Novartis delivers strong sales and innovation in 2013; underlying business performance reinforces growth prospects

Novartis delivers strong sales and innovation in 2013; underlying business performance reinforces growth prospects

Net sales up 4% in constant currencies[1] in 2013, despite generic erosion of USD 2.2 billion
Net sales of USD 57.9 billion (+2%, +4% cc)
Operating income of USD 10.9 billion (-3%, +5% cc)
Core[1] operating income of USD 14.5 billion (-2%, +3% cc)
Core EPS of USD 5.09 (-1%, +4% cc) 
Free cash flow[1] of USD 9.9 billion (-13%)

Dividend of CHF 2.45 per share, up 7%, proposed for 2013; 74% payout of net income

Strong momentum in innovation continued with 18 approvals in 2013
Major approvals for Ultibro Breezhaler in COPD and Bexsero in MenB infections; first European approval for AirFluSal Forspiro in asthma and COPD in fourth quarter
Regulatory submission for AIN457 in moderate-to-severe plaque psoriasis in US and EU
Strong newsflow from Novartis Oncology: positive pivotal trial for LBH589 in multiple myeloma; LEE011 advanced to Phase III in breast cancer; continued positive data in CTL019 in leukemia
Sandoz initiated Phase III trial for adalimumab (Humira®), advancing its biosimilars pipeline

Group performance driven by growth products[2] and Emerging Growth Markets[2] expansion
Growth products grew 15% to USD 18.1 billion or 31% of Group net sales in 2013
Emerging Growth Markets up 10% (cc) in 2013; up 12% (cc) in fourth quarter
Underlying business, which excludes USD 2.2 billion generics impact, saw net sales up 8% (cc) and core operating income up 15% (cc) in 2013

Sharpened execution of strategy in 2013 and delivering shareholder returns
Divestment of blood transfusion diagnostics unit as part of ongoing portfolio management
Initiated USD 5.0 billion share buyback, reinforcing confidence in growth prospects

Outlook 2014:
Group net sales to grow low to mid-single digit (cc), core operating income to grow ahead of sales (cc). This assumes Diovan monotherapy US generic launch at the beginning of Q2 2014[3]
This is consistent with January 2013 outlook, adjusted for the delay in Diovan monotherapy generic launch in the US
Key figures
Q4 2013
Q42012[4]
% change

FY 2013
FY 2012[4]
% change

USD m
USD m
USD
cc

USD m
USD m
USD
cc
Net sales
15 078
14 828
2
4

57 920
56 673
2
4
Operating income
2 373
2 401
-1
10

10 910
11 193
-3
5
Net income
2 058
2 022
2
13

9 292
9 383
-1
7
EPS (USD)
0.83
0.82
1
13

3.76
3.83
-2
6
Free cash flow
3 319
3 513
-6


9 945
11 383
-13

Core









Operating income
3 395
3 594
-6
2

14 485
14 842
-2
3
Net income
2 955
3 042
-3
4

12 533
12 576
0
5
EPS (USD)
1.20
1.24
-3
4

5.09
5.15
-1
4

[1] Constant currencies (cc), core results, and free cash flow are non-IFRS measures. An explanation of these non-IFRS measures and reconciliation tables can be found beginning on page 46 of the 2013 Condensed Financial Report.
[2] Growth products are defined on page 2, and Emerging Growth Markets are defined on page 7.
[3] Assumption for forecasting purposes only. Outlook excludes the blood transfusion diagnostics unit in 2013 and 2014.
[4] Restated as explained in the the 2013 Condensed Financial Report on pages 36 and 72.
All product names appearing in italics are trademarks owned by or licensed to Novartis Group Companies.


Basel, January 29, 2014 - Commenting on the results, Joseph Jimenez, CEO of Novartis, said:
"Novartis delivered strong performance in 2013, growing both net sales and core operating income in constant currencies while absorbing patent expirations. We maintained good momentum in innovation, with 18 approvals and 3 FDA Breakthrough Therapy designations. Our growth products continued to expand, rejuvenating our portfolio and reinforcing our growth prospects."

GROUP REVIEW

Fourth quarter

Group net sales grew on strong execution of growth products[1]
Group net sales increased 2% (+4% cc) to USD 15.1 billion in the fourth quarter. Currency had a negative impact of 2 percentage points, mainly from the weakened yen and weakening emerging market currencies against the US dollar.

Excluding the impact of generic competition of approximately USD 0.4 billion, mainly due to Zometa/Aclasta and Diovan, underlying net sales grew 7% in constant currencies. Growth products contributed USD 4.8 billion or 32% of Group net sales, up 15% over the prior-year quarter.

