Basel, 15 April 2003 - Novartis today reported its quarterly results for the first time in US dollars, reflecting the continuing strategic importance of the business in the US, where the Group currently generates 43% of its revenues. Dr. Daniel Vasella, Chairman and CEO of Novartis, said: "With world events weighing heavily on the business and financial environment - and our society as a whole - I am pleased that Novartis has maintained strong operating growth. Virtually all of our businesses achieved good sales growth on top of the strong comparative first quarter of last year. Thanks to a strong operating income it was possible - despite the one-time charge related to Roche's 2002 loss - to maintain net income at last year's record level. We are continuing to invest in our future and to ensure the flow of new products with attractive licensing deals and the build-up of our new Cambridge research headquarters."
Group sales up 21% to USD 5.7 billion
Continuing strong performances in Pharmaceuticals and Generics lifted Group sales 21%. In local currencies, sales climbed 13%, of which 9 percentage points came from volume expansion. Acquired businesses, most notably Lek, added 3 points, whilst price increases contributed just 1 point. The impact of currency translations from local currencies into USD added 8 percentage points to sales growth.
Operating income rises 24% to USD 1.4 billion
Continued productivity gains and product mix improvements led to a 1.5 percentage point reduction in the cost of goods sold to 23.8% of sales. Research & Development investments were increased 34% to 14.7% of sales to feed future innovation, while Marketing & Sales investments to drive new product roll-outs rose slightly below sales by 20% to 32.0% of sales. General & Administration costs were lower than expected. As a result, operating income increased slightly ahead of sales to USD 1.4 billion, with the operating margin reaching 23.6%.
Net income stable at USD 1.1 billion
Excluding the impact of Roche's 2002 loss, net income would have increased 27%, as net income from associated companies amounted to a loss of USD 246 million. Net financial income reached USD 180 million (-20%) despite difficult financial market conditions and a lower level of liquid funds.
Employees
The number of employees increased 6% in the first quarter, primarily due to the integration of Lek.
Outlook 2003 (barring any unforeseen events)
As Novartis continues to focus on its core Pharmaceuticals business, key therapeutic areas and brands, Pharmaceuticals and Group sales are expected to grow approximately 10% in local currencies in 2003.
A vigorous investment strategy is being pursued to sustain high-level growth. Pharmaceuticals Research investments are projected to increase overproportionately to sales by more than 20% in 2003. This is expected to lead to a decrease in Pharmaceuticals' operating margin in 2003. In addition, Business Development and Licensing activities have been stepped up in order to capture further attractive growth opportunities.
Despite the higher investments in Research and a lower anticipated level of financial income, owing to a lower level of liquidity and the challenging economic environment, both operating and net income are expected to exceed the previous year's levels, barring any unforeseen events.
Pharmaceuticals Division
Sales
Novartis' core Pharmaceuticals business posted an 18% rise in sales (10% in local currencies) to USD 3.6 billion, driven by the key cardiovascular and oncology franchises. Sales growth was powered by Diovan, Lotrel, Lescol, Gleevec/Glivec, and Zometa and lifted by the roll-out of Elidel and Zelnorm.
Of the major markets, the US continued to achieve strong sales growth of 16% with sales reflecting the good performances of key growth drivers and recently launched products. Japan again reported dynamic sales growth, whilst in Europe strong volume gains in Italy and Spain offset the effects of pricing pressures in several countries, mandatory generic substitution in Germany, and the effects of parallel imports both in Germany and the UK.
Operating income
Strong top-line growth pushed Pharmaceuticals' operating income up 28% to USD 1.1 billion. The cost of goods sold was reduced by 1.8 percentage points of sales thanks to product mix changes and productivity gains. To power future innovation and to support the new research strategy as well as the establishment of the new Cambridge facility, Research & Development investments increased faster than sales to 19.1% of sales. Marketing & Sales investments grew as a percentage of sales due to the increase in promotional activities to support Zelnorm in the US and the roll-out of Elidel in Europe. Overall, the increase in investments was more than offset by reduced General & Administration costs, which include a one-time gain of USD 178 million from the divestment of non-core product lines in January. Overall, first-quarter operating margin improved from 28.1% in 2002 to 30.5% in 2003.
