Novartis Posts 7% Increase in Net Income Despite Sluggish Pharmaceutical Sales

Swiss pharmaceutical giant Novartis has had a positive start to the year as group net income was up 7% year-on-year (y/y) to US$2.323 billion in the first quarter, of which US$185 million was the consequence of beneficial currency movements. Net sales were up by 9% y/y to US$9.909 billion in the reporting currency, but were stagnant in local currencies. Growth was driven by the group's generic franchise Sandoz (up 12% y/y), its consumer healthcare department (up 14% y/y), and the vaccine and diagnostic unit (up 21% y/y). Pharmaceutical sales were up 6% y/y to US$6.264 billion in reporting currency but fell by 3% in local currencies. Pharmaceutical sales in the United States fell by a staggering 19% on the back of generic competition and the market withdrawal of irritable bowel syndrome drug Zelnorm (tegaserod maleate; see Switzerland: 2 April 2007: Novartis Pulls Plug on U.S. Zelnorm Sales).

Novartis's operating income, as calculated by Global Insight, was up 9% y/y to US$2.253 billion. The rise resulted from increased net sales, together with contained operating expenses. Indeed, the cost of goods sold rose by 6% y/y to US$2.648 billion as the firm incurred lower royalty payments. In addition, marketing and sales expenses rose by 9% y/y to US$2.815 billion as productivity improvements counterbalanced the cost of new product launches. Research and development (R&D) expenses rose 11% y/y to US$1.674 billion on the back of late-stage pipeline investments. The group's operating margin, as calculated by Global Insight, was marginally up by 0.08 percentage point y/y to 22.73%.

In the core pharmaceutical business, sales growth was driven by the strong performance of heart drug Diovan and cancer drug Gleevec/Glivec, which, respectively, generated revenues of US$1.369 billion and US$888 million, equivalent to growth of 19% and 32%, respectively. Newly launched products such as ophthalmology drug Lucentis (ranibizumab), hypertension drugs Tekturna/Rasilez (aliskiren) and Exforge (amlodipine and valsartan), and Alzheimer's disease drug Exelon (rivastigmine tartrate) brought in over US$500 million in the first quarter of the year. Once-daily iron chelator Exjade (deferasirox), launched in 2005, continued to penetrate the market as sales grew by 68% y/y to US$109 million.

On the other hand, pharmaceutical sales suffered in the United States (down 19% y/y), hit by generic competition on hypertensive Lotrel (amlodipine/benazepril), anti-fungal drug Lamisil (terbinafine hydrochloride), anti-viral medicine Famvir (famciclovir), and epilepsy treatment Trileptal (oxcarbazepine), as well as the market withdrawal of Zelnorm. Indeed, sales of Lotrel and Trileptal fell by 73% and 54% y/y, respectively.

Outlook and Implications

Novartis has reiterated its guidance for 2008, expecting mid-single-digit percentage growth for net sales and low-single-digit percentage growth for pharmaceutical sales in local currencies. Following the first-quarter results, the growth figures in local currencies stand at 0% for net sales and -3% for pharmaceutical sales. Although Novartis's generic, consumer healthcare, and vaccine and diagnostic franchises are expected to carry on growing, the impact of plummeting U.S. pharmaceutical sales will need to be offset by strong growth for the newly launched products in order for the guidance to be met. The European launch of type 2 diabetes drug Galvus (vildagliptin; see Switzerland: 1 February 2008: Novartis to Launch Type-2 Diabetes Drug Galvus in Europe) should also help to boost sales.

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