Novartis reports strong results in the first six months of 2005

 

 

 

 

 

All three Divisions delivered double-digit growth, leading to an increase of 12% (+9% lc) for the Group in the second quarter.

 

Novartis increased its share of the global health-care market to 4.6% for the first five months of 2005, up from 4.4% in the same year-ago period, according to IMS Health.

 

Led by the key brands Diovan, Gleevec/Glivec, Lotrel, Femara and Zometa, net sales for the Pharmaceuticals Division rose 12% (+9% lc) in the second quarter.

 

General Medicines (excluding Mature Products) reported a net sales gain of 14% (+12% lc), led by a 19% (+17% lc) improvement in Cardiovascular franchise sales despite increased competition for Diovan and a slowdown in the US branded antihypertension market. Net sales in Specialty Medicines (Oncology, Transplantation & Immunology, and Ophthalmics) advanced 18% (+14% lc). Oncology net sales surged 23% (+20% lc) based on the ongoing growth of Gleevec/Glivec as well as Femara, while Ophthalmics net sales were up 12% (+8% lc) as Visudyne performed well in many key markets worldwide.

 

Second-quarter sales in the US rose 9% to USD 2.0 billion, supported by good performances from Diovan, Lotrel  and Zelnorm as well as the Oncology franchise (+16%). In Europe, net sales rose 12% (+7% lc), while net sales advanced 10% (+7% lc) in Japan and 32% (+21% lc) in Latin America, thanks to excellent growth from Diovan and Gleevc. Sales in the emerging growth markets rose 29% (+23% lc), with leading performances in Turkey, China and Russia.

 

Second-quarter sales rose 13% (+9% lc), led by retail generics in France, Eastern Europe (particularly Russia) and contributions from the 2004 acquisitions of Durascan and Sabex. Strong sales of authorized generic products supported US sales growth, where pricing conditions remained very competitive. The results of Sandoz do not yet include any sales from the Hexal acquisition, completed on June 6, as sales and income of this business will only be consolidated from the third quarter of 2005 onwards.

 

Net sales were up 10% (+8% lc) in the second quarter amid ongoing strong double-digit sales growth in Animal Health and low-double-digit sales growth for OTC as well as continued high-single-digit USD sales expansion in Medical Nutrition, CIBA Vision and Infant & Baby. Growth in Animal Health was driven by the US as well as Latin America and Asia. A late cough and cold season helped OTC sales in the US and Europe, while Medical Nutrition expanded sales at double-digit rates in North America, Japan and Australia. Infant & Baby benefited from the impact of new product launches in the US. CIBA Vision continued reinforcing its No. 2 worldwide market position thanks to the successful launch of the breathable contact lenses O2Optix. 

 

Operating income

 

	H1 2005		H1 2004(1)		Change
	USD m	% of net sales	USD m	% of net sales	in %
Pharmaceuticals	2 975	30.0	2 624	29.5	13
Sandoz	189	11.6	223	15.3	-15
Consumer Health	575	16.0	539	16.5	7
Corporate income & expense, net	-210		-217		-3
Total	3 529	23.3	3 169	23.3	11

(1) Pro forma basis

 

	Q2 2005		Q2 2004(1)		Change
	USD m	% of net sales	USD m	% of net sales	in %
Pharmaceuticals	1 611	31.4	1 373	30.0	17
Sandoz	79	9.5	132	17.9	-40
Consumer Health	289	15.7	274	16.5	5
Corporate income & expense, net	-130		-64
Total	1 849	23.7	1 715	24.6	8

(1) Pro forma basis

 

 

 

• Group operating income rose 11% to USD 3.5 billion, supported by the strong Pharmaceuticals business expansion.
• Pharmaceuticals operating income was up 13% to USD 3.0 billion despite continued strong investments in R&D and launch investments in new products and indications.
• Sandoz operating income declined 15% to USD 189 million, mainly impacted by restructuring charges and price pressures in the US.
• Consumer Health operating income climbed 7% to USD 575 million, driven by strong sales performance and despite major investments to strengthen key brands, including the launch of O2Optix contact lenses.

 

 

Operating income rose at a slower pace than net sales in the second quarter, as a strong Pharmaceuticals expansion and Consumer Health contribution were offset by Sandoz, which was affected by the impact of price pressure in the US and one-time restructuring and other charges.