Group operating income decreased 1% (+10% cc) to USD 2.4 billion. The negative impact of 11 percentage points from currency was greater than in previous quarters primarily due to a further strengthening of the Swiss franc and weakening of the yen and emerging market currencies in the fourth quarter. Operating income margin declined 0.5 percentage points to 15.7% of net sales mainly due to currency, with operating income margin improving 1.0 percentage points in constant currencies. The adjustments made to Group operating income to arrive at core operating income amounted to USD 1.0 billion (2012: USD 1.2 billion).

Core operating income was down 6% (+2% cc) to USD 3.4 billion. Core operating income margin in constant currencies declined 0.5 percentage points; currency had a negative impact of 1.2 percentage points, resulting in a net decline of 1.7 percentage points to 22.5% of net sales.

Excluding the impact of generic competition, underlying core operating income grew 10% in constant currencies.

Group net income of USD 2.1 billion was up 2% in reported terms, and up 13% in constant currencies, principally due to operating income performance and lower income tax. EPS was up 1% (+13% cc) to USD 0.83, in line with net income.

Group core net income of USD 3.0 billion was down 3% in reported terms, but up 4% in constant currencies, from core operating income performance and lower income tax. Core EPS declined 3% (+4% cc) to USD 1.20, in line with core net income.

Pharmaceuticals net sales, which continued to benefit from delayed entry of generic competition for Diovan monotherapy in the US, reached USD 8.3 billion (+1%, +4% cc) in the fourth quarter, driven by strong volume growth (+9 percentage points), partly offset by the impact of generic competition (USD 0.4 billion, -5 percentage points), mainly for Zometa/Aclasta and Diovan. Growth products, including Gilenya, Afinitor, Tasigna, Galvus, Lucentis, Xolair, the Q Family[2] and Jakavi, together generated USD 3.3 billion or 40% of division net sales, compared to 33% in the prior-year period.

Pharmaceuticals operating income was up 5% (+14% cc) to USD 2.0 billion, due to higher sales and higher exceptional charges in the prior-year quarter. Core operating income declined 6% (+2% cc) to USD 2.1 billion. Core operating income margin in constant currencies declined 0.6 percentage points, mainly due to increased royalties and generic erosion, partly offset by productivity savings from Marketing & Sales; currency had a negative impact of 1.4 percentage points, resulting in a net decrease of 2.0 percentage points to 25.6% of net sales.

[1] "Growth products" comprise products launched in 2008 or later, or products with exclusivity until at least 2017 in key markets (EU, US, Japan) (except Sandoz, which includes only products launched in the last 24 months). The definition of growth products is maintained in all comparisons to prior year.
[2] The Q Family includes Arcapta Neohaler/Onbrez Breezhaler, Seebri Breezhaler and Ultibro Breezhaler.

Alcon net sales amounted to USD 2.7 billion (+3%, +6% cc) in the fourth quarter, driven by newly launched products. Surgical performance (+5%, +9% cc) was driven by Alcon's new phacoemulsification platform, Centurion, as well as demand for other equipment platforms, including the LenSx femtosecond laser. Ophthalmic Pharmaceuticals franchise performance (+2%, +5% cc) was driven by growth of combination glaucoma and dry-eye products. Vision Care also grew (+1%, +4% cc), with solid sales in contact lenses, including Dailies Total1.

Alcon operating income was USD 172 million (-47%, -30% cc), decreasing mainly due to higher amortization of intangible assets, timing of integration-related costs, and exceptional restructuring costs. Core operating income of USD 851 million was down 5% in reported terms, but up 1% in constant currencies. Core operating income margin in constant currencies decreased by 1.6 percentage points largely due to product mix with the growth of the surgical equipment business and Marketing & Sales investments to support new product launches; currency had a negative impact of 1.2 percentage points, resulting in a net decrease of 2.8 percentage points to 32.1% of net sales.

Sandoz net sales of USD 2.4 billion (+1%, +1% cc) showed a slight increase over the prior-year quarter, which included high US authorized generic sales of valsartan HCT and four months of Fougera sales. Volume growth of 9 percentage points more than compensated for price erosion of 8 percentage points. Western Europe (excluding Germany) and emerging markets delivered strong sales growth, offset by declines in the US and Germany. Sandoz also continued to strengthen its global leadership position in biosimilars (USD 119 million, +26% cc) in the fourth quarter.

