Novartis delivers strong growth in first nine months of 2005 on track to achieve full-year sales and earnings objectives

Group nine-month net sales rise 14% in USD (+12% lc), thanks to strong underlying growth and market share gains in all divisions

Pharmaceuticals growth of 11% (+9% lc) for first nine months driven by ongoing expansion of Cardiovascular and Oncology franchises

Group operating income up 13% in first nine months, as Pharmaceuticals volume and margin expansion offsets acquisition costs in Sandoz and Consumer Health

Net income increases 13% to USD 4.8 billion in first nine months, EPS rises by 15%

Integration of Hexal and Eon Labs into Sandoz and of BMS North American OTC products into Consumer Health progressing rapidly

Positive data for key late-stage projects LAF237 (diabetes), SPP100 (hypertension) and FTY720 (multiple sclerosis) in third quarter underscore pipeline strength

 

 

 

Basel, October 18, 2005 - Commenting on the results, Dr. Daniel Vasella, Chairman and CEO of Novartis, said, "I am pleased with the overall strong performance of our business in the third quarter, particularly the dynamic growth of Pharmaceuticals and with the positive late-stage results for first-in-class compounds such as LAF237 for diabetes, SPP100 for hypertension, and FTY720 for multiple sclerosis. These medicines address significant patient needs and provide a platform for continued strong growth. Sandoz performed well, especially in key markets, as the integration of Hexal and Eon Labs into Sandoz progressed at a fast pace. Based on the robust results, we are confident of achieving our full-year objectives for new record sales and earnings."

 

 

 

 

 

Key factors for the 19% increase in third-quarter sales were ongoing high growth in Pharmaceuticals as well as the contributions of Hexal and Eon Labs to Sandoz. Consumer Health sales rose at a high-single-digit rate. Excluding acquisitions, Group sales rose 9% in USD for the quarter.

 

Novartis increased its share of the global health-care market (including Pharmaceuticals and Sandoz) to 5.27% for the first eight months of 2005, an increase from 5.04% in the 2004 period, which has been restated to include the contributions of Hexal and Eon Labs, according to IMS Health. Pharmaceuticals increased its share of the global health-care market to 3.91% compared to 3.82% for the same period in 2004.

 

Strong performances by many leading products - particularly Gleevec/Glivec, Diovan, Lotrel, Femara and Zometa - as well as robust growth in the US and other markets such as France, Germany and key emerging markets underpinned the 10% (+9% lc) increase in third-quarter net sales.

 

General Medicines (excluding Mature Products) delivered a net sales increase of 9% (+9% lc) as strategic Cardiovascular franchise brand sales rose 14% (+14% lc) and the Neuroscience franchise also delivered double-digit net sales gains. Net sales in Specialty Medicines (Oncology, Transplantation and Ophthalmics) were up 16% (+15% lc) as Oncology net sales rose 20% (+19% lc) based on Femara, Gleevec/Glivec and Zometa.

 

In the US, third-quarter sales advanced 11% to USD 2.1 billion as strong performances by the Cardiovascular and Oncology franchises as well as Zelnorm/Zelmac offset lower sales of Elidel. Net sales in Europe rose 4% (+5% lc), supported particularly by Diovan but offset by launches of generic terbinafine in key markets, while Japan grew 4% (+5% lc) and emerging growth markets reported an increase of 22% (+19% lc), thanks to dynamic performances in China, Russia and Turkey.

 

Excluding the Hexal and Eon Labs acquisitions, sales were up 10% (+9% lc), driven in particular by volume expansions in France, Russia, India and Italy. Sales in Germany and the US were also higher, but price erosion had an adverse impact. The consolidation of Hexal and Eon Labs for the first time led to a 106% (+104% lc) increase in sales for the third quarter as these businesses performed significantly better than initially expected.

 

Net sales for the third quarter rose 9% (+8% lc), helped by a strong double-digit performance from OTC thanks to its focus on seven strategic brands. CIBA Vision delivered high-single-digit growth from the successful roll-out of O2OPTIX contact lens and in other market segments in Europe. Medical Nutrition grew at a low-single-digit rate, reflecting renewed competition in the US and France as well as changing reimbursement rules in Germany. Animal Health benefited from its focus on core brands, but the performance was broadly in line with last year following a reduction in net sales from the fall US sales offer. Infant & Baby benefited from new product launches in the US and Mexico.

