7 6 479 6 317 3
Core
Operating income 3 381 3 489 -3 -3 9 974 10 733 -7 -4
Net income 2 938 3 061 -4 -4 8 656 9 334 -7 -4
EPS (USD) 1.23 1.27 -3 -3 3.63 3.87 -6 -3

On October 25, 2016 Novartis reported solid third quarter results with Growth Products[1] offsetting Gleevec patent expiration (Press release, Novartis, OCT 25, 2016, View Source [SID1234515980]).

Commenting on the results, Joseph Jimenez, CEO of Novartis, said:
"Novartis delivered a solid Q3 despite the Gleevec generic impact in the US, due to the strong performance of our Growth Products. We continued to drive innovation, with positive pipeline readouts for LEE011 in advanced breast cancer, BAF312 in SPMS and AMG 334 in episodic migraine. We are continuing to invest for the future, as we manage the Gleevec loss of exclusivity in 2016 and 2017."

[1] Growth Products are defined on page 2. Biopharmaceuticals are defined on page 3.
[2] Constant currencies (cc), core results and free cash flow are non-IFRS measures. An explanation of non-IFRS measures can be found on page 46 of the Condensed Interim Financial Report. Unless otherwise noted, all growth rates in this Release refer to same period in prior year.
[3] SPMS = secondary progressive multiple sclerosis.
[4] Refers to continuing operations, defined on page 38 of the Condensed Interim Financial Report.

GROUP REVIEW

Novartis laid out five priorities for 2016: deliver strong financial results; strengthen innovation; improve Alcon performance; capture cross-divisional synergies; and build a higher-performing organization. We made progress in each of these areas in the third quarter.

Financial results

On January 27, 2016, Novartis announced plans to further focus its divisions, integrating businesses that share therapeutic areas to better leverage our development and marketing capabilities. These plans included a new divisional structure. In compliance with International Financial Reporting Standards (IFRS), Novartis updated its segment financials to reflect the new structure, both for the current and prior year, to aid comparability of year-on-year results. As a result, all comparisons of divisional results from 2016 to 2015 reflect the new structure.

In addition, as a result of the portfolio transformation transactions completed in 2015, Novartis reported the Group’s financial results in 2015 as "continuing operations" and "discontinued operations." All comparisons from 2016 to 2015 are versus continuing operations, unless otherwise noted. See page 38 of the Condensed Interim Financial Report for a full explanation.

Third quarter

Continuing operations

Net sales were USD 12.1 billion (-1%, -1% cc) in the third quarter, as volume growth of 5 percentage points was more than offset by the negative impact of generic competition (-4 percentage points) and pricing (-2 percentage points). Growth Products[1] contributed USD 4.3 billion or 36% of net sales, up 20% (USD) over the prior-year quarter.

Operating income was USD 2.3 billion (+2%, +1% cc). Core adjustments amounted to USD 1.1 billion (2015: USD 1.3 billion), broadly in line with the prior-year quarter.

Core operating income was USD 3.4 billion (-3%, -3% cc). Core operating income margin in constant currencies decreased 0.6 percentage points, mainly due to investments behind new launches and the Alcon growth plan, partially offset by productivity improvements. Currency had a positive impact of 0.1 percentage points, resulting in a net decrease of 0.5 percentage points in US dollar terms to 27.9% of net sales.

Net income was USD 1.9 billion (+7%, +7% cc), up more than operating income mainly due to higher income from associated companies.

EPS was USD 0.81 (+8%, +8% cc), up more than net income due to a reduction in the number of shares outstanding.

Core net income was USD 2.9 billion (-4%, -4% cc), broadly in line with core operating income.

Core EPS was USD 1.23 (-3%, -3% cc), down less than core net income due to a reduction in the number of shares outstanding.

Free cash flow was USD 2.6 billion (-7% USD), a decrease of USD 0.2 billion compared to the prior-year quarter. The decrease was driven by higher net investments in intangible assets, mainly due to the ofatumumab milestone payment, which more than offset an increase in cash flows from operating activities.

