Novartis Begins to See Benefits of Overhaul -- 2nd Update

By Andrew Morse 

ZURICH--Novartis AG on Thursday reported a huge rise in first-quarter profit as the proceeds of a series of transactions that overhauled the Swiss drug giant flattered its results.

Basel-based Novartis said net profit attributable to shareholders rose more than four times to $13 billion in the quarter ended March 31 as the company recorded one-time gains of $12.8 billion on the sales of businesses to GlaxoSmithKline PLC and Eli Lilly and Co. Novartis reported $2.94 billion in net profit a year earlier.

Core net income from continuing operations, a measure that strips out exceptional items, fell 4% to $3.2 billion, from $3.33 billion a year earlier. Core net income would have risen 8% if measured in constant currency, which strips out the impact of foreign-exchange swings.

Sales dropped 7% drop to $11.94 billion in the quarter from $12.77 billion a year earlier based on operations the company still owns.

The figures come as Novartis begins to benefit from 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'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 Lilly an animal health business.

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.

Investors welcomed the results, with Novartis shares rising 1.4% to 101.60 Swiss francs in late-morning trading.

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.

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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