Q1 2020 net sales from continuing operations1 grew 13% (cc2, +11% USD) with double digit growth (cc) in Innovative Medicines and Sandoz:
Impacts of COVID-19:
Basel, April 28, 2020 - Commenting on the quarter, Vas Narasimhan, CEO of Novartis, said:
"We continue to deliver our medicines to patients and advance our innovative pipeline as reflected in our strong operational performance in Q1. While there are many uncertainties for the coming year, we are maintaining our full year outlook at this time and will continue to play our part to overcome the pandemic. Our response to the COVID-19 crisis demonstrates Novartis’ relentless commitment to our associates, patients, and the global community. For our associates we’ve committed to no COVID-19 related job losses and a full range of support programs. To support the global public health response, we are engaged in multiple collaborative R&D efforts, large scale clinical trials and donations to support local communities in currently over 60 countries."
As the COVID-19 situation continues to evolve, our primary concern remains the health and safety of our associates and patients globally while we also continue to take strong actions to help address the pandemic.
We are supporting our associates through a range of programs, from additional paid days off for those who have to care for ill family members at home, enhanced child care, on-line learning programs and enabled working from home. Importantly, Novartis has made a commitment that there will be no COVID-19 related job losses.
During the first quarter, COVID-19 did not have a material impact on our underlying business, financial condition, cash collections or liquidity. COVID-19 did result in increased forward purchasing by customers, including at the patient level, as some patients filled prescriptions to cover a longer period of time. Novartis continues to deliver needed medicines to patients and healthcare providers around the world. We do not anticipate supply chain disruption for the majority of the portfolio at this time given strong mitigation measures and inventory levels.
Clinical trials are continuing and we are leveraging our digital tools to limit the disruption caused by the pandemic. We are seeing slowdowns in new enrollments in ongoing clinical studies and start-up with new studies. We are utilizing the SENSE digital technology implemented in 2018 that allows us to track in real time all of our clinical trials (500+) in more than 70 countries at the level of individual patients and shift to contingency plans rapidly as the situation evolves. This includes, direct-to-patient medication delivery supported by home nursing services, virtual safety assessments and remote medical monitoring. At this time we remain confident the impact on our ongoing clinical trials is manageable. Looking ahead for the remainder of the year, we do not expect delays in our planned 2020 regulatory submissions. We will continue to monitor and provide more updates as the year unfolds.
Novartis is participating in collaborative research efforts such as the COVID-19 Therapeutics Accelerator, coordinated by the Bill & Melinda Gates Foundation, Wellcome, and Mastercard, as well as a COVID-19 directed partnership organized by the Innovative Medicines Initiative. Both are cross-sector collaborations that bring several pharmaceutical companies and expert academic institutions into coordinated research programs, with the aim of bringing the most promising molecules forward quickly without organizational barriers. Additionally, in response to an urgent call for research and development on COVID-19, issued by the European Federation of Pharmaceutical Industries and Associations, Novartis is contributing by making available several compounds from its libraries that are considered suitable for in vitro antiviral testing.
Together with the research community, Novartis is assessing whether our clinical-stage investigational or approved medicines could be repurposed beyond their intended or approved indications to treat complications of SARS-CoV-2 infection. Novartis initiated a Phase III clinical trial in collaboration with Incyte to evaluate the use of ruxolitinib in combination with standard of care (SoC), compared to SoC alone, as well as a Phase III study of canakinumab, in patients with pneumonia as a result of SARS-CoV-2 infection. In addition, Novartis announced a Phase III trial of hydroxychloroquine, alone and in combination with azithromycin, for the treatment of hospitalized patients with COVID-19 disease. Under an expedited managed access program, Novartis has granted requests and provided ruxolitinib and canakinumab. Requests for investigator initiated trials have also been granted for COVID-19-related clinical studies of imatinib, secukinumab, hydroxychloroquine and valsartan. Novartis has committed to donate up to 130 million doses of generic hydroxychloroquine to support the global COVID-19 pandemic response.