Highlights (sales growth in local currencies unless stated)
Primary Care
Diovan (+49%, US: +60%), Novartis' flagship antihypertensive, continued to grow faster than its category worldwide, gaining share in an expanding segment thanks to increasing awareness of the cardio-renal benefits of the angiotensin II receptor blocker class. Diovan maintained its leadership in the US, where total prescriptions grew 30% (IMS y.t.d. February), underlining the steady growth in demand for Diovan. Elsewhere, the 160/25 strength of Co-Diovan was successfully launched in Germany.
Lotrel (US: +33%; hypertension) extended its share of new and total prescriptions and steadily gained market share supported by initiatives to help switch patients whose blood pressure is not adequately controlled by ACE inhibitors.
Lescol (+22%, US: +21%; cholesterol reduction) continues to show strong sales growth driven by the XL extended-release formulation and supported by a favorable risk/benefit profile. Additional data from the LIPS study were published at the end of March, showing that Lescol sharply reduces the risk of cardiac events in patients with advanced coronary artery disease.
Lamisil (+14%, US: +41%; fungal infections) maintained its leading share of the US oral antifungal segment as total and new prescription trends remained stable. Sales in the US benefited from a smaller seasonal reduction in wholesaler inventories than in 2002. New direct-to-consumer (DTC) and professional educational campaigns were finalized for launch in the second quarter.
Elidel (eczema), first launched in March 2002, is now the number-one branded prescription treatment for eczema in the US. First-quarter global sales reached USD 47 million, boosted by a successful direct-to-consumer advertising campaign in January in the US, where new prescriptions grew twice as quickly as the market. Elidel recently gained approval in Switzerland and has now been launched in more than 20 markets worldwide.
Zelnorm/Zelmac (irritable bowel syndrome with constipation), now launched in 29 countries, generated first-quarter revenues of USD 20 million. In the US, Zelnorm is reimbursed for over 90% of managed-care situations and has now been prescribed by 68% of target gastro-enterologists, up from 54% in December. Total prescriptions rose more than 30% since January (on a comparable month basis) as a result of medical need, professional education and disease awareness activities. DTC campaigns are currently in preparation to further build the category and address concerns that 75% of patients are not diagnosed and treated.
Oncology
Novartis Oncology further expanded its segment share as sales jumped 27% in local currencies (37% in USD).
Gleevec/Glivec (+95%, US: +42%), for chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST), continued to exceed expectations and benefited from EU approval as first-line treatment for CML at the end of December. Further progress was made on reimbursement, the most significant in the first quarter being in Korea. First-line reimbursement discussions are ongoing in several markets.
Zometa (+196%, US: +168%), the most prescribed intravenous bisphosphonate for bone metastases, continued to post dynamic growth, with sales reaching USD 207 million. As the most efficacious bisphosphonate Zometa has now captured more than 80% of the sales of its predecessor, Aredia. The combined Aredia/Zometa franchise grew 28%. A new and more convenient liquid concentrate formulation of Zometa gained US and EU approval in March, whilst the European CPMP issued a positive opinion for a label update to include long-term data on preventing bone complications in a broad range of advanced cancers.
Sandostatin (acromegaly and carcinoid syndrome) posted 2% growth overall (US: +4%) to USD 164 million, driven by continued growth of Sandostatin LAR (+13%, US: +18%).
Femara, the first-line therapy for advanced breast cancer in postmenopausal women, achieved a 23% rise (US: +21%) in sales to USD 56 million. Sales growth will continue to moderate until adjuvant data become available. Whilst initial marketing approval was delayed in Japan, the FDA approved a new label with survival and safety updates in the US.
Ophthalmics
Ophthalmics' sales rose 4% in local currencies (+14% in USD), driven by Visudyne. Despite mandatory pricing pressures, reimbursement issues and wholesaler stocking in the fourth quarter of 2002, the other Ophthalmics brands performed well, including Zaditen in Japan.
Visudyne (+12%, treatment in macular degeneration) sales continued to grow following recent launches and progress on reimbursement.
Transplantation
The Business Unit's sales decreased 19% in local currencies (-11% in USD) as the Neoral franchise continued to defend its position against generic and branded competitor products.
