Novartis Posts Strong H1 Performance as Operating Income Grows 12%

Swiss pharmaceutical giant Novartis has posted encouraging half-year financial highlights on the back of double-digit net sales, successful efficiency savings, and positive currency effects. Group net sales reached US$20,635 million, an 11% year-on-year (y/y) rise, of which two percentage points (pp) could be attributed to sales volume growth and nine pp to beneficial currency effects. The company recorded double-digit sales growth across its franchises as, measured in U.S. dollars, pharmaceutical sales grew 10% y/y to US$13,192 million; vaccines and diagnostics sales grew by 25% y/y to US$602 million; generic unit Sandoz's sales expanded by 13% y/y to 3,854 million; and the consumer health franchise posted 13% y/y growth with sales standing at US$2,987 million. Sales in the United States carried on their downward trend as they fell by 11% y/y to US$4,203 million on the back of generic competition on hypertensive Lotrel (amlodipine/benazepril), anti-fungal drug Lamisil (terbinafine hydrochloride), anti-viral medicine Famvir (famciclovir), and epilepsy treatment Trileptal (oxcarbazepine). U.S. market withdrawal of irritable bowel syndrome drug Zelnorm (tegaserod maleate) also contributed to fall in U.S. sales (see Switzerland: 2 April 2007: Novartis Pulls Plug on U.S. Zelnorm Sales).

For the first half of the year (H1), Novartis' operating income, as calculated by Global Insight, was up 12% y/y to US$4,611 million. The rise is the result of higher net sales and relatively contained operating expenses due to the Forward initiative, Novartis's productivity improvement programme. The cost of goods sold rose by 12% y/y to US$5,584 million, while marketing and sales expenses rose by 10% y/y to US$5,921 million. Research and development (R&D) expenses rose 14% y/y to US$3,441 million. The group's operating margin, as calculated by Global Insight was marginally up by 0.1 percentage point y/y to 22. 3%. The group total net income was up by 9% y/y to US$4,583 million.

Growth picked up during the second quarter (Q2) for Novartis as it recorded a 14% y/y growth in net sales to US$10,726 million for the period. Beneficial currency effects accounted for nine pp of the recorded growth. The company's vaccines and diagnostics franchise posted impressive 28% y/y growth, with sales reaching US$322 million. The cost of goods sold rose by 18% y/y to US$2,936, on the back of currency effects and an unfavourable product mix. R&D expenses rose by 16% y/y to US$1,767 million due to investments in late-phase clinical trials.

In the core pharmaceutical business, sales growth was driven again by heart drug Diovan (valsartan) and cancer drug Gleevec (imatinib), which over the first quarter of the year saw their sales grow by 20% y/y and 29% y/y to reach US$2,878 million and US$1,830 million, respectively. Newly launched products collectively brought in US$1.3 billion in revenues over the period. Indeed, ophthalmology drug Lucentis (ranibizumab) and osteoporosis treatment Aclasta/Reclast (zoledronic acid) respectively generated sales of US$437 and US$103 million. Once-daily iron chelator Exjade (deferasirox), launched in 2005, continued its strong market penetration as sales grew by a whopping 541% y/y to US$173 million in the first quarter of the year.

While growth was driven by the company's top 20 products, the rest of its portfolio saw its sales contract by 9% y/y to US$2,618 million in the first quarter of the year. Even in the top 20 products, some drugs took a beating due to generic competition in the United States. Indeed, Lotrel saw its sales plummet by 67% y/y to US$195 million while Trileptal's sales took a 56% y/y plunge to US$173 million. The winners and losers of the company's portfolio were the same when the results are analysed for the second quarter of the year.

Outlook and Implications

Novartis has maintained its 2008 guidance of record-breaking net sales with overall mid-single-digit growth in local currencies. At it stands, for the first half of the year the group's net sales grew by 2% y/y, while pharmaceutical sales grew by 1% y/y, and Sandoz's sales expanded by 2% y/y in local currencies. Although the company is below targets for now, it could be in a position to record stronger growth in the second half of the year. Indeed, newly launched products such as Lucentis, Reclast, hypertension drugs Tekturna/Rasilez (aliskiren) and Exforge (amlodipine and valsartan) as well as Alzheimer's disease drug Exelon (rivastigmine tartrate) are expected to carry on their market penetration, boosting company's top line. As Lotrel, Trileptal, Lamisil and Famvir fell victim to U.S. generic competition last year, the effect on sales for the second half of the year is expected to level off.

Novartis recently gained full control of Tekturna/Rasilez (see Switzerland: 10 July 2008: Novartis Snaps Up Tekturna Development Partner Speedel for US$880 mil.), which together with the anticipated European launch of type-2 diabetes drug Galvus (vildagliptin; see Switzerland: 1 February 2008: Novartis to Launch Type-2 Diabetes Drug Galvus in Europe) could boost second-half-year sales. Looking further ahead, the multibillion acquisition of eyecare specialist Alcon will contribute to the group's growth in the future years (see Switzerland: 7 April 2008: Novartis to Pay Nestlé Up to US$39 bil. for Eye-Care Specialist Alcon). The company also has promising compounds about to be submitted for regulatory approval, the flagship ones being kidney cancer drug RAD001/Afinitor (everolimus) and meningococcal vaccine Menveo (MenACWY-CRM; see Switzerland: 19 May 2008: ASCO 2008: Novartis Touts Oncology Drug Rad0001 in Kidney Cancer and Switzerland: 6 May 2008: Novartis Touts Menveo as More Efficacious than Rival Vaccine Menactra for Meningitis).

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