Novartis Gains Momentum with Strong Performance in First Half of 2008 from Portfolio Focused on Growth Areas of Healthcare

  • First-half results for continuing operations led by improving Pharmaceuticals performance ahead of expectations and expansion in Vaccines and Diagnostics
  • Net sales rise 11% (+2% in local currencies) to USD 20.6 billion
  • Operating income advances 12% to USD 4.9 billion on business expansion, productivity gains and currency benefits
  • Net income up 13% to USD 4.6 billion; basic EPS rises 17% to USD 2.01
  • Dynamic growth from new products - including Tekturna/Rasilez, Exforge, Lucentis, Exelon Patch and Aclasta/Reclast - provides USD 1.3 billion in first-half net sales
  • Key R&D projects on track for 2008 submissions, particularly Afinitor (RAD001) for advanced kidney cancer and Menveo meningococcal meningitis vaccine
  • 25% stake in Alcon, the world leader in eye care, purchased in July; strategic acquisitions strengthen portfolio and complement internal growth drivers
  • Novartis on track for record sales and earnings in 2008 from continuing operations

Key figures - Continuing operations
First half
Second quarter

BASEL, Switzerland, July 17, 2008 - Commenting on the results, Dr. Daniel Vasella, Chairman and CEO of Novartis said: "The growth acceleration in the second quarter of 2008 and our R&D successes, especially in Pharmaceuticals and Vaccines, demonstrate that our strategy is delivering results and that we are heading towards a promising future despite a weak economy. Speed and productivity of operations are improving and growth in most countries is dynamic."
OVERVIEW
First half
All businesses contributed to the strong performance, especially accelerating sales and profitability in Pharmaceuticals and sustained dynamic growth in Vaccines and Diagnostics that underpinned expectations for record results in 2008.
Net sales rose 11% (+2% in local currencies) to USD 20.6 billion as higher sales volumes contributed two percentage points of growth, while currency translation added nine points. Price changes and acquisitions had no significant impact.
Advancing faster than net sales, operating income was up 12% to USD 4.9 billion and driven by the solid business expansion as well as the Forward initiative, which also provided funds for major investments in new product development and expansion in fast-growing markets. The operating margin was slightly higher at 24.0% of net sales from 23.9% in the 2007 period.
Net income rose 13% to USD 4.6 billion on the increase in operating income as well as higher levels of financial income and income from associated companies. Basic earnings per share (EPS) rose faster, up 17% to USD 2.01 due to fewer outstanding shares.
Second quarter
Net sales for the quarter rose 14% (+5% lc) to USD 10.7 billion as Pharmaceuticals grew ahead of expectations and succeeded in overcoming the impact of 2007 challenges in the US. Vaccines and Diagnostics expanded at a fast rate, while difficult conditions in the US led to moderate growth in Sandoz and Consumer Health. Higher sales volumes provided five percentage points of growth, while positive currency translation added nine points.
Operating income advanced 17% to USD 2.5 billion on double-digit contributions from Pharmaceuticals and Consumer Health. As a result, the operating income margin rose to 22.9% of net sales from 22.3% in the 2007 period.
Net income also rose 17%, rising to USD 2.3 billion, benefiting from the ongoing business expansion and supported by higher levels of financial income and associated company income. Basic earnings per share (EPS) rose 19% to USD 0.99, above the 17% of net income growth reflecting the lower number of outstanding shares.

Underscoring the benefits of a strategic healthcare portfolio
The performance in the first half of 2008 shows how Novartis is fully leveraging growth opportunities and benefits from the Group's strategic healthcare portfolio.
Recently launched pharmaceutical products contributed USD 1.3 billion to net sales in the first half of the year thanks to the ongoing rollout after 15 approvals in the US and EU in 2007. Top performers included Aclasta/Reclast (USD 103 million) as the only once-yearly therapy for osteoporosis and Lucentis (USD 437 million) as the only approved treatment shown to maintain and improve vision in people with age-related macular degeneration.
Sustained investments in innovation are delivering results. Afinitor (RAD001) is set for first regulatory submissions in 2008 as a breakthrough treatment for advanced kidney cancer, with studies underway in other cancers. Among other projects set for 2008 submissions is the meningococcal meningitis vaccine Menveo, which has the potential to become the first to protect from infancy to adulthood against four common serogroups associated with this often-fatal bacterial disease.