[1] "Growth Products" are an indicator of the rejuvenation of the portfolio, and comprise products launched in a key market (EU, US, Japan) in 2011 or later, or products with exclusivity in key markets until at least 2020 (except Sandoz, which includes only products launched in the last 24 months). They include the acquisition effect of the GSK oncology assets.

Innovative Medicines (formerly named the Pharmaceuticals Division) net sales were USD 8.2 billion (-1%, -1% cc) in the third quarter. Volume contributed 5 percentage points to sales growth. Generic competition had a negative impact of 5 percentage points and pricing had a negative impact of 1 percentage point, both largely due to Gleevec/Glivec genericization in the US. Growth Products grew 21% (cc) to USD 3.8 billion, or 46% of division net sales.

Operating income was USD 2.0 billion (+8%, +9% cc). Core operating income was USD 2.7 billion (-2%, -1% cc). Core operating income margin in constant currencies was flat; currency had a negative impact of 0.3 percentage points, resulting in a net decrease of 0.3 percentage points to 32.7% of net sales.

Sandoz net sales were USD 2.5 billion (-1%, -1% cc) in the third quarter, as volume growth of 5 percentage points was offset by 6 percentage points of price erosion. Performance was impacted by significantly lower launch activity in the US compared to a strong prior-year quarter. Global sales of Biopharmaceuticals[1] grew 41% (cc) to USD 262 million. Anti-Infectives franchise sales (partner label and finished dosage form sales) were USD 339 million (-2% cc), reflecting discontinuation of low-margin products.

Operating income was USD 354 million (-9%, -9% cc). Core operating income was USD 530 million (0%, +1% cc). Core operating income margin in constant currencies increased by 0.2 percentage points; currency had a positive impact of 0.1 percentage points, resulting in a net increase to 21.1% of net sales.

Alcon net sales were USD 1.4 billion (-2%, -3% cc) in the third quarter. Surgical sales (-4% cc) were down, impacted by lower IOL sales, mainly due to competitive pressures, and a continued decline in cataract equipment, primarily LenSx, which has reached high penetration in its market segment. The strong installed cataract equipment base continued to generate good growth of consumables (+4% cc). Vision Care sales (0% cc) were flat, as contact lenses delivered another quarter of growth, benefitting from the continued strong performance of Dailies Total1, offsetting a slight decline in contact lens care. Launches of Dailies Total1 Multifocal in the US and EU are expected to continue the growth trajectory in contact lenses.

Operating loss was USD 50 million, compared to an income of USD 57 million in the prior-year quarter. Core operating income was USD 206 million (-32%, -35% cc), primarily impacted by declining sales and increased investments in M&S behind the growth plan. Core operating income margin in constant currencies decreased by 6.8 percentage points; currency had a positive impact of 0.5 percentage points, resulting in a net decrease of 6.3 percentage points to 14.3% of net sales.

[1] Biopharmaceuticals include biosimilars, biopharmaceutical contract manufacturing and Glatopa.

Total Group

For the total Group, net income amounted to USD 1.9 billion, broadly in line with the prior-year quarter, and basic earnings per share was USD 0.81.

Total Group free cash flow amounted to USD 2.6 billion, compared to USD 2.8 billion in the prior-year quarter.

Nine months

Continuing operations

Net sales were USD 36.2 billion (-2%, 0% cc) in the first nine months. Growth Products contributed USD 12.5 billion or 35% of net sales, up 21% (USD) over the prior-year period.

Operating income was USD 6.8 billion (-7%, -3% cc). Core adjustments amounted to USD 3.2 billion (2015: USD 3.4 billion), broadly in line with the prior-year period.

Core operating income was USD 10.0 billion (-7%, -4% cc). Core operating income margin in constant currencies decreased 1.2 percentage points, mainly due to the loss of exclusivity on Gleevec, investments behind new launches and the Alcon growth plan. Currency had a negative impact of 0.3 percentage points, resulting in a net decrease of 1.5 percentage points to 27.6% of net sales.

