Novartis eyes more cost-cutting moves to deliver faster-growing profits

Novartis ($NVS) is looking for big things as it doubles down in oncology, hives off vaccines, and teams up with GlaxoSmithKline ($GSK) on consumer health. It's looking for impressive results from its new meds, especially its forthcoming heart failure drug LCZ696 and brand-new psoriasis med Cosentyx. And it's thinking that these changes will help it bear the battering from generic competition.

But in the meanwhile, it's going to cut some spending, too. And to head off the blow from a stronger Swiss franc, Novartis will be looking to shift some costs outside of its home country.

The Swiss drugmaker figures on mid-single-digit sales growth for 2015 as strong sales of the multiple sclerosis drug Gilenya and other newer drugs offset continuing losses to Diovan generics. Gilenya brought in $3 billion for 2014, up 30% year-over-year, while the company's recently minted respiratory portfolio, including the brand-new Ultibro, managed a $484 million haul.

David Epstein

Plus, LCZ696 is poised for launch in the middle of the year, and it's a drug pharma chief David Epstein has deemed a "megablockbuster." Cosentyx is revving up after an FDA approval last week, and analysts see it growing to blockbuster levels.

The bottom line will be growing faster than sales next year, however, Novartis says. Core operating income will increase at a high-single-digit rate, as the company works to follow through on its commitment to boost margins.

And that means ongoing cost cuts. Last year, Novartis squeezed $1.6 billion out of its supply chain by revamping procurement; this year, it's looking for procurement savings even bigger than that. The company will continue shrinking its manufacturing footprint to save money, CEO Joe Jimenez said during a call with analysts.

Then there are the moves to damp down costs in Switzerland, where the central bank decoupled the franc from the euro. As the Financial Times reports, Jimenez says the currency change was absolutely necessary given the euro's downward trajectory. But Novartis will be looking for ways to save at home, where it incurs 13% of its costs--and collects just 2% of its sales.

"If they're smart they'll try to shift as much of the Swiss operations to other currencies to mitigate the blow," Fabian Wenner, an analyst at Kepler Cheuvreux in Zurich, told Bloomberg. "If they can shift production, R&D and whatnot, they need to do it."

While it takes a hawkish look at costs, Novartis is preparing to close a big deal with GlaxoSmithKline that will completely remake its operations. It's doubling down on oncology by snapping up Glaxo's cancer business for $16 billion, and getting out of vaccines with a sale of that unit to the U.K. drugmaker for $7.1 billion. Consumer health will head out as well, to a joint venture run by Glaxo. CFO Harry Kirsch says the company is on track to close those deals by midyear as planned.

- read the FT story
- get more from Bloomberg

Special Reports: Pharma's top 10 M&A deals of 2014's first half - GlaxoSmithKline/Novartis | Top 15 late-stage blockbusters in the pipeline - LCZ696

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