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Novartis healthcare portfolio generates strong growth in first quarter of 2010, progress on delivering innovation, growth and productivity

Wed, 04/21/2010 - 1:23pm
Novartis
Basel, April 20, 2010 - Commenting on the results, Joseph Jimenez, CEO of Novartis, said: "I am pleased with the strong growth generated in the first quarter of 2010 across our entire healthcare portfolio. All of our businesses are making good progress, particularly the sustained expansion in Pharmaceuticals and the strong contributions from supply contracts for A (H1N1) pandemic flu vaccines. We are focusing on extending our lead in innovation, driving growth and improving productivity, which we believe will generate greater sustainable value from our portfolio. The growing contributions from products launched since 2007 are rejuvenating our portfolio and are the result of our commitment to innovation and successful R&D investments. We are intensifying productivity efforts to improve profitability as well as to enable continued investments in drug discovery and expansion into new markets. As we prepare for the integration of Alcon, which will create a new growth platform in eye care, we are building momentum in 2010 and achieving continued success."


GROUP REVIEW

First quarter

Novartis delivered a strong performance in the first quarter of 2010 - particularly the rapid expansion of recently launched products and important regulatory approvals achieved for new medicines and vaccines - as the Group made progress with a sharp focus on innovation, growth and productivity.

Net sales rose 25% (+18% cc) to USD 12.1 billion on improvements in all businesses, particularly sales of A (H1N1) pandemic flu vaccines and rapid growth of recently launched products across the Group (USD 1.9 billion). Currency movements contributed seven percentage points to reported growth. Pharmaceuticals (USD 7.3 billion, +7% cc) advanced in all regions and maintained solid volume growth. Vaccines and Diagnostics (USD 1.4 billion, +436% cc) provided USD 1.1 billion from recognition of A (H1N1) pandemic vaccine sales. Sandoz (USD 2.0 billion, +9% cc) grew on successful new product launches and integration of EBEWE Pharma following the September 2009 acquisition. All Consumer Health businesses (USD 1.5 billion, +7% cc) had good performances and grew faster than their markets.

Operating income rose 50% (+42% cc) to USD 3.5 billion on the volume-driven sales expansion and significant contributions from Vaccines and Diagnostics, while also benefitting from eight percentage points of favorable currency movements. The operating income margin improved 4.7 percentage points to 28.9% of net sales from 24.2% in the 2009 period. Core operating income, which excludes exceptional items and amortization of intangible assets in both periods, rose 48% (+41% cc) to USD 3.9 billion, and the core operating income margin rose 5.0 percentage points to 31.9% of net sales from 26.9% in the year-ago quarter.

Net income advanced 49% (+41% cc) to USD 2.9 billion as contributions from associated companies and financial income more than offset increased interest expenses and a higher tax rate. Earnings per share (EPS) rose largely in line with net income to USD 1.29 from USD 0.87 in the 2009 period. Core net income grew 44% (+36% cc) to USD 3.3 billion, while core EPS was up 44% (+36% cc) in the first quarter to USD 1.45 from USD 1.01 in the year-ago period.


Delivering innovation, growth and productivity

Novartis continues to advance its strategy to meet the needs of patients everywhere with a broad healthcare portfolio that includes innovative medicines, preventive vaccines, cost-effective generics and self-care products. At the heart of this portfolio lies a sustained commitment to innovation, which has resulted in breakthrough products offering patients opportunities for improved health outcomes.

At a time of converging trends, which include rising global demand for medicines but also increasing cost-containment pressures, the new leadership team appointed in January 2010 has established priorities to deliver innovation, growth and productivity consistent with the Group's aspiration to be the world's most successful and respected healthcare company.

These priorities, aimed at creating greater value for patients, payors and physicians, include (1) extending the Group's lead in innovation; (2) delivering sustainable growth through successful new product launches, investments to strengthen the business portfolio, and expansion in emerging markets; and (3) productivity initiatives that free up resources to improve profitability and support investments in innovation and growth.

Innovation

Innovation is the key driver of Novartis. The Group's strong commercial position is the result of consistent R&D investments and a commitment to advancing treatment standards for patients.

An industry leader in new product approvals, Novartis achieved US and European Union approvals in the first quarter for Menveo, a new vaccine offering protection against four major serogroups of meningococcal meningitis, a potentially fatal bacterial disease. In Japan, three medicines - Afinitor (kidney cancer), Equa (type 2 diabetes) and Exforge (hypertension) - gained regulatory approvals in January. This follows approval of six medicines in 2009 in Japan, the Group's second-largest market.

Two US regulatory submissions completed in late 2009 - Tasigna (cancer) and Gilenia (FTY720, multiple sclerosis) - were recognized in the first quarter of 2010 for their potential patient benefits. The US Food and Drug Administration granted these submissions priority review status, which accelerates the review of medicines that offer major advances or provide treatments where no adequate therapy exists. In the first quarter, a US filing was also made for Menveo to expand the use of this vaccine to children from age 2-10.

Many development projects are progressing toward regulatory submissions in 2010, with up to five in oncology: two additional indications for Afinitor as well as first submissions for the development projects SOM230 (Cushing's disease), LBH589 (Hodgkin's lymphoma) and EPO906 (ovarian cancer). Others include the first submission in Europe for MenB, which has the potential to become the first global vaccine against the B serogroup of meningococcal meningitis. However, one of the two Phase III trials involving ASA404 (cancer) was halted in March following an interim analysis of benefits for patients with non-small cell lung cancer (NSCLC). The Pharmaceuticals development project PTZ601 (infections) was also halted in the first quarter, resulting in a pre-tax impairment charge of USD 152 million (USD 57 million after release of deferred tax provisions).

 

Growth

New products, the result of successful R&D investments, are rejuvenating the Novartis portfolio together with initiatives to strengthen positions in emerging markets, build global businesses of scale, develop new commercial skills and improve talent. Contributions from recently launched products across the Group rose 68% to USD 1.9 billion in the first quarter, representing 16% of net sales compared to 12% in the 2009 period. In Pharmaceuticals, recently launched products provided USD 1.5 billion of net sales in the 2010 period, representing 20% of the division's net sales compared to 14% in the 2009 quarter.

