Novartis AG Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020; filed January 26, 2021. The filing reports full-year results, not a standalone Q4 period. Financial statements are prepared under IFRS in U.S. dollars.
Business context
Novartis is a global medicines company operating through two divisions: Innovative Medicines, comprising patented prescription medicines, and Sandoz, comprising generic pharmaceuticals and biosimilars. Products were sold in approximately 155 countries, with 105,794 full-time-equivalent associates at year-end.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales from continuing operations | USD 48.659 billion | USD 47.445 billion | +3% reported; +3% constant currencies |
| Operating income | USD 10.152 billion | USD 9.086 billion | +12% reported; +19% constant currencies |
| Operating margin | 20.9% | 19.2% | +1.7 percentage points |
| Net income from continuing operations | USD 8.071 billion | USD 7.147 billion | +13% reported; +20% constant currencies |
| Basic EPS from continuing operations | USD 3.55 | USD 3.12 | +14% reported; +21% constant currencies |
| Core operating income | USD 15.416 billion | USD 14.112 billion | +9% reported; +13% constant currencies |
| Core operating margin | 31.7% | 29.7% | +2.0 percentage points |
| Operating cash flow from continuing operations | USD 13.650 billion | USD 13.547 billion | +1% |
| Free cash flow from continuing operations | USD 11.691 billion | USD 12.937 billion | -10% |
Segment performance
- Innovative Medicines: Sales of USD 39.013 billion, up 3% reported and 4% in constant currencies. Operating income was USD 9.172 billion, down 1% reported but up 4% in constant currencies. Core operating income was USD 13.645 billion, with a 35.0% core margin.
- Sandoz: Sales of USD 9.646 billion, down 1% reported and flat in constant currencies. Operating income rose to USD 1.043 billion from USD 551 million, helped by lower impairments, productivity and spending reductions. Core operating income was USD 2.334 billion, with a 24.2% core margin.
- Growth products included Cosentyx at USD 3.995 billion, Entresto at USD 2.497 billion, Promacta/Revolade at USD 1.738 billion and Zolgensma at USD 920 million. Major declines included Afinitor/Votubia, Exjade/Jadenu, Gilenya and Lucentis, primarily due to generic competition or COVID-19 effects.
Liquidity, debt and balance sheet
- Cash, cash equivalents, marketable securities and related instruments totaled USD 11.563 billion at year-end.
- Total financial debt, including derivatives, was USD 36.044 billion, compared with USD 27.384 billion in 2019. Net debt increased to USD 24.481 billion from USD 15.938 billion.
- The debt-to-equity ratio increased to 0.64:1 from 0.49:1.
- Novartis issued USD 5.0 billion of U.S. dollar bonds and a EUR 1.85 billion sustainability-linked bond, while repaying USD 2.0 billion of bonds at maturity.
- A USD 6.0 billion committed credit facility, maturing in September 2024, was undrawn at year-end. Commercial paper outstanding totaled USD 4.3 billion.
- Total assets were USD 132.059 billion and total equity was USD 56.666 billion. Goodwill and other intangible assets totaled USD 66.808 billion, increasing materially following acquisitions.
Material changes versus 2019
- Sales and operating income increased, while operating and core margins expanded through volume growth, productivity and lower spending.
- Free cash flow declined because of higher legal payments and lower divestment proceeds, despite higher operating income and broadly stable operating cash flow.
- Net debt rose substantially, primarily to fund the USD 9.6 billion acquisition of The Medicines Company and the acquisition of Aspen’s Japanese business, as well as other capital activities.
- Novartis retained the Sandoz U.S. dermatology and generic oral-solids businesses after terminating the planned Aurobindo transaction.
- Comparability of total net income is affected by the 2019 Alcon spin-off. 2019 included a USD 4.691 billion non-taxable, non-cash gain on distribution of Alcon; accordingly, total net income fell to USD 8.071 billion from USD 11.737 billion, despite continuing-operations earnings growth.
- Intangible-asset impairment charges were USD 914 million in 2020. This included a USD 485 million impairment related to discontinuation of the ZPL389 program and a USD 181 million partial write-down of Votrient.
Guidance, outlook and management commentary
- The filing states that Novartis entered 2021 with continued focus on innovative medicines, advanced therapy platforms, data and digital capabilities, operational excellence and access to medicines. It does not provide a clear numerical 2021 revenue or earnings guidance figure in the supplied text.
- Management reported that COVID-19 disrupted ophthalmology, dermatology and Sandoz retail-generics activity, but operations and collections remained stable and clinical development disruptions were manageable.
- Management expects ongoing pressure from pricing and reimbursement controls, generic and biosimilar competition, and loss of exclusivity for key products.
- The pipeline included 118 assets in Phase I or II and 49 in Phase III or registration at December 31, 2020. Development timing remains subject to clinical, regulatory, manufacturing and reimbursement outcomes.
- The proposed 2020 dividend was CHF 3.00 per share, subject to shareholder approval at the March 2, 2021 Annual General Meeting. If approved, expected total payments were approximately USD 7.7 billion at the year-end exchange rate.
Risks, contingencies and unusual items
- Key risks include product launch and safety risk, patent expiry, pricing pressure, clinical and regulatory failure, manufacturing and supply interruptions, cybersecurity, data privacy, foreign exchange volatility, tax disputes and integration of acquisitions.
- Novartis recorded significant 2020 legal and compliance costs. These included a USD 0.7 billion settlement relating to U.S. speaker programs, approximately USD 0.3 billion to resolve historical FCPA investigations, and a USD 195 million Sandoz resolution with the U.S. Department of Justice Antitrust Division. A USD 187 million provision was recorded for potential related civil claims.
- More than 3,000 individual product-liability cases and other legal matters were not fully provided for because loss was not considered probable or reliably estimable. Plaintiffs’ alleged claims in certain matters aggregated to approximately USD 0.5 billion, excluding potentially unspecified punitive or multiple damages.
- Contractual cash obligations totaled USD 50.510 billion, including debt and interest, leases, pension obligations, research and development milestones, contingent consideration and commitments for transactions not yet closed.
- The filing reports no material off-balance-sheet arrangements and states that disclosure controls and internal control over financial reporting were effective at December 31, 2020.
Investor verification checklist
- Reconcile continuing-operations growth with reported IFRS results and distinguish core, constant-currency and free-cash-flow measures from IFRS measures.
- Assess the sustainability of growth in Entresto, Cosentyx, Zolgensma, Kisqali, Promacta/Revolade and newer launches against patent expiry and competitive risks.
- Review the effect of generic competition on Gilenya, Lucentis, Afinitor/Votubia, Exjade/Jadenu and established medicines.
- Examine the increase in net debt, 2021 and later debt maturities, commercial-paper reliance and the effect of future acquisitions or milestone payments.
- Review legal provisions, unresolved product-liability and antitrust matters, including possible losses not accrued in the financial statements.
- Verify shareholder approval of the proposed CHF 3.00 dividend and the status of the announced 2021 transactions and research commitments.