Net income was USD 5.8 billion (-4%, +1% cc), with the increase relative to the operating income decline due to higher income from associated companies.

EPS was USD 2.42 (-2%, +2% cc), up more than net income due to a reduction in the number of shares outstanding.

Core net income was USD 8.7 billion (-7%, -4% cc), in line with core operating income.

Core EPS was USD 3.63 (-6%, -3% cc), down less than core net income due to a reduction in the number of shares outstanding.

Free cash flow was USD 6.5 billion (+3% USD), an increase of USD 0.2 billion compared to the prior-year period. The increase was driven by lower net investments in property, plant, equipment and intangible assets, partially offset by lower cash flows from operating activities.

Innovative Medicines net sales were USD 24.3 billion (-2%, 0% cc) in the first nine months, as volume growth (+6 percentage points) was fully offset by the impact of generic competition (-6 percentage points). Pricing impact was negligible.

Operating income was USD 6.1 billion (-4%, 0% cc). Core operating income was USD 7.9 billion (-6%, -2% cc). Core operating income margin in constant currencies decreased by 0.7 percentage points, mainly due to launch investments for Entresto and Cosentyx, partially offset by productivity improvements; currency had a negative impact of 0.6 percentage points, resulting in a net decrease of 1.3 percentage points to 32.7% of net sales.

Sandoz net sales were USD 7.5 billion (0%, +2% cc) in the first nine months, as volume growth of 8 percentage points more than offset 6 percentage points of price erosion. Global sales of Biopharmaceuticals grew 32% (cc) to USD 724 million, benefitting from the performance of prior-year launches in the US (Glatopa in June 2015 and Zarxio in September 2015). Anti-Infectives franchise sales were USD 1.0 billion (-2% cc), reflecting discontinued low-margin products and the weak flu season in the first quarter.

Operating income was USD 1.1 billion (+7%, +12% cc). Core operating income was USD 1.5 billion (0%, +4% cc). Core operating income margin in constant currencies increased by 0.3 percentage points; currency had a negative impact of 0.3 percentage points, resulting in flat 20.6% of net sales.

Alcon net sales were USD 4.4 billion (-4%, -2% cc) in the first nine months. Surgical sales (-3% cc) reflected weaker performance of IOLs, mainly due to competitive pressures, and the slowdown of equipment sales, primarily LenSx in Cataract and Wavelight in Refractive, partially offset by continued solid growth of cataract consumables (+4% cc). Vision Care sales (-1% cc) were impacted by competitive pressures in the US, partially offset by continued strong global growth of Dailies Total1.

Operating loss was USD 12 million, compared to an income of USD 252 million in the prior-year period. Core operating income was USD 687 million (-29%, -25% cc), primarily impacted by increased investments in M&S and R&D behind the growth plan and the impact of the decline in sales. Core operating income margin in constant currencies decreased by 5.1 percentage points; currency had a negative impact of 0.6 percentage points, resulting in a net decrease of 5.7 percentage points to 15.7% of net sales.

Total Group

For the total Group, net income amounted to USD 5.8 billion compared to USD 16.7 billion in the prior-year period, and basic earnings per share decreased to USD 2.42 from USD 6.94. The prior-year period benefitted from the net income from discontinued operations, which included USD 12.8 billion of exceptional pre-tax divestment gains from the portfolio transformation transactions and USD 0.5 billion of additional pre-tax transaction related expenses.

Total Group free cash flow amounted to USD 6.5 billion, compared to USD 6.0 billion in the first nine months of 2015.

Key growth drivers

Underpinning our financial results in the third quarter is a continued focus on key growth drivers, including Gilenya, Tasigna, Cosentyx, Tafinlar + Mekinist, Jakavi, Promacta/Revolade and Entresto, as well as Biopharmaceuticals and Emerging Growth Markets.

