Novartis delivers strong innovation in 2012, offsetting patent expirations; next growth phase expected to begin in 2013

NovartisNovartis' Group net sales reached USD 14.8 billion (0%, +2% cc) in the fourth quarter. Currency had a negative impact of 2 percentage points. Portfolio rejuvenation continued to drive overall growth for the Group, as recently launched products grew 17% over the previous-year quarter to USD 4.3 billion. These products, which include Lucentis, Gilenya, Afinitor and Tasigna, contributed 29% of Group net sales, up from 25% in the year-ago period, and more than offset the impact of generic competition in the quarter of USD 0.6 billion.

Group operating income increased 88% (+94% cc) to USD 2.5 billion, driven mainly by Pharmaceuticals and Alcon. Core operating income was up 3% (+5% cc) to USD 3.7 billion. The adjustments made to Group operating income to arrive at core operating income amounted to USD 1.2 billion (2011: USD 2.2 billion). Net adjustments in 2012 were lower principally as a result of the exceptional charges in 2011 of USD 0.9 billion relating to Tekturna/Rasilez. Operating income margin increased by 7.8 percentage points to 16.7% of net sales. Core operating income margin in constant currencies increased by 0.8 percentage points to 24.8% of net sales.

Group net income increased 72% (+77% cc) to USD 2.1 billion, broadly in line with operating income. EPS of USD 0.84 was up 71% (+79% cc) over the prior-year EPS of USD 0.49.

Group core net income rose 3% (+5% cc) to USD 3.1 billion, in line with core operating income. Core EPS was up 3% (+4% cc) to USD 1.27.

Free cash flow was USD 3.5 billion for the quarter compared to USD 3.9 billion in 2011.

Pharmaceuticals delivered another quarter of growth despite the impact of generic competition (including the loss of exclusivity for Diovan HCT in the US at the end of the third quarter). Net sales were USD 8.3 billion (0%, +1% cc), with strong volume growth of 8 percentage points more than absorbing the negative impact of generic competition (USD 0.6 billion, -7 percentage points). Pricing had no significant impact. Products launched since 2007 generated USD 3.1 billion or 38% of net sales, growing 26% in constant currencies over the same period last year.

Pharmaceuticals operating income increased 133% (+141% cc) to USD 1.9 billion primarily as a result of exceptional charges taken in 2011 of USD 0.9 billion relating to Tekturna/Rasilez. Pharmaceuticals core operating income was unchanged at USD 2.3 billion (0%, +1% cc). Core operating income margin in constant currencies increased by 0.1 percentage points. Currency was neutral, resulting in a core operating income margin of 27.6%.

Alcon net sales expanded 6% (+8% cc) to USD 2.6 billion in the fourth quarter, with solid growth in all three franchises. The Surgical franchise (+8%, +10% cc) benefited from strong surgical equipment sales, growth in intraocular lenses (IOLs), and Emerging Growth Markets. Ophthalmic Pharmaceuticals (+5%, +7% cc) was led by solid sales of the Systane (Dry Eye) family and fixed combination glaucoma products in non-US markets, partially offset by weaker sales of Travatan (Glaucoma) in the US. Vision Care grew 4% (+6% cc) as a result of solid sales of contact lenses and weak multi-purpose product sales in the previous-year quarter.

Alcon operating income increased 37% (+43% cc) to USD 323 million. The adjustments made to the division's operating income to arrive at core operating income amounted to USD 0.6 billion (2011: USD 0.6 billion). Core operating income increased by 13% (+15% cc) to USD 899 million as a result of sales growth, productivity gains and the realization of post-integration synergies. Core operating income margin in constant currencies increased by 2.3 percentage points; currency had a negative impact of 0.2 percentage points, resulting in a core operating income margin of 34.9% of net sales.

Sandoz net sales grew 4% (+6% cc) over the prior-year period to USD 2.4 billion. Fougera contributed 7 percentage points of growth from four months of sales reported in the fourth quarter. Excluding Fougera, volume was flat and price had a negative impact of 1 percentage point. Lower enoxaparin sales in the US were partially offset by strong double-digit sales growth in Central and Eastern Europe, Latin America and biosimilars, as well as high single-digit sales in Western Europe and Asia.