 

Operating income rose 17% in the second quarter, outpacing net sales growth based on strong productivity gains in Cost of Goods Sold (COGS), General & Administrative and Marketing & Sales more than offsetting R&D investments. The operating margin improved to 31.4%, up 1.4 percentage points from 30.0% in the year-ago quarter. COGS declined 1.2 percentage points in the second quarter to 15.3% of net sales based on improvements in productivity and product mix. Marketing & Sales expenses fell 0.1 percentage points to 32.8% of net sales as productivity gains more than offset targeted investments to support Femara and Enablex in the US as well as to expand operations in China and Turkey. Research & Development expenses rose faster than sales, climbing 15% and accounting for 17.9% of net sales. Key factors were investments in Phase III trials for LAF237 (diabetes), Aclasta (osteoporosis), SPP100 (hypertension), LDT600 (hepatitis B) as well as investments in the Novartis Institute for BioMedical Research (NIBR). Other Income & Expense was flat compared to the year-ago quarter, while General & Administrative expenses improved to 3.1% of sales, down 0.3 percentage points from the year-ago quarter.

 

The second-quarter included a divestment gain of USD 96 million from the sale of license rights for Restasis® (cyclosporine ophthalmic emulsion) to Allergan (excluding royalties until the time of sale in April 2005). In the prior-year quarter, license income of USD 5 million was recorded.

 

Operating income in the second quarter declined against a strong previous-year performance, mainly as  a result of one-time expenses of USD 30 million for restructuring and other charges. The overall operating margin was affected negatively by the one-off items as well as price pressure in the US, particularly for AmoxC and omeprazole, while Marketing & Sales expenses as well as General & Administrative  expenses were stable as a percentage of net sales.

 

Operating income in the second quarter increased 5%, at a slower pace than net sales as a result of higher Marketing & Sales expenditures, particularly in CIBA Vision for the O2Optix launch, as well as R&D investments to further strengthen product pipelines in OTC and Medical Nutrition.

 

Net income for the second quarter rose 9% to USD 1.6 billion compared to USD 1.5 billion (pro forma) in the year-ago period. Net income as a percentage of net sales fell slightly to 21.1% from 21.6% in the 2004 second quarter.

 

Novartis has made significant progress toward creating the world leader in generic pharmaceuticals through the previously announced strategic acquisitions of Hexal AG of Germany and Eon Labs, Inc. (NASDAQ: ELAB) of the US.

 

Novartis completed the acquisition of Hexal AG on June 6. Only a provisional consolidated balance sheet of Hexal AG was available for consolidation at the end of the second quarter of 2005. Novartis will record in the third quarter 2005 report the results of Hexal retroactive to June 6. For the full year, Novartis expects the consolidation of Hexal and Eon Labs (based on preliminary estimates) to have a net negative effect on operating income of between USD 150 million and USD 250 million. This estimate reflects the operating income contribution from the two companies offset by a number of one-time costs, which include integration, restructuring and inventory step-up costs. The negative impact on Group net income is expected to be between USD 250 million and USD 350 million, reflecting in addition lower net financial income based on reduced net liquidity. Based on the current sales performances of the two companies,  Novartis anticipates the second-half sales contribution will be in excess of USD 1.0 billion.

 

Novartis anticipates receiving US regulatory approval during the third quarter of 2005 to acquire Eon Labs after submitting a response in June for additional information to the US Federal Trade Commission. The tender offer to acquire the publicly held shares of Eon Labs, set at USD 31.00 per share, is currently scheduled to expire on July 20, 2005, and is subject to completion of the US regulatory process and the contemporaneous purchase of a 67.7 percent stake in Eon Labs from its control shareholder.

 

These strategic acquisitions, which were announced in February, combine Sandoz's global geographic presence and expertise in anti-infectives with Hexal's leadership in Germany and strong track record of successful product development  as well as Eon Labs' strong position in the US for "difficult-to-make" generics. After the acquisitions are completed, Sandoz will be the global leader in generics with combined pro forma 2004 sales of USD 5.1 billion, a portfolio of over 600 active ingredients in more than 5,000 dosage forms and more than 20,000 employees.

 

Based on the half-year performance, Novartis remains confident of achieving its key financial objectives for 2005. Further gains in market share are expected to keep Novartis positioned as one of the fastest-growing pharmaceutical companies, delivering high single-digit net sales growth for the Group and Pharmaceuticals in local currencies.

 

Barring any unforeseen events, Group operating and net income should reach new record levels on a comparable basis (and excluding the impact of the Hexal and Eon Labs acquisitions).

 

 

Diovan (USD 912 million) (+20%; +18% lc; +15% US), the No. 1 angiotensin-receptor blocker (ARB) worldwide, maintained strong growth rates despite aggressive competition in key markets and a slowdown in the overall ARB market growth in the US, where Diovan remained the leader with 38% share of the ARB market (Source: IMS). Germany, France and Italy led sales in Europe, where Diovan became in June the only antihypertensive of its kind to gain EU approval to treat both heart attack survivors (VALIANT trial) and patients with heart failure (Val-HeFT trial).

 

Lotrel (USD 278 million only in the US) (+22%), the No. 1 fixed combination treatment for hypertension in the US, remained the top-ranked branded combination antihypertensive therapy. Lotrel, along with Diovan, also benefited from disease awareness and education initiatives in the US.

