Novartis AG

Good morning and good afternoon, everyone, and welcome to our conference call on the proposed acquisition of Avidity. 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. Please refer to the company's Form 20-F on file with the U.S. Securities and Exchange Commission for a description of some of these factors. The discussion today is not the solicitation of a proxy nor an offer of any kind with respect to the securities of Avidity Biosciences or SpinCub. The parties intend to file relevant documents with the U.S. SEC, including a proxy statement for the transaction and a registration statement for the spinoff. We urge you to read these materials and contain important information when they become available. Before we get started, I just want to remind our analysts to please limit yourselves to one question at a time. We'll cycle to the queue as often as we need to. We're also not taking questions on Q3 earnings or other clinical trials on this call. And with that, we'll hand across to Beth.

Great. Thank you, Sloan. And thank you, everybody, for joining today's conference call. We're very excited to go over with you the proposed acquisition of Ability Biosciences, which we think is a strong strategic fit for the company, builds our presence in neuromuscular diseases, builds our RNA technology platform, and materially improves the medium and long-term growth profile of Novartis. So moving to slide four, I wanted to give you first an overview of the transaction. Novartis proposes to acquire all outstanding shares of Avidity for $72 per share. This represents a 46% premium to the October 24th closing price. Avidity will separate its early-stage precision cardiology programs into a new spin code, including the relevant third-party agreements. Novartis will acquire the neuromuscular franchise, follow-on compounds, platform rights, And we do expect a closing in the first half of 2026, subject to the completion of the spinco and the usual customary closing conditions. Through this acquisition, we'll acquire three late-stage assets, which I'll go through in turn, a preclinical neuromuscular pipeline, and importantly, a platform for extrahepatic delivery of XRNAs, an area that's, as you know, a high interest to Novartis as one of the leaders in delivering XRNAs for cardiology, related indications to the liver. This will give us the capabilities to deliver these technologies outside of the liver in the future. And moving to slide six, I wanted to start with the strategic rationale for the deal in a little bit more detail. We've articulated to you we want to do deals in our core therapeutic areas and our core technology platforms. And this is a deal that fits both. We strengthen our neuroscience franchise by adding three late stage muscular programs. And this builds on the extensive experience we have with Zolgensma. It really complements the footprint that we have with Zolgensma. I'll go through that in a bit more detail later in the presentation. It advances the XRNA strategy that we began by firing the medicine company and now have built over the last year as a broad portfolio of RNA therapeutics targeting a range of cardiovascular targets. This now adds a unique platform for antibody oligonucleotide conjugates, enabling us to deliver RNA to the muscle. It also adds a first in disease pipeline, and we want to be in these areas where there are high unmet needs and a need for disease-modifying therapies. Delvisran and Delbrax have the potential to be meaningful disease-modifying therapies for DM1 and FSHD. As I noted, this enhances our growth profile, and I'll go through that in a bit more detail, but I already want to highlight that these are medicines without LOEs before at least 2042 and are IRA-exempt. And from a sales profile and return profile standpoint, unlock multiple near-term multi-billion dollar opportunities with three programs expected to launch before 2030. Now moving to slide seven, This transaction is also in line with the capital allocation priorities of the company. We've been consistent in saying we want to invest in our core business. We want to do value-creating, bolt-on to life, creativity, acquisition. We want to consistently grow our dividend, which we remain absolutely committed to. And, of course, ongoing share buybacks with excess capital, and we have an ongoing $10 billion buyback, which we expect to complete by the end of 2027. Now, over the years, we have done value trading bolt-ons in neuroscience to build out our capability in a range of areas, including, as you see here, these deals, including areas in neuromuscular conditions, including DTX and case therapeutics, amongst others. So this really complements the efforts that we've had over the recent years. It strengthens the key therapeutic area, it's the best in cash profile, and as I noted, the attractive sales and financial profile. Moving to slide A, and just to say a bit more about the impact that we expect avidity could have on Novartis, it raises our 24 to 29-hager from plus 5% to plus 6%. But even more importantly, in my mind, it adds multiple assets that can drive significant It adds to the portfolio of late-stage assets that we'll be talking about in a few weeks, adding these additional large-scale assets, which can bolster that growth profile 2030 and beyond. And as I noted, these are assets that have that outlook into the 2040s without exposure to IRAs. Now, we did note in the release we will have a few points of margin solutions of 1% to 2% we expect, and we expect to get back to our 40% plus core margin in 2029 with efforts, of course, as always, to get there sooner and continue our strong