Sandoz operating income decreased 28% (-29% cc) to USD 284 million primarily as a result of an exceptional gain of USD 106 million recorded in 2011. Core operating income was USD 414 million (+1%, +1% cc). Core operating income margin in constant currencies decreased by 0.8 percentage points as a result of higher quality and manufacturing costs and continued investment in our biosimilars and respiratory pipeline. A favorable currency impact of 0.3 percentage points resulted in a core operating income margin of 17.3% of net sales.

Vaccines and Diagnostics net sales of USD 628 million were down 6% (-5% cc), impacted by higher pre-pandemic sales and diagnostics shipments in the fourth quarter of 2011. Operating income decreased 2% (-8% cc) to USD 41 million. Core operating income declined 2% (-5% cc) to USD 99 million, resulting in a core operating income margin of 15.8% of sales.

Consumer Health, which includes OTC and Animal Health, declined 11% (-10% cc) to USD 961 million, impacted by the continuing absence of shipments from the Lincoln, Nebraska manufacturing site. In the fourth quarter, OTC re-launched Excedrin Migraine, Triaminic and Lamisil AT in the US, and in January 2013 began shipping Excedrin Extra Strength. Operating loss amounted to USD 12 million. Core operating income declined 86% (-84% cc) to USD 23 million and core operating income margin declined to 2.4% of net sales.

Full year
Group net sales amounted to USD 56.7 billion (-3%, 0% cc). Currency had a negative impact of 3 percentage points as a result of the strengthening of the dollar against most currencies. Recently launched products grew 13% and contributed USD 16.3 billion or 29% of Group net sales, up from 25% a year ago.

Group operating income was USD 11.5 billion (+5%, +8% cc). Currency had a negative impact of 3 percentage points as the dollar strengthened against most currencies. Group core operating income declined to USD 15.2 billion (-5%, -2% cc). The adjustments made to Group operating income to arrive at core operating income amounted to USD 3.6 billion (2011: USD 4.9 billion). Core operating income margin in constant currencies decreased by 0.7 percentage points. A positive currency impact of 0.2 percentage points resulted in a core operating income margin of 26.7% of net sales.

Group net income was USD 9.6 billion (+4%, +7% cc), in line with operating income. EPS increased by 3% (+6% cc) to USD 3.93.

Core net income was down 5% (-3% cc) to USD 12.8 billion, in line with core operating income. Core EPS declined 6% (-3% cc) to USD 5.25.

Free cash flow reached USD 11.4 billion for the full year, down 9% from the previous year principally due to higher investments in property, plant and equipment as well as in intangible and other financial assets and lower proceeds from the sale of intangible assets.

Pharmaceuticals delivered USD 32.2 billion (-1%, +2% cc) in net sales, driven by 8 percentage points of volume growth, more than offsetting the negative impact of generic competition (USD 1.9 billion, -6 percentage points). Pricing had a slightly negative impact. Recently launched products grew 28% in constant currencies and contributed USD 11.4 billion or 35% of total net sales for the division compared to 28% in 2011.

Pharmaceuticals operating income increased 16% (+19% cc) to USD 9.6 billion primarily as a result of the exceptional charges taken in 2011 of USD 0.9 billion in relation to Tekturna/Rasilez. Core operating income grew 2% (+5% cc) to USD 10.2 billion. In constant currencies, core operating income margin increased by 0.7 percentage points due to continuing productivity efforts and the growth in recently launched products, more than offsetting the adverse mix effect of generic competition. Currency had a positive impact of 0.2 percentage points, resulting in a core operating income margin of 31.8% of net sales.

Alcon net sales expanded 3% (+5% cc) to USD 10.2 billion for the year, driven by sales growth across its Surgical (+5%, +8% cc), Ophthalmic Pharmaceuticals (+2%, +5% cc) and Vision Care (+1%, +4% cc) franchises.

Operating income was USD 1.5 billion (0%, +6% cc). Core operating income grew by 6% (+9% cc) to USD 3.7 billion. The adjustments made to the division's operating income to arrive at core operating income amounted to USD 2.2 billion (2011: USD 2.0 billion). Core operating income margin increased by 1.1 percentage points in constant currencies. Currency was neutral, leading to a core operating income margin of 36.2% of net sales.