Growth Products

Growth Products, an indicator of the ongoing rejuvenation of our portfolio, contributed 36% of Group net sales in the third quarter, and were up 20% (USD). In Innovative Medicines, Growth Products contributed 46% of division net sales in the quarter, and sales for these products were up 21% (cc).

Gilenya (USD 790 million, +15% cc), a once-daily oral medicine for relapsing forms of multiple sclerosis, continued to grow double-digit, mainly due to volume growth.

Tasigna (USD 441 million, +8% cc) showed solid growth in the quarter, despite the entry of multiple generic versions of Gleevec in the US.

Cosentyx (USD 301 million) continued its strong launch trajectory in the third quarter. Across its three approved indications, Cosentyx has been used to treat more than 50,000 patients in a post-marketing setting to date.

Tafinlar + Mekinist (USD 172 million, +29% cc) continued to show strong growth, particularly in Europe, as the first approved combination therapy for patients with BRAF V600 mutation-positive unresectable or metastatic melanoma.

Promacta/Revolade (USD 168 million, +44% cc) grew at a strong double-digit rate, driven by continued worldwide uptake as well as growth of the thrombopoietin class for chronic immune (idiopathic) thrombocytopenic purpura.

Jakavi (USD 149 million, +47% cc) growth was driven by patient gains in the myelofibrosis indication globally and the launch of the polycythemia vera indication in key markets.

Entresto (USD 53 million) continued to grow steadily with approvals in 64 countries to date and continued progress with reimbursement around the world. In the US, expansion of the primary care field force is underway, and in Europe, uptake continues to be faster. Entresto sales are expected to be approximately USD 0.2 billion for full year 2016.

Sandoz Biopharmaceuticals (USD 262 million, +41% cc), including Glatopa and Zarxio, delivered strong growth.

Emerging Growth Markets

Net sales in Emerging Growth Markets – which comprise all markets except the US, Canada, Western Europe, Japan, Australia and New Zealand – grew 6% (cc) in the third quarter, led by China (+6% cc), Russia (+9% cc) and India (+10% cc).

Strengthen innovation

The third quarter saw pipeline progress with positive regulatory decisions and significant clinical trial data released. Key developments are included below.

New approvals and regulatory opinions

The FDA granted three simultaneous approvals for the expanded use of Ilaris (canakinumab) to treat three rare and distinct types of Periodic Fever Syndromes.

In October, the CHMP recommended approval for Lucentis (ranibizumab) to treat patients with visual impairment due to choroidal neovascularization (CNV) associated with causes other than neovascular age-related macular degeneration or myopic CNV.

The FDA approved Sandoz biosimilar etanercept, Erelzi (etanercept-szzs), for all indications included in the reference product label.
Alcon achieved FDA approval for CyPass Micro-Stent, a minimally invasive surgical device to treat mild to moderate glaucoma in cataract patients.

Alcon’s AcrySof IQ Toric IOL with UltraSert, a pre-loaded, astigmatism-correcting IOL for cataract surgery, was approved in the US.

Regulatory submissions and filings

The FDA granted Breakthrough Therapy designation to LEE011 (ribociclib) in combination with letrozole as first-line treatment for women with postmenopausal HR+/HER2- advanced or metastatic breast cancer, based on positive results of the Phase III MONALEESA-2 trial.

Tafinlar + Mekinist (dabrafenib + trametinib) combination therapy was filed with the EMA and Swissmedic for the treatment of patients with BRAF V600E mutation-positive non-small cell lung cancer (NSCLC). The combination has also been submitted to the FDA for the same indication.

PKC412 (midostaurin) was filed with the EMA and Swissmedic for the treatment of newly diagnosed FLT3 mutation-positive acute myeloid leukemia and advanced systemic mastocytosis. A rolling submission in the US is ongoing.

Results from important clinical trials and other highlights

Results from the pivotal Phase III MONALEESA-2 study showed LEE011 plus letrozole significantly extended progression-free survival (PFS) compared to a standard of care, letrozole, as a first-line treatment in post-menopausal women with HR+/HER2- advanced breast cancer. LEE011 plus letrozole reduced the risk of disease progression or death by 44% over letrozole alone, significantly extending PFS across all patient subgroups.