Sales of Neoral/Sandimmun (-19%, immunosuppression) were reduced due to US wholesaler stocking in 2002 and the arrival of new generic competition to Sandimmun in the US in the third quarter of 2002. Within the EU, generics have only been introduced in Germany. Neoral sales were underpinned by sustained momentum in Japan and the successful implementation of the C2 monitoring system, which is now bringing significant benefits to more than 20 000 transplant patients worldwide.
Simulect, the induction immunosuppressant designed to complement Neoral, posted a 2% rise in sales, lifted by its successful introduction in Japan, where more than 60% of major renal transplant centers are now prescribing Simulect.
Myfortic, the advanced enteric-coated formulation of mycophenolate sodium used to prevent organ rejection, has now gained approvals for use in kidney transplantation in ten countries including Switzerland, Brazil and Australia.
Mature Products
The mature brands again reported only a modest decline in overall sales as a result of focused investments on selected key products and markets. Voltaren (-10%, anti-inflammatory) continued to compete well against increasing competition from generics, as the sales decline reflected the strong first-quarter increases in 2002; this was also the case with the Cibacen/Cibadrex (-10%) antihypertensive range.
Pipeline update
Business Development & Licensing activities have been stepped up in order to capture further attractive growth opportunities and complement the Novartis pipeline. A number of deals were announced in the first quarter: the acquisition of Pfizer's incontinence treatment Enablex® (darifenacin), subject to regulatory approvals and other conditions; the acquisition of a 51% stake in Idenix, giving Novartis options/rights to Idenix's pipeline including three attractive hepatitis treatments currently in Phases I/II and III; a licensing agreement with Regeneron for their IL-1 trap rheumatoid arthritis compound in Phase II; an agreement with Valley Forge Pharmaceuticals granting Novartis Ophthalmics exclusive rights for developing and commercializing the first pharmaceutical treatment for myopia; and a license agreement with Ivax Corporation regarding the use of their new Airmax(TM) inhaler to deliver Novartis' respiratory drugs Foradil The active ingredient formoterol is licensed to Novartis by Yamanouchi. and Miflonide.
A number of pipeline products are currently undergoing regulatory review in major markets including the following, which are all on track:
Foradil Certihaler1, The formulation and device were developed under an agreement with SkyePharma., a new-generation inhaler system for asthma patients: submitted in December 2002 (US and EU).
Certican, which targets primary causes of chronic rejection in transplantation: filed last July (EU) and last December (US).
Prexige (arthritis and pain): filed last November (US and EU) and currently under review for approval in osteoarthritis, dysmenorrhea, and pain. Most recently, Prexige was granted its first marketing authorization, in Mexico, for chronic use in osteoarthritis, rheumatoid arthritis, acute pain and dysmenorrhea.
Stalevo Licensed from Orion. (Parkinson's disease) the entacapone-levodopa-carbidopa combination: filed last August (US and EU).
Starlix Licensed from Ajinomoto. (diabetes): label expansion to include use in combination with rosiglitazone filed in December 2002 (US).
Xolair In development under an agreement between Novartis Pharma AG, Genentech, Inc. and Tanox, Inc. (asthma treatment): amendment to the marketing application submitted last December (US).
Consumer Health Division
Generics
Sales
Generics posted a dynamic jump in sales of 98% (83% in local currencies) to USD 761 million, driven by the exceptional performance of the retail franchise in the US and boosted considerably by the acquisition of Lek, which contributed 47 percentage points to sales growth.
The retail franchise with finished forms saw a 114% rise in sales in local currencies, lifted by a number of new launches in key markets, including loratadine (a generic version of Claritin®) in the US. In addition, strong sales growth in the US was fuelled by Geneva's and Lek's generic versions of the anti-infective Augmentin® and other new products. Sales in Europe grew dynamically, especially in the UK, France, the Nordic region, the Netherlands, Italy and Spain.
Although production capacity was increasingly used to meet captive demand, the industrial generics franchise achieved a 7% rise in sales in local currencies, driven in particular by continued strong sales of cephalosporins and other bulk antibiotics.
