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Pharmaceuticals Delivers Strong Underlying Growth in First Quarter of 2009 as Novartis Continues to Rejuvenate Product Portfolio

  • Group's strong operational performance led by Pharmaceuticals net sales growth of 12% in local currencies on rapid expansion of recently launched products
  • R&D progress led by first approvals of anti-cancer medicine Afinitor and Ixiaro, a vaccine against Japanese encephalitis; key development projects advancing well
  • Q1 2009 reported results include significant negative currency impact:
  • Net sales of USD 9.7 billion (-2%, but +8% in local currencies, or lc) driven by underlying Pharmaceuticals expansion; Sandoz up 4% lc on sustained growth in many regions
  • Operating income of USD 2.3 billion down 6%, but rises 7% excluding adverse currencies (-11 percentage points) and exceptional items in both periods
  • Net income of USD 2.0 billion falls 14%, includes effects in 2009 first quarter of lower average net liquidity and Alcon financing costs
  • Basic EPS of USD 0.87 in first quarter of 2009 vs. USD 1.02 in 2008 period
  • Novartis expects strong operational performance in 2009, but a continuation of recent currency rates could more than offset underlying profit improvements
Key figures - Continuing operations
First quarter

Basel, April 23, 2009 - Commenting on the results, Dr. Daniel Vasella, Chairman and CEO of Novartis, said: "New products fueled ongoing momentum in Pharmaceuticals in the first quarter of 2009, and the fundamentals of the business remain positive. R&D projects are progressing well, and I am pleased with the first approvals of Afinitor, offering hope to advanced kidney cancer patients, and the Ixiaro vaccine against Japanese encephalitis. The uncertain economy and currency market volatility create an opportunity to continue to enhance productivity and manage costs. Our aim in 2009 remains to again deliver record underlying net sales and earnings excluding currency effects."
Pharmaceuticals led the Group's healthcare portfolio in the first quarter of 2009, with the division's net sales up 12% in local currencies. Sustained expansion of recently launched products rejuvenated the Pharmaceuticals portfolio and led to market share gains in 11 of the top 15 countries. The benefits of R&D investments were reaffirmed with the first regulatory approval of the anti-cancer medicine Afinitor in the US as well as the US and European approvals of the new Ixiaro vaccine against Japanese encephalitis. Good progress was achieved in a number of the Group's development projects.
The solid underlying performance was offset in reported results by the effect of a stronger US dollar (the Group's reporting currency), with net sales reduced by 10 percentage points and operating income by 11 percentage points, and was also impacted by weaker performances in OTC and Animal Health, due to the global economic crisis.
As a result, net sales rose 8% in local currencies in the first quarter, but fell 2% in US dollars to USD 9.7 billion. Higher sales volumes provided eight percentage points of growth over the 2008 quarter, but this could not overcome the 10 percentage points lost to negative currency movements. Net price changes and acquisitions had no impact.
Operating income fell 6% to USD 2.3 billion, which included currency losses along with sustained Pharmaceuticals investments, reduced contributions from Sandoz and higher one-time gains in 2008. However, operating income rose 7% when adjusted for currencies, exceptional items and the amortization of intangible assets in both periods.
Net income declined 14% to USD 2.0 billion, also hurt by currencies. A drop in average net liquidity and financing costs for the 25% Alcon stake, which was acquired in 2008, further reduced non-operating income in the 2009 quarter. Basic earnings per share (EPS) were USD 0.87 in the 2009 first quarter compared to USD 1.02 in the 2008 period.
Targeting sustainable growth in a challenging environment
Novartis continues its focus in 2009 on driving sustainable growth from its broad healthcare portfolio in a challenging environment, one in which the demand for medicines continues to rise.
Following a consistent strategy paired with disciplined execution, Novartis is committed to selectively strengthen its businesses, step up investments in innovation and expand in high-growth markets while improving organizational efficiency. These are particularly important to ensure Novartis, which also benefits from its sound financial position, emerges stronger and more competitive when economic conditions start to improve.
Novartis believes it has an excellent portfolio to address the fast-changing and complex needs of patients and societies worldwide. The Group is building on leadership, expertise and synergies in innovative medicines as well as high-quality cost-effective generic drugs, preventive vaccines and diagnostics, and consumer health products.
In Pharmaceuticals, recently launched products are increasingly driving growth, providing USD 0.9 billion of net sales in the first quarter in 2009 and representing 14% of net sales compared to 8% in the 2008 quarter. Major R&D investments are being made to accelerate the highly rated pipeline, spurred on by the first worldwide approval of Afinitor in the US. More than 130 regulatory submissions are planned for the US, Europe and Japan between 2009 and 2011, while decisions are pending for 2008 submissions that included QAB149 (COPD) and Ilaris (formerly ACZ885, Muckle-Wells Syndrome).
Vaccines and Diagnostics has built a platform for growth while advancing a pipeline led by the 2009 approvals of Ixiaro in the US and Europe and progress in the two late-stage meningitis vaccines. Menveo (serogroups A,C,W,Y) is awaiting first regulatory decisions in the US and Europe after submissions in 2008 for initial use in people from ages 11 to 55, while the MenB vaccine in late-stage trials has the potential to be the first of its kind.
Major initiatives are also underway to return Sandoz, the world's second-largest generics company, to higher growth rates and profitability. Key to this is resolving challenges in the US while accelerating the solid growth seen in the rest of the world. New global and US leadership teams are aiming to increase the contribution of new product launches and address all FDA concerns about a US manufacturing site that is being remediated. Globally, Sandoz is expanding in emerging markets and accelerating development of higher-value generics.
Consumer Health is maximizing the value of trusted brands and seeking to achieve above-market growth. While CIBA Vision expands with new product launches, OTC and Animal Health are addressing difficult consumer trends amid recessions in some regions, particularly the US, through renewed efforts on innovation and marketing excellence.
Expansion in targeted high-growth markets continues with a long-term perspective. Net sales in the top six emerging markets rose 23% lc to USD 846 million in the 2009 first quarter, with only limited signs to date of an adverse impact from global economic conditions.
Novartis is also integrating the drive for greater productivity and increased efficiency into the Group's operations, improving efficiency and speed while freeing up resources to focus on customers and growth initiatives. Forward, the Group-wide project launched in late 2007, is ahead of schedule, delivering USD 329 million of incremental savings in the 2009 first quarter. The program is set to exceed the 2009 cost savings goal of USD 1.3 billion, and the 2010 savings goal of USD 1.6 billion (compared to 2007).
Group outlook
(Barring any unforeseen events)
Novartis expects continued strong underlying momentum, with Group net sales growing in 2009 at a mid-single-digit rate and Pharmaceuticals net sales growing at a mid- to high-single-digit rate, both in local currencies. Improvements in underlying operating and net income to record levels in 2009, however, could very well be more than offset in reported results by currency-related losses if recent exchange rates continue during the year.

First quarter
Net sales
Pharmaceuticals: USD 6.4 billion (+3%, +12% lc)
Providing 66% of the Group's net sales, Pharmaceuticals achieved 12% growth in local currencies thanks to double-digit growth in all regions and recently launched products nearly doubling their contribution from the year-ago quarter. The US (USD 2.2 billion, +13%) reaffirmed the return to growth seen in 2008. Japan (USD 724 million, +14% lc) was among the leading regions and benefited from the approval and launch of four new medicines (Co-Diovan, Lucentis, Xolair and Tasigna) in the 2009 quarter. Launches also underpinned Europe (USD 2.3 billion, +11% lc). The six emerging markets of Brazil, China, India, Russia, South Korea and Turkey (USD 550 million, +20% lc) grew strongly.
Thanks to ongoing geographic rollout and improving reimbursement levels, recently launched products - led by Lucentis, Exelon Patch, Exforge, Exjade, Reclast/Aclasta, Tekturna/Rasilez and Tasigna - delivered USD 872 million of sales in the 2009 quarter, up 94% lc over the 2008 quarter. These products provided eight percentage points of the 12% lc sales growth in the 2009 first quarter while also representing 14% of the division's net sales compared to 8% in the 2008 period.