The Phase III EXPAND study of BAF312 (siponimod) in SPMS met its primary endpoint and reduced the risk of three-month confirmed disability progression by 21% and six-month confirmed disability progression by 26% compared with placebo. A consistent reduction in the risk of confirmed disability progression was seen across subgroups, including patients without relapses.

The Phase III ARISE study of the fully human monoclonal antibody AMG 334 (erenumab) in episodic migraine prevention met its primary endpoint of a statistically significant reduction in the number of monthly migraine days versus placebo. AMG 334 is being co-developed by Novartis and Amgen. Novartis has commercial rights to AMG 334 outside of the US, Canada and Japan.

Follow-up data from the Phase III SCULPTURE study showed that Cosentyx (secukinumab) delivers high and long-lasting skin clearance in patients with moderate-to-severe plaque psoriasis out to four years of treatment.

The Journal of the American Academy of Dermatology published results from the head-to-head CLEAR study demonstrating that Cosentyx is superior to Stelara (ustekinumab) in delivering long-lasting clear or almost clear skin over one year of treatment in adults with moderate-to-severe psoriasis.

Post-hoc analyses of data from the PARADIGM-HF study showed that among patients who had been hospitalized for HF, those on Entresto (sacubitril/valsartan) reported higher relative health-related quality of life scores compared to those taking ACE inhibitor enalapril.

Follow-up data from a Phase III study of the combination of Tafinlar + Mekinist in patients with BRAF V600E/K mutation-positive advanced melanoma demonstrated an overall survival benefit at three years.

The Phase III ASCEND-4 study of Zykadia (ceritinib) in previously untreated adult patients with ALK+ NSCLC met its primary endpoint, demonstrating clinically significant improvement in progression free survival (PFS) compared to standard chemotherapy, including maintenance.

The results of a Phase II trial of QAW039 (fevipiprant), published in Lancet Respiratory Medicine, showed fevipiprant significantly decreases sputum eosinophils compared to placebo in patients with severe asthma.

Additional analyses of the FLAME trial data showed that, relative to Seretide, Ultibro Breezhaler (indacaterol/glycopyrronium) reduced the rate of all COPD exacerbations across different patient sub-groups, lowered patients’ need for rescue medication, and demonstrated an improved benefit-risk profile with less evidence of systemic effects.

Top-line results for confirmatory Phase III study for Sandoz biosimilar infliximab demonstrated equivalent efficacy to reference product Remicade, as measured by the American College of Rheumatology 20 (ACR20) response at Week 14. Sandoz acquired EEA-wide rights from Pfizer in Q1 2016.

Improve Alcon performance

Alcon increased investments in the third quarter to accelerate innovation and sales, strengthen customer relationships and improve basic operations.

The division made significant progress in innovation, with FDA approvals for the CyPass Micro-Stent and UltraSert Toric IOL, the launch of NGENUITY 3D visualization system for vitreoretinal surgery, and US and EU launches of Dailies Total1 Multifocal contact lenses.

In Vision Care, Alcon continued to invest in DTC behind key brands. Contact lenses delivered another quarter of growth, benefitting from the continued strong performance of Dailies Total1.

In Surgical, Alcon continued to invest behind the new IOL launches in Europe (UltraSert pre-loaded and PanOptix trifocal), while the strong installed cataract equipment base continued to generate good growth in cataract consumables.

The division also continued to strengthen its foundation to better serve customers by expanding its field service organization, improving its supply chain, and investing in new commercial capabilities and systems.

Capture cross-divisional synergies

We continued to advance our productivity programs in the third quarter, helping to support margins for the Group.