Sandoz operating income of USD 276 million was down 3% in reported terms, but up 3% in constant currencies, primarily due to lower exceptional items compared to the prior year. Core operating income declined by 10% (-6% cc) to USD 373 million. Core operating income margin in constant currencies decreased by 1.2 percentage points, mainly driven by the very high-margin prior-year sales of valsartan HCT in the US as well as the extra month of high-margin Fougera sales in the 2012 quarter. Currency had a negative impact of 0.6 percentage points, resulting in a net decrease of 1.8 percentage points to 15.5% of net sales.

Vaccines and Diagnostics net sales were up 4% (+3% cc) to USD 655 million, driven by seasonal influenza, pre-pandemic sales including H7N9 in the US and Menveo growth, partially offset by lower pediatric bulk sales due to earlier supply phasing. We also commenced the first sales of Bexsero to several European private markets. Operating income was USD 42 million compared to USD 41 million in the prior-year quarter. Core operating income was USD 93 million compared to USD 99 million in 2012.

Consumer Health, which comprises OTC and Animal Health, saw net sales grow 8% (+10% cc) to USD 1.0 billion in the fourth quarter, mainly driven by strong performance of key brands globally and product re-launches in the US. Operating income increased to USD 48 million, compared to a loss of USD 12 million in the prior-year quarter, as gross margin from incremental sales was partially offset by commercial investment behind the growth of key brands and product re-launches. Core operating income was USD 60 million. Core operating income margin in constant currencies increased 4.4 percentage points; currency had a negative impact of 1.0 percentage point, resulting in a net increase of 3.4 percentage points to 5.8% of net sales.

Full year

Strong net sales performance more than offset impact of generic competition
Group net sales increased to USD 57.9 billion in the full year, up 2% (+4% cc) over 2012. Currency had a negative impact of 2 percentage points, mainly from the weakening yen and emerging market currencies against the US dollar.

Excluding the impact of generic competition, underlying sales grew 8% in constant currencies. Growth products contributed USD 18.1 billion or 31% of Group net sales, up from 28% in 2012. Loss of exclusivity impacted sales by approximately USD 2.2 billion, mainly due to Diovan and Zometa/Aclasta.

Group operating income was USD 10.9 billion (-3%, +5% cc). The negative currency impact of 8 percentage points was greater than the currency impact on sales, as the yen and emerging market currencies represent a larger proportion of operating income than sales. Operating income margin declined 1.0 percentage points to 18.8% of net sales, due to a negative currency impact of 1.1 percentage points with the margin improving 0.1 percentage points in constant currencies.

Core operating income was USD 14.5 billion (-2%, +3% cc). Core operating income margin in constant currencies decreased by 0.3 percentage points, mainly from lower gross margins due to higher royalties and generic erosion, as well as R&D investment in Pharmaceuticals; currency had a negative impact of 0.9 percentage points, resulting in a net decrease of 1.2 percentage points to 25.0% of net sales. The adjustments made to Group operating income to arrive at core operating income amounted to USD 3.6 billion (2012: USD 3.6 billion).

Excluding the impact of generic competition, underlying core operating income grew 15% in constant currencies.

Group net income of USD 9.3 billion was down 1% in reported terms, but up 7% in constant currencies, due to operating income performance, higher income from associated companies and lower net financial expense. EPS was down 2% (+6% cc), in line with net income, to USD 3.76.

Group core net income was USD 12.5 billion, flat in reported terms, but up 5% in constant currencies, ahead of core operating income mainly due to higher income from associated companies and lower net financial expenses. Core EPS was USD 5.09 (-1%, +4% cc), largely following core net income.

Pharmaceuticals delivered net sales of USD 32.2 billion (0%, +3% cc) for the full year, driven by strong volume growth (+9 percentage points) and pricing (+1 percentage point), which more than offset the impact of generic competition (USD 2.2 billion, -7 percentage points). Growth products grew 25% in constant currencies and contributed USD 12.3 billion or 38% of division net sales in 2013, compared to 31% in 2012.

Pharmaceuticals operating income was USD 9.4 billion (-2%, +3% cc). Core operating income declined 7% (-1% cc) to USD 9.5 billion. Core operating income margin in constant currencies declined by 1.3 percentage points, mainly due to increased investments into promising R&D pipeline assets, increased royalties and generic erosion, partly offset by productivity savings from Marketing & Sales; currency had a negative impact of 0.9 percentage points, resulting in a net decrease of 2.2 percentage points to 29.6% of net sales.