The Forward initiative is progressing well since its launch in December 2007 to improve speed, flexibility and productivity for enhanced competitiveness. Novartis is streamlining decision-making and freeing up resources to support future growth. About 65% of the anticipated 2008 cost savings of USD 670 million have been delivered. This initiative has a goal of pre-tax annual cost savings of USD 1.6 billion in 2010. The reduction of 2,500 full-time equivalent positions is underway, with nearly all affected associates notified.
The momentum of Pharmaceuticals in the first half confirmed plans for a new growth cycle starting in the second half of 2008, with quarterly net sales growth from Pharmaceuticals expected at a high-single-digit rate by the fourth quarter, in local currencies.
Strategic actions to strengthen healthcare portfolio
Complementing internal growth drivers, particularly new products from R&D investments and geographic expansion, Novartis has taken strategic actions during 2008 to further strengthen its healthcare portfolio with targeted acquisitions.
A 25% stake in Alcon Inc. (NYSE: ACL) was purchased on July 7 from Nestlé S.A. for USD 10.4 billion as part of an agreement that provides Novartis the opportunity to take majority ownership of the world leader in eye care. In an optional second step, Novartis has the right to acquire, and Nestlé the right to sell, the remaining 52% Alcon stake held by Nestlé between January 2010 and July 2011 for up to approximately USD 28 billion.
The acquisition of Protez Pharmaceuticals, a privately held US biotechnology company, will provide rights in the US and Europe to PZ-601, a promising antibiotic in Phase II development that has shown potential to treat life-threatening hospital infections.
Speedel Holding Ltd. (SWX: SPPN) became a majority-owned subsidiary on July 10 after the acquisition of an additional 51.7% stake. A mandatory public tender offer will start in August to buy remaining shares, with total acquisition costs estimated at CHF 907 million (or USD 880 million). Novartis has a long-standing collaboration with Speedel, whose R&D pipeline is a strong fit with the Group's leading position in cardiovascular disease.
Group outlook
(Barring any unforeseen events)
Novartis reaffirms expectations for another year of record net sales and earnings in 2008 from continuing operations entirely focused on healthcare. Net sales from continuing operations for the Group are expected to rise at a mid-single-digit rate, and at a low-single-digit growth rate in the Pharmaceuticals Division, both in local currencies. Sandoz is now expected to achieve mid-single-digit net sales growth for the full year in local currencies.
BUSINESS REVIEW
First half
Net sales

Pharmaceuticals: +10% (+1% lc) to USD 13.2 billion
Dynamic growth from Oncology products and the flagship brand Diovan, along with increasing contributions from recently launched products, more than offset an 11% decline in the US, which was caused by the 2007 generic entries for four products (Lotrel, Lamisil, Trileptal and Famvir) and the Zelnorm suspension. Outside of North America, all other regions expanded, with Europe at USD 5.2 billion (+8% lc), Japan at USD 1.2 billion (+6% lc), Latin America at USD 0.9 billion (+8% lc) and the rest of the world at USD 1.4 billion (+19% lc).
Oncology (USD 4.0 billion, +14% lc) gained momentum and accounted for four of the five top-selling medicines. Gleevec/Glivec achieved sales of USD 1.8 billion (+17% lc), and Zometa, Sandostatin and Femara are all on track for over USD 1 billion in annual sales. Cardiovascular strategic products (USD 3.3 billion, +3% lc) benefited from sustained gains for Diovan (USD 2.9 billion, +12% lc) and increasing contributions from the new high blood pressure medicines Exforge and Tekturna/Rasilez.
Recently launched products added USD 1.3 billion in first-half net sales after 15 major US and EU approvals in 2007 and launches underway in 2008. Top performers included the once-yearly osteoporosis therapy Aclasta/Reclast (USD 103 million), Lucentis (USD 437 million) as a standard of care for age-related blindness and Exelon Patch as a new skin patch formulation for Alzheimer's Disease and dementia linked to Parkinson's Disease.
