Core operating income declines (-5% cc), driven by generic erosion and growth investments
Continued to build the pipeline in Q1
Group-wide initiatives and Alcon growth plan on track
Constant currencies (cc), core results and free cash flow are non-IFRS measures. An explanation of non-IFRS measures can be found on page 39 of the Condensed Interim Financial Report. Unless otherwise noted, all growth rates in this Release refer to same period in prior year.
Growth Products are defined on page 2.
Ankylosing spondylitis (AS) and psoriatic arthritis (PsA).
Refers to continuing operations, defined on page 32 of the Condensed Interim Financial Report.
Basel, April 21, 2016 - Commenting on the results, Joseph Jimenez, CEO of Novartis, said:
"I am pleased we were able to show sales growth in constant currencies despite the entry of a generic version of Gleevec in the US. As expected, our results reflect additional investments behind our new launches and Alcon. We are on track with the plan we outlined in January to further focus our divisions, drive greater innovation and significant synergies and productivity. I remain confident in our long-term growth prospects, underpinned by our strong pipeline and the talent leading our Research and Development functions."
Novartis laid out five priorities for 2016: deliver strong financial results; strengthen innovation; improve Alcon performance; capture cross-divisional synergies; and build a higher-performing organization. We made progress in each of these areas in the first quarter.
On January 27, 2016, Novartis announced plans to further focus our divisions, integrating businesses that share therapeutic areas to better leverage our development and marketing capabilities. These plans included the transfer of the Ophthalmic Pharmaceuticals franchise from Alcon to the Pharmaceuticals Division, and the transfer of selected mature products from the Pharmaceuticals Division to Sandoz. Operationally, these transfers were completed as of April 1, 2016. The centralization of manufacturing and integration of some drug development functions, also announced on January 27, 2016, are on track for implementation by July 1, 2016.
In compliance with International Financial Reporting Standards (IFRS), Novartis updated its segment financials to reflect the new divisional structure, both for the current and prior year, to aid comparability of year-on-year results. As a result, all comparisons of divisional results from 2016 to 2015 reflect this new divisional structure.
In addition, in 2015, Novartis completed a series of portfolio transformation transactions, including the acquisition of oncology assets from GSK and a 36.5% interest in GSK Consumer Healthcare Holdings, and the divestment of its Vaccines and Animal Health businesses. To reflect these transactions, Novartis reported the Group’s financial results in 2015 as "continuing operations" and "discontinued operations." All comparisons from 2016 to 2015 are versus continuing operations, unless otherwise noted. See page 32 of the Condensed Interim Financial Report for a full explanation.
Net sales were USD 11.6 billion (-3%, +1% cc) in the first quarter, as volume growth of 7 percentage points more than offset the negative impact of generic competition (-4 percentage points) and pricing (-2 percentage points). Growth Products contributed USD 3.9 billion or 34% of net sales, up 24% (USD) over the prior-year quarter.
Operating income was USD 2.5 billion (-12%, -5% cc). Core adjustments amounted to USD 0.8 billion (2015: USD 0.9 billion), with product divestment gains partly offset by amortization of the oncology assets acquired from GSK in Pharmaceuticals.
Core operating income was USD 3.3 billion (-11%, -5% cc). Core operating income margin in constant currencies decreased 1.8 percentage points, mainly due to loss of exclusivity on Gleevec, investments behind new launches and the Alcon growth plan. Currency had a negative impact of 0.7 percentage points, resulting in a net decrease of 2.5 percentage points in US dollar terms to 28.1% of net sales.
Net income was USD 2.0 billion (-13%, -4% cc), broadly in line with operating income.
EPS was USD 0.85 (-11%, -3% cc), broadly in line with net income.
Core net income was USD 2.8 billion (-13%, -6% cc), broadly in line with core operating income.
Core EPS was USD 1.17 (-12%, -5% cc), broadly in line with core net income.
Free cash flow was USD 1.4 billion (USD -0.1 billion), broadly in line with the prior-year quarter.