All therapeutic franchises grew in local currencies. Oncology (USD 2.0 billion, +13% lc) ranked as the largest, led by Gleevec/Glivec (USD 894 million, +13% lc), Femara (USD 286 million, +15% lc) and Zometa (USD 342 million, +10% lc). Cardiovascular (USD 1.7 billion, +14% lc) strategic portfolio gains came from the new high blood pressure medicines Exforge (USD 136 million) and Tekturna/Rasilez (USD 52 million) as well as ongoing global expansion of Diovan (USD 1.4 billion, +7% lc), particularly outside the US.
Vaccines and Diagnostics: USD 247 million (-12%, -2% lc)
The modest decline in local currencies mainly reflected lower sales of TBE (tick-borne encephalitis) vaccines due to the weather-related late start of the European vaccination season in 2009. Seasonal influenza vaccine sales resumed in the Southern Hemisphere.
Sandoz: USD 1.7 billion (-9%, +4% lc)
All regions outside the US showed solid growth in local currencies, particularly Central and Eastern Europe (+18% lc) and Asia-Pacific (+28% lc). Germany (+2% lc) gained market share and improved its leadership position. The US fell 3%, a smaller decline than in recent quarters, and largely a consequence of lost sales from approved products that have been blocked for distribution since 2008 as part of an FDA review of a US manufacturing site as well as price erosion.
Consumer Health: USD 1.3 billion (-11%, +1% lc)
CIBA Vision rose on the momentum of new contact lens products and market segment gains. OTC sales were lower due to decelerating growth in some emerging markets and reduced demand for branded OTC products in the US, while Animal Health sales were down slightly on a slowdown in the companion animal business.

Operating income
Pharmaceuticals: USD 2.1 billion (-2%)
Strong business expansion and increased productivity provided underlying operating income growth of 11%, which was roughly in line with the 12% lc net sales expansion. These operating income gains were more than offset by the adverse impact of currencies (-10 percentage points) and higher exceptional items in the 2008 quarter (-3 percentage points). As a result, reported operating income in US dollars fell 2% and the operating margin declined to 32.1% of net sales from 33.5% in the 2008 quarter. Other revenues fell 0.9 percentage points, mainly from the end of Betaseron® royalty receipts in late 2008, while Cost of Goods Sold rose 0.8 percentage points on higher royalty payments made for some products. However, Marketing & Sales costs fell 0.9 percentage points as productivity gains more than offset sustained strong investments in new product launches around the world. R&D investments were unchanged at 20.9% of net sales.
Vaccines and Diagnostics: USD -67 million
Major investments were made in the competitive vaccines development pipeline, while the year-ago quarter included an exceptional settlement gain of USD 49 million. Adjusted operating income, excluding exceptional items and the amortization of intangible assets in both periods, was USD 11 million in the 2009 first quarter compared to an adjusted operating loss of USD 20 million in the year-ago quarter.
Sandoz: USD 291 million (-16%)
Reduced contributions from the US and negative currency movements of about 12 percentage points more than outweighed productivity gains and growth in key markets. Cost of Goods Sold rose 3.3 percentage points as a percent of net sales compared to the 2008 quarter on changes to product mix largely due to the lack of US product launches, while Marketing & Sales and R&D supported geographic expansion and product development, particularly in difficult-to-make generics such as biosimilars.
Consumer Health: USD 235 million (-10%)
Reported results were significantly hurt by unfavorable currency movements, with growth of 9% excluding currency changes. Consumer Health achieved productivity gains, particularly at CIBA Vision, and a higher gross margin, thus enabling higher R&D investments for new products.
Corporate Income & Expense, net
Among reasons for higher net corporate expenses in the 2009 quarter were increases in pension expenses and additional product liability costs.

First quarter
Income from associated companies
The 25% Alcon stake provided net income of USD 12 million in the 2009 quarter, as the anticipated share of Alcon's net income and a positive adjustment from reported results in 2008 more than offset amortization charges. However, reduced income from Roche was largely due to a negative adjustment of USD 40 million from Roche's reported 2008 results that were below expectations. Overall, income from associated companies fell to USD 83 million in the 2009 quarter from USD 137 million the 2008 period.
Financial result, net
Average net liquidity in the 2009 first quarter fell to net debt of USD 1.8 billion from net liquidity of USD 6.4 billion in 2008, reflecting the mid-2008 purchase of the Alcon stake. Currency losses and reduced financial income, which was due to less liquidity as a result of the Alcon acquisition, contributed to the fall of USD 196 million in financial income. Interest expense rose to USD 86 million, reflecting an additional expense of USD 50 million in the 2009 first quarter due to the US dollar bond issued in early 2009 and the Swiss franc bonds issued in mid-2008.