Targeted expansion in emerging markets is generating significant growth despite the financial crisis, which continues to impact some countries. In the first quarter, net sales from the top six emerging markets rose 38% (+22% cc) to USD 1.2 billion, driven by China and India. These six markets, which also include Brazil, Russia and South Korea, represented 9.6% of Group net sales, up from 8.7% in the 2009 period, more than offsetting cost-containment measures in Turkey.

Healthcare markets around the world are evolving rapidly, driven by factors such as intensifying cost-containment initiatives, a more challenging regulatory environment and the changing roles of physicians and payors. Novartis is constantly seeking ways to address these changes. Three important new initiatives were announced in the first quarter of 2010.

In China, a new regional operating structure is being implemented in Pharmaceuticals to recognize the diversity of China's regions to better address local market needs as the government, and Novartis, make major long-term investments to improve healthcare access and quality.

In anticipation of changes to the product portfolio in the US, which includes expected approvals for a number of new specialty medicines but also the loss of market exclusivity for Diovan and other medicines in the next few years, Novartis has further streamlined its US business in Pharmaceuticals to maximize the potential of the changing portfolio in both primary care and specialty markets. This initiative, announced in April 2010, will create three national specialty businesses focused on multiple sclerosis, respiratory diseases and neuroscience to complement the existing Oncology business unit. In addition, a fourth business for primary care medicines, including the cardiovascular portfolio, will be consolidated into four regional units (reduction from the current five units). Approximately 383 full-time equivalent positions, primarily in headquarter-based functions, are to be reduced in a socially responsible manner, with 35% expected to be achieved by not filling vacant positions. A one-time charge of USD 24 million is planned to be taken in the second quarter of 2010, with annual cost savings of USD 56 million anticipated from 2011.

In addition, "Customers First" was launched in February 2010 after pilot programs to accelerate collaboration across the businesses in 45 countries - including the US, top European markets and Japan - that together represent 95% of Group net sales. Local cross-divisional teams are identifying ways to increase opportunities with key customers while increasing customer service and productivity.

Productivity

Novartis is now implementing a continuous focus on agility, efficiency, productivity and resource allocation throughout its operations, freeing up resources to improve profitability as well as to invest in future growth, particularly promising pipeline projects and emerging markets.

In the first quarter of 2010, the core operating income margin improved five percentage points to 31.9% of net sales over the 2009 period, supported by continuing improvements in productivity. Key areas of improvement in the 2010 quarter included Marketing & Sales in Pharmaceuticals, which declined to 27.9% of net sales in the first quarter of 2010 from 29.5% in the 2009 period, supported by the "geo-tailoring" strategy to adapt sales forces to local market needs while supporting new product launches. Offsetting these improvements was an increase in Cost of Goods Sold; this is partly the result of sustained reductions in inventory and productivity efforts, which has created excess capacity and lower fixed overhead absorption. Simplification of manufacturing operations is under review. Sandoz continues to improve manufacturing productivity, enabling it to absorb the impact of price erosion and improve its core operating income margin by 2.4 percentage points to 22.5% of net sales. Continuing improvements in gross margin have enabled Consumer Health to make significant investments in the launch of Prevacid24HR in the US without an adverse impact on the operating income margin.

Completion of the Alcon transactions will require a sharper focus on further improving free cash flow, which rose 93% to USD 2.9 billion in the first quarter of 2010 (before dividends). This improvement is a direct consequence of the strong sales of A (H1N1) pandemic vaccines as well as programs in the divisions to significantly reduce cash conversion cycles. The Group's goal is to return to a net cash position within four years after completion of the Alcon transactions. Internal and external investments will continue to target growth opportunities offering potential to earn a premium on the Group's cost of capital and strengthen the healthcare portfolio.

Alcon

The addition of Alcon, the global leader in eye care, will create a new growth platform in the fast-growing eye care sector. Novartis announced on January 4 plans to gain full ownership of Alcon by first completing the agreement to acquire a 77% majority stake - on track for completion in the second half of 2010 - and subsequently entering into an all-share direct merger with Alcon for the remaining 23% minority stake. Following the merger under Swiss law, Alcon will become a new division that incorporates CIBA Vision and certain Novartis ophthalmic medicines.


2010 outlook

Novartis is building momentum in 2010 and reaffirms expectations for Group net sales to grow at a mid-single-digit percentage rate in constant currencies (excluding Alcon) and for improvement in the Group's operating income margin in 2010, driven by the business expansion and ongoing productivity gains. The strong sales and profit contributions in the first quarter of 2010 from fulfillment of agreed-upon government supply contracts for A (H1N1) pandemic vaccines, with sales approximately USD 400 million above the Group's target at the beginning of the year, will further strengthen these prospects. If exchange rates remain at their current levels for the remainder of the year, reported and constant currency growth rates would be broadly similar.

Pharmaceuticals is continuing the strong volume growth from 2009 amid uncertain pricing conditions, with net sales reaffirmed to grow in 2010 at a mid- to high-single digit rate in constant currencies. In addition to the exceptional sales contributions from A (H1N1) pandemic vaccines, Vaccines and Diagnostics is launching the new Menveo vaccine in the US and Europe while expanding in targeted emerging markets. Sandoz is increasing its pace of sales growth in 2010 on contributions from all regions and the integration of EBEWE Pharma coupled with a renewed focus on productivity, while Consumer Health aims to keep growing ahead of its markets after a successful start to the year.


HEALTHCARE BUSINESS REVIEW

Pharmaceuticals

  Q1 2010 Q1 2009 % change
  USD m USD m USD cc
Net sales 7 291 6 433 13 7
Operating income 2 327 2 062 13 7
  As % of net sales 31.9 32.1    
Core operating income 2 431 2 171 12 6
  As % of net sales 33.3 33.7    

 

First quarter

Net sales

Net sales expanded 13% to USD 7.3 billion (+7% in cc), driven by volume expansion. Recently launched products provided USD 1.5 billion of net sales in the 2010 period, representing 20% of net sales compared to 14% in the 2009 quarter. These products launched since 2007 - which include Lucentis, Exforge, Exelon Patch, Exjade, Reclast/Aclasta, Tekturna/Rasilez, Tasigna, Afinitor, Onbrez Breezhaler, Ilaris and Fanapt - contributed substantially to the division's 7% cc net sales growth in the quarter.

All regions continued to benefit from the product portfolio transformation, particularly Europe (USD 2.8 billion, +10% cc) generating 25% of its net sales from recently launched products. Latin America and Canada maintained solid growth rates (USD 0.6 billion, +12% cc). Japan (USD 0.7 billion, -4% cc) was impacted by a slowdown in demand ahead of the biennial price cuts in April, masking underlying momentum from the regulatory approvals of nine new medicines since 2009. The six top emerging markets (USD 690 million, +9% cc) were led by double-digit gains in China, India, South Korea and Brazil, but more than offseting cost-containment measures in Turkey.

All therapeutic areas contributed to the business expansion. Oncology (USD 2.4 billion, +14% cc), the largest franchise, was led by sustained growth of Gleevec/Glivec (USD 1.0 billion, +8% cc) and Femara (USD 344 million, +15% cc), and important contributions from the recently launched products Exjade (USD 179 million, +39% cc), Tasigna (USD 75 million, +102% cc) and Afinitor (USD 41 million). Cardiovascular and Metabolism (USD 1.9 billion, +7% cc) was affected by Diovan (USD 1.4 billion, -1% cc), driven by the slowdown in demand ahead of the biennial price cut in Japan. Neuroscience and Ophthalmics (USD 901 million, +24% cc) saw rapid growth from Lucentis (USD 364 million, +43% cc) and Exelon/Exelon Patch (USD 251 million, +17% cc).

Operating income

Operating income rose 13% (+7% in cc) to USD 2.3 billion. The operating income margin of 31.9% of net sales was impacted by an impairment charge in R&D of USD 152 million after discontinuation of PTZ601, an anti-infective development project, while an asset write-up in Cost of Goods Sold of USD 100 million and an exceptional settlement gain in Other Income of USD 42 million were both related to the recent settlement with Teva regarding Famvir.

Core operating income grew 12% (+6% cc) to USD 2.4 billion. The core operating income margin of 33.3% of net sales was affected by lower Other Revenues and sales to other divisions (-0.7 percentage points) as well as higher Cost of Goods Sold (-1.0 percentage points) as a result of lower fixed overhead absorption and a devaluation of inventories to reflect lower standard costs, in addition to higher royalties. R&D improved 0.7 percentage points, mainly driven by phasing of clinical trial activities. Marketing & Sales and General & Administrative expenses benefited from continued productivity efforts, improving 1.7 percentage points compared to the same period in 2009. Higher net costs from Other Income and Expense (-1.1 percentage points) were mainly due to the 2009 period benefiting from provision reversals for launch product inventories.


Cardiovascular and Metabolism

  Q1 2010 Q1 2009  % change
  USD m USD m USD cc
Hypertension medicines 1 735 1 590 9 5
   Diovan 1 442 1 402 3 -1
   Exforge 204 136 50 42
   Tekturna/Rasilez 89 52 71 66
Galvus 76 26 192 176
Lotrel 73 83 -12 -12
Total strategic products 1 884 1 699 11 7
Mature products 295 331 -11 -16
Total 2 179 2 030 7 3

 

An expanding portfolio of high blood pressure medicines (USD 1.7 billion, +5% cc) has enabled Novartis to increase its leadership of the global branded hypertension market segment, achieving a 15.3% share in January 2010 compared to 14.4% in January 2009 (Source: IMS Health). Single-pill combinations based on valsartan (Diovan) and aliskiren (Tekturna/Rasilez) now provide over half of these sales, reflecting the continuing shift toward use of combination therapies.

Diovan (USD 1.4 billion, -1% cc) sales declined in the first quarter, mainly driven by a slowdown in the angiotensin receptor blocker (ARB) market in Japan ahead of the biennial price cut. In the US, Diovan reached sales of USD 588 million (+1% cc) in the first quarter, maintaining its leading share of the ARB segment with a 41.3% share in February 2010 (+1.1 percentage points vs. December 2009 and +0.9 percentage points vs. February 2009, Source: IMS Health). Diovan is the only medicine in the ARB class approved to treat the three major cardiovascular indications: high blood pressure, high-risk heart attack and heart failure. 

Exforge (USD 204 million, +42% cc) continued to deliver strong growth on geographic expansion and the launch of Exforge HCT in the US and Europe. Exforge, a single-pill combination of Diovan (valsartan) and the calcium channel blocker amlodipine, has been consistently setting new standards for high blood pressure combination therapies since its first launch in 2007. Exforge received regulatory approval in Japan in January 2010, while Exforge HCT, which adds a diuretic in a single pill, has been a key growth driver in both the US and Europe.

Tekturna/Rasilez (USD 89 million, +66% cc) has a high growth rate supported by geographic expansion and launches of the single-pill combinations Tekturna/Rasilez HCT and Valturna. Tekturna/Rasilez is the only approved high blood pressure therapy in a new class of medicines known as direct renin inhibitors. The US is benefiting from the new growth driver Valturna, a single-pill therapy of aliskiren and valsartan launched in late 2009. Other single-pill combinations in development are a combination of aliskiren and amlodipine, currently under regulatory review in the US and Europe, and a triple-combination therapy with aliskiren, amlodipine and a diuretic expected to be submitted for US regulatory approval in 2010.

Galvus/Eucreas (USD 76 million, +176% cc), oral treatments for type 2 diabetes, has delivered sustained growth in many markets, particularly Germany, Spain, Brazil, Korea and India. Galvus was approved in Japan in January 2010 under the brand name Equa.


Oncology

  Q1 2010 Q1 2009 % change
  USD m USD m USD cc
Gleevec/Glivec 1 032 894 15 8
Zometa 375 342 10 5
Femara 344 286 20 15
Sandostatin 310 258 20 14
Exjade 179 122 47 39
Tasigna 75 35 114 102
Afinitor 41 1 NM NM
Other 49 59 -17 -22
Total 2 405 1 997 20 14

NM - Not meaningful

Gleevec/Glivec (USD 1.0 billion, +8% cc) has sustained growth through continued expansion in chronic myeloid leukemia (CML) as well as adjuvant treatment of gastrointestinal stromal tumors (GIST). Gleevec/Glivec, a targeted therapy for certain forms of CML and GIST, was most recently approved in 2009 for use in adjuvant (post-surgery) GIST patients, with approvals now achieved in more than 55 countries in North America, Europe and Asia-Pacific.

Tasigna (USD 75 million, +102% cc) has been growing rapidly on geographic expansion given the approvals in more than 80 countries and market penetration as a second-line therapy for patients with certain forms of CML resistant or intolerant to prior therapy including Gleevec/Glivec. In December 2009, Tasigna was submitted for US, European and other approvals worldwide for use in certain newly diagnosed chronic-phase CML patients based on data from the ENESTnd trial, the largest ever head-to-head comparison of a targeted therapy against Glivec. In February 2010, Tasigna received priority review status in the US for this submission. Trials are also underway examining the use of Tasigna in CML patients with suboptimal response to Glivec and in patients with metastatic GIST.

Zometa (USD 375 million, +5% cc) expansion has come from improved compliance and use of this intravenous bisphosphonate therapy in patients with certain types of cancer that has spread to bones, particularly in key European markets. US and European regulatory submissions were completed in late 2009 for use in adjuvant breast cancer in premenopausal women.

Femara (USD 344 million, +15% cc) achieved ongoing double-digit growth on market share gains in the US and key European markets, mainly Germany, France, Italy and Denmark. The use of Femara, an oral therapy for postmenopausal women with hormone sensitive breast cancer, has driven approximately 70% of overall aromatase inhibitor market segment growth around the world, particularly in the initial adjuvant (post-surgery) setting (Source: IMS Health Q4 2009).

Sandostatin (USD 310 million, +14% cc) benefited from increasing use of Sandostatin LAR in neuroendocrine tumors (NET).

Exjade (USD 179 million, +39% cc) has continued to expand on increased average dosing and improved adherence to therapy in the US, while also expanding in the Middle East. Exjade, currently approved in more than 100 countries as the only once-daily oral therapy for transfusional iron overload, received regulatory approvals in 2009 in the US, Europe, Switzerland and other countries extending the dose range to 40 mg/kg.

Afinitor (USD 41 million) has seen strong uptake following recent launches in key European markets. Afinitor, an oral inhibitor of the mTOR pathway, was launched in the US, Europe, Switzerland and Japan after first regulatory approvals in 2009 as a new treatment for advanced renal cell carcinoma (RCC, kidney cancer) following VEGF-targeted therapy. Afinitor, now approved in 49 countries, is being studied in many other cancer types. Phase III studies are underway in patients with neuroendocrine tumors (NET), breast cancer, lymphoma, tuberous sclerosis complex (TSC) and gastric cancer. Two potential regulatory submissions are planned for 2010 based on trials involving patients with neuroendocrine tumors (NET) as well as TSC. A late-stage trial in patients with hepatocellular carcinoma (HCC) will be initiated in the second quarter.


Neuroscience and Ophthalmics

  Q1 2010 Q1 2009  % change
  USD m USD m USD cc
Lucentis 364 229 59 43
Exelon/Exelon Patch 251 203 24 17
Comtan/Stalevo 141 123 15 9
Fanapt 21      
Extavia 20 3 NM NM
Other 104 117 -11 -17
Total strategic products 901 675 33 24
Mature products 133 131 2 -7
Total 1 034 806 28 19

NM - Not meaningful

Lucentis (USD 364 million, +43% cc) continued to deliver strong growth, particularly in France, the UK, Australia and Japan, where it was launched in early 2009. This biotechnology eye therapy, which is approved in more than 80 countries for "wet" age-related macular degeneration, has now been used in more than 250,000 patients for this disease, a leading cause of blindness in people over age 50. A regulatory submission for this indication was accepted in April in China. In December 2009, a regulatory submission was filed in Europe for treatment of visual impairment due to diabetic macular edema (DME). Genentech holds the US rights to this medicine.

Exelon/Exelon Patch (USD 251 million, +17% cc) has been driven by Exelon Patch since its first launch in 2007, generating more than 60% of total Exelon sales in the first quarter of 2010 compared to 46% in the 2009 period. In February, this therapy for mild to moderate forms of Alzheimer's disease dementia (approved in Europe) as well as dementia linked with Parkinson's disease (approved in the US) was also submitted for regulatory approval in Japan.

Extavia (USD 20 million) has grown from geographic expansion in key markets, particularly Russia, Italy, Spain and the US, and expansion in Germany. Extavia, the Novartis-branded version of Betaferon®/Betaseron® for relapsing forms of multiple sclerosis, was launched in the US in 2009, and in over 20 other countries, including Canada and Russia, in 2010.


Respiratory

  Q1 2010 Q1 2009  % change
  USD m USD m USD cc
Xolair 80 61 31 24
TOBI 65 74 -12 -14
Other 2 -1 NM NM
Total strategic products 147 134 10 5
Mature products 49 53 -8 -15
Total 196 187 5 -1

NM - Not meaningful

Xolair (USD 80 million, +24% cc) has been growing in major European and Latin American markets as well as in Japan after its recent launch. The first quarter of 2010 also included lower sales to Genentech compared to the 2009 period for the US, where Novartis co-promotes Xolair with Genentech and shares a portion of operating income. Xolair, a biotechnology drug for moderate to severe persistent allergic asthma in the US and severe persistent allergic asthma in Europe, has a global presence with approvals in more than 80 countries. Phase III trials in China are planned to start in 2010 to support regulatory submissions in this country.