productivity efforts in the company. Lastly, I do want to note that this is a deal that we believe clearly exceeds our internal rate of return threshold, has clear value creation potential, and will deliver, we hope, substantial return to our shareholders over time. And moving to slide 10, so now I want to take a moment to go into the core value drivers. And let's start with the technology platform. Vividi brings a pioneering AOC platform for RNA therapeutics, in particular with the ability to deliver RNA to the muscle. This platform consists of monoclonal antibodies that target specific receptors on the target tissue. Those monoclonal antibodies are combined with an oligonucleotide to create the AOC conjugate. This gives you the ability to target these RNA therapeutics to cells beyond the liver where normally RNA therapeutics track. It gives you flexibility to deploy either SI RNAs or all the nucleotides of different structures to the relevant tissue. We believe that the technology can give you the capability to maximize therapeutic durability as well as infrequent dosing, and it's reproducible and scalable. So moving to slide 11. Over the next few slides, I want to take each of the three assets in turn. This page hopefully is helpful to you in that it covers a lot of the key data that I'll be covering in more detail, giving you the patient populations, our base case timeline, and the mechanism of action. But let's dive into each one separately. So starting on slide 12, with DM1, myotonic dystrophy. This is a rare progressive neuromuscular disorder with a poor prognosis, no disease-modifying therapy, but with a relatively large patient population, with an estimated 80,000 patients in the US and the EU combined. There are no currently approved disease-modifying therapies for this condition. It's an under-recognized disease, so the prevalence may ultimately be higher than what we currently model. It's progressive and often fatal. It primarily affects skeletal, cardiac, and smooth muscle. Its autonomic dominance increases in severity from generation to generation. There's a significant impact on quality of life. Some of the quality of life measures and things we look at, these are muscle weakness and weight gain, myotonia that can be, cardiopulmonary comorbidities, And importantly, there is a reduced lifespan in these patients. The current standard of care primarily consists of supportive care, physical and pharmacological symptom management, and as I said, no disease-modifying therapies. So Delvisram is designed to address the root cause of DM1, and I'll go through that in a bit more detail. This is a medicine that's well-recognized by regulators. It has FDA orphan drug designations, it has fast-track designations, and it has breakthrough therapy designations. And it also has, in Europe, orphan drug designation. So moving to slide 13, Zeldesrin, as I noted, is addressing the underlying cause of DM1. So DM1 is caused by trinucleotide repeat, CTG repeat, that expand within the DMPK gene. These expansions change the mRNA structure such that mRNAs sequester splicing factors, including another splicing factor, importantly, called MBNL. This leads to loss of normal cell function and muscle wastage. And so the goal here is to restore normal NB and L function. Now, this one does that by degrading the DMTK, mRNA apparent transcripts in muscle cells and restoring normal NB and L function in splicing. The way this was studied in the clinic was in the Phase 1-2 Mirena study. The trial showed that the medicine is delivered to muscle, engages the target, and restores splicing. In the study, there were a number of endpoints which were also used in the Phase 3 program that's ongoing to assess myotonia, the video hand-opening time, to assess strength, hand grip, and quantitative muscle testing. and to look at activities of daily living, a patient-reported outcome measure called DM-1 active. Moving to slide 14, in the Phase I-II Mirena study, Del Vistaran demonstrated the potential to get transformational therapy in these patients with really meaningful improvements in all four measures. In the study, the comparison was to the natural history for these patients, but the video hand-opening time you can see was improved, significantly improved versus in natural history. The QMP composite and hand grip were also significantly improved. And from a patient-reported outcome study, there were very positive feedback from patients who were in the trial. So in total, in this Phase II study, efficacy endpoints were met. There was a reversal of disease progression compared to the natural history data. durable improvements in multiple functional endpoints over one year of follow-up, improvements across the domains that are relevant for the disease, and also significant VMPK knockdowns not shown here on the study. Overall, there was also a favorable safety profile. There were 37 patients enrolled that remained on the study, and all related AEs were mild or moderate. The most common related AEs was nausea, and there was no study drug-related treatment discontinuations or serious adverse events. So moving to slide 15, the Phase III Harbor Study really tries to replicate the Phase II study that I just went over. It's a global, pivotal trial with SEA, EMA, and other regulatory authorities' endorsement. It completed enrollment already in July 2025. The participants are currently eligible to roll over to an open-label extension study And it has 40 global sites, and the endpoints you can see here on the clinical endpoint are aligned with what was done in the Phase II study. Overall, the study is a 54-week study with 159 patients randomized to placebo or the active group. You can see here the population is targeting patients who are over 16 years old and with a significant number of repeats, over 100 repeats in the gene. We expect the 54-week readout in the second half of 2026 and global regulatory submission in 2027. There is an earlier look at the study in week 30. We'll certainly evaluate that, but our base case remains a submission in 2027. And I think it's important to understand the study well because this is a key differentiator, we believe, of avidity versus competitors. This is the only fully enrolled phase three study that will generate randomized placebo-controlled data. It's the only study that has participants from around the world, including the United States, and we think can generate a compelling data package that can be used with regulators, health authorities, and payers. Now moving to slide 16. Returning to the second disease in the portfolio, SSHD, this is a rare hereditary disorder causing relentless loss of muscle in certain parts of the body, as designated in the actual name of the disease, osteoscapular humeral dystrophy. It is estimated to be somewhere between 45,000 and 87,000 patients, but as with DM1, I think there will be better understanding of the number of patients as therapies become available. No currently approved therapies. It's one of the most common forms of muscular dystrophy, causing, again, the progressive muscle weakness, pain, and fatigue. The onset typically occurs in the teenage or adult years, but what happens with these patients is there's a steady loss of independence, and 20% of these patients ultimately become wheelchair-bound. Now, this particular disease is caused by a barren expression of a gene called Dux4, which leads to cell death, immune response, and oxidative stress. It is an autosomal dominant disorder, potentially affecting multiple generations. 20 to 30% of cases also arise from spontaneous mutations affecting the death of a gene. And Delbrac is designed to address this root cause of FSHG. And it's the only asset to demonstrate disease-modifying potential in a CHG study. Delbrac has orphan drug designation, fast-track designation, and EMA orphan drug designation. Now, moving to slide 17. In the FACE 1242 study, Delbrecht improved mobility, strength, and upper limb function compared to patients that were treated with placebo. You can see here in the floor graph at 12 months with Q13 week dosing. You can see the improvement in the 10-minute walk test. Also, improvements in other functional measures as well, including the RWS, which is the reachable Workspace test is a timed up-and-go test, which, again, is a measure of mobility in these patients, as well as in the QMT test, which is a composite endpoint. Overall, the study met its efficacy endpoints with improved mobility and muscle strength, consistent improvement in quality of life as measured by patient-reported outcomes, And from a pharmacodynamic standpoint, rapid and significant reduction in the levels of C-DUX, which is a marker of DUX4, and creatine kinase, which is a key marker of muscle damage. From a safety and tolerability standpoint, all participants remain on study, no discontinuation, and mostly mild and moderate adverse events. Moving to slide 18. Overall, this compelling data could support C-DUX as a biomarker for an accelerated approval, though as I'll go through, our base case remains the filing with Phase III data. C-DUX is a direct target of Dux4, and it's elevated six to nine-fold in people living with FSHD. Elevated C-DUX levels are also linked to worsening disease muscle weakness. Significant and rapid reductions in C-ducts like we saw in the study and creatine kinase in these participants was seen following treatment with Delbrac. And with that we saw, as you saw, the improved functional mobility and muscle strength. So right now there is a biomarker cohort ongoing for the Fortitude study to better understand the reductions in C-ducts. And the FDA has confirmed the potential for an accelerated approval based on demonstrating that reduction in C-ducts combined with the clinical data, which I went through in the earlier slide. So that data is expected in the second quarter of 2026. Our base case remains filing with Phase III data, which I'll go through in a moment. But we'll certainly be looking at that bottom marker cohort to see if there is the potential for an accelerated approval. And moving to slide 19. The Phase III Fortitude Study of Delbrecht in FSHD is already enrolling. It's intended to serve as a confirmatory study for full approval. Participants are across 45 sites in North America, Europe, and Japan. The registrational endpoints you can see here are in line with what we saw earlier for the Phase II study. And in addition, there are signs and symptoms of FSHD as well as specific endpoints around the C-DUX increasing kinase biomarkers. It's a 200 patient randomized study. You can see here a few six weeks, two milligrams per kilogram versus placebo. And as I noted, our phase three readout of global regulatory submission under a standard filing path is expected in 2028. And moving to slide 20. The third asset amongst the LASIK portfolio of femininity is in DMV and a certain subgroup within DMV. You all likely well know that DMV is a severe early onset disease marked by progressive muscle damage and reduced life expectancy. There's an estimated 10,000 to 15,000 patients with DMV. This is a monogenic X-linked recessive condition leading to progressive muscle damage and weakness. Symptoms can occur very early on in life by four years of age. Insanity leads to loss of ambulation for these