 

Lamisil (USD 315 million) (+6%; +4% lc; +1% US), the leading treatment worldwide for fungal nail infections, performed well and maintained its US market leadership position despite the introduction of a generic version of the competitor itraconazole. Sales growth in the US, however, was negatively affected by inventory de-stocking. France continued to see high sales, maintaining its position as the largest European market.

 

Zelnorm/Zelmac (USD 102 million) (+34%; +35% lc +37% US), a novel therapy for irritable bowel syndrome with constipation (IBS-C) and the first and only prescription medicine for chronic idiopathic constipation, kept up a robust double-digit growth rate, reaching a 68% share of the IBS market in the US. Initiatives in the US to grow awareness about the benefits of Zelnorm for treating IBS-C and chronic constipation supported sales. Sales outside the US were up 28% for the quarter.

 

Elidel (USD 58 million) (-38%; -39% lc; -50% US) reported lower sales based on a decline in US prescriptions for the eczema treatment. Novartis is still in product labeling discussions with the FDA after an FDA Advisory Committee in February recommended the inclusion of a boxed warning for Elidel  and Protopic® (Astellas) relating to a theoretical risk of lymphoma. Novartis and many independent medical experts do not agree that such an action would be justified. Novartis remains confident in the safety and efficacy of Elidel in its approved indications. Sales outside the US rose 13% in the quarter.

 

 

Gleevec/Glivec (USD 537 million) (+33%; +28% lc; +18% US), for all stages of Philadelphia-chromosome positive (Ph+) chronic myeloid leukemia (CML) and certain forms of gastro-intestinal stromal tumors (GIST), maintained strong growth rates in the second quarter. This dynamic performance was achieved through further penetration of both the CML and GIST markets as well as an increase in the average daily dose. Promising new data presented at the American Society of Clinical Oncology (ASCO) assessing high-dose Glivec (800mg) in patients with chronic phase Ph+ CML further demonstrated the importance of optimizing patient response to therapy.

 

Zometa (USD 312 million) (+13%; +11% lc; +7% US), the leading intravenous bisphosphonate for bone metastases, reached a record 73% market share in the US during the second quarter, supported in part by greater use in prostate and lung cancer. After achieving blockbuster status in 2004, growth rates for Zometa have moderated due to high penetration rates in breast cancer and myeloma as well as increasing competition. Strong 12-month data from the Z-FAST study investigating the prevention of bone loss in women with early breast cancer receiving aromatase inhibitor therapy demonstrated an important potential new use of Zometa.  

 

Femara (USD 136 million) (+48%; +44% lc; +58% US), a leading therapy for early and advanced breast cancer in postmenopausal women, continued to grow strongly following its European approval for use in the extended adjuvant setting (after standard tamoxifen treatment), an indication approved in more than 75 countries, including the US. Applications have now been filed in both the US and Europe for use of Femara in the adjuvant setting (post-surgery). Data from two landmark trials - MA-17 in the extended adjuvant setting and BIG 1-98 in adjuvant treatment - have supported the growth of Femara and its position as a major advance in the treatment of women with breast cancer. Since publication of the first MA-17 results in October 2003, monthly prescriptions for Femara in the US have risen more than 190%.

 

Sandostatin (USD 232 million) (+19%; +16% lc; +18% US), a leading treatment for patients with the hormone condition acromegaly as well as for symptoms of gastro-entero-pancreatic neuroendocrine tumors, achieved high double-digit growth rates due to the performance of the long-acting LAR version, while the subcutaneous version faced generic competition in the US.

 

Visudyne (USD 129 million) (+18%; +15% lc; -6% US), a top treatment for "wet" AMD (age-related macular degeneration), the leading cause of blindness for people over age 50, advanced in the second quarter, helping the business unit to report an 12% (+8% lc) rise in second-quarter sales. Visudyne sales grew in many key markets worldwide, with sales outside the US up 31%. In the US, sales declined slightly due to new competition.

 

Sales rose 3% (-1% lc) during the second quarter, primarily the result of generic competition for the Neoral/Sandimmun franchise (-3%; -6% lc; -21% US). The decline in the US was partially compensated for by growth in Japan and select European countries, including France and Germany. Myfortic, for use in kidney transplantation, gained market share worldwide and is now marketed in most major countries, including Italy. Certican received Swiss approval on May 18, allowing for regulatory submissions in several countries in Asia, the Middle East and Europe.

 

 

Novartis has made good progress toward its 2005 objectives for key development projects and regulatory milestones. Among the second-quarter developments:

 

 

 

 

Corporate income & expense, net

Net corporate expenses were USD 130 million in the second quarter compared to an expense of USD 64 million in the year-ago period, mainly the result of an increase in the elimination of inter-divisional profit in inventory of USD 20 million and an increase in certain legal and product liability accruals. In the first six months, net corporate expenses were USD 210 million against an expense of USD 217 million in the prior year.