Novartis Business Services (NBS) continued to execute on its priorities of driving efficiency, standardization and simplification across the Group. NBS cost under management remained stable versus prior year, as it continued the selective offshoring of services to five Global Service Centers. NBS is also driving efficiencies through the consolidation of IT suppliers and contracts, in addition to consolidating facilities services from more than 100 to 3 suppliers globally.

In Procurement, we generated approximately USD 0.5 billion in savings by leveraging our scale.

In the centralized Technical Operations organization, which has been operational since July 1, transformation planning is progressing for each manufacturing technology platform. Organizing by technology platform is expected to enhance our ability to optimize capacity planning and lower costs through simplification, standardization and external spend optimization across the network. Technical Operations[1] represents approximately 28,000 employees and 67 manufacturing sites.

The Global Drug Development (GDD) organization, which has been operational since July 1, completed a review of our entire portfolio of medicines, which has enabled allocation of drug development resources based on the promise of each asset for the entire Novartis Group versus a single business unit. Additionally, GDD has completed the integration of the vast majority of its global functions, which is expected to help strengthen capabilities, enable more efficient utilization of functional resources and optimize external spend. The organization is on track to complete integration of the remaining global functions by the end of 2016. GDD represents approximately 10,000 employees worldwide.

In total, our productivity initiatives generated gross savings of approximately USD 0.6 billion in the third quarter.

[1] Excluding Alcon, which has additional sites (16) and employees (13,000)

Build a higher-performing organization

Novartis continues to proactively drive compliance, reliable product quality and sustainable efficiency as part of the quality strategy. A total of 127 global health authority inspections were completed in the first nine months (53 in Q3), 17 of which were conducted by the FDA (4 in Q3). All but three were deemed good or acceptable. The three not deemed good or acceptable were as follows: The inspection of the UK country organization by the UK Medicines & Healthcare Products Regulatory Agency (MHRA), reported in the first quarter of 2016, resulted in an unsatisfactory outcome as a result of issues relating to the accessibility of clinical trial data, which is being addressed through an existing project. A Sandoz site in Warsaw (Poland) was not immediately granted a GMP certificate by the Russian Health Authorities due to a registration discrepancy for one product, which is currently being addressed. Resubmission is in progress, and a GMP certificate is expected in due course. The outcome of an EMA inspection of a Sandoz site in Holzkirchen (Germany) is pending.

Capital structure and net debt

Retaining a good balance between investment in the business, a strong capital structure and attractive shareholder returns will remain a priority. Our target credit rating is double-A.

During the first nine months of 2016, 12.8 million treasury shares were delivered as a result of options exercised and share deliveries related to equity-based participation plans of associates. To partially offset the dilutive impact of such transactions, 11.2 million Novartis shares were repurchased on the SIX Swiss Exchange second trading line and from employees. Novartis aims to further offset the dilutive impact from equity-based participation plans of associates that occurred in the first nine months over the remainder of the year through additional share repurchases.

Also, during the third quarter of 2016, Novartis issued two euro denominated bonds for a total amount of USD 2.0 billion. A euro denominated bond issued in 2009 for a total amount of USD 1.7 billion was repaid in the second quarter at maturity.

As of September 30, 2016, net debt increased by USD 2.3 billion to USD 18.8 billion, compared to USD 16.5 billion at December 31, 2015. The net debt increase was mainly driven by the USD 6.5 billion annual dividend payment, acquisition and divestment related payments and share repurchases, partly offset by USD 6.5 billion free cash flow generation in the first nine months of 2016.

The long-term credit rating for the company continues to be double-A (Moody’s Aa3; Standard & Poor’s AA-; Fitch AA).

2016 Outlook

Barring unforeseen events

Group net sales are expected to be broadly in line with the prior year (cc), with Growth Products offsetting the impact of generic competition.

Core operating income is expected to be broadly in line with the prior year, or decline low-single digit (cc).

These comparisons are versus 2015 continuing operations.

If early October exchange rates prevail for the remainder of 2016, the currency impact for the year would be negative 1 percentage point on sales and negative 3 percentage points on core operating income.

