Novartis Reports Record Results for 2009 as Sales Increase 7%

Swiss pharma major Novartis has delivered another set of exceptional results for the 2009 financial year, with growth reported across most lines of its business. Overall, revenues increased 7% year-on-year (y/y) on an as-reported basis, to US$44.3 billion. The pharmaceutical division experienced sustained growth, with sales up 7% y/y, increasing to double digits (at 12% y/y) when measured in local currencies. As expected, the vaccines and diagnostic division greatly benefited from pandemic vaccines sales, reporting revenues of US$2,424 billion, a 38% y/y increase. In the fourth quarter alone, divisional sales were up by 182%. The company's generics arm, Sandoz, performed well in the fourth quarter, with sales up 19% y/y. Full-year growth was marginally negative, at -1% y/y; however, when measured in local currencies, growth increased to 5% y/y. In terms of its performance in the various regions, measured in local currencies, double-digit growth rates were reported across the board, with sales up 11% y/y in the U.S. market, 10% in Europe, and 17% in the top six emerging markets—Brazil, Russia, China, India, Turkey, and South Korea.

Net income as calculated by IHS Global Insight was up 18% y/y to US$10,288 billion. An overview of its operations shows that expenditure on marketing and sales, and general administration both grew by a mere 2% y/y, to US$12.1 billion and US$2,281.0 billion, respectively; growth of 3% y/y, to US$7.5 billion, was recorded for research and development (R&D), and 6% y/y for cost of goods sold. In terms of its operating margin, as calculated by IHS Global Insight, this amounted to a 2.2-percentage-point increase to 23.2% y/y. Net income was also up 4% y/y, to US$8.5 billion.

Pharmaceutical sales continue to be driven by Novartis' cardiovascular and oncology portfolio, as well as by the increased uptake of new product launches. In the cardiovascular segment, Diovan (valsartan) continues its rein as the company's biggest blockbuster, reaching the US$6 billion mark, showing 5% y/y growth. Exforge (amlodipine + valsartan), a recently launched product, also made important gains, with sales of US$671 million, up 65% y/y. In terms of its oncology portfolio, sales of Gleevec (imatinib) stood at US$3.9 billion (a 7% y/y increase), followed by sales of Zometa (zoledronic acid), and Femara (letrozole), which amounted to US$1.5 billion (up 6% y/y) and US$1.3 billion (up 12% y/y), respectively. New drugs such as macular degeneration treatment Lucentis (ranibizumab), osteoporosis drug Aclasta/Reclast (zoledronic acid), Alzheimer's disease drug Exelon Patch (rivastigmine tartrate), and once-daily iron chelator Exjade (deferasirox) all performed well. Sales of Lucentis were up 39% y/y to US$1.2 billion, sales of Reclast grew 86% y/y to US$474 million, and sales of Exjade grew 23% y/y to US$652 billion.

Lescol (fluvastatin sodium), Tegretol (carbamazepine), and Lotrel (amlodipine/benazepril) all saw their sales plummet in double digits, by 13% y/y, 17% y/y, and 17% y/y respectively, following continued generic erosion. The top 20 selling products continue to drive pharmaceutical sales; however, the performance of the rest of the portfolio was also strong, with sales up by 7% y/y.

Leadership Changes

In conjunction with the release of its financial results, Novartis has also announced a shake-up of its management team. Daniel Vasella, chief executive officer of the company for the last 14 years, is to step aside from this role to focus on his duties as chairman of the group. Vasella will be replaced by Joe Jimenez, who currently heads the pharmaceutical division. His position will in turn be filled by David Epstein, who currently fronts the oncology division. These changes will take effect from 1 February.

Outlook and Implications

Novartis has undoubtedly had a good year, with net income and profit up by 4% y/y and 6% y/y, respectively, in line with the company's own expectations. Favourable currency effects have also contributed to this performance. As expected, pandemic influenza (flu) vaccine sales have given the company an important boost, with its pandemic flu vaccine sales generating an additional revenue of US$1 billion in the fourth quarter. Looking forward to 2010 and beyond, Novartis expects to sustain current growth rates on the back of new product sales and continued growth in the high-growth expanding markets. However, the company has provided a cautionary note, as healthcare reforms in the important U.S. market may affect further growth in this region; it is too early to predict what the impact of the U.S. healthcare reform will be though, if successful. Also, in Novartis' second-largest market, Japan, the government continues to introduce price cuts every two years, which may impact on sales revenue; there continues to be a bigger push for generic use in the Japanese market as well, and this may have an impact on the company's performance in that market. Other fast-growing markets such as Turkey have also recently implemented cost-containment measures, imposing price cuts on pharmaceutical products, and this is likely to affect sales.

As Diovan's patent-expiry date edges closer, Novartis remains optimistic that it will be able to compensate for the revenue loss that is expected. The fact that Diovan will lose its patent protection over various phases—in 2011 for Europe, and 2012 in the United States—means that the company will be better placed to absorb the pinch. In terms of the vaccines division, following a positive nod from the European Medicines Agency's Committee for Medicinal Products for Human Use for meningococcal disease vaccine Menveo in December 2009, a final positive decision is expected shortly from the European Commission, with a decision from the U.S. FDA expected in the first quarter of the year. Early estimates suggest that annual sales could peak at US$500 million; therefore, we can expect this product to boost the performance of the vaccines division. In terms of future pandemic flu vaccine sales, Novartis recognises that this was a one-off windfall, and it is therefore unlikely to make significant gains from these products as the A/H1N1 flu pandemic winds down. Despite the fact that Novartis' offer to fully acquire U.S. eyecare giant Alcon has initially been turned down by the Alcon board, the company remains optimistic that it will be able to strike a deal with Alcon; however, a time frame has not been provided. If successful, this acquisition will create a new source of revenue for Novartis, and more importantly, it will diversify the company's sources of growth.