Operating income
Operating income soared 104% to USD 112 million, reflecting the strong top line growth. The favorable product mix and productivity gains contributed to a reduction in the cost of goods sold as a percentage of sales. Marketing & Sales increased as a percentage of sales owing to the addition of Lek, whilst General & Administration costs were reduced. The operating margin was thus increased to 14.7%.
OTC
Sales
OTC (over-the-counter medicines) sales grew a strong 18% (+8% in local currencies), clearly ahead of the market, and reached USD 401 million. The performance was primarily driven by the continued strength of the five global brands Voltaren, Lamisil, Nicotinell / Habitrol, Otrivin and Calcium-Sandoz, which collectively grew 10% in local currencies, led by Lamisil (antifungal) and Nicotinell / Habitrol (smoking cessation), which increased dynamically in all regions. The US launch of private label OTC loratadine (a generic version of Claritin®) contributed significantly to volume gains and more than offset the impact of the poor cough and cold season in the US.
Operating income
Operating income rose 63% to USD 52 million, driven by strong volume growth. The focus on higher margin products and productivity gains led to a reduction in the cost of goods sold. With the exception of Research & Development, which increased in line with sales to drive important mid-term clinical trials, functional costs all decreased as a percentage of sales, resulting in a 3.6 percentage point jump in operating margin from the previous first-quarter level to 13.0%.
Animal Health
Sales
Animal Health sales at USD 157 million were up 5% (0% in local currencies) from the high level of the previous year's first quarter. Sales accelerated dynamically towards the quarter end following a soft start due to the economic uncertainty and unusual weather conditions in key regions.
The companion animal franchise grew strongly, driven by double-digit sales growth from Fortekor (heart/kidney failure in dogs/cats) and complemented by good market share gains by a number of new products launched towards the end of last year. In February, Deramaxx received US approval, extending its indication to chronic pain and inflammation control associated with osteoarthritis in dogs.
Sales in the farm animal franchise were led by a continuing strong performance in the Latin American and Asian regions, which helped partially to offset the impact of the prolonged drought on the Australian livestock industry and the adverse market conditions in some European countries and the US.
Operating income
Operating income decreased 8% to USD 23 million, leading to an operating margin of 14.6%. Investments in Research & Development were higher than in the previous first quarter, owing to the timing of large studies for development projects.
Marketing & Sales outlay increased in line with sales to support the recently launched brands. The increased investments were partially offset by a favorable development in the cost of goods sold.
Medical Nutrition
Sales
Medical Nutrition sales grew 17% (4% in local currencies) to USD 190 million, driven by the strong performance of Enteral Nutrition (Isosource and Novasource) and supported by good sales of medical device products under the Compat brand. The Medical Food franchise (Resource) also performed well, benefiting from the expansion of the home-care channel.
Operating income
Operating income reached USD 20 million up from the previous first quarter. Productivity gains and reductions in raw material costs contributed to a reduction in the cost of goods sold, while General & Administration costs fell. As a result, the operating margin leaped to 10.5% compared with only 3.7% in the previous first quarter.
Infant & Baby
Sales
Infant & Baby sales were down 5% (-2% in local currencies) to USD 307 million, owing to divestment of minor businesses in Europe and additional cash discounts being deducted from sales.
Gerber once again increased its segment share in the US, driven by innovative new products, such as Lil' Entrées microwavable convenience meals for babies and toddlers. The US Baby Care franchise posted a 3% rise in sales, lifted by new product launches including a new insulated cup and a line of breast therapy products for nursing mothers.
Operating income
Operating income dropped 24% to USD 45 million as the cost of goods sold and Marketing & Sales increased due to strategic investments in the US for the conversion to plastic packaging of key jarred brands. The operating margin fell 3.6 percentage points from the previous first quarter level to 14.7%.
CIBA Vision
Sales
CIBA Vision sales increased 16% (7% in local currencies) to USD 296 million, benefiting from the continued strong performance of the high volume lens business and growing sales in the lens care and surgical franchise.
Focus DAILIES (daily disposables) and NIGHT & DAY (continuous wear up to 30 nights) contact lenses continued to perform dynamically, particularly in Europe and North America, where double-digit sales growth was achieved. FreshLook colored lenses retained category leadership as new comfort improvements are rolled out globally.