Onbrez Breezhaler (QAB149) (USD 3 million) a once-daily long-acting bronchodilator for adult patients with chronic obstructive pulmonary disease (COPD), was launched in Germany in December 2009 as well as Ireland and Denmark in March 2010 after European regulatory approval in November 2009. More than 20 launches are planned globally for the second half of 2010, including in the UK, Spain, Brazil and Mexico. Regulatory submissions are also planned for 2010 in Japan and China. In the US, all clinical studies to support resubmission have been started following a Complete Response letter from the FDA in October 2009 requesting additional data.


Immunology and Infectious Diseases

  Q1 2010 Q1 2009 % change
  USD m USD m USD cc
Neoral/Sandimmun 212 221 -4 -10
Reclast/Aclasta 123 85 45 41
Myfortic 100 73 37 27
Certican 34 23 48 36
Other 71 46 54 43
Total strategic products 540 448 21 14
Mature products 207 220 -6 -11
Total 747 668 12 6

 

Reclast/Aclasta (USD 123 million, +41% cc) has maintained a strong growth pace driven by the US and geographic expansion. Reclast/Aclasta, a once-yearly infusion therapy for osteoporosis, has benefited from increasing patient access to infusion centers and a broad range of use in patients with various types of this debilitating bone disease.

Certican (USD 34 million, +36% cc), a transplantation medicine, is now available in more than 70 countries for use in the prevention of organ rejection based on its immunosuppressive efficacy and side-effect profile. Discussions are continuing with the FDA on product labeling and a Risk Evaluation Mitigation Strategy (REMS) to gain US regulatory approval (under the brand name Zortress) for prevention of organ rejection in adult kidney transplant patients. The FDA issued a Complete Response letter in December 2009, but did not request additional clinical trials.

Ilaris (ACZ885) (USD 4 million), a fully human monoclonal antibody that blocks action of the inflammatory protein interleukin-1 beta, has received additional regulatory approvals in Canada (February) and Brazil (March) following US and European regulatory approvals in 2009 for treatment of cryopyrin-associated periodic syndrome (CAPS), a group of rare auto-inflammatory disorders. Submissions of ACZ885 for use in the treatment of hard-to-treat gout are planned for late 2010. Trials are ongoing in other diseases in which IL-1 beta is believed to play an important role, including chronic obstructive pulmonary disease (COPD), type 2 diabetes and systemic juvenile idiopathic arthritis (SJIA).


Vaccines and Diagnostics

  Q1 2010 Q1 2009 % change
  USD m USD m USD cc
Net sales 1 361 247 451 436
Operating income 839 -67 NM NM
  As % of net sales 61.6      
Core operating income 923 9 NM NM
  As % of net sales 67.8 3.6    

NM - Not meaningful

First quarter

Net sales

The further deliveries for many supply contracts with governments around the world for A (H1N1) pandemic flu vaccines and adjuvants generated net sales of USD 1.1 billion, resulting in the strong overall four-fold increase compared to the year-ago period. The vast majority came from recognition of sales for deliveries made during the first quarter as part of supply contracts reached in 2009. The new vaccine Menveo was also launched in March after US and European regulatory approvals for initial use from age 11 and older against four meningococcal meningitis serogroups. Sales in other areas, including diagnostics and tick-borne encephalitis vaccines, were broadly unchanged in the 2010 period compared to 2009.

Novartis has now largely finished deliveries of A (H1N1) pandemic vaccines and adjuvants to fulfill agreements with various governments, including the United States, following the pandemic outbreak in mid-2009, and production of A (H1N1) monovalent doses has been stopped.

Following the declaration of the pandemic in 2009, Novartis made significant investments that enabled the delivery of more than 150 million A (H1N1) pandemic vaccine doses through the end of the first quarter of 2010. More than 30,000 people were enrolled in A (H1N1) pandemic vaccine clinical trials, while three different technology platforms (traditional egg-based, cell-culture-based and MF-59 adjuvanted vaccines) received regulatory approvals to maximize the vaccine supply. Novartis also deployed more than 1,000 associates from other divisions within the Group to support these initiatives.

Operating income

Operating income in the first quarter of 2010 was USD 839 million compared to an operating loss of USD 67 million in the 2009 period based on contributions of A (H1N1) pandemic vaccines in the 2010 period, which were made possible by major investments in 2009.

Core operating income rose to USD 923 million from USD 9 million in the year-ago quarter. Significant investments were made in the first quarter of 2010 in R&D, including post-marketing commitments for A (H1N1) pandemic vaccines as well as the late-stage Menveo and MenB clinical development programs. Higher Marketing & Sales investments in the first quarter of 2010 over the 2009 period supported geographic expansion, particularly in emerging markets, and the build-up of sales and marketing infrastructure for the Menveo launch in the US.


Sandoz

  Q1 2010 Q1 2009 % change
  USD m USD m USD cc
Net sales 2 001 1 726 16 9
Operating income 310 291 7 -1
  As % of net sales 15.5 16.9    
Core operating income 450 347 30 21
  As % of net sales 22.5 20.1    

 

First quarter

Net sales

All regions and businesses supported accelerating growth (USD 2.0 billion, +16%, +9% cc) compared to 2009 as 17 percentage points of volume expansion from new product launches, the inclusion of EBEWE Pharma's specialty generics business since September 2009 and continued strong results from biosimilars more than offset price erosion of eight percentage points.

US retail generics and biosimilars (+19% cc) delivered successful new product launches (tacrolimus, lansoprazole and oxaliplatin) as well as improvements in sales of antibiotics and injectable oncology medicines. German retail generics and biosimilars (+5% cc) grew in a declining market, strengthening its leadership position while adapting its business model to compete effectively in the tender systems adopted by some major healthcare providers in 2009. In Western Europe (+11% cc), many markets grew at a double-digit pace, notably Italy, the UK, Austria, Switzerland, Belgium and the Nordic region, but France contracted strongly and lost market share due to fierce price competition. Emerging markets expanded at a rapid pace, particularly the Middle East, Turkey and Africa (+18% cc) and Asia-Pacific (+16% cc) and Central and Eastern Europe (+7% cc). Biosimilars (+81% cc) gained further momentum on contributions from the three launch brands Omnitrope, Binocrit and Filgrastim.