Pharmaceuticals net sales were USD 7.7 billion (-3%, +1% cc) in the first quarter, with volume growth of 9 percentage points. Generic competition had a negative impact of 6 percentage points and pricing had a negative impact of 2 percentage points, both largely due to Gleevec/Glivec genericization in the US. Growth Products generated USD 3.3 billion or 42% of division net sales. These products grew 31% (cc) over the same period last year. The oncology assets acquired from GSK continued to contribute significantly to sales growth in the quarter, as the prior-year period only included one month of sales (due to closing of the transaction on March 2, 2015). Generic impact on the Ophthalmic Pharmaceuticals products transferred from Alcon, mainly Patanol, negatively impacted Pharmaceuticals sales growth in the quarter.
Operating income was USD 2.2 billion (-11%, -4% cc). Core operating income was USD 2.6 billion (-9%, -3% cc). Core operating income margin in constant currencies decreased by 1.5 percentage points, driven by higher production costs and launch investments in Entresto and Cosentyx. Currency had a negative impact of 0.7 percentage points, resulting in a net decrease of 2.2 percentage points to 33.7% of net sales.
Sandoz net sales were USD 2.4 billion (0%, +4% cc) in the first quarter, as volume growth of 11 percentage points more than offset 7 percentage points of price erosion. Global sales of Biopharmaceuticals grew 50% (cc) to USD 214 million, benefitting from the launches of Glatopa in June 2015 and Zarxio in September 2015. Anti-Infectives franchise sales were USD 360 million (-3% cc), reflecting the weak flu season compared to the prior year. The mature products transferred from the Pharmaceuticals Division grew versus prior year (cc), benefitting from four products which were part of the oncology assets acquired from GSK.
Operating income was USD 346 million (+2%, +9% cc). Core operating income was USD 485 million (0%, +6% cc). Core operating income margin in constant currencies increased by 0.5 percentage points, with a positive impact from the mature products and ongoing productivity improvements, and a negative impact from higher M&S investment behind biosimilars and other key products. Currency had a negative impact of 0.5 percentage points, resulting in a core operating income margin of 19.8% of net sales.
Alcon net sales were USD 1.4 billion (-7%, -3% cc) in the first quarter. Surgical sales (-3% cc) were driven by a slowdown in cataract equipment placements, as we progress through the launch cycles for Centurion and LenSx. Cataract consumables delivered growth, more than offsetting a slight decline in intraocular lenses (IOLs). Vision Care performance (-4% cc) was impacted by weaker sales of AirOptix and Dailies AquaComfort Plus in the US, despite continued strong sales of Dailies Total1 globally. lens care declined due to competitive pressure and the continued market shift to daily disposable lenses.
Operating income was USD 31 million (-78%, -52% cc). Core operating income was USD 243 million (-36%, -26% cc), primarily impacted by declining sales and our planned higher spending in M&S behind the growth plan. Core operating income margin in constant currencies decreased by 5.9 percentage points; currency had a negative impact of 2.1 percentage points, resulting in a net decrease of 8.0 percentage points to 17.0% of net sales.
For the total Group, net income amounted to USD 2.0 billion compared to USD 13.0 billion in the prior-year period, and basic earnings per share decreased to USD 0.85 from USD 5.40. The decrease was due to the income from discontinued operations, which in the prior-year period included USD 12.8 billion exceptional divestment gains from the portfolio transformation transactions and USD 0.5 billion additional transaction related expenses.
Free cash flow was USD 1.4 billion compared to USD 1.2 billion in the first quarter of 2015.
Growth Products" are an indicator of the rejuvenation of the portfolio, and comprise products launched in a key market (EU, US, Japan) in 2011 or later, or products with exclusivity in key markets until at least 2020 (except Sandoz, which includes only products launched in the last 24 months). They include the acquisition effect of the GSK oncology assets.
Underpinning our financial results in the first quarter is a continued focus on key growth drivers, including Gilenya, Tasigna, Cosentyx, Tafinlar + Mekinist, Jakavi, Promacta/Revolade and Entresto, as well as Biopharmaceuticals and Emerging Growth Markets.
Emerging Growth Markets
The first quarter saw pipeline progress with positive regulatory decisions and significant clinical trial data released. Key developments are included below.