Net sales for the first half of 2008 included a one-time contribution of USD 104 million from a provision reversal following a Novartis review of accounting for rebate programs to US government health agencies.
Vaccines and Diagnostics: +25% (+15% lc) to USD 602 million
Strong growth driven by deliveries of tick-borne encephalitis (TBE) vaccines, geographic expansion outside the US in diagnostics and sales of H5N1 pandemic vaccines.
Eastern Europe and improving positions in key markets helped mitigate the impact of a 7% lc decline in the US due to few new product launches. Russia solidified its position among the top five countries with 42% lc growth, while Germany gained market share and rose 1% lc. Poland, Canada, Brazil and Turkey provided important contributions.
Consumer Health continuing operations: +13% (+4% lc) to USD 3.0 billion
All businesses supported the improved performance, with CIBA Vision showing the strongest gains based on recent launches of new contact lens products and the benefits of full supplies following shortages in 2007.
Operating income
Pharmaceuticals: +18% to USD 4.3 billion
The double-digit advance was driven by the underlying business expansion in many regions that helped offset challenges in the US, strong contributions from productivity initiatives and a positive impact from one-time items. As a result, the operating income margin rose 2.2 percentage points to 32.4% of net sales from 30.2% in the 2007 period. Other Revenues provided 0.7 percentage points to the higher operating margin, mainly from royalty income for Betaseron®. Marketing & Sales expenses were 30.4% of net sales compared to 31.4% in the 2007 period on good productivity gains and effective reallocation of resources to support the rollout of new products including Exforge, Tekturna/Rasilez, Aclasta/Reclast, Lucentis and Exelon Patch. R&D investments rose in line with net sales, accounting for 20.2% of net sales. Priority areas included oncology compounds such as Afinitor, further support for Cardiovascular products and emerging late-stage compounds such as FTY720.
Vaccines and Diagnostics: operating loss of USD 128 million
The operating loss in the first half reflects the seasonal nature of this business, where seasonal flu vaccines sales mainly occur in the second half. Major investments were made in manufacturing and product quality as well as late-stage clinical trials and pre-launch activities for the two meningitis vaccines. The year-ago results also included a one-time legal settlement gain of USD 83 million. Excluding exceptional items and the amortization of intangible assets in both periods, the adjusted operating loss was USD 4 million in the first half compared to an adjusted operating income of USD 77 million in the 2007 period.
Sandoz: +5% to USD 591 million
Lower sales in the US and accelerated investments in R&D were among factors for the slowdown in operating income growth. Productivity gains supported an improvement in Costs of Goods Sold, which rose only 9%. However, R&D expenses rose 39% to support new projects, particularly for difficult-to-make generics. Marketing & Sales costs were higher on investments in emerging markets and to expand activities in follow-on biologics. The operating margin fell to 15.3% of net sales, a decline of 1.1 percentage points.
Consumer Health continuing operations: +17% to USD 566 million
An excellent double-digit expansion in operating income thanks to the overall business expansion and productivity benefits in all business units from the Forward initiative. Total Selling, General & Administration costs declined as a percentage of net sales, while R&D investments expanded at a fast pace to support new product development. The operating income margin was 18.9% of net sales, up from 18.3% in the 2007 period.
Corporate income and expense, net
Among factors for the increased net corporate expenses were the negative impact of foreign exchange movements and additional investments in global IT infrastructure.
Second quarter
Net sales
Pharmaceuticals: +14% (+5% lc) to USD 6.9 billion
A turnaround was achieved in the 2008 second quarter with higher sales in local currencies coming from the flagship cardiovascular and oncology brands as well as recently launched products. This more than compensated for the 3% decline in the US, which continued to be affected by 2007 generic entries for four products and the loss of Zelnorm.
Outside of North America, all regions showed strong performances: Europe (USD 2.7 billion, +8% lc), Japan (USD 664 million, +7% lc), Latin America (USD 466 million, +11% lc) and the rest of the world (USD 686 million, +18% lc).
Oncology (USD 2.1 billion, +13% lc) was the top-performing franchise, representing 30% of total net sales and driven by dynamic growth from Gleevec/Glivec, Femara and Exjade. The Cardiovascular franchise grew 9% lc on the leadership of Diovan (USD 1.5 billion, +13% lc) and increasing contributions from Tekturna/Rasilez and Exforge.