Alcon net sales were USD 10.5 billion (+3%, +5% cc) in the full year. The Surgical franchise grew 4% (+7% cc), driven by procedure growth, market share gains and demand for LenSx and Centurionequipment. Ophthalmic Pharmaceuticals franchise growth (+2%, +5% cc) was due to broad market share gains across key segments, but was impacted by generic competition in the US glaucoma segment. Vision Care grew (+2%, +4% cc), as sales growth in contact lenses was partly offset by declines in the contact lens care market.

Alcon operating income of USD 1.2 billion (-16%, -2% cc) was impacted by integration and restructuring charges, partially offset by sales growth and productivity gains. Core operating income of USD 3.7 billion was in line with prior year in reported terms, but up 6% in constant currencies. Core operating income margin in constant currencies increased by 0.1 percentage points; currency had a negative impact of 1.1 percentage points, resulting in a net decrease of 1.0 percentage point to 35.2% of net sales.

Sandoz net sales increased by 5% (+5% cc) to USD 9.2 billion, driven by double-digit retail generics and biosimilars sales increases in Western Europe (excluding Germany), Japan and emerging markets. Biosimilars accounted for USD 420 million (+23% cc) of net sales globally. Volume increased 14 percentage points, including 3 percentage points contributed by Fougera, more than offsetting price erosion of 9 percentage points, driven primarily by higher pricing for enoxaparin (generic Lovenox®) in the first half of 2012.

Sandoz operating income decreased by 6% (-3% cc) to USD 1.0 billion. Core operating income grew by 3% (+4% cc) to USD 1.5 billion. The difference between reported and core operating income growth was driven by higher exceptional items, particularly USD 85 million for legal provisions, compared to the previous year. Core operating income margin in constant currencies decreased by 0.1 percentage points; currency had a negative impact of 0.4 percentage points, resulting in a net decrease of 0.5 percentage points to 16.8% of net sales.

Vaccines and Diagnostics net sales increased 7% (+6% cc) to USD 2.0 billion in the full year, driven by higher Menveo sales, seasonal influenza demand and pre-pandemic sales. Operating loss was USD 165 million, compared to a loss of USD 250 million in 2012. Core operating income was USD 65 million, compared to a loss of USD 75 million in 2012.

Consumer Health returned to growth in 2013 as net sales increased 9% (+10% cc) to USD 4.1 billion, driven by both the OTC and Animal Health businesses. Operating income of USD 178 million was driven by gross margin from incremental sales and higher income from minor divestments, partially offset by commercial investment behind re-launches and restructuring expenses related to the Lincoln, Nebraska, USA manufacturing site in the first quarter of 2013. Core operating income increased 87% (+95% cc) to USD 298 million. Core operating income margin in constant currencies increased 3.4 percentage points; currency had a negative impact of 0.4 percentage points, resulting in a net increase of 3.0 percentage points to 7.3% of net sales.

Executing on innovation, growth and productivity

A consistent focus on three priorities - innovation, growth and productivity - across our portfolio guides every aspect of our long-term strategy. In the fourth quarter, we took significant steps to sharpen the execution of that strategy, strengthening shareholder value.

Innovation: Strong momentum across the portfolio continued in the fourth quarter

The fourth quarter saw continued pipeline progress with positive regulatory decisions and significant clinical trial data released. Key developments are included below.

New approvals and positive opinions

Europe and Australia approved Lucentis pre-filled syringe
Novartis received regulatory approval for a pre-filled syringe for Lucentis (ranibizumab) in Europe and Australia. The syringe, specifically designed for intraocular injection, will contain a ready-to-use solution of Lucentis that is identical in composition to the solution in vials.

Alcon received positive recommendations in UK and Germany for Jetrea
The National Institute for Health and Care Excellence (NICE) recommended Jetrea (ocriplasmin) to treat eligible patients suffering from symptomatic vitreomacular adhesion and vitreomacular traction when associated with macular hole. The German Federal Joint Committee (G-BA) has also concluded that Jetrea provides significant added benefit to VMT patients.

Sandoz received first European approval for AirFluSal Forspiro (LABA/ICS[3])
Sandoz received marketing authorization in Denmark for AirFluSal Forspiro (salmeterol and fluticasone), a novel inhaler for patients with asthma and/or chronic obstructive pulmonary disease.AirFluSal Forspiro received additional European approvals including Germany and Sweden in January 2014. The approvals follow the successful completion of EU decentralized procedures.

Regulatory submissions and filings

AIN457 in psoriasis submitted in US and EU
A regulatory application for the use of AIN457 (secukinumab) to treat moderate-to-severe plaque psoriasis was submitted in the US and EU, after results from a Phase III study demonstrated that AIN457 is significantly superior to the standard of care in clearing skin.

US and EU submissions accepted for Signifor
...

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