Operating income

Operating income grew 7% to USD 310 million, but down 1% cc, as the operating income margin fell 1.4 percentage points to 15.5% of net sales. Key factors for the reduction included acquisition-related charges for the EBEWE Pharma integration (-0.7 percentage points), exceptional costs for termination of a co-development agreement (-0.8 percentage points) and provisions for settlement of Average Wholesale Pricing litigation in the US (-1.9 percentage points).

Core operating income rose 30% (+21% cc) to USD 450 million, resulting in the core operating income margin rising 2.4 percentage points to 22.5% of net sales. Cost of Goods Sold (+0.1 percentage points) improved slightly as productivity improvement programs fully offset price erosion. Marketing & Sales costs (-0.9 percentage points) rose faster than sales on investments in biosimilars, Central & Eastern Europe and Asia-Pacific. R&D investments (+1.0 percentage points) were lower as productivity initiatives more than offset investments in development programs for biosimilars as well as other differentiated generics, including oncology injectables and respiratory products. General & Administrative costs (+0.8 percentage points) grew slower than net sales due to ongoing cost-containment measures, while Other Income & Expense (+1.4 percentage points) improved against the 2009 period due to lower legal fees.


Consumer Health

  Q1 2010 Q1 2009 % change
  USD m USD m USD cc
Net sales 1 478 1 303 13 7
Operating income 264 235 12 3
  As % of net sales 17.9 18.0    
Core operating income 288 254 13 5
  As % of net sales 19.5 19.5    

 

First quarter

Net sales

All three Consumer Health businesses - OTC, Animal Health and CIBA Vision - contributed to higher net sales in the first quarter of 2010 (USD 1.5 billion, +13%, +7% cc), as these businesses grew ahead of their respective markets following challenges in 2009 posed by the financial crisis.

Pain medicines - particularly Voltaren in Europe and Excedrin in the US - were key contributors in OTC, while a weak "Cough & Cold" season slightly offset this performance. Prevacid24HR has achieved a 30% market share in the growing US over-the counter market for proton pump inhibitors since its launch in November 2009, propelled by a strong advertising and promotional campaign. CIBA Vision maintained its excellent growth pace from 2009, expanding in all regions on new product launches. The AirOptix contact lens franchise was among top performers, gaining share in all major markets. Animal Health grew ahead of its market in the US, helped by a strong competitive position for parasiticide products.

The US (+11%) delivered strong performances across all three businesses, while Europe (+5% cc) achieved robust growth with strong performances from Germany, France and Spain. Net sales in the top six emerging markets grew 27% (+11% cc), as all countries contributed to the positive results and led by double-digit gains in India and Turkey. Russia also delivered double-digit growth despite recent government price controls.

Operating income

Operating income rose 12% (+3% cc) to USD 264 million, at a slower pace than net sales as the operating income margin declined 0.1 percentage points in the first quarter of 2010 to 17.9% of net sales from the 2009 period.

Core operating income grew 13% (+5% cc) to USD 288 million, largely in line with net sales in constant currencies, as the core operating income margin was unchanged at 19.5% of net sales. Other Revenues and sales to other divisions (+0.3 percentage points) were higher, while Cost of Goods Sold (+0.5 percentage points) improved as a result of robust sales growth in key markets, optimized pricing and productivity gains. However, this was largely offset by higher Marketing & Sales expenses (-0.6 percentage points), primarily driven by significant promotional support for the 2009 launch of Prevacid24HR in the US as well as sales force expansion in emerging markets. R&D investments were flat as a percentage of net sales as investments were made in new product development across the businesses. General & Administrative costs (-0.3 percentage points) increased in the 2010 period as a result of a provision release in 2009, while Other Income & Expense (+0.1 percentage points) were largely unchanged compared to the 2009 period.


FINANCIAL REVIEW

First quarter

  Q1 2010 Q1 2009 % change
  USD m USD m USD cc
Net sales 12 131 9 709 25 18
Divisional operating income 3 740 2 521 48 41
Corporate income & expense, net -229 -174    
Group operating income 3 511 2 347 50 42
Income from associated companies 103 83 24 17
Financial income 49 -48 NM NM
Interest expense -133 -86 -55 -52
Taxes -582 -321 -81 -94
Net income 2 948 1 975 49 41
EPS (USD) 1.29 0.87 48 40
         
Core operating income 3 865 2 611 48 41
Core net income 3 309 2 302 44 36
Core EPS (USD) 1.45 1.01 44 36

NM - Not meaningful

Net sales

Net sales rose 25% (+18% cc) to USD 12.1 billion on improvements in all businesses, particularly sales of A (H1N1) pandemic flu vaccines and rapid growth of recently launched products across the Group (USD 1.9 billion). Currency movements contributed seven percentage points to reported growth. Pharmaceuticals (USD 7.3 billion, +7% cc) advanced in all regions and maintained solid volume growth. Vaccines and Diagnostics (USD 1.4 billion, +436% cc) provided USD 1.1 billion from recognition of A (H1N1) pandemic vaccine sales. Sandoz (USD 2.0 billion, +9% cc) grew on successful new product launches and integration of EBEWE Pharma following the September 2009 acquisition. All Consumer Health businesses (USD 1.5 billion, +7% cc) had good performances and grew faster than their markets. Higher volumes represented 19 percentage points of growth, while currency movements had a positive impact of seven points and acquisitions added one point. However, price changes reduced growth by two points. All regions achieved double-digit growth, led by Europe (USD 4.9 billion, +13% cc) and the US (USD 3.9 billion, +23% cc). Asia-Pacific (USD 2.2 billion, +18% cc) benefited from rapid expansion in key markets. Among the top six emerging markets (USD 1.2 billion, +22% cc), China, Brazil, India, Russia and South Korea maintained solid growth, but Turkey was hampered by cost-containment measures.

Corporate income & expense, net

Corporate expense rose in the first quarter to USD 229 million from USD 174 million in the 2009 period, mainly driven by an additional inter-divisional profit elimination and various one-time costs.

Group operating income

Operating income rose 50% (+42% cc) to USD 3.5 billion on the volume-driven sales expansion and significant contributions from Vaccines and Diagnostics, while also benefitting from eight percentage points of favorable currency movements. The operating income margin improved 4.7 percentage points to 28.9% of net sales from 24.2% in the 2009 period. Core operating income, which excludes exceptional items and amortization of intangible assets in both periods, rose 48% (+41% cc) to USD 3.9 billion, and the core operating income margin rose 5.0 percentage points to 31.9% of net sales from 26.9% in the year-ago quarter.

Income from associated companies

For the first quarter of 2010, income from associated companies rose 24% to USD 103 million from USD 83 million in the 2009 period on anticipated higher net income contributions from Alcon and Roche. Contributions from Roche for the 2010 quarter were reduced by USD 43 million after Roche took an additional Genentech-related exceptional restructuring charge in the second half of 2009. Core results, which exclude exceptional items and the amortization of intangible assets in both periods, increased 30% to USD 288 million.


Financial income and interest expense

Financial income was a positive USD 49 million in the first quarter from a negative USD 48 million in the 2009 period, mainly related to significantly higher average liquidity in the 2010 period and a positive currency result. Interest expenses rose 55% to USD 133 million following the issuance of US dollar bonds in February 2009 and March 2010 and a euro bond in June 2009.

Taxes

The tax rate (taxes as percentage of pre-tax income) rose to 16.5% in the first quarter from 14.0% in the 2009 period. A significant part of this increase was due to sales of A (H1N1) pandemic flu vaccines in higher-tax jurisdictions.

Net income

Net income rose 49% (+41% cc) to USD 2.9 billion as contributions from associated companies and financial income more than offset increased interest expenses and a higher tax rate. Core net income rose 44% (+36% cc) to USD 3.3 billion.

Earnings per share

Earnings per share (EPS) rose largely in line with net income to USD 1.29 in the first quarter from USD 0.87 in the 2009 period, while core EPS grew 44% (+36% cc) to USD 1.45 from USD 1.01. The average numer of shares outstanding rose 1% to 2,279.1 million from 2,265.9 million in the year-ago period, while a total of 2,287.9 million shares were oustanding at March 31, 2010.

Balance sheet

Total assets amounted to USD 95.8 billion at March 31, 2010, an increase of USD 0.3 billion compared to the end of 2009. Although cash and marketable securities rose by USD 2.4 billion as a result of reinvesting proceeds from the US dollar bond issued in March 2010, these were nearly offset by reductions due to currency changes (USD 2.0 billion) and lower underlying trade receivables (USD 0.3 billion).

Total liabilities increased by USD 2.5 billion to USD 40.6 billion as higher financial debts of USD 3.9 billion were partially offset by reductions in other non-financial liabilities. The Group's equity fell by USD 2.2 billion to USD 55.2 billion at March 31, 2010, principally due to the dividend payment for 2009 of USD 4.5 billion (a 13% increase from the dividend payment for 2008 of USD 3.9 billion) and translation losses of USD 1.0 billion. These were partially offset by net income of USD 2.9 billion in the first quarter of 2010.

The Group's debt/equity ratio rose to 0.32:1 at March 31, 2010, compared to 0.24:1 at the end of 2009, reflecting the higher financial debt following the issuance of the USD 5 billion bond in March 2010 and the lower equity. The Group's financial debt of USD 17.9 billion consisted of USD 4.5 billion in current and USD 13.4 billion in non-current liabilities. Overall liquidity rose to USD 19.9 billion from USD 17.4 billion at the end of 2009. Net liquidity at March 31, 2010, fell to USD 2.0 billion from USD 3.5 billion at the end of the previous year following the USD 4.5 billion payment of the 2009 dividend.

Credit agencies maintained their ratings of Novartis debt during the first quarter of 2010. Moody's rated the Group as Aa2 for long-term maturities and P-1 for short-term maturities, and Standard & Poor's had ratings of AA- for long-term and A-1+ for short-term maturities. Fitch had a long-term rating of AA and a short-term rating of F1+.

Cash flow

Cash flow from operating activities rose 69% to USD 3.3 billion in the first quarter, driven by the strong business performance and in particular proceeds from A (H1N1) pandemic vaccines. Cash used for investing activities fell by USD 1.7 billion to USD 1.1 billion from the 2009 period, which included USD 2.4 billion of investments in marketable securities with proceeds from the 2009 US dollar bond. Among investments in the 2010 period were USD 0.4 billion for acquisitions, including USD 0.3 billion for completion of the EBEWE Pharma transaction. Cash flow from financing activities included a USD 4.2 billion increase in net financial debt due to the 2010 US dollar bond issuance and USD 0.4 billion arising from treasury share transactions, principally related to share-based compensation, but these were largely offset by the dividend payment of USD 4.5 billion .

Free cash flow before dividends rose 93% to USD 2.9 billion, with the USD 1.4 billion increase principally coming from the improved cash flow from operating activities.


INNOVATION REVIEW

Novartis has one of the industry's most competitive pipelines with 135 projects in pharmaceutical clinical development, of which 58 involve new molecular entities.

Among developments in the first quarter of 2010:

  • Approvals in Japan in January for Afinitor (kidney cancer), Equa (Galvus) (type 2 diabetes) and Exforge (hypertension) following approvals of six new medicines in this market in 2009.
  • First approvals of the Menveo meningitis vaccine in the US (February) and Europe (March) from age 11 and older, and also the US filing for use from age 2-10.
  • Submission for US approval of a triple combination therapy for hypertension in a single pill containing Tekturna/Rasilez, amlodipine and hydrochlorothiazide as well as Exelon Patch (Alzheimer's disease) and Tasigna (cancer) for approval in Japan.
  • Two US regulatory submissions completed in late 2009 - Tasigna (newly diagnosed CML) and Gilenia (FTY720, multiple sclerosis) - were given priority review status.
  • Discontinuation of PTZ601 (complicated staphylococcal skin and soft tissue infections) after observation of a high rate of adverse events in a Phase I study and LCI699 (heart failure) after identification of a safety issue in form of an impaired stress response. One of the two Phase III trials involving ASA404 (non-small cell lung cancer) was halted in March following an interim analysis of benefits for patients with NSCLC.