Net financial income in the second quarter totaled USD 61 million, down from USD 98 million in the year-ago period. The overall second-quarter return on net liquidity was 4.8% compared to 7.3%, reflecting the low-yield environment and lower level of net liquidity following the payment of USD 5.3 billion for the Hexal acquisition on June 6. For the half year, net financial income was USD 106 million compared to USD 126 million in the 2004 period, leading to a return of 3.5% against 4.1 % in the prior year.

Associated companies provided a net contribution of USD 28 million in the second quarter compared to USD 14 million in 2004. The Group's 42% investment in Chiron Corporation contributed a loss of USD 16 million compared with income of USD 4 million in the prior-year period. The investment in Roche resulted in income of USD 41 million. This amount consists of an estimated USD 68 million share of Roche's net income for the 2005 second quarter, offset by charges of USD 27 million related to amortization of intangible assets. In the first half, associated companies generated income of USD 61 million against USD 56 million in the year-ago period.

 

The Group's equity decreased by USD 0.9 billion in the first half of 2005 to USD 30.4 billion at June 30, 2005, as a result of the USD 2.1 billion dividend payment, a total of USD 0.4 billion in purchases of treasury shares and USD 1.7 billion of translation losses. This more than offset net income of USD 3.1 billion and other movements of USD 0.2 billion.

 

Net liquidity declined by USD 5.3 billion in the first half to USD 1.7 billion at June 30, 2005, from USD 7.0 billion at January 1, 2005, following the outlay of USD 5.3 billion for the Hexal acquisition. The debt/equity ratio at the end of the first half was 0.25:1 compared to 0.22:1 as of December 31, 2004.

 

During the second quarter, Novartis repurchased 0.2 million shares for USD 9 million through its share repurchase program via a second trading line on the SWX Swiss Exchange, bringing the total of shares repurchased in 2005 to 10.2 million for USD 0.5 billion. Since the start of the fourth program in August 2004, a total of 25.4 million shares have been repurchased for USD 1.2 billion.

 

Novartis is one of the few non-financial companies worldwide to have attained the highest credit ratings from Standard & Poor's and Moody's, the two benchmark rating agencies. S&P rates Novartis as AAA for long-term maturities and A1+ for short-term maturities, while Moody's has rated the company as Aaa and P1, respectively.

 

Cash flow

Cash flow from operating activities for the first half rose by USD 0.6 billion to USD 3.3 billion, mainly the result of the strong business expansion and strict management of working capital. In the second quarter, cash flow from operating activities was reduced by USD 0.4 billion to USD 1.3 billion, primarily due to the dividend withholding tax payment of USD 745 million occurring in the 2005 second quarter compared to the first quarter of 2004. Free cash flow (excluding any impact from the Hexal transaction) in the first half rose USD 0.5 billion to USD 0.8 billion despite a higher dividend payment in 2005.

 

 

This release contains certain forward-looking statements relating to the Group's business, which can be identified by the use of forward-looking terminology such as "will", "anticipate", "outlook", "expect", "pipeline", "potential", "planned", "will be", "intends to",  or similar expressions, or by express or implied discussions regarding potential future sales of new or existing products, potential new products or potential new indications for existing products, or by other discussions of strategy, plans or intentions. Such statements reflect the current views of the Group with respect to future events and are subject to certain risks, uncertainties and assumptions. There can be no guarantee that any  products will reach any particular sales levels, or that any new products will be approved for sale in any market, or that any new indications will be approved for existing products in any market. In particular, management's expectations could be affected by, among other things, new clinical data; unexpected clinical trial results; unexpected regulatory actions or delays or government regulation generally; the Group's ability to obtain or maintain patent or other proprietary intellectual property protection; competition in general; government, industry, and general public pricing pressures and other risks and factors referred to in the Group's current Form 20-F on file with the US Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Novartis is providing the information in this press release as of this date and does not undertake any obligation to update any forward-looking statements contained in this press release as a result of new information, future events or otherwise.

 

Novartis AG (NYSE: NVS) is a world leader in pharmaceuticals and consumer health. In 2004, the Group's businesses achieved net sales of USD 28.2 billion and pro forma net income of USD 5.6 billion. The Group invested approximately USD 4.2 billion in R&D. Headquartered in Basel, Switzerland, Novartis Group companies employ about 83,700 people and operate in over 140 countries around the world.

 

For further information please consult http://www.novartis.com.

 

 

 

September 20, 2005        Pipeline update

October 18, 2005            Nine-month and third quarter results

January 2006                   Full-year 2005 results