Novartis Raises Full-Year Pharma Sales Guidance on Strong Q3

Swiss pharmaceutical giant Novartis has posted strong third-quarter financial results, thanks to double-digit growth in net sales, successful efficiency savings and positive currency effects. Group net sales reached US$10,747 million, a 12% year-on-year (y/y) rise, of which 8 percentage points could be attributed to sales volume growth and 5 percentage points to beneficial currency effects. The company recorded double-digit sales growth for its pharmaceutical, and vaccines and diagnostics franchises—pharmaceutical sales grew 14% y/y to US$6,709 million, while vaccines and diagnostics sales grew by 16% y/y to US$666 million. U.S. pharmaceutical sales were on the rebound, growing by 9% y/y to US$2,203 million over the period after suffering from generic competition on hypertensive Lotrel (amlodipine/benazepril), anti-fungal drug Lamisil (terbinafine hydrochloride), anti-viral medicine Famvir (famciclovir) and epilepsy treatment Trileptal (oxcarbazepine), as well as market withdrawal of irritable bowel syndrome drug Zelnorm (tegaserod maleate) in 2007 and the first half of 2008 (see Switzerland: 2 April 2007: Novartis Pulls Plug on U.S. Zelnorm Sales). In the meantime, generic unit Sandoz' sales expanded by 7% y/y to US$1,899 million, while the consumer health franchise posted 7% y/y growth with sales standing at US$1,473 million.

Novartis' operating income, as calculated by Global Insight, was up 28% y/y to US$2,369 million on the back of strong sales and contained operating expenses following across-the-board productivity improvements, which have already saved the company US$714 million this year. The cost of goods sold was nearly stable at US$3,021 million, while marketing and sales expenses rose by 7% y/y to US$2,877 million. Research and development (R&D) expenses rose by 25% y/y to US$1,942 million. The group's operating margin, as calculated by Global Insight, was up by 2.8 percentage points y/y to 22.0%. Finally, the company's total net income was down by a whopping 69% y/y to US$2,101 million due to the high 2007 third-quarter baseline when Novartis booked revenues from the divestment of Medical Nutrition and Gerber.

In the core pharmaceutical business, the vast majority of the company's top 20 products recorded double-digit growth, while only a handful of products saw sales contract. Revenues were driven again by heart drug Diovan (valsartan) and cancer drug Gleevec (imatinib), which over the third quarter of the year saw sales grow by 14% y/y and 21% y/y to reach US$1,443 million and US$950 million respectively. The company's newly launched products—namely Lucentis (ranibizumab), Reclast (zoledronic acid), hypertension drugs Tekturna/Rasilez (aliskiren) and Exforge (amlodipine and valsartan), and Alzheimer's disease drug Exelon (rivastigmine tartrate)—continued their market penetration and brought in third-quarter revenues of US$800 million.

While revenues were driven by the company's top 20 products, the rest of its portfolio recorded modest growth momentum, with sales up 3% y/y to US$1,298 million. Interestingly, Novartis' U.S. sales were on the rebound and only Trileptal recorded a double-digit sales plunge (57% y/y) to US$86 million.

Outlook and implications

Novartis has maintained its 2008 guidance of record-breaking net sales with overall mid-single-digit growth in local currencies. However, the company has upgraded its forecast for its pharmaceutical franchise while downgrading its expectations for its generic division. With regards to the company's top line, the effect of generic competition on Lotrel, Trileptal, Lamisil and Famvir is wearing off as anticipated, while the company's newly launched products are providing significant growth momentum. Novartis is also in an increasingly favourable position to capitalise on emerging market growth as the company now derives 25% of its total net sales from these markets.

Novartis has room for further revenue expansion in the short term as the company has completed the acquisition of a 25% stake in eye-care specialist Alcon and has gained full control of potential blockbuster Tekturna/Rasilez (see Switzerland: 7 April 2008: Novartis to Pay Nestlé Up to US$39 bil. for Eye-Care Specialist Alcon and 10 July 2008: Novartis Snaps Up Tekturna Development Partner Speedel for US$880 mil.). Looking further ahead, the Swiss giant has made promising progress on its pipeline as oncology drug Afinitor (RAD001, everolimus), meningococcal vaccine Menveo and chronic obstructive pulmonary disease (COPD) candidate treatment QAB149 all clinched fast-track status in the United States. While Novartis has initiated regulatory filing for the first two compounds, the company also anticipates pushing ahead with the process for QAB149 by the end of the year. Novartis could be in a position to derive revenues from these products as early as 2009.