Operating income

 

(1)      Pro forma basis

 

(1) Pro forma basis

 

 

 

 

Operating income rose at a slightly slower pace than net sales in the third quarter as the dynamic performance of Pharmaceuticals as well as the operating and acquisition-related contributions in Sandoz partially offset a modest decline in Consumer Health. Cost of Goods Sold (COGS) was higher, owing to purchase price accounting and increased amortization of intangible assets in Sandoz related to acquisitions.

 

Operating income growth continued to outpace sales, rising 20% in the third quarter based on sustained profitability improvements that led to a 2.8 percentage point improvement in the operating margin to 33.0% of net sales compared to the year-ago quarter. Productivity gains, especially in the US, led to a 1.5-percentage-point improvement in Marketing & Sales, offsetting investments in Oncology related to Femara in the US and Europe, Enablex launches as well as Diovan and Lotrel investments in the US. R&D expenses rose at a slower pace than sales, contributing 0.5 percentage points to the improved margin, mainly the result of the timing of expenses compared to the 2004 third quarter. Costs of Goods Sold (COGS) was in line with year-ago levels as a percentage of sales, while General & Administrative expenses contributed 0.3 percentage points to the improvement based on cost-containment measures. A slight decline in Other Income & Expenses compared to the 2004 period also contributed to the higher operating income.

 

In the third quarter, Novartis recorded an impairment of USD 66 million related to the acquired and capitalized marketing rights for NKS104, a statin no longer being developed for potential use in combination with Diovan. Further development of this compound is being assessed as additional data will become available during the fourth quarter of 2005, which could result in additional impairments.

 

Operating income rose significantly in the third quarter based on the first-time operating income contributions of USD 122 million from Hexal and Eon Labs as well as volume expansion and cost-containment efforts. This was offset by USD 129 million in purchase accounting and restructuring costs related to the acquisitions. Underlying operating income (excluding Hexal and Eon Labs acquisition effects) increased to USD 41 million.

 

The decline in operating income reflected strong investments in key brands as well as one-time costs of USD 16 million related to the acquisition of the BMS product portfolio in OTC in the third quarter. Also negatively impacting the performance were higher production and distribution costs as well as a reduction in net sales from the US fall sales offer in Animal Health.

 

Net income rose 13% to USD 1.7 billion in the third quarter from USD 1.5 billion (pro forma) in the 2004 third quarter. Net income as a percentage of net sales declined to 19.8% from 20.8% in the year-ago period due to the one-time acquisition-related purchase accounting and restructuring costs.

 

The integration of Hexal and Eon Labs with Sandoz has made rapid progress, positioning Sandoz for dynamic growth with combined pro forma 2004 sales of USD 5.1 billion and a portfolio of over 600 active ingredients in more than 5,000 dosage forms. Sandoz has a number of advantages, particularly strong positions in key markets such as the US and Germany, a broad technology portfolio, a competitive cost structure with its global production network and a pipeline covering many of the major substances expected to become generic in the coming years with a goal of 80 product introductions annually.

 

As Hexal and Eon Labs are performing well and exceeding expectations, Novartis now expects for the full year from these acquisitions a sales contribution in excess of USD 1.3 billion and that the net negative effect on operating income will be reduced to between USD 75 million and USD 150 million, a decline from the initial estimate of USD 150 million to USD 250 million made at the end of the second quarter. As a result, the estimated negative impact on Group net income will be reduced to between USD 175 million and USD 250 million from the earlier estimate of USD 250 million to USD 350 million.

Based on the outstanding performance to date in 2005, Novartis reaffirms its confidence in achieving the full-year objectives to deliver high-single-digit net sales growth for the Group and Pharmaceuticals in local currencies as well as record levels of operating and net income on a comparable basis to 2004. (This full-year outlook excludes the impact of the Hexal and Eon Labs acquisitions.)

 

 

 

Diovan (USD 925 million) (+17% worldwide; +17% lc; +14% US), the most prescribed angiotensin-receptor blocker (ARB) worldwide, maintained strong growth rates in both the US and Europe in the third quarter, in part supported by two recently approved indications and the global rollout of Co-Diovan, a combination of Diovan and a diuretic. Growth and market share gains in Europe have been driven mainly by Co-Diovan and the launch of new indications. Diovan is the only agent in its class worldwide indicated to treat high blood pressure, high-risk heart attack survivors (VALIANT trial) and patients with heart failure (Val-HeFT trial). In the US, Diovan remained the leader with a 38% share of the ARB market (Source: IMS) despite increased competition. Supporting Diovan in the US has been disease-awareness and education initiatives ("BP Success Zone") that also underpinned Lotrel sales.