Summary Financial Performance
Continuing operations[1] Q3 2016 Q3 2015 % change 9M 2016 9M 2015 % change
USD m USD m USD cc USD m USD m USD cc
Net sales 12 126 12 265 -1 -1 36 196 36 894 -2 0
Operating income 2 269 2 234 2 1 6 813 7 300 -7 -3
As a % of sales 18.7 18.2 18.8 19.8
Core operating income 3 381 3 489 -3 -3 9 974 10 733 -7 -4
As a % of sales 27.9 28.4 27.6 29.1
Net income 1 945 1 812 7 7 5 762 5 974 -4 1
EPS (USD) 0.81 0.75 8 8 2.42 2.48 -2 2
Free cash flow 2 591 2 788 -7 6 479 6 317 3
Innovative Medicines Q3 2016 Q3 2015[2] % change 9M 2016 9M 2015[2] % change
USD m USD m USD cc USD m USD m USD cc
Net sales 8 173 8 254 -1 -1 24 289 24 847 -2 0
Operating income 2 020 1 872 8 9 6 066 6 316 -4 0
As a % of sales 24.7 22.7 25.0 25.4
Core operating income 2 676 2 724 -2 -1 7 947 8 451 -6 -2
As a % of sales 32.7 33.0 32.7 34.0
Sandoz Q3 2016 Q3 2015[2] % change 9M 2016 9M 2015[2] % change
USD m USD m USD cc USD m USD m USD cc
Net sales 2 517 2 542 -1 -1 7 539 7 516 0 2
Operating income 354 388 -9 -9 1 080 1 009 7 12
As a % of sales 14.1 15.3 14.3 13.4
Core operating income 530 528 0 1 1 550 1 548 0 4
As a % of sales 21.1 20.8 20.6 20.6
Alcon Q3 2016 Q3 2015[2] % change 9M 2016 9M 2015[2] % change
USD m USD m USD cc USD m USD m USD cc
Net sales 1 436 1 469 -2 -3 4 368 4 531 -4 -2
Operating loss/income -50 57 nm nm -12 252 nm nm
As a % of sales -3.5 3.9 -0.3 5.6
Core operating income 206 302 -32 -35 687 971 -29 -25
As a % of sales 14.3 20.6 15.7 21.4
Corporate Q3 2016 Q3 2015 % change 9M 2016 9M 2015 % change
USD m USD m USD cc USD m USD m USD cc
Operating loss -55 -83 34 9 -321 -277 -16 -34
Core operating loss -31 -65 52 26 -210 -237 11 -8
Discontinued operations Q3 2016 Q3 2015 % change 9M 2016 9M 2015 % change
USD m USD m USD cc USD m USD m USD cc
Net sales 14 601
Operating loss/income 45 12 571
As a % of sales nm nm
Core operating loss - 49 - 223
As a % of sales nm nm
Total Group[3] Q3 2016 Q3 2015 % change 9M 2016 9M 2015 % change
USD m USD m USD cc USD m USD m USD cc
Net income 1 945 1 895 3 3 5 762 16 738 -66 -64
EPS (USD) 0.81 0.79 3 4 2.42 6.94 -65 -64
Free cash flow 2 591 2 788 -7 6 479 6 027 7
nm= not meaningful

[1] Continuing operations include the businesses of Innovative Medicines (formerly named the Pharmaceuticals Division), Alcon, Sandoz and Corporate activities, and starting on March 2, 2015, the results from the new oncology assets acquired from GSK and the 36.5% interest in the GSK Consumer Healthcare Holdings Ltd. (the latter reported as part of income from associated companies). See page 38 of the Condensed Interim Financial Report for full explanation.

[2] In compliance with IFRS, Novartis updated its segment financials to reflect the new divisional structure announced on January 27, 2016, to aid comparability of year-on-year results.

[3] Total Group net income and EPS include in the prior year the impact of the exceptional divestment gains and the operating results of the discontinued operations. Total Group free cash flow comprises the free cash flow from continuing operations and discontinued operations.