In order to comply with International Financial Reporting Standards (IFRS), Novartis has separated the Group’s reported financial data for the current and prior years into "continuing" and "discontinued" operations. The results of the Alcon business in 2019 are reported as discontinued operations. See page 33 and Notes 2, 3 and 10 in the Condensed Interim Financial Report for a full explanation.
The Sandoz US generic oral solids and dermatology businesses will be retained by Novartis, after mutual agreement with Aurobindo to terminate the transaction. This decision was taken as approval from the U.S. Federal Trade Commission for the transaction was not obtained within the agreed timelines.
The commentary below focuses on continuing operations including the businesses of Innovative Medicines and Sandoz, as well as the continuing Corporate functions. We also provide information on discontinued operations.
Continuing operations first quarter
Net sales were USD 12.3 billion (+11%, +13% cc) in the first quarter driven by volume growth of 17 percentage points, mainly from Entresto, Zolgensma, Cosentyx and Promacta/Revolade. Volume growth also benefited from COVID-19 related forward purchasing. Strong volume growth was partly offset by price erosion of 3 percentage points and negative impact from generic competition of 1 percentage point. Excluding COVID-19 related forward purchases, we estimate sales growth would have been approximately 9% (cc).
Operating income was USD 2.7 billion (+22%, +30% cc) mainly driven by higher sales, partly offset by launch investments and higher legal expenses.
Net income was USD 2.2 billion (+16%, +24% cc) mainly driven by higher operating income, partly offset by higher taxes. EPS was USD 0.96 (+19%, +27% cc), growing faster than net income benefiting from lower weighted average number of shares outstanding.
Core operating income was USD 4.2 billion (+28%, +34% cc) mainly driven by higher sales and gross margin, partly offset by launch investments. Core operating income margin was 34.0% of net sales, increasing by 4.7 percentage points (+5.4 percentage points cc). Excluding COVID-19 related forward purchases and lower spending, we estimate core operating income growth would have been approximately 22% (cc) and core operating income margin would have been approximately 32% of net sales.
Core net income was USD 3.5 billion (+26%, +31% cc) driven by growth in core operating income, partly offset by higher financial expenses. Core EPS was USD 1.56 (+29%, +34% cc), growing faster than core net income benefiting from lower weighted average number of shares outstanding.
Free cash flow from continuing operations amounted to USD 2.0 billion (+8%) compared to USD 1.9 billion in the prior year quarter. The increase was mainly driven by higher cash flows from operating activities.
Innovative Medicines net sales were USD 9.8 billion (+11%, +13% cc). Pharmaceuticals BU sales grew 14% (cc), driven by continuing momentum on Entresto and Cosentyx and the launch uptake of Zolgensma. Oncology BU grew 12% (cc) driven by continuing momentum on Promacta/Revolade, Tafinlar + Mekinist and Kisqali as well as the launch uptake of Piqray. Volume contributed 18 percentage points to sales growth and partly benefited from COVID-19 related forward purchasing. Generic competition had a negative impact of 2 percentage points, mainly driven by Afinitor, Exjade, Travatan and Exforge, and net pricing had a negative impact of 3 percentage points.
Sandoz net sales were USD 2.5 billion (+9%, +11% cc) driven by volume growth of 15 percentage points including COVID-19 related forward purchasing, partly offset by price erosion of 4 percentage points. Excluding the US, net sales grew strongly (+17% cc). Global sales of Biopharmaceuticals grew to USD 450 million (+31% cc), mainly driven by continued strong double-digit growth in Europe.
Discontinued operations include the business of Alcon and certain Corporate costs directly attributable to Alcon up to the spin-off date. As the Alcon spin-off was completed on April 9, 2019, the first quarter of the prior year includes three months of operating results of the divested business.