 

Lotrel (USD 269 million only in the US) (+23% US), the No. 1 fixed combination treatment for hypertension in the US since 2002, delivered its strongest growth of the year in the third quarter, in part helped by increasing awareness about the benefits of therapies like Lotrel that combine an ACE inhibitor with a calcium channel blocker (CCB).

 

Lamisil (USD 318 million) (-8% worldwide; -7% lc; -1% US), the leading treatment worldwide for fungal nail infections, posted modest decline in sales following the expiry of patent protection in most major European markets, including the UK, Germany, the Netherlands and Italy. In the US, Lamisil has maintained market leadership although a generic version of the competitor itraconazole has been introduced.

 

Zelnorm/Zelmac (USD 113 million) (+36% worldwide; +34% 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, maintained robust double-digit growth rates in the US and key markets in Latin America. More than 2.5 million patients have been treated to date with Zelnorm.

 

Elidel (USD 53 million) (-36% worldwide; -37% lc; -43% US) reported lower sales for the second consecutive quarter following a decline in US prescriptions for the eczema treatment. Novartis is in product labeling discussions with the US Food and Drug Administration (FDA) following the FDA's health advisory statement earlier this year relating to a theoretical risk of lymphoma. Novartis remains confident in the safety and efficacy of Elidel in its approved indications.

 

Gleevec/Glivec (USD 547 million) (+33% worldwide; +31% lc; +46% US), indicated for all stages of Philadelphia-chromosome positive (Ph+) chronic myeloid leukemia (CML) and certain forms of gastro-intestinal stromal tumors (GIST), again delivered strong growth rates in the third 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. Gleevec/Glivec recently received EU approval for increasing the average daily dose to 800 mg from 400 mg or 600 mg in patients with chronic phase CML and in GIST patients whose cancer is progressing on the lower dose. Gleevec/Glivec is on track to be submitted by the end of 2005 in the US, EU and Japan as a treatment for Ph+ acute lymphoblastic leukemia (ALL) and other rare diseases.

 

Zometa (USD 302 million) (+15% worldwide; +14% lc; +13% US), the leading intravenous bisphosphonate for bone metastases, reached a record 74% market share in a maturing US market during the third quarter. Greater use in prostate and lung cancer was somewhat offset by slowing growth in breast cancer and myeloma due to high penetration rates. In the EU, Zometa is growing market share despite new competition.

 

Femara (USD 136 million) (+35% worldwide; +33% lc; +26% US), a leading therapy for early and advanced breast cancer in postmenopausal women, continued to grow strongly based on increased use in the extended adjuvant setting (after standard tamoxifen treatment), an indication approved in more than 75 countries, including the US. In August, the FDA granted priority review to Femara for adjuvant (post-surgery) treatment of postmenopausal women with hormone receptor-positive early breast cancer. Regulatory action is now expected before the end of the year. Novartis asked for priority review based on enhanced efficacy in subgroups who may be at an increased risk of relapse for which existing therapies have not demonstrated benefit. Applications for the adjuvant indication have also been filed in Europe. In addition, Femara was recently submitted for approval in Japan for treatment of postmenopausal women with breast cancer, and a decision is expected by the end of 2005 or in early 2006.

 

Sandostatin (USD 219 million) (+6% worldwide; +5% lc; -7% US), a leading treatment for patients with the hormone condition acromegaly as well as for symptoms of gastro-entero-pancreatic neuroendocrine tumors, achieved positive growth rates due to the performance of the long-acting LAR version, which reported a double-digit increase in the US while the subcutaneous version continued to face generic competition. Sandostatin LAR growth is driven by increasing penetration in carcinoid tumors and acromegaly.

 

Ophthalmics

Visudyne (USD 124 million) (+9% worldwide; +8% lc; -9% US), the top treatment for "wet" AMD (age-related macular degeneration), the leading cause of blindness for people over age 50, continued to grow in the third quarter, helping the business unit to report a 5% (+3% lc) rise in third-quarter sales. In the US, sales declined due to new competition, but Visudyne sales growth was strong in other key markets worldwide, including the UK, Germany and France, with sales outside the US up 25%.

