Novartis AG — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018; filed January 30, 2019. The filing is an annual Form 20-F, not a standalone fourth-quarter filing, so separate Q4 financial results are not clearly provided. Financial statements are prepared under IFRS in U.S. dollars.
Business context
Novartis is a global healthcare company operating through Innovative Medicines, Sandoz generics and biosimilars, and Alcon eye care. The Group reported 125,161 full-time-equivalent associates and products sold in approximately 155 countries at year-end.
- Innovative Medicines: USD 34.9 billion of sales, up 8%.
- Sandoz: USD 9.9 billion of sales, down 2% reported and 3% in constant currencies.
- Alcon: USD 7.1 billion of sales, up 6% reported and 5% in constant currencies.
Financial performance and key metrics
| USD millions, except per-share data | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | 51,900 | 49,109 | +6% reported; +5% constant currencies |
| Operating income | 8,169 | 8,629 | -5% |
| Operating margin | 15.7% | 17.6% | -1.9 percentage points |
| Net income | 12,614 | 7,703 | +64% |
| Basic EPS | 5.44 | 3.28 | +66% |
| Net cash from operating activities | 14,272 | 12,621 | +13% |
| Free cash flow | 11,717 | 10,428 | +12% |
| Core operating income | 13,823 | 12,850 | +8% |
| Core operating margin | 26.6% | 26.2% | +0.4 percentage points |
| Core net income | 11,938 | 11,391 | +5% |
Gross profit was USD 34.8 billion, compared with USD 33.0 billion in 2017. Reported operating income declined despite higher sales because of acquisitions, restructuring, impairment charges and growth investments. Research and development expense was USD 9.1 billion, approximately 17% of sales.
Cash flow, debt and liquidity
- Cash, cash equivalents, marketable securities, commodities, time deposits and derivative financial instruments totaled USD 16.0 billion, up from USD 9.5 billion.
- Total financial debt, including derivatives, was USD 32.1 billion, compared with USD 28.5 billion.
- Net debt declined to USD 16.2 billion from USD 19.0 billion because liquidity increased more than debt.
- Current financial debt and derivative liabilities rose to USD 9.7 billion, including a USD 3.0 billion bond reclassified as current due to its 2019 maturity.
- Commercial paper outstanding was USD 4.0 billion. A USD 6.0 billion committed credit facility was undrawn at year-end and matures in September 2020.
- The debt-to-equity ratio increased to 0.41:1 from 0.38:1. Year-end credit ratings were A1/P-1 from Moody’s and AA-/A-1+ from S&P.
Material changes versus the prior comparable period
- Sales growth was driven by volume growth, Cosentyx, the AAA acquisition and growth products including Entresto, Promacta/Revolade, Tafinlar + Mekinist, Jakavi and Xolair. Pricing and generic competition each reduced sales growth by approximately two percentage points at Group level.
- Gleevec/Glivec sales declined 20% because of generic competition. Sandoz U.S. sales declined 16%, reflecting continued generic pricing pressure.
- Innovative Medicines operating income increased 4% to USD 7.9 billion, while Alcon reported an operating loss of USD 194 million, compared with a USD 3 million loss in 2017.
- Alcon’s loss included approximately USD 0.3 billion related to the voluntary withdrawal of the CyPass Micro-Stent.
- Intangible-asset impairment charges increased to USD 1.2 billion from USD 709 million, including approximately USD 400 million related to Votrient, USD 337 million related to CyPass and USD 220 million related to the pending Sandoz U.S. divestment.
- Novartis completed the sale of its 36.5% stake in the GSK Consumer Healthcare joint venture for USD 13.0 billion and recognized a pre-tax gain of USD 5.8 billion, which materially increased reported net income.
- Novartis acquired AAA, AveXis and Endocyte for aggregate cash consideration of approximately USD 14.7 billion, primarily strengthening radioligand therapy and gene therapy capabilities.
- The Group adopted IFRS 9 and IFRS 15 using the modified retrospective method, increasing opening retained earnings by USD 177 million and USD 60 million, respectively.
Guidance, outlook, commentary and risks
Management identified continued sales momentum from growth products and pipeline launches as key opportunities, while expecting ongoing pressure from patent expiries, generic competition, pricing and reimbursement controls. The filing states that Novartis planned potentially significant 2019 launches including AVXS-101, BAF312 and RTH258, subject to regulatory approval. It also identified additional expected competition for products including Gilenya, everolimus products, Exjade/Jadenu and Lucentis.
- Alcon spin-off: Shareholder approval was sought for a planned spin-off of Alcon, expected in the first half of 2019 if conditions were satisfied. The proposed distribution was one Alcon share for every five dividend-bearing Novartis shares.
- Sandoz divestment: The pending sale of selected U.S. dermatology and generic oral-solids assets to Aurobindo was expected to close in 2019 for approximately USD 0.8 billion in cash plus potential earn-outs.
- Dividend: The Board proposed a 2018 dividend of CHF 2.85 per share, subject to shareholder approval.
- Manufacturing and quality: Sandoz recalled certain valsartan, losartan and irbesartan products in several countries because of impurities found in third-party active ingredients.
- Legal and regulatory exposure: The Group disclosed investigations and litigation involving pricing, sales and marketing practices, antitrust matters, product liability, intellectual property, tax, environmental matters and data privacy. More than 2,000 individual product-liability cases were not provisioned because payment was not considered probable or losses could not be reliably estimated; plaintiffs’ alleged claims aggregated approximately USD 1.5 billion.
- Customer concentration: The three largest customers represented approximately 16%, 13% and 7% of Group sales and 12%, 10% and 6% of trade receivables, respectively.
- Other risks: Research and development failure, loss of intellectual-property protection, pricing pressure, manufacturing disruption, foreign exchange volatility, pension assumptions, tax disputes, cybersecurity incidents, political instability and impairment of goodwill or intangible assets.
Important facts investors should verify
- Whether the Alcon spin-off received shareholder and regulatory approval and the final separation terms.
- The timing and final proceeds of the Sandoz U.S. asset divestment to Aurobindo.
- The effect of 2019 generic launches and patent expiries on Gilenya, Exjade/Jadenu, everolimus products, Lucentis and other mature products.
- Regulatory approval, launch timing and commercial uptake for AVXS-101, BAF312 and RTH258.
- The ultimate financial impact of the CyPass withdrawal, product recalls, legal proceedings and government investigations.
- Whether the reported improvement in core operating performance translates into sustained IFRS operating-income and margin growth after acquisition, restructuring and impairment adjustments.
- The maturity and refinancing requirements associated with the USD 3.0 billion bond due in 2019 and other current financial debt.
- The final approved dividend and the impact of Swiss franc/U.S. dollar exchange rates on ADR-holder