Recently launched products, including Tekturna/Rasilez, Exforge, Lucentis, Aclasta/Reclast and Exelon Patch, added USD 700 million of net sales in the second quarter as rollouts continued in key markets and new reimbursement decisions offered greater patient access. The 2008 second quarter included USD 104 million from a provision reversal following a Novartis review of accounting for rebate programs to US government health agencies.
Vaccines and Diagnostics: +28% (+19% lc) to USD 322 million
A H5N1 pandemic vaccine tender to the US government of USD 68 million was recorded in the 2008 second quarter. Higher deliveries of polio vaccines and blood testing diagnostics helped offset a modest decline in TBE vaccines, with sales limited by capacity.
Sandoz: +13% (+2% lc) to USD 1.9 billion
Key markets including Russia, Poland, Turkey, Canada and Switzerland delivered robust results, but the US continued to suffer as net sales fell 11% lc mainly from a lack of new product launches in 2008.
Consumer Health continuing operations: +12% (+3% lc) to USD 1.5 billion
CIBA Vision delivered strong growth from new products and full supplies after shortages in 2007. Emerging markets and strategic brands helped OTC offset lower sales in the US, which were hurt by an overall market shift in consumer spending toward unbranded, "private label" products. Animal Health saw solid growth in its companion animals business, more than offsetting a worldwide decline in demand for farm animal products.
Operating income
Pharmaceuticals: +23% to USD 2.2 billion
Strong operating income gains came from growing momentum in the underlying business, good progress of productivity initiatives that have delivered savings ahead of schedule and a net positive impact from one-time items. As a result, the operating income margin rose to 31.4% of net sales from 29.1% in the 2007 period. Cost of Goods Sold increased 18%, rising 0.6 percentage points as a percentage of net sales from an unfavorable product mix and currency effects. Other Revenues provided 0.6 percentage points to the improved operating income margin, mainly from royalty income for Betaseron®. R&D investments rose 12% on investments in projects including QAB149, QMF149, FTY720, Afinitor (RAD001), ACZ885 and Tekturna/Rasilez. Marketing & Sales declined to 30.4% of net sales as productivity initiatives supported major investments in new product launches that are rejuvenating the portfolio.
Vaccines and Diagnostics: operating loss of USD 75 million
Ongoing investments in R&D projects and manufacturing improvements were among key reasons for the operating loss expanding to USD 75 million in the second quarter from a loss of USD 20 million in the year-ago period. The second quarter of 2007 benefited from a gain of USD 16 million from legal settlements. Excluding exceptional items and the amortization of intangible assets in both periods, adjusted operating income was USD 16 million in the 2008 quarter compared to USD 39 million in the 2007 quarter.
Sandoz: +1% to USD 246 million
The sharp slowdown in operating income growth reflected reduced contributions from the US as well as significant investments in R&D for new products and expansion in key markets. The 2007 quarter included one-time charges of USD 28 million. The operating income margin fell to 12.6% from 14.1% in the 2007 period.
Consumer Health continuing operations: +25% to USD 304 million
CIBA Vision, Animal Health and OTC all contributed to operating income growing faster than sales, benefiting from the business expansion and productivity gains that supported investments in new products and expansion in key markets. The operating income margin rose to 19.9% of net sales in the 2008 quarter from 17.8% in the year-ago period.
Corporate income and expense, net
Higher corporate expenses included the impact of negative foreign exchange movements and additional investments in global IT infrastructure, which were partially offset by productivity gains from the Forward initiative.

FINANCIAL REVIEW
First half and second quarter
Income from associated companies
Higher income contributions in the first half and the second quarter of 2008 represented largely the Novartis share of anticipated net income from the Roche investment.
Financial income, net
Improved net financial income in the first half came mainly from the significantly higher average net liquidity in the first half of 2008 (USD 5.9 billion vs. USD 0.4 billion in the year-ago period) and robust currency management. However, sharply lower US interest rates for short-term fixed income investments weighed on the second-quarter performance.