 

Sales for the third quarter were up 7% (+6% lc), supported by unchanged sales of Neoral/Sandimmun (+0% worldwide, +0% lc, -12% US) amid generic competition. Myfortic sales continued to grow in the third quarter, supported by accelerated growth in new prescriptions in the US. Certican was launched in Italy during the third quarter, continuing the global rollout. An FDA Advisory Committee is scheduled for November 16 to review the use of Certican in heart transplantation.

Novartis provided an update on its industry-leading pipeline in September, presenting positive pivotal Phase III data on the potentially first-in-class compounds LAF237 (diabetes) and SPP100 (hypertension) as well as an overview of other key projects in late-stage development. With one of the highest R&D productivity rates in the pharmaceutical industry, Novartis currently has 75 projects in clinical development, including 52 in Phase II, Phase III or registration and of which 46 are new molecular entities (NMEs).

 

Among the recent highlights:

 

 

Corporate

 

Corporate income & expense, net

Net corporate expenses were an expense of USD 117 million in the third quarter, an increase from an expense of USD 85 million in the 2004 third quarter, mainly on account of increased charges for legal expenses. In the first nine months, net corporate expenses were USD 327 million compared to an expense of USD 302 million in the year-ago period.

 

Net financial income in the third quarter was USD 18 million, a decline from USD 35 million in the year-ago quarter as average net liquidity declined due to acquisitions. The overall return on net liquidity was 8.7% compared to 2.5% in the year-ago period, principally due to currency gains. Net financial income for the first nine months was USD 124 million, down from USD 161 million in the same period of 2004, but the return on net liquidity remained steady at 3.7%.

 

Associated companies provided a net contribution of USD 65 million in the third quarter, a decline from USD 98 million in the 2004 third quarter, mainly the result of a profit contribution from Roche during the exceptional first half of 2004. The Group's 42% investment in Chiron Corporation contributed income of USD 17 million in the third quarter compared with income of USD 4 million in the prior-year period. The investment in Roche resulted in income of USD 47 million. This amount consists of an estimated share of USD 76 million of Roche's net income for the third quarter of 2005, partially offset by charges of USD 29 million related to amortization of intangible assets. Associated companies provided income of USD 126 million in the first nine months of 2005, down from USD 154 million in the year-ago period.

 

The Group's equity increased by USD 0.4 billion in the first nine months to USD 31.7 billion at September 30, 2005, as a result of the net income of USD 4.8 billion and USD 0.3 billion for share-based compensation, which were partly offset by the dividend payment of USD 2.1 billion, a total of USD 0.3 billion for the purchase of treasury shares, USD 1.8 billion of translation losses and USD 0.5 billion in actuarial net losses.

 

Reflecting the acquisitions made to date in 2005, net liquidity fell by USD 6.0 billion to USD 1.0 billion at September 30, 2005, from USD 7.0 billion at January 1, 2005, which includes the outlay of USD 8.6 billion to acquire Hexal and Eon Labs as well as the North American OTC business of BMS. The debt/equity ratio at the end of the first nine months remained steady at 0.22:1, the same level as at December 31, 2004.

 

Novartis repurchased no shares in the third quarter through its share repurchase program via a second trading line on the SWX Swiss Exchange, leaving the total of shares repurchased to date in 2005 unchanged at 10.2 million for USD 0.5 billion. A total of 25.4 million shares have been repurchased for USD 1.2 billion following the start of the fourth share-repurchase program in August 2004.

 

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 rose by USD 1.0 billion in the first nine months of 2005 to USD 5.8 billion, reflecting the strong business expansion and strict management of working capital. In the third quarter, cash flow from operating activities increased by USD 0.4 billion to USD 2.5 billion. Free cash flow (excluding the impact of acquisitions) in the first nine months of the year rose to USD 3.1 billion, an increase of USD 1.0 billion.

 

 

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 "on track", "is set to become", "holds great promise", "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 4.1 billion in R&D. Headquartered in Basel, Switzerland, Novartis Group companies employ about 91,700 people and operate in over 140 countries around the world.

 

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

 

 

January 19, 2006                                                                       Full-year 2005 results

February 28, 2006                                                          Annual General Meeting

 

 

 

 

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