In the first quarter of 2020, there were no activities related to discontinued operations. In the first quarter 2019, discontinued operations net sales were USD 1.8 billion, operating income amounted to USD 71 million and net loss from discontinued operations was USD 101 million. For further details see Note 2 "Distribution of Alcon Inc. to Novartis AG shareholders", Note 3 "Significant transactions - Completion of the spin-off of the Alcon business through a dividend in kind distribution to Novartis AG shareholders" and Note 10 "Discontinued operations".
Total Group first quarter
For the total Group, net income amounted to USD 2.2 billion compared to USD 1.8 billion in prior year, and basic earnings per share was USD 0.96 compared to USD 0.77 in prior year. Cash flow from operating activities for the total Group amounted to USD 2.5 billion and free cash flow to USD 2.0 billion.
Key growth drivers (Q1 performance):
Underpinning our financial results in the first quarter is a continued focus on key growth drivers including:
Net sales of the top 20 Innovative Medicines products in 2020
R&D Update - Key developments from the first quarter
New approvals and regulatory update
Regulatory submissions and filings
Results from ongoing trials and other highlights
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.
In Q1 2020, 25.2 million shares (for an equity value of USD 1.0 billion) were delivered as a result of options exercised and share deliveries related to participation plans of associates. In the same period, 1.5 million shares (for an equity value of USD 0.1 billion) were repurchased from associates. Consequently, the total number of shares outstanding increased by 23.7 million versus December 31, 2019. 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 an equity increase of USD 0.9 billion and a net cash inflow of USD 0.7 billion.
In the first quarter of 2020, Novartis issued bonds denominated in US dollars for a total notional amount of USD 5.0 billion, repaid a USD 1.0 billion bond issued in February 2017 at maturity and paid down a USD 7.0 billion short term credit facility drawn in January 2020 in connection with the acquisition of The Medicines Company.
As of March 31, 2020, the net debt increased by USD 13.9 billion to USD 29.8 billion compared to December 31, 2019. The increase was mainly driven by the acquisition of The Medicines Company for USD 9.6 billion and the USD 7.0 billion annual dividend payment, partly offset by USD 2.0 billion free cash flow in Q1 2020.
As of Q1 2020, the long-term credit rating for the company is A1 with Moody’s Investors Service and AA- with S&P Global Ratings.
We continuously track our liquidity positions and assets / liabilities profile. We have a strong balance sheet and related funding capabilities to meet our funding needs. Concerning the COVID-19 situation, the Group has not experienced liquidity or cash flow disruptions during the first quarter of 2020 and maintains a cash and cash equivalents position of USD 4.5 billion as per March 31, 2020. We believe that our strong credit rating allows for continued access to short term funding in the US commercial paper market. The Group further has a committed credit facility of USD 6.0 billion as a backstop for the US commercial paper program, which was undrawn as of March 31, 2020, providing a further source of liquidity if needed. Novartis is well positioned to meet its ongoing financial obligations and has sufficient liquidity to support our normal business activities.
Barring unforeseen events
Excluding Alcon from both 2019 and 2020
At Q4 2019 earnings Novartis issued guidance excluding the Sandoz US oral solids and dermatology portfolio. As Novartis is retaining the Sandoz US portfolio our guidance is now on continuing operations. Novartis expects growth of continuing operations sales and core operating income to be approximately 1% lower than the guidance provided under the previous assumption.
This guidance includes the forecast assumption that we see a return to normal prescription and consumption dynamics during Q2 in our major markets. We will closely monitor the business dynamics and provide any additional guidance at Q2 earnings. The guidance also includes the forecast assumption that no Gilenya and no Sandostatin LAR generics enter in 2020 in the US.
Foreign exchange impact
If late-April exchange rates prevail for the remainder of 2020, the currency impact for the year would be negative 3 percentage points on net sales and negative 6 percentage points on core operating income. The estimated impact of exchange rates on our results is provided monthly on our website.
Detailed financial results accompanying this press release are included in the Condensed Interim Financial Report at the link below: