Novartis starts to reap rewards of revamp

Novartis announced better-than-expected first quarter profits on Thursday as it began to show the benefits of a sweeping overhaul that has left the Swiss healthcare group more streamlined and focused.

Sales were hurt by appreciation of the US dollar - the currency in which Novartis reports results - and the group warned that this was likely to remain a drag on financial performance for the rest of the year.

But underlying results were strong as efforts by Joe Jimenez, chief executive, to increase productivity and raise margins start to pay-off.

Sales from continuing operations fell 7 per cent to $11.9bn but this was a 3 per cent increase when adjusted for currency movements. Core net income was down 4 per cent at $3.2bn, or $1.33 a share. This was a rise of 8 per cent on a currency-adjusted basis.

Mr Jimenez said the group was on course to deliver on its full-year guidance for core operating profit to rise by a high single-digit percentage and sales at a mid-single digit rate, excluding the effects of currency movements.

Novartis last month completed a $20bn asset swap with GlaxoSmithKline in which both groups offloaded non-core assets and beefed up in areas of strength. For Novartis, this involved trading its vaccines unit for GSK's cancer business, while the pair set up a joint-venture in consumer healthcare. The Swiss group also sold its animal health division to Eli Lilly of the US.

These transactions have left Novartis focused on three main businesses - innovative pharmaceuticals, generic drugs and eye care - in a move away from the more diversified structure built by Mr Jimenez's predecessor Daniel Vasella.

Core operating profit margins rose by 1.7 per cent in the first quarter as a result of the restructuring as well as a cost-saving drive to streamline back-office operations.

Mr Jimenez said Novartis had moved into an execution phase as it delivered the benefits of recent deals and a strong drug pipeline. The group hopes to win approval soon for a new heart medicine called LCZ696 which Andrew Baum, analyst at Citigroup, said could generate $11bn in peak annual sales.

Novartis is also at the forefront of a new category of copycat drugs called biosimilars which compete with off-patent biological medicines. These are more complex and higher-value products than the generic pills that enter the market when traditional chemical-based drugs lose patent protection.

Sandoz, the generics division of Novartis, last month won approval from the Food and Drug Administration for the first biosimilar allowed in the US - a copy of Amgen's Neupogen anti-infective. Mr Baum forecast that Novartis could capture up to a quarter of the $110bn in revenues he expects to be captured by biosimilars in the next 10 years.

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