teenage, often teenage boys, with significant reductions in life expectancy, caused by the mutations in the DMD gene, which encodes dystrophin proteins. So you're trying to restore proper dystrophin protein in these patients. Six to seven percent of patients have mutations to exon 44 skipping, DMD44, and that's what we're targeting here. So Del Dota is designed specifically to skip exon 44 of the dystrophin gene and produce functional full-length dystrophin and restore the function of this protein. Delzota has orphan drug designation, fast-track therapy designation, breakthrough therapy, and rare pediatric designation, as well as EMA orphan drug designation. Moving to slide 21. So the phase one, two is 444, Registrational Study of DELZOTA, showing improvements across key biomarkers and points. You can see on the left-hand side, I think from expert community perspective, remarkable increases in the dystrophin protein, as well as striking reductions as well, increasing kinase. I think this is viewed, in my mind, a very strong proof of principle of the overall platform, but importantly, also an important therapy for this group of patients. There was a 40% increase in the exon skipping across the dose score, a 25% increase in dystrophin production, as I noted, 80% reduction in TK levels, and clinically meaningful improvements across functional endpoints with a favorable safety and tolerability profile. So this is a program that's on track to replicate submission for accelerated approval in 2026. So also, I think, an important part of this acquisition. Moving to slide 22. Now, I think one of the most important things to note from a commercial standpoint and why I believe we can drive an uptake in these medicines is that it's aligned with our commercial capabilities and the neuromuscular experience we've built up since the launch of Zolgensma. We have deep understanding of patient journeys in rare diseases, in areas like spinal muscular atrophy as well, diseases like PNH and C3G. We've built up patient identification and activation capabilities. We have strong payer engagement capacity as well. Our field structure is ready to deploy across neuromuscular indications. I'll come back to that in a moment. And we also have built up scalable support programs as we've gone through the launches of medicines, such as Dulgenta, Subhalta, Ben Raffia, and also Ilaris before this. And when you think about coverage of diagnosing neurologists, we see here already with a first launch in BMD, a 90% overlap. And already with FSHD and BM1, 60% and 40% overlaps of the primary prescribing physicians, which we believe will allow us to have a relatively small scale to be able to fully cover the physicians in question in FSHD and BM1. And we're absolutely prepared to do that. So, taking together, avidity is highly synergistic with our commercial footprint in the rare neuromuscular space and in rare diseases generally. The moon, just like 23. We also wanted to give you a perspective on external forecasts. You can see here the min, median, and max. At this point, we would just highlight that both the assets in DM1 and SSHD have multibillion-dollar potential and certainly we think very sizable potentials given the size of the patient populations. and our expertise in launching these medicines. And as I already noted, you don't have an LOE for either medicine before the early 2040s, at the earliest, and neither medicine is currently or expected to be subject to IRA. So moving to slide 25, so in closing, and just to give you a summary transaction, Hopefully it's clear, $72 per share. The total transaction value is estimated to be $12 billion on a fully diluted basis, representing an enterprise value of $11 billion at the expected closing date. We expect to close in the first half of 2026, subject to the separation of the spin co and other closing conditions. We believe this deal will bring potential value to the company with multiple multi-billion dollar peak sales opportunities, near-term launches, and exclusive rights to an exciting RNA platform outside of cardiology. This enables us to raise our near-term sales guidance from plus 5% to plus 6%. But importantly, and perhaps even more importantly, bolsters our growth for all 2030 and beyond. It does involve short-term dilution of 1% to 2%, but we expect to get back to the 40% plus core margin in 2029 with an aspiration to get there sooner. And we expect an IRR to well connect us to our cost of capital with significant value creation if the assets are successful. And then lastly, this fits with our capital allocation priorities, no change to our capital allocation strategy overall. So, taken together, we think an attractive opportunity for Novartis, our shareholders, and most importantly, for the patients that these therapies can treat. So, with that, let me open it up for questions. Oh, and maybe before I open it up for Q&A, just to mention on the call with me, we have a number of folks. We have Harry Curse, of course, our CFO. Alongside that, we have Sriram Arabia, our Global Head of Development. We also have Dr. Norman Kutsy, who is our Head of Neuroscience, a developer and a neurologist. and Dr. Bob Bailo, our head of research in neuroscience and neuroscience in our biomedical research. We've been really one of the global thought leaders in muscular diseases, such as the ones we talk about here. So with that, we can open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1, 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1, 1 again. We will take our first question. The first question comes from the line of Sachin Jain from Bank of America. Please go ahead. Your line is open.