Novartis delivers solid growth in second quarter

Novartis delivers solid growth in second quarter

Novartis delivers solid growth in second quarter

The FINANCIAL -- Basel, July 18, 2018 - Commenting on the results, Vas Narasimhan, CEO of Novartis, said: "We made significant progress this quarter to transform Novartis into a focused medicines company. We completed the Alcon strategic review, exited the OTC joint venture, and strengthened our innovation engine with the acquisition of AveXis. Operationally we delivered solid growth, with margins expanding and key growth drivers including Cosentyx delivering strong performance. We also advanced our transformational medicines portfolio as we launched Kymriah in DLBCL and Aimovig in the US, completed the regulatory submission of BAF312 to FDA, and progressed toward a submission of our gene therapy AVXS-101."

Novartis strategy to become a focused medicines company

Our long-term strategy is to focus Novartis as a leading medicines company powered by data and digital. We reimagine medicine to create transformative treatments in areas of great medical need and find new ways to deliver them to people worldwide. We continue to execute this strategy by pursuing 5 priorities: operational execution, breakthrough innovation, data and digital leadership, restoring our reputation to be a trusted stakeholder in society, and the transformation of our culture.

According to Novartis, during the second quarter, we took actions that reflect this strategy and our capital allocation priorities. Novartis concluded the strategic review of Alcon, determining that a proposed 100% spinoff is in the best interest of shareholders and consistent with the Novartis strategy of focusing as a leading medicines company. The planned spinoff would create the world leading eye care device company. Completion of the transaction is subject to general market conditions, tax rulings and opinions, final Board of Directors endorsement and shareholder approval at the 2019 AGM in line with Swiss corporate law. The transaction is expected to be tax neutral to Novartis. Mike Ball has become Chairman-designate, Alcon COO David Endicott took over as Alcon CEO on July 1st.

During the second quarter we also completed the sale of our stake in the GSK consumer healthcare joint venture for USD 13 billion. The proceeds are being deployed towards the AveXis acquisition, completed in the quarter, and the announced share buyback of up to USD 5 billion. Novartis intends to continue paying a strong and growing dividend in Swiss francs, with no adjustment for the intended 100% spinoff of Alcon. These actions are consistent with our capital allocation strategy, and the dividend policy and share buyback highlights our confidence in topline growth and margin expansion.

Novartis continues its long-term journey to rebuild trust with society and transform its culture. Strong actions have been taken this year to strengthen our organization including adding the Ethics, Risk and Compliance Officer to the executive committee, rolling out a new professional practices policy based on principles to help associates take better decisions and continuing to further leverage data analytics to become more predictive in identifying risks. The Novartis leadership team, at all levels of the organization, continues to reinforce the message of never compromising on ethical standards and values.

GROUP REVIEW

Second quarter financials

Net sales were USD 13.2 billion (+7%, +5% cc) in the second quarter, as volume growth of 9 percentage points (cc), mainly driven by Innovative Medicines growth drivers, was partly offset by the negative impacts of pricing (-2 percentage points) and generic competition (-2 percentage points).

Operating income was USD 2.5 billion (+9%, +6% cc) mainly driven by higher sales and improved gross margin, partly offset by growth investments. Core adjustments amounted to USD 1.1 billion (2017: USD 1.0 billion).

Net income was USD 7.8 billion, compared to USD 2.0 billion in prior year, benefiting from a USD 5.7 billion net gain recognized from the sale of our stake in the GSK consumer healthcare joint venture.

EPS was USD 3.34, compared to USD 0.84 in prior year, driven by growth in net income and the lower number of shares outstanding.

Core operating income was USD 3.5 billion (+9%, +7% cc) driven by higher sales and improved gross margin, partly offset by investments for key growth drivers. Core operating income margin in constant currencies increased 0.5 percentage points; currency impact was not significant, resulting in a net increase of 0.5 percentage points to 26.9% of net sales.

Core net income was USD 3.0 billion (+5%, +3% cc) as growth in core operating income was partly offset by the discontinuation of core income from the GSK consumer healthcare joint venture.

Core EPS was USD 1.29 (+6%, +4% cc), driven by growth in core net income and the lower number of shares outstanding.

