Novartis AG: FY2019 Form 20-F Summary
Business context and reporting period
Novartis AG filed its annual report for the fiscal year ended December 31, 2019, under IFRS as issued by the IASB. The filing is not a standalone fourth-quarter report; Q4-specific results are not separately presented in the supplied text. Continuing operations comprise Innovative Medicines, Sandoz and Corporate activities. The Alcon eye-care devices business was spun off on April 9, 2019 and is reported as discontinued operations.
Novartis operates primarily through Innovative Medicines, focused on patented prescription medicines, and Sandoz, focused on generic pharmaceuticals and biosimilars. Continuing-operations sales were generated across approximately 155 countries, with 103,914 full-time-equivalent associates at year-end.
Key financial metrics
| USD millions, except per-share data | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales to third parties from continuing operations | 47,445 | 44,751 | +6% reported; +9% constant currencies |
| Operating income from continuing operations | 9,086 | 8,403 | +8% reported; +14% constant currencies |
| Operating margin | 19.2% | 18.8% | +0.4 percentage points |
| Net income from continuing operations | 7,147 | 12,800 | -44% |
| Group net income | 11,737 | 12,614 | -7% |
| Basic EPS from continuing operations | USD 3.12 | USD 5.52 | -43% |
| Core operating income from continuing operations | 14,112 | 12,557 | +12% reported; +17% constant currencies |
| Core operating margin | 29.7% | 28.1% | +1.6 percentage points |
| Operating cash flow from continuing operations | 13,547 | 13,049 | +4% |
| Free cash flow from continuing operations | 12,937 | 11,256 | +15% |
Innovative Medicines generated sales of USD 37.7 billion, or 79% of continuing-operations sales, and operating income of USD 9.3 billion. Growth was led by Cosentyx, Entresto, Promacta/Revolade, Kisqali, Lutathera and newly launched products including Zolgensma, Piqray, Mayzent, Beovu and Adakveo. Sandoz generated sales of USD 9.7 billion, down 1% reported but up 2% in constant currencies; US retail-generics pricing pressure remained a major constraint.
At December 31, 2019, cash, cash equivalents, marketable securities and related instruments totaled USD 11.4 billion. Total financial debt, including current and non-current debt and derivatives, was USD 27.4 billion, comprising USD 20.4 billion of non-current debt and USD 7.0 billion of current debt and derivative liabilities. Reported net debt was USD 15.9 billion, compared with USD 16.2 billion in 2018. The company had USD 2.3 billion of commercial paper outstanding and an undrawn USD 6.0 billion committed credit facility maturing in September 2024.
Novartis proposed a 2019 dividend of CHF 2.95 per share, subject to shareholder approval. During 2019, the company repurchased approximately 60.3 million shares for USD 5.4 billion and completed the previously announced USD 5.0 billion buyback.
Material changes versus the prior comparable period
- Sales and operating income increased, supported by volume growth, product launches, productivity programs and divestment-related items. Reported sales growth was reduced by currency translation, while pricing and generic competition were negative contributors.
- Net income from continuing operations fell sharply because 2018 included a USD 5.7 billion net gain from the divestment of Novartis’s GSK consumer healthcare stake. The 2019 result included a higher effective tax rate of 20.1%, versus 9.2% in 2018.
- The Alcon spin-off reduced year-end assets and equity and generated a non-taxable, non-cash gain of USD 4.7 billion in discontinued operations. The distribution reduced equity by approximately USD 23.4 billion.
- Innovative Medicines operating income rose 18% to USD 9.3 billion, while Sandoz operating income fell 59% to USD 551 million. Sandoz results were affected by impairments and restructuring, including the discontinuation of the US generic Advair development program.
- Continuing-operations intangible-asset impairment charges increased to approximately USD 1.2 billion from USD 841 million, including USD 669 million in Innovative Medicines and USD 506 million in Sandoz.
- Research and development expense increased to USD 9.4 billion from USD 8.5 billion, while the company continued to invest in gene therapy, cell therapy, radioligand therapy and other advanced platforms.
- Novartis adopted IFRS 16 Leases in 2019, recognizing USD 1.7 billion of right-of-use assets and USD 1.9 billion of lease liabilities at year-end.
Guidance, outlook, commentary and risks
The filing describes a strategy centered on innovative medicines, advanced therapy platforms, data science and digital capabilities. Management identified 15 ongoing or upcoming major launches and stated that several potentially significant new molecular entities could launch in 2020, including ofatumumab for relapsing multiple sclerosis. The supplied filing text does not provide a clear final numeric 2020 sales or earnings guidance range.
- Loss of exclusivity and generic or biosimilar competition are expected to continue affecting products including Gleevec/Glivec, Exjade/Jadenu, Afinitor, Sandostatin, Lucentis and potentially Gilenya. The company estimated that generic competition reduced 2019 sales by approximately USD 0.5 billion.
- Pricing and reimbursement pressure is expected to intensify globally, including government price controls, mandatory rebates, formulary restrictions and greater use of generics and biosimilars.
- Key legal and regulatory matters include US marketing-practices investigations, generic-drug pricing antitrust proceedings, product-liability claims, the Aimovig dispute with Amgen, and investigations concerning Greece, Korea and other markets. A USD 0.7 billion provision was recorded in 2019 for the Southern District of New York marketing-practices matter.
- The company disclosed a Zolgensma data-integrity issue and stated that the CEO requested no incentive payout for the related “building trust with society” objective. Intrathecal AVXS-101 studies remained subject to a partial clinical hold.
- Manufacturing and supply risks are elevated for complex sterile, biologic, cell, gene and radioligand therapies. Sandoz also recalled certain products containing impurities, including valsartan, losartan, ibersartan and ranitidine products.
- The pending divestment of selected Sandoz US businesses to Aurobindo was expected to close in the first quarter of 2020, subject to regulatory approval. The acquisition of The Medicines Company closed on January 6, 2020 for approximately USD 9.7 billion, and Novartis borrowed USD 7.0 billion under a short-term facility on January 7, 2020.
- Total contractual cash obligations were USD 48.8 billion, including USD 10.2 billion of acquisition commitments, USD 4.4 billion of potential R&D milestone commitments and USD 5.4 billion of interest on non-current debt.
Most important facts for investors to verify
- Reconcile continuing-operations performance with the large Alcon spin-off gain and the 2018 GSK divestment gain.
- Assess the sustainability of Innovative Medicines growth, particularly Cosentyx, Entresto, Zolgensma, Kisqali, Lutathera and other recent launches.
- Verify the timing and financial impact of patent expiries, generic competition and Sandoz pricing pressure.
- Review the USD 1.2 billion of intangible-asset impairments and the sensitivity of goodwill and intangible valuations to sales forecasts, regulatory outcomes and discount rates.
- Evaluate liquidity after the January 2020 USD 7.0 billion borrowing and the USD 9.7 billion acquisition of The Medicines Company.
- Review provisions, contingencies and potential exposures related to marketing practices, antitrust matters, product liability, data integrity and environmental remediation.
- Confirm shareholder approval and payment details for the proposed CHF 2.95 per-share dividend.