Sandoz net sales decreased by 8% (-4% cc) in 2012 to USD 8.7 billion as a result of declines in the US retail generics and biosimilars (-17% cc) and Germany (-7% cc), partly offset by double-digit sales growth in biosimilars (+36% cc), rest of Western Europe (+10% cc) and Asia (+17% cc). Total sales volume decreased 1 percentage point and price erosion was 5 percentage points primarily due to increased competition on US sales of enoxaparin (USD 451 million in 2012 compared to USD 1.0 billion in 2011). Fougera contributed 2 additional percentage points of growth from the inclusion of approximately five months of sales in 2012.

Operating income decreased 23% (-24% cc) to USD 1.1 billion. Core operating income declined 22% (-21% cc) to USD 1.5 billion. In constant currencies, core operating income margin decreased by 3.7 percentage points as a result of lower sales and higher investments in quality assurance, manufacturing and development of future biosimilars and respiratory products. A favorable currency impact of 0.7 percentage points resulted in a core operating income margin of 17.3% of net sales.

Vaccines and Diagnostics net sales were USD 1.9 billion (-7%, -4% cc) for 2012 compared to USD 2.0 billion in 2011, which was positively impacted by bulk pediatric shipments and a one-time pre-pandemic sale. Operating loss was USD 250 million compared to a loss of USD 249 million in the previous year. Core operating loss for the year was USD 75 million compared to an income of USD 135 million in 2011.

Consumer Health net sales declined 19% (-16% cc) to USD 3.7 billion, mainly due to the continuing absence of shipments from the Lincoln, Nebraska manufacturing site. Operating income decreased 93% (-89% cc) to USD 48 million. Core operating income decreased 82% (-78% cc) to USD 159 million and core operating income margin decreased by 14.6 percentage points to 4.3% of net sales due to Lincoln and costs related to the upgrades at the site.

Commenting on the results, Joseph Jimenez, CEO of Novartis, said: "Novartis maintained strong momentum in innovation in 2012, securing 17 major approvals and significantly advancing promising pipeline projects. Our pipeline is expected to deliver a record number of near-term approvals and filings, and with our strong global commercial capacity we anticipate 14 products to reach blockbuster status by 2017, up from 8 in 2012. After our 2013 patent expirations are behind us, our relentless focus on innovation, growth, and productivity is expected to result in Group net sales growth of at least mid-single digits in both 2014 and 2015, with core operating income growing ahead of sales. I want to thank Daniel Vasella for his leadership and expertise which guided Novartis to become one the world's leading healthcare companies. I look forward to continuing to work with the Board as we embark on a new phase of dynamic growth."

Commenting on his decision, Dr. Vasella, Chairman of Novartis, said: "Novartis is solidly on course to navigate the volatility and uncertainties of today's economic environment. I am confident in the leadership of Joe Jimenez and his top team, the company's strategy with its commitment to innovation, and the course charted to strengthen Novartis as one of world's leading healthcare companies. I have therefore concluded that after 25 years with the company, the time is right for me to ensure a smooth transition. The Board proposes Dr. Jörg Reinhardt, a very experienced healthcare executive with deep knowledge of the company, as non-executive Chairman to lead the Board of Directors. I also want to thank current Vice-Chairman Prof. Dr. Ulrich Lehner for his willingness to lead the Board ad interim."

Commenting on the proposed change in Chairman of the Novartis Board of Directors, current Vice-Chairman Prof. Dr. Ulrich Lehner said: "We regretfully accept the decision of Dr. Daniel Vasella not to stand for re-election at the next Annual General Meeting. Dr. Vasella has played an unparalleled role in shaping today's healthcare industry. Under his leadership, Novartis set a high bar to discover medicines that could change the practice of medicine and impact the lives of millions of patients. Thanks to his vision and his leadership, Novartis progressed to become among the most admired companies."

About Novartis
Novartis provides innovative healthcare solutions that address the evolving needs of patients and societies. Headquartered in Basel, Switzerland, Novartis offers a diversified portfolio to best meet these needs: innovative medicines, eye care, cost-saving generic pharmaceuticals, preventive vaccines and diagnostic tools, over-the-counter and animal health products. Novartis is the only global company with leading positions in these areas. In 2012, the Group achieved net sales of USD 56.7 billion, while R&D throughout the Group amounted to approximately USD 9.3 billion (USD 9.1 billion excluding impairment and amortization charges). Novartis Group companies employ approximately 128,000 full-time-equivalent associates and operate in more than 140 countries around the world.

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