Free cash flow amounted to USD 3.6 billion (+10% USD) compared to USD 3.2 billion in prior year, driven by higher cash flows from operating activities.

Innovative Medicines net sales were USD 8.9 billion (+10%, +8% cc) in the second quarter, as Pharmaceuticals grew 6% (cc) and Oncology grew 10% (cc). Volume contributed 12 percentage points to sales growth. Generic competition had a negative impact of 3 percentage points largely due to Gleevec/Glivec in the US and Europe and certain Ophthalmology products. Pricing had a negative impact of 1 percentage point.

Operating income was USD 2.3 billion (+11%, +8% cc), mainly driven by higher sales and improved gross margin, partly offset by higher growth and launch investments. Core adjustments were USD 0.6 billion (2017: USD 0.5 billion). Core operating income was USD 2.9 billion (+14%, +12% cc). Core operating income margin in constant currencies increased by 1.2 percentage points; currency had a positive impact of 0.1 percentage points, resulting in a margin of 32.2% of net sales.

Sandoz net sales were USD 2.5 billion (0%, -2% cc) in the second quarter, as 9 percentage points of price erosion, mainly in the US, were largely offset by 7 percentage points of volume growth. Excluding the US, net sales grew by 5% (cc). Global sales of Biopharmaceuticals grew 34% (cc), mainly driven by Rixathon (rituximab) and Erelzi (etanercept) in Europe, and Zarxio (filgrastim) in the US.

Operating income was USD 328 million (-1%, -2% cc) mainly due to lower sales and higher ex-US M&S investments, partly offset by a legal settlement gain. Core operating income was USD 480 million (-3%, -5% cc). Core operating income margin decreased by 0.6 percentage points; currency had a negative impact of 0.2 percentage points, resulting in a net decrease of 0.8 percentage points to 19.5% of net sales.

Alcon net sales were USD 1.8 billion (+7%, +5% cc) in the second quarter. Surgical growth of 8% (cc) was mainly driven by double-digit growth of implantables, which includes intraocular lenses (IOLs) and CyPass Micro Stent, and continued strong growth in consumables. Vision Care sales grew 1% (cc), as double digit growth of Dailies Total1 was mostly offset by declines in both weekly/monthly lenses and contact lens care. Alcon's results reflect the sixth consecutive quarter of net sales growth as a result of improved operations, innovation, and customer relationships.

Operating income was USD 65 million compared to USD 29 million in prior year, mainly driven by higher sales and improved gross margin, partly offset by growth investments. Core operating income was USD 338 million (+16%, +14% cc). Core operating income margin in constant currencies increased by 1.5 percentage points; currency had a positive impact of 0.1 percentage points, resulting in a net increase of 1.6 percentage points to 18.6% of net sales.

First half financials

Net sales were USD 25.9 billion (+9%, +5% cc) in the first half, as volume growth of 9 percentage points (cc), mainly driven by Innovative Medicines growth drivers, was partly offset by the negative impacts of pricing (-2 percentage points) and generic competition (-2 percentage points).

Operating income was USD 4.9 billion (+17%, +11% cc) driven by higher sales and improved gross margin, partly offset by growth investments. Core adjustments amounted to USD 2.0 billion (2017: USD 2.0 billion).

Net income was USD 9.8 billion, compared to USD 3.6 billion in prior year, benefiting from a USD 5.7 billion net gain recognized from the sale of our stake in the GSK consumer healthcare joint venture and the contribution from the growth in operating income, partly offset by the discontinuation of income from the GSK consumer healthcare joint venture.

EPS was USD 4.21, compared to USD 1.54 in prior year, driven by growth in net income and the lower number of shares outstanding.

Core operating income was USD 6.9 billion (+10%, +6% cc) driven by higher sales and improved gross margin, partly offset by growth investments. Core operating income margin in constant currencies increased 0.3 percentage points; currency impact was not significant, resulting in a net increase of 0.3 percentage points to 26.6% of net sales.

Core net income was USD 6.0 billion (+8%, +3% cc) driven by growth in core operating income, partly offset by the discontinuation of core income from the GSK consumer healthcare joint venture.

Core EPS was USD 2.58 (+10%, +5% cc), driven by growth in core net income and the lower number of shares outstanding.

