Novartis Begins to See Benefits of Overhaul -- Update

By Andrew Morse 

ZURICH--Novartis AG on Thursday reported a 4% fall in first-quarter core net income but reiterated its guidance for the full year as the Swiss drug giant begins to feel the benefits of a big overhaul of its portfolio of businesses that focuses it on three key areas.

Basel-based Novartis said core net income from continuing operations fell to $3.2 billion, from $3.33 billion a year earlier. Core net income, a measure that excludes items management deems to be exceptional, would have risen 8% if measured in constant currency, which strips out the impact of foreign exchange swings.

The pharmaceutical giant reported a 7% drop in sales to $11.94 billion in the quarter ended March 31 from $12.77 billion a year earlier based on operations the company still owns. Analysts surveyed by Dow Jones had forecast sales of $12.61 billion.

Novartis said it expected net sales to grow in the mid-single digits for the full year, with core operating income rising at a faster high-single-digit pace.

The figures come shortly after Novartis completed a series of transactions valued at roughly $25 billion that refocused the drug group on three core areas: pharmaceuticals, generics and eye care. The sweeping overhaul, which included the purchase of GlaxoSmithKline PLC's oncology unit, has transformed Novartis into a cancer powerhouse with roughly a fifth of its revenue expected to come from cancer drugs.

Novartis also formed a joint venture with GSK to create an over-the-counter business and sold the U.K. company most of its vaccines business. Novartis also sold Eli Lilly and Co. an animal health business.

When the proceeds from those transactions are included Novartis reported a huge rise in net profit attributable to shareholders of $13 billion in the quarter ended March 31. Novartis reported $2.94 billion in net profit a year earlier.

In a conference call to discuss the earnings, Chief Executive Joe Jimenez said the transformation was helping the company boost its profit margins--Novartis reported a 1.7 percentage point margin expansion in the quarter--as it squeezed out costs, particularly in procuring materials. The company said it saved $650 million in the first quarter, $350 million of which came from buying in bulk.

Like other multinationals, Novartis is feeling the impact of volatile currency markets, particularly a strong dollar that has risen against other currencies. The company, which reports in the U.S. dollars, said its revenue could be reduced by 10 percentage points if early April exchange rates continue for the rest of the year.

Mr. Jimenez said the company expected a decision from the U.S. Food and Drug Administration in the third quarter on its LCZ696 heart medication. Many analysts see LCZ696 as a potential blockbuster that could have sales of as much as $5 billion by 2020.

Write to Andrew Morse at [e-mail]

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