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WSJ
Novartis Cautious on Outlook as Profit Drops 46%
By STEN STOVALL
Switzerland's Novartis AG on Wednesday said its profitability will decline this year because of competition from generic rivals, continued drug price cuts and the need to make further investments in innovative therapies.
The Swiss drug maker, which is trying to balance the sales decline stemming from the expiry of its blockbuster heart drug Diovan, issued the cautious earnings outlook for 2012 as it reported a 46% drop in fourth-quarter net profit, hit by restructuring costs, research and development write-offs, lower drug prices and the strong Swiss franc.
Kicking off the reporting season for European drug makers, Novartis said sales measured in constant currencies are expected to be in line with 2011, while core operating income margin is expected to be slightly below that achieved last year, despite recent restructurings and lucrative new drug launches.
"While productivity measures and margin improvements on products launched since 2007 are important contributions to improving profitability, they are not expected to fully offset the loss of margin from generic competition, price erosion, new investments necessary to sustain growth in new products and the impact of a delayed start-up of [the company's Lincoln, Nebraska consumer health facility.]," the drug maker said.
Novartis, which reports in dollars, has been continually cutting costs since Joe Jimenez took over the helm as chief executive in 2010. Mr. Jimenez on Wednesday said more cost savings of between $1.5 billion and $2.5 billion will be needed this year to keep the company on track.
He also said Novartis's multiple-sclerosis drug Gilenya is expected to remain a growth driver despite worries about the potential blockbuster's prospects after safety concerns were recently raised.
For the latest quarter, the Basel-based pharmaceuticals company recorded net charges totaling $1.5 billion, helping produce a steep decline in net profit for the three months to Dec. 31. It slumped to $1.18 billion from $2.17 billion a year-earlier, missing market forecasts of $1.76 billion.
Sales for the quarter beat views, rising 4.1% to $14.78 billion, helped by the full inclusion of eye care company Alcon. That revenue rise came despite the company's two blockbuster products, Diovan and cancer medicine Femara, being hit hard by generic competition. Analysts had forecast total net sales at $14.63 billion.
The market interpreted the company's news as negative overall, and sold Novartis shares, but analysts said the reaction would probably be short-lived.
Bank Sarasin analyst David Kaegi said the fourth-quarter sales and 2012 guidance were slightly better than expected. "It now only sees core operating profit 'slightly' below last year's level, and that is good news," he said.
Novartis shares in the European morning were down 2.1% at 50.90 Swiss francs ($54.87) in a slightly lower Swiss market.
The company's restructuring plans reflect troubles facing the whole pharma sector which, besides steep drug price cuts in Europe and the U.S., is also smarting from revenue declines due to drug patent expirations. Novartis is the world's second-largest pharmaceuticals company by sales behind Pfizer Inc.
Earlier this month the Swiss group said it will cut nearly 2,000 of its U.S. workforce and will take a $900 million charge after another of its key drugs, blood pressure medicine Rasilez, failed to live up to expectations. The changes are expected to take place in the second quarter of this year. That was in addition to some 2,000 job cuts—mostly in Switzerland and the U.S.—announced in October in a revamp whose costs were booked in the latest quarter.
Write to Sten Stovall at sten.stovall@dowjones.com
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