Free cash flow amounted to USD 5.5 billion (+12% USD) compared to USD 4.9 billion in prior year, mainly driven by higher cash flows from operating activities, partly offset by higher investments in intangible assets.

Innovative Medicines delivered net sales of USD 17.3 billion (+11%, +7% cc) in the first half, as Pharmaceuticals grew 6% (cc) and Oncology grew 8% (cc). Volume contributed 12 percentage points to sales growth. Generic competition had a negative impact of 3 percentage points largely due to Gleevec/Glivec. Pricing had a negative impact of 2 percentage points.

Operating income was USD 4.4 billion (+18%, +13% cc) mainly driven by higher sales, partly offset by higher growth and launch investments. Core adjustments were USD 1.1 billion (2017: USD 1.1 billion). Core operating income was USD 5.5 billion (+13%, +8% cc). Core operating income margin in constant currencies increased by 0.5 percentage points; currency had a positive impact of 0.2 percentage points, resulting in a net increase of 0.7 percentage points to 31.8% of net sales.

Sandoz net sales were USD 5.0 billion (+2%, -3% cc) in the first half, as 8 percentage points of price erosion, mainly in the US, were partly offset by 5 percentage points of volume growth. Excluding the US, net sales grew by 5% (cc). Global sales of Biopharmaceuticals grew 23% (cc) mainly driven by Rixathon (rituximab) and Erelzi (etanercept) in the EU.

Operating income was USD 737 million (+10%, +4% cc) mainly driven by strong gross margin improvements and higher divestment gains, partly offset by lower sales and higher ex-US M&S investments. Core operating income was USD 979 million (+2%, -2% cc). Core operating income margin increased by 0.2 percentage points; currency had a negative impact of 0.1 percentage points, resulting in a net increase of 0.1 percentage points to 19.7% of net sales.

Alcon net sales were USD 3.6 billion (+9%, +6% cc) in the first half. Stock in trade movements accounted for approximately 1% (cc) of growth. Surgical sales grew 8% (cc) driven mainly by implantables and consumables. Vision Care sales grew 3% (cc) driven by contact lenses, including continued double-digit growth of Dailies Total1.

Operating income was USD 155 million in the first half, compared to USD 27 million in prior year, driven by higher sales and improved gross margin, partly offset by growth investments. Core operating income was USD 698 million (+27%, +21% cc). Core operating income margin in constant currencies increased by 2.3 percentage points; currency had a positive impact of 0.5 percentage points, resulting in a net increase of 2.8 percentage points to 19.4% of net sales.

Key growth drivers

Underpinning our financial results in the second quarter is a continued focus on key growth drivers, including Cosentyx, Entresto, Promacta/Revolade, Tafinlar + Mekinist, Kisqali, Jakavi, Lutathera and Kymriah as well as Biopharmaceuticals and Emerging Growth Markets.

Capital structure and net debt

Retaining a good balance between investment in the business, a strong capital structure and attractive shareholder returns remains a priority.

During the first half of 2018, Novartis repurchased 9.2 million shares (USD 0.7 billion) to mitigate dilution related to participation plans of associates. In addition, 1.4 million shares (USD 0.1 billion) were repurchased from associates, and 14.9 million treasury shares (USD 0.8 billion) were delivered as a result of options exercised and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding increased by 4.3 million versus December 31, 2017. Novartis aims to offset the dilutive impact from equity-based participation plans of associates over the remainder of the year. These treasury share transactions resulted in a net cash outflow of USD 0.3 billion. On June 29, 2018, Novartis announced a new up-to USD 5 billion share buyback to be executed by the end of 2019 on the second trading line.

As of June 30, 2018, the net debt increased by USD 0.2 billion to USD 19.2 billion versus December 31, 2017. The increase was mainly driven by the USD 7.0 billion annual dividend payment, the acquisition of Advanced Accelerator Applications S.A. in Q1 and of AveXis, Inc. in Q2 2018, mostly offset by the inflow from the sale of the stake in the GSK consumer healthcare joint venture and USD 5.5 billion free cash flow in H1 2018. From July 2018, the long-term credit rating for the company is A1 with Moody's Investors Service, AA- with S&P Global Ratings and AA with Fitch Ratings.