Novartis second quarter results enhance future growth prospects with eight significant regulatory milestones; on track to deliver 2012 outlook

Category: BioValley

Group net sales increased 1% in constant currencies (cc), with growth in recently launched products more than offsetting loss from Diovan patent expiration

Group net sales of USD 14.3 billion (+1% cc) in the second quarter; first half net sales of USD 28.0 billion (0% cc)
Core operating income of USD 3.9 billion (-3% cc) in second quarter, USD 7.6 billion (-5% cc) in first half; operating leverage achieved in Pharmaceuticals and Alcon in second quarter and first half
Core EPS of USD 1.38 (-3% cc) in second quarter and of USD 2.65 (-5% cc) in first half; EPS USD 1.12 (+4% cc) in second quarter, USD 2.07 (-7% cc) in first half
Free cash flow of USD 2.3 billion in second quarter, USD 4.4 billion in first half

Strong momentum in innovation, continued execution on recently launched brands, and ongoing productivity enhancements expected to drive long-term growth

Pharmaceuticals secured five significant regulatory milestones in the second quarter, including CHMP recommendations for Afinitor in advanced breast cancer, Jakavi in myelofibrosis and Seebri Breezhaler in COPD
Alcon achieved three approvals in the quarter: AcrySof IQ ReSTOR +2.5D Toric Multifocal intraocular lenses in the EU, as well as Dailies Total1 and a new indication of Durezol in the US
Recently launched products contributed 29% to Group net sales (28% for the half year), rejuvenating our diversified healthcare portfolio

Further progress made on remediation at Consumer Health site in Lincoln, Nebraska; limited production resumed On track to deliver 2012 full year outlook

Basel, July 19, 2012 - Commenting on the results, Joseph Jimenez, CEO of Novartis, said: "Novartis achieved eight significant regulatory milestones in the second quarter, including CHMP recommendation for Afinitor in advanced breast cancer, further enhancing our future growth prospects. Pharmaceuticals and Alcon delivered solid financial performance and operating leverage in the second quarter, underpinned by our continued focus on portfolio rejuvenation, with recently launched products now representing 29% of Group net sales compared to 25% last year."

Second quarter

Continued robust sales momentum in Pharmaceuticals and Alcon
Group net sales reached USD 14.3 billion (-4%, +1% cc) in the second quarter, with growth from recently launched products more than offsetting the loss associated with the Diovan patent expiration. Currency had a negative impact of 5 percentage points as a result of the strengthening of the dollar against most major currencies.

The rejuvenation of our portfolio is key to our long-term growth. Products launched since 2007, which include Lucentis, Gilenya, Afinitor, Tasigna and Galvus, continued to perform strongly. These recently launched products grew 8% to USD 4.1 billion and now comprise 29% of Group net sales, up from 25% a year ago.

Pharmaceuticals had another quarter of good underlying growth despite the Diovan patent expiration in Europe, with net sales of USD 8.3 billion (-1%, +4% cc). Strong volume growth of 9 percentage points more than offset the effect of generics entries (-4 percentage points) and a negative pricing impact of 1 percentage point. Excluding Diovan, net sales grew 8%, demonstrating the strong underlying performance of the division. Recently launched products, the key growth driver for Pharmaceuticals, generated USD 2.8 billion of net sales, growing 28% cc over the same period last year. These products now represent 34% of division sales, compared to 28% in the year-ago period.

Alcon net sales grew 1% (+5% cc) to USD 2.6 billion in the quarter. This robust performance was led by strong Surgical sales growth of 3% (+8% cc), benefitting from strong cataract product sales in the US and Emerging Growth Markets, as well as contact lens sales growth of 2% (+6% cc), underpinned by the solid uptake of new products such as the LenSx femtosecond refractive cataract laser and silicone hydrogel lens Dailies Total1. Ophthalmic Pharmaceuticals grew 4% in cc, reflecting a weak ocular allergy season (sales of allergy products declined 6%).