The lens care franchise reported a pick-up in sales driven by growth in North America and the continuing success of FreshLook Care in Japan.
The ophthalmic surgical business grew steadily ahead of the market, supported by increased sales of a number of recently launched new products.
Operating income
Operating income rose 26% to USD 29 million. Conversion to the improved comfort FreshLook lens and continued investment in product quality led to an increase in the cost of goods sold. Marketing & Sales and General & Administration costs grew proportionately less than sales. As a result, the operating margin improved from 9.0% in the previous first quarter to 9.8%.
Corporate
Corporate income/expense, net
Net corporate expense (which includes the costs of corporate management, income from charging share and share option plan costs to the operating companies, and pension income) amounted to USD 26 million in contrast to an income of USD 17 million in the first quarter of 2002. The change was largely due to currency translation of non-US dollar costs.
Result from associated companies
Associated companies resulted in an overall expense of USD 246 million. Novartis' 42% stake in Chiron Corporation contributed an income of USD 25 million, whereas the stake in Roche Holding AG yielded a first-quarter pre-tax loss of USD 277 million. USD 269 million of this is due to the Novartis share in the associated company's unexpected large loss of CHF 4.0 billion in 2002, booked only in 2003. The remainder represents an estimate for the first quarter of the current year.
Financial income, net
Net financial income amounted to USD 180 million, generated in a difficult environment by good currency management and successful bond investments. Gross financial income reached USD 272 million, compared with USD 241 million in the previous first quarter, owing to additional income on currency and interest-rate instruments.
Strong balance sheet
Novartis maintained the strength of its balance sheet at 31 March 2003 and continues to be rated AAA by Standard & Poor's and Moody's.
The Group continued the share buy-back program initiated last July to repurchase shares via a second trading line on the SWX Swiss Exchange for up to a total of CHF 4.0 billion (approximately USD 2.6 billion). On 31 March, 29.1 million shares had been repurchased for a total of USD 1.1 billion.
The Group's equity decreased slightly from USD 28.3 billion at 31 December 2002 to USD 28.0 billion at 31 March 2003, as net income (USD 1.1 billion) and translation gains (USD 0.6 billion) only partially offset dividend payments (USD 1.7 billion) and the acquisition of treasury shares (USD 0.1 billion).
Total financial debts rose USD 0.3 billion from the 31 December 2002 level, principally on account of exchange rate movements on non-US dollar amounts. As a result, the debt/equity ratio rose slightly from 0.20:1 on 31 December 2002 to 0.21:1 on 31 March 2003.
Cash flow
The cash flow from operating activities increased 45% to USD 1.8 billion, mainly as result of the strong business expansion and good working capital management.
Cash outflow used for investing activities was only USD 52 million. Capital expenditure increased USD 60 million to USD 219 million, but this was offset by a significant inflow of USD 167 million from the sale of marketable securities, intangible and financial assets.
Free cash flow was a negative USD 66 million, owing to the increased dividend payment of USD 1.7 billion in the first quarter of 2003. However, a USD 544 million increase in cash flow from operations more than offset the dividend increase of USD 357 million and additional fixed asset investments of USD 60 million.
Overall, liquidity (cash, cash equivalents and marketable securities including financial derivatives) amounted to USD 12.9 billion at 31 March 2003. After deducting financial debt, net liquidity remains high at USD 7.0 billion.
Disclaimer
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 "would have", "pipeline", "Outlook", "expected", "projected", "opportunities", "anticipated", "will", "estimate" or similar expressions, or express or implied discussions regarding potential future sales of 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 existing 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 company's ability to obtain or maintain patent or other proprietary intellectual property protection; competition in general; and other risks and factors referred to in the Company'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 AG (NYSE: NVS) is a world leader in pharmaceuticals and consumer health. In 2002, the Group's businesses achieved sales of USD 20.9 billion and a net income of USD 4.7 billion. The Group invested approximately USD 2.8 billion in R&D. Headquartered in Basel, Switzerland, Novartis Group companies employ about 77 200 people and operate in over 140 countries around the world. For further information please consult http://www.novartis.com.
Further Reporting Dates in 2003
21 July 2003 First-half and second-quarter results
20 October 2003 Nine-month and third-quarter results
19 November 2003 R&D day
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