2010 selected major approvals: US, Europe and Japan

Product Active ingredient Indication Approval date
Afinitor Everolimus Kidney cancer Japan - Q1
Equa (Galvus) Vildagliptin Type 2 diabetes Japan - Q1
Exforge Valsartan and amlodipine Hypertension Japan - Q1
Menveo Quadrivalent meningococcal conjugate vaccine Prevention of meningococcal meningitis (A, C, Y, W-135) US, EU - Q1

 


Selected projects awaiting regulatory decisions

    Completed submissions  
Product Indication US EU Japan News update
ABF656 Hepatitis C Q4 2009     - EU submission withdrawn in April 2010 for technical reasons
Exelon Patch Alzheimer's disease Approved Approved Q1 2010  
FTY720
(Gilenia)
Multiple sclerosis Q4 2009 Q4 2009   - FDA granted six-month priority review status; Advisory Committee meeting scheduled for June 10
Lucentis Diabetic macular edema   Q4 2009    
QAB149 COPD Q4 2008 Approved   - Clinical trials underway to address FDA Complete Response letter (Q4 2009), resubmission planned for 2010
Tasigna Newly diagnosed CML Q4 2009 Q4 2009 Q1 2010 - FDA granted six-month priority review status
Tekturna and amlodipline Hypertension Q4 2009 Q4 2009    
Tekturna, amlodipine and hydrochlorothiazide Hypertension Q1 2010     - US submission made in February 2010

- EU submission set for 2010
TOBI-TIP Cystic fibrosis   Q4 2009   - US submission planned for 2010
Zometa Adjuvant breast cancer Q4 2009 Q4 2009    
Zortress (Certican) Kidney transplantation Q2 2009 Approved   -Addressing issues from FDA

 


Selected pharmaceutical pipeline projects

Project/ Compound Potential indication/ Disease area Planned submissions Current Phase News update

 
ACZ885 Refractory gout 2010 III - On track for 2010 submission
  SJIA 2011 III  
  Type 2 diabetes 2012 II - Phase III start targeted for December 2010
AFQ056 Parkinson's disease 2012 II  
AG0178 Major depressive disorder 2012 III  
AIN457 Behcet's uveitis 2010 III - On track for 2010 submission
  Non-infectious uveitis 2011 III  
  Psoriasis 2013 II - Phase III start planned for 2011
  Rheumatoid arthritis 2013 II - Phase III start planned for end of 2010
ASA404 Non-small cell lung cancer (NSCLC) 2012 III - First-line Phase III NSCLC trial stopped in March 2010, second-line Phase III NSCLC trial ongoing (interim analysis in H2 2010)
BAF312 Multiple sclerosis ≥2014 II  
Certican Prevention of organ rejection - liver 2011 III  
DEB025 Hepatitis C ≥2014 II - In-licensed from Debiopharm in Q1 2010
EPO906 Ovarian cancer 2010 III - On track for 2010 submission
Exjade Non-transfusion-dependent Thalassemia (NTDT) 2011 II  
INC424 Myelofibrosis 2011 III  
LBH589 Hodgkin's lymphoma 2010 II - On track for 2010 submission

- Updated Phase II pivotal study data to be presented at ASCO
  Multiple myeloma 2013 III  
  Hematological tumors ≥2014 II  
LCQ908 Type 2 diabetes 2013 II - Phase II interim results expected in second half of 2010
LCZ696 Heart failure 2013 III  
LDE225 Gorlin's syndrome 2011 II  
Lucentis Retinal vein occlusion 2011 II  
NVA237 COPD 2011 III  
PKC412 Aggressive systemic mastocytosis 2011 II  
  Acute myeloid leukemia 2013 III  
PRT128 Acute coronary syndrome (ACS)

Chronic coronary heart disease (CHD)
2013 II - First data from INNOVATE-
PCI Phase II trial available in
Q2 2010
      - Phase III start for CHD planned for H2 2010 and ACS for 2011
PTK796 Infections 2012 III  
QAX028 COPD ≥2014 II  
QMF149 COPD 2013 II  
  Asthma 2013 II  
QTI571 (Glivec) Pulmonary arterial hypertension 2011 III - Phase III recruitment ongoing
QVA149 COPD 2012 II - Phase III planned start in 2010

 

Project/ Compound Potential indication/ Disease area Planned submissions Current Phase News update
RAD001
(Afinitor)
Neuroendocrine tumors 2010 III - On track for 2010 submission
Tuberous sclerosis complex SEGA 2010 III - On track for 2010 submission
Tuberous sclerosis complex AML 2011 III  
ER+ breast cancer 2012 III  
  HER2+ breast cancer 2013 III  
  Gastric cancer 2012 III  
  Lymphoma ≥2014 III  
RLX030 Acute heart failure 2013 III - Corthera acquisition in Q1 2010 (relaxin)
SBR759 Hyperphosphatemia 2011 III  
SMC021 Osteoarthritis 2011 III  
  Osteoporosis 2011 III  
SOM230 Cushing's disease 2010 III - On track for 2010 submission
  Acromegaly 2011 III  
  Refractory / resistant carcinoid syndrome 2011 III  
Tasigna GIST ≥2014 III  
  cKIT melanoma 2012 II  
TKI258 Solid tumors 2013 II  

 


Selected vaccine pipeline projects

Project/ Compound Potential indication/ Disease area Planned submissions Current Phase News update
Menveo
(A,C,W,Y meningitis serogroups)
Prevention of meningococcal disease (serogroups A, C, Y and W-135) in infants 2011 (EU/US) III  
  Prevention of meningococcal disease (serogroups A, C, Y and W-135) from 2-10 years     - Submitted in the US in Q1 2010
MenB
(B meningitis serogroup)
Prevention of meningococcal disease (serogroup B) in infants 2010 (EU) III - End-of-Phase II meeting to be held with FDA in Q3 2010 to discuss Phase III requirements

 


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