On January 27, 2016, we outlined delivery milestones for the Alcon turnaround, starting with focusing the division on its core Surgical and Vision Care business. Operational control for the Ophthalmic Pharmaceuticals franchise was transferred on April 1, 2016 to the Pharmaceuticals Division.
Within the newly focused Alcon devices business, we made investments in the first quarter to accelerate innovation and sales, strengthen customer relationships and improve basic operations. We increased M&S in both Surgical and Vision Care, including for new IOL launches and promotional programs behind key lens brands. We also initiated multiple projects to improve customer service and supply chain performance.
We expect our investments to improve sales performance later in the year.
On January 27, 2016, Novartis outlined several initiatives to leverage Group scale to drive even greater efficiency and innovation. These included centralizing our manufacturing operations across divisions within a single Technical Operations unit, and integrating some drug development functions across divisions.
These initiatives are incremental to our existing productivity programs, including synergies delivered by Novartis Business Services (NBS), our cross-divisional services organization, created in 2014 to drive efficiency, standardization and simplification across the Group.
We continued to advance all of our productivity programs in the first quarter, helping to support margins for the group.
In total, our productivity initiatives generated gross savings of approximately USD 0.5 billion in the first quarter.
The company’s focus on quality continued to yield results in the first quarter of 2016. A total of 32 global health authority inspections were completed and closed during the quarter, nine of which were conducted by the FDA. All 32 closed inspections were deemed good or acceptable. The outcome of an ongoing inspection by the Medicines and Healthcare Products Regulatory Agency (MHRA) in the UK is still pending.
Retaining a good balance between investment in the business, a strong capital structure and attractive shareholder returns will remain a priority. Strong cash flows and a sound capital structure have allowed Novartis to focus on driving innovation and growth across its diversified healthcare portfolio, while keeping its double-A credit rating as a reflection of financial strength and discipline.
During Q1 2016, 12.1 million treasury shares were delivered as a result of options exercised and share deliveries related to equity-based participation plans of associates. To partially offset the dilutive impact related to such transactions, 4.7 million Novartis shares were repurchased on the SIX Swiss Exchange second trading line and from employees. With these transactions, the total number of shares outstanding increased by 7.4 million in the first quarter of 2016. Novartis aims to further offset the dilutive impact from equity-based participation plans of associates experienced in the first quarter over the remainder of the year through additional share purchases.
As of March 31, 2016, the net debt increased by USD 6.5 billion to USD 23.0 billion, compared to USD 16.5 billion at December 31, 2015. The free cash flow of USD 1.4 billion was primarily used for payments related to the acquisition of businesses, share repurchases and the portfolio transformation transactions. The increase in net debt was driven by the dividend payment of USD 6.5 billion.
The long-term credit rating for the company continues to be double-A (Moody’s Aa3; Standard & Poor’s AA-; Fitch AA).
Barring unforeseen events
We confirm our outlook as presented at the beginning of 2016. Group net sales and core operating income are expected to be broadly in line with the prior year (cc), after absorbing the impact of generic competition. Generic competition impact on sales is expected to be as much as USD 3.2 billion compared to USD 2.2 billion in 2015.
These comparisons are versus 2015 continuing operations.
If March average exchange rates prevail for the remainder of 2016, the currency impact for the year would be negative 2% on sales and negative 3% on core operating income. This currency impact versus 2015 results from the continued strength of the US dollar against most currencies.
Continuing operations include the businesses of Pharmaceuticals, Sandoz and Alcon and starting on March 2, 2015 the results from the oncology assets acquired from GSK and the 36.5% interest in the GSK Consumer Healthcare Holdings (the latter reported as part of income from associated companies). See page 32 of the Condensed Interim Financial Report for full explanation.
In compliance with IFRS, Novartis updated its segment financials to reflect the new divisional structure announced on January 27, 2016, to aid comparability of year-on-year results.
Total Group net income and EPS include in the prior year the impact of the exceptional divestment gains and the operating results of the discontinued operations. Total Group free cash flow comprises the free cash flow from continuing operations and discontinued operations.
A condensed interim financial report with the information listed in the index below can be found on our website at hugin.info/134323/R/2005327/740645.pdf.