Sandoz net sales declined 13% (-7% cc) to USD 2.1 billion driven by 7 percentage points of price erosion. Volume was flat, as the expected lower sales for enoxaparin (USD 156 million in the second quarter of 2012 compared to USD 284 million in the 2011 period) and US authorized generics, together with the market decline in Germany, offset strong double-digit growth in the rest of Western Europe, Asia, Central and Eastern Europe, and biosimilars (+39% cc). Vaccines and Diagnostics net sales were up 17% (+21% cc) to USD 349 million. Sales growth was driven by Menveo, which continued to see double-digit growth in the US, as well as the timing of bulk pediatric shipments in 2011, which produced a weak comparative quarter. Consumer Health, which includes OTC and Animal Health, declined 24% (-18% cc) to USD 904 million in the quarter, impacted by the suspension of production at the Lincoln, Nebraska manufacturing site.

Pharmaceuticals and Alcon delivered operating leverage
Group core operating income, which excludes exceptional items and amortization of intangible assets, decreased by 8% (-3% cc) to USD 3.9 billion. Core operating income margin in constant currencies decreased by 1.2 percentage points. Contributions to this lower core operating income margin included improvements in Pharmaceuticals (+0.6 percentage points in cc) and Alcon (+0.2 percentage points in cc), offset by declines in Sandoz (-0.8 percentage points in cc), Vaccines and Diagnostics (-0.2 percentage points in cc) and Consumer Health (-1.0 percentage point in cc). Together with a positive currency impact of 0.1 percentage points, this resulted in a net decrease in core operating margin of 1.1 percentage points.

Operating income was down 4% (+1% in cc) to USD 3.2 billion as a result of the lower core operating income and net core adjustments, which in the second quarter amounted to a net expense of USD 723 million compared to USD 913 million in the prior-year period. Currency depressed operating income by 5 percentage points.

Pharmaceuticals core operating income increased 2% (+6% cc) to USD 2.7 billion. Core operating income margin in constant currencies increased by 0.8 percentage points. Currency had a positive impact of 0.1 percentage points, resulting in a net increase of 0.9 percentage points to 33.3% of net sales.

Alcon core operating income of USD 974 million increased by 3% (+7% cc). Alcon delivered operating leverage through productivity gains and the realization of post-integration synergies (USD 73 million), while continuing to invest in Emerging Growth Markets and R&D. Core operating income margin in constant currencies increased by 0.8 percentage points, with a negative currency impact of 0.1 percentage points, resulting in a net increase of 0.7 percentage points to 36.8% of net sales.

Sandoz core operating income declined 35% (-31% cc) to USD 349 million. Core operating income margin in constant currencies decreased by 5.8 percentage points. This declined from the exceptionally high level of 21.6% in the second quarter of 2011 as a result of lower sales and the impact of higher quality and manufacturing costs as well as increased investment into Sandoz's biosimilars and respiratory pipeline. A favorable currency impact of 0.5 percentage points took the core operating income margin to 16.3% of net sales.

Vaccines and Diagnostics core operating loss for the period was USD 90 million compared to a loss of USD 89 million for the same period in 2011. Consumer Health core operating income declined to USD 18 million and core operating income margin declined by 17.2 percentage points in constant currencies, impacted by the suspension of production at the Lincoln, Nebraska manufacturing site.

Group net income was flat in USD (+5% cc) at USD 2.7 billion following the decline in operating income partially offset by improvements in non-operating items. EPS declined in line with net income by 1% (+4% cc) to USD 1.12.

Group core net income was down 6% (-2% cc), following the decrease of core operating income. Core EPS declined 7% (-3% cc) to USD 1.38.

Free cash flow of USD 2.3 billion in the second quarter was 30% below the previous year of USD 3.3 billion. Lower divestment proceeds (USD 0.4 billion) and higher payment of tax (USD 0.3 billion) primarily accounted for most of the decline.