Taxes
The tax rate for continuing operations was 14.0% in the first half of 2008, in line with the year-ago period. In the second quarter of both years, the tax rate for continuing operations was lower than usual due to reductions of anticipated full-year tax rates. In the 2008 quarter, the tax rate was 13.0% compared to 12.7% in the 2007 quarter.
Net income from discontinued operations
Discontinued operations net income in the 2008 first half represent adjustments to various accruals related to the divestments of Medical Nutrition (as of July 1, 2007) and Gerber (as of September 1, 2007).
Balance sheet
Total equity rose to USD 51.6 billion as of June 30, 2008, compared to USD 49.4 billion at the end of 2007. This increase of USD 2.2 billion comes from net income of USD 4.6 billion and currency translation gains of USD 1.4 billion, which were partially offset by USD 3.3 billion for the 2008 dividend payment (which was 29% higher than the year-earlier payment in US dollar terms) and USD 0.2 billion in actuarial losses on defined-benefit pension plans. The launch of Swiss franc bond issues during the second quarter of 2008, which raised CHF 1.5 billion, and higher short-term financial debts mainly from the USD 3 billion Commercial Paper program in the US led to the debt/equity ratio rising to 0.21:1 from 0.12:1 at the end of 2007.
Proceeds from divestments completed in 2007 and ongoing cash flow contributions led to net liquidity of USD 5.5 billion at the end of the first half, which was significantly higher than net liquidity of USD 0.1 billion at the end of the year-ago period.
In the first half of 2008, six million shares were repurchased for USD 296 million after the start of the sixth share repurchase program in March via a second trading line on the Swiss Stock Exchange. This program was suspended in April 2008 after Novartis announced the Alcon agreement. Credit agencies reduced their ratings for Novartis while supporting the strategic intentions of this acquisition. Standard & Poor's has now rated Novartis as AA- for long-term maturities and as A-1+ for short-term maturities. Moody's has rated the Group as Aa2 and P-1, respectively, while Fitch has given a long-term rating of AA and a short-term rating of F1+. All three agencies maintained a "stable" outlook.
Cash flow
In the first half of 2008, cash flow from operating activities in continuing operations fell by USD 0.4 billion to USD 3.5 billion as higher operating income contributions were more than offset by investments in working capital and tax payments. Cash inflow from investing activities in continuing operations amounted to USD 4.5 billion, mainly from the sale of USD 5.5 billion in marketable securities that was offset by USD 1.0 billion in capital expenditures. Proceeds of the Swiss franc bond offerings in the 2008 second quarter and the US commercial paper program provided a cash inflow of USD 4.5 billion. This was partially offset by the dividend payment for 2007 of USD 3.3 billion and treasury share repurchases of USD 0.5 billion and other outflows of USD 0.2 billion, which resulted in a net cash inflow of USD 0.5 billion from financing activities in continuing operations.
PHARMACEUTICALS PRODUCT REVIEW
Note: Net sales data refer to first-half 2008 worldwide performance in local currencies
Diovan (USD 2.9 billion, +12% lc), the world's top-selling branded medicine for high blood pressure, maintained solid growth worldwide and achieved its highest US share ever of 41% of the segment for angiotensin receptor blockers (ARBs). Although growth has slowed for the US antihypertensive segment, including the ARB class, Diovan has grown steadily in all key markets based on its status as the only medicine in its class approved to treat high blood pressure, high-risk heart attack survivors and patients with heart failure.
Gleevec/Glivec (USD 1.8 billion, +17% lc), a targeted therapy for certain forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), generated double-digit growth based on its status as the leading therapy for these and other life-threatening forms of cancer.
Zometa (USD 677 million, 0% lc), an intravenous bisphosphonate therapy for patients with cancer that has spread to the bones, was unchanged as fast expansion in some markets offset the US and Europe. Growth for this class of medicines began to slow in 2007 with patients receiving treatment less frequently and for shorter courses of therapy.
Femara (USD 561 million, +19% lc), an oral therapy for women with hormone-sensitive breast cancer, outpaced competitors and gained share in the aromatase inhibitor segment due to its unique benefits shown in major clinical trials. Growth in Europe was impacted slightly by the loss of patent protection earlier in 2008 in some markets, including Spain.

Posted: July 2008


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