NVS

Novartis AG Form 6-K Summary: Third Quarter 2007 Results

Business Context and Reporting Period

This Form 6-K, dated October 19, 2007, reports the financial results for Novartis AG for the third quarter and the first nine months ended September 30, 2007. The company is a global healthcare leader focused on pharmaceuticals, generics, vaccines, and consumer health. The reporting period is characterized by the successful divestment of the Medical Nutrition and Gerber businesses, allowing Novartis to focus solely on healthcare products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Nine-month net sales from continuing operations rose 13% (9% in local currencies) to $28.1 billion. Growth was driven by Vaccines and Diagnostics (+110%) and Sandoz (+21%), offsetting a decline in US Pharmaceuticals sales due to generic competition and the Zelnorm suspension.
• Profitability: Total net income doubled to $11.1 billion, primarily due to after-tax divestment gains of $5.2 billion from the sale of Medical Nutrition and Gerber. Operating income from continuing operations (excluding a one-time environmental charge) rose 9% to $6.5 billion.
• Environmental Provision: A one-time charge of $590 million was recorded to increase provisions for worldwide environmental liabilities, including the creation of a Swiss foundation for remediation costs.
• Balance Sheet: Equity increased to $49.5 billion. Net liquidity improved to $7.3 billion from net debt of $0.7 billion at year-end 2006, driven by divestment proceeds.

Guidance, Outlook, and Management Commentary

• Outlook: Novartis reaffirms expectations for record operating and net income from continuing operations in 2007 (excluding divestment gains and the environmental provision). The company expects mid-single-digit growth in 2007 net sales for continuing operations and low-single-digit growth for the Pharmaceuticals division in local currencies.
• Management Changes: Joe Jimenez was appointed CEO of Pharmaceuticals, and Thomas Ebeling was named CEO of Consumer Health to expand management experience and provide fresh impetus.
• Restructuring: Novartis announced the elimination of 1,260 positions in the US Pharma marketing and sales organization, expected to generate annual savings of $230 million in 2008.
• Risks and Contingencies:
  • Product Losses: Significant sales declines in the US due to generic competition for Lotrel, Lamisil, and Famvir, and the suspension of Zelnorm.
  • Legal Proceedings: Ongoing litigation regarding Zometa/Aredia (osteonecrosis of the jaw), gender discrimination claims, and patent disputes (Famvir, contact lenses).
  • Regulatory: Pending FDA decisions on Prexige and Galvus; ongoing discussions regarding Zelnorm safety data.

Key Facts for Investor Verification

• Divestment Gains: Verify the sustainability of earnings by excluding the $5.2 billion after-tax gain from discontinued operations (Medical Nutrition and Gerber) when assessing core operational performance.
• Environmental Liability: Confirm the status of the $590 million environmental provision and the potential for future remediation costs beyond the initial Swiss foundation capitalization.
• US Pharmaceuticals Exposure: Assess the long-term impact of the $3.1 billion annual US sales loss from Zelnorm, Lotrel, Lamisil, and Famvir on future revenue growth.
• Share Repurchases: Monitor the execution of the plan to repurchase up to $4 billion of shares by February 2008, with $3.0 billion already repurchased in the first nine months.
• Regulatory Pipeline: Track the approval status of key late-stage compounds (Tasigna, Galvus, FTY720) which are critical for the anticipated growth phase starting in late 2008.