The tax rate (taxes as a percentage of pre-tax income) fell to 14.0% from 15.0% in the first quarter of 2008, and in line with the 14.1% tax rate for the full year in 2008.
Net income from continuing operations
Lower contributions from the operating businesses and reduced non-operating income in the 2009 quarter were among factors for the 14% decline in net income from continuing operations to USD 2.0 billion from USD 2.3 billion in the year-ago period.
Basic earnings per share
Basic earnings per share (EPS) from continuing operations were USD 0.87 per share in 2009, down from USD 1.02 in the 2008 period, in line with the decline in net income.
Balance sheet
Total assets fell slightly to USD 78.0 billion at the end of the 2009 first quarter from USD 78.3 billion at the end of 2008, mainly from a decrease of USD 1.9 billion in non-current assets to USD 55.5 billion due to the stronger US dollar.
The Group's equity declined by USD 4.2 billion to USD 46.2 billion at the end of the 2009 first quarter from USD 50.4 billion at the end of 2008. Recognized income and expenses were down to USD 0.2 billion as net income of USD 2.0 billion for the 2009 quarter was more than offset by USD 0.7 billion in actuarial losses on pension plans, USD 1.4 billion in currency translation losses, and USD 0.1 billion of negative fair value adjustments on financial instruments and other factors. A net total of USD 0.2 billion in treasury shares were repurchased in the first quarter of 2009, but no transactions have taken place on the second trading line since this program was suspended in April 2008 following the announcement of the Alcon transaction. The dividend payment distributed in the first quarter of 2009 amounted to USD 3.9 billion, an 18% increase in US dollars from the 2008 dividend payment of USD 3.3 billion.
The Group's debt/equity ratio increased to 0.25:1 at the end of the first quarter from 0.15:1 at the end of 2008, reflecting the financing program started in the first quarter with the successful issuance of a USD 5 billion bond (two tranches) in the US. At the end of the 2009 first quarter, financial debt of USD 11.5 billion consisted of USD 4.5 billion in current and USD 7.0 billion in non-current liabilities.
Credit agencies reduced their ratings for Novartis in April 2008, citing expected financing requirements for Alcon while supporting the transaction's strategic intentions. Moody's rated the Group as Aa2 for long-term maturities and P-1 for short-term maturities and Standard & Poor's had a rating of AA- and A-1+, for long-term and short-term maturities, respectively. Fitch had a long-term rating of AA and a short-term rating of F1+. These agencies maintained a "stable" outlook.
Cash flow
Cash flow from continuing operating activities rose 16% to USD 2.0 billion in the first quarter, driven by the underlying business expansion as well as lower tax payments in the 2009 quarter compared to the prior-year period. Operating cash flow in the 2008 first quarter also included restructuring payments for the Forward initiative.
A substantial amount of the proceeds from the USD 5 billion bond were reinvested into marketable securities in the first quarter of 2009, resulting in the swing in cash flow related to investing activites to an outflow of USD 2.8 billion from an inflow of USD 3.4 billion in the 2008 quarter. Cash inflows from financing activities were a net USD 0.5 billion as the USD 5 billion of proceeds from the bond was offset by the dividend payment of USD 3.9 billion and other items totaling USD 0.6 billion.
Overall liquidity increased to USD 7.8 billion at the end of the 2009 first quarter from USD 6.1 billion at the end of 2008. Taking into account the debt raised in 2009, net debt increased to USD 3.6 billion at the end of the first quarter from net debt of USD 1.2 billion at the end of 2008 and net liquidity of USD 4.4 billion at the end of the 2008 first quarter.
Note: Net sales growth data refer to 2009 performance in local currencies.
Diovan (USD 1.4 billion, +7% lc), the world's top-selling branded medicine for high blood pressure, achieved 10% lc growth in key regions outside the US that represented nearly 60% of total sales. Japan delivered dynamic growth for the Diovan franchise ahead of the March 2009 introduction of Co-Dio, a single-pill combination with a diuretic that gained approval in January. In the US, Diovan rose 3% as growth was hampered by inventory reductions among some wholesalers, but maintained its leading 40% share of the angiotensin receptor blockers (ARB) segment.
Gleevec/Glivec (USD 894 million, +13% lc), a targeted therapy for certain forms of chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), was a top driver of incremental sales growth in the first quarter based on leadership positions in treating these cancers. Gleevec was approved as the first post-surgery (adjuvant setting) therapy for GIST in the US (December 2008) and in Switzerland (February 2009), and also recommended for approval in Europe (March 2009). Data on these benefits in adjuvant GIST patients were published in "The Lancet" medical journal.
Zometa (USD 342 million, +10% lc), an intravenous bisphosphonate therapy for patients with cancer that has spread to the bones, has seen renewed expansion from improved compliance for existing indications as well as landmark data presented in 2008 showing a significant anticancer benefit. In February 2009, "The New England Journal of Medicine" published these data showing Zometa reduces the risk of cancer recurrence or death in premenopausal women with hormone-sensitive, early-stage breast cancer. More studies are underway to review other potential anticancer benefits of Zometa.
Femara (USD 286 million, +15% lc), an oral therapy for women with hormone-sensitive breast cancer, maintained strong growth leading to sustained market segment gains in the US, Europe and Japan. The entry of generic competition in some markets in 2008, including some European countries, has had a modest impact on global growth.
Sandostatin (USD 258 million, +6% lc), for acromegaly and neuroendocrine tumors of the gastrointestinal tract and pancreas, benefited from an increasing use of Sandostatin LAR, the once-monthly version that accounts for over 85% of net sales. New data from a Phase III study presented in January showed patients with metastatic neuroendocrine tumors of the midgut who received Sandostatin LAR had significantly increased time to tumor progression compared with those given a placebo.
Lucentis (USD 229 million, +43% lc), a biotechnology eye therapy approved in more than 80 countries, has become a leader in its segment as the only treatment proven to maintain and improve vision in patients with "wet" age-related macular degeneration, a leading cause of blindness in people over age 50. Broad sales expansion has been seen in Europe since the first launch in early 2007, while Lucentis was approved and launched in Japan in the 2009 first quarter. Enrollment has been completed for a Phase III trial in diabetic macular edema (DME) and a regulatory submission in Europe is still expected for 2010. Genentech holds the US rights to this medicine.
Exelon/Exelon Patch (USD 203 million, +21% lc), a therapy for mild to moderate forms of Alzheimer's disease dementia and also dementia linked with Parkinson's disease, has benefited from the late 2007 launch of Exelon Patch, a novel skin patch, that has led to significant market segment gains in the US and other countries.
Exforge (USD 136 million, +114% lc), a single-pill high blood pressure medicine with the angiotensin receptor blocker Diovan (valsartan) and calcium channel blocker amlodipine, continues to grow rapidly due to data underscoring its differentiated efficacy profile.
Exjade (USD 122 million, +24% lc), approved in over 90 countries as the only once-daily oral therapy for transfusional iron overload, received the first major approval for a new dose of 40 mg/kg in Switzerland, providing a new dose for high-risk patients needing more intensive iron chelation.
Reclast/Aclasta (USD 85 million, +128% lc), the first once-yearly infusion therapy for different kinds of osteoporosis, has shown dynamic growth thanks to increasing access to patient infusion centers and improving reimbursement levels. More than 5,700 infusion centers have been established in the US, more than double from early 2008. Known as Aclasta in Europe and Reclast in the US, this medicine has 100% reimbursement on US Medicare formularies and full reimbursement status in France, Germany and the UK.
Lotrel (USD 83 million, -13% lc, only US), a single-pill combination for high blood pressure, provides sales from higher doses with market exclusivity. Sales of lower doses fell after an "at risk" generics launch in 2007 despite a US patent still valid until 2017.
Myfortic (USD 73 million, +30% lc), a therapy for kidney transplant patients, has seen rapid growth thanks to its novel enteric-coated formulation of mycophenolic acid.
Xolair (USD 61 million, +77% lc, only Novartis sales), a biotechnology drug for moderate to severe allergic asthma, was approved and launched in Japan during the 2009 first quarter. It now has approvals in more than 60 countries worldwide. The Xolair Liquid formulation to ease administration was approved in Europe in February. In December 2008, Xolair was submitted for US and EU approval for use in children age 6 to less than 12 years old. Novartis co-promotes Xolair with Genentech in the US and shares a portion of operating income. Genentech's Xolair US sales were USD 133 million in the first quarter of 2009.
Tekturna/Rasilez (USD 52 million, +97% lc), the first new type of high blood pressure medicine in more than a decade, has grown steadily in a competitive market, particularly in Europe, based on data affirming its ability to reduce blood pressure for over 24 hours and the potential to protect the heart and kidney, which is being studied in the ASPIRE HIGHER outcomes program. Rasilez HCT, a single-pill combination with a diuretic, is being launched in Europe after approval in January 2009. This combination is already available in the US as Tekturna HCT. Other single-pill combinations are in development, while a combination with Diovan was submitted for US approval at the end of 2008.
Tasigna (USD 35 million), a new second-line therapy for patients with a form of chronic myeloid leukemia (CML) resistant or intolerant to prior therapy, including Gleevec/Glivec, was approved and launched in Japan while growing in key markets. Tasigna shows the potential to become a leading therapy for newly diagnosed CML patients, with results expected in 2010 from a Phase III trial comparing it with Gleevec/Glivec. Submissions for third-line use of Tasigna in GIST patients are now planned by the end of 2009.
Galvus/Eucreas (USD 26 million), two new oral treatments for type 2 diabetes, have performed well in many European and Latin American markets after receiving approvals in early 2008 and late 2007, respectively. Galvus is the market leader in some Latin American countries due to its strong efficacy profile. Eucreas is a single-pill combination of Galvus with the oral anti-diabetes medicine metformin. Galvus has now been launched in over 30 countries, while Eucreas is now available in nearly 20 countries.
Extavia, for patients with some forms of multiple sclerosis (MS), has been launched in eight countries, including Germany and France, since the start of 2009 as part of the European rollout. Extavia is the same medicine as Betaferon®/ Betaseron®, which is marketed by Bayer Schering and was the first beta interferon therapy for MS. Novartis gained rights to its own branded version in agreements with Bayer Schering reached after Novartis fully acquired Chiron. Novartis plans to launch Extavia in the US in 2009.
Afinitor (everolimus, RAD001), an oral inhibitor of the mTOR pathway, received its initial US approval in March as the first therapy for patients with advanced renal cell carcinoma (kidney cancer) after failure of treatment with sunitinib or sorafenib. It has also been submitted in Europe, Switzerland and Japan for this indication. Afinitor is being studied in many cancer types, with Phase III studies underway in neuroendocrine tumors (NET) and plans to initiate Phase III trials in breast and gastric cancer, tuberous sclerosis complex (TSC), hepatocellular carcinoma (HCC) and lymphoma. Submissions for Afinitor in advanced secretory carcinoid tumors, a form of NET, are also planned for 2009. Data from an early clinical study presented in January showed positive results in patients with advanced gastric cancer after failure of one or more prior treatments.
QAB149 (indacaterol), a bronchodilator for chronic obstructive pulmonary disease (an incurable condition with damaged lungs, usually from smoking), was accepted for US and European review after submissions in late 2008. Data from Phase III trials showed QAB149 has a fast onset of action and is more effective than standard bronchodilators over 24 hours with a good safety profile, even at doses higher than required for therapeutic effect. Further data from the Phase III program, which was finished in 2008, are planned to be made public at the American Thoracic Society meeting in May.
Ilaris (canakinumab, formerly ACZ885), a human antibody targeting IL-1 beta, has accelerated review status in a number of countries for its first submission for use in treating a group of rare auto-inflammatory diseases called Cryopyrin-Associated Periodic Syndromes (CAPS), which includes Muckle-Wells Syndrome. Submissions in the US, Switzerland and Europe were made already in December 2008 after data from two studies showed adults and children given Ilaris achieved rapid and long-lasting clinical remission. Priority review status has been granted in the US and Switzerland. Studies are underway in other areas, including gout, Systemic Juvenile Idiopathic Arthritis (SJIA) and type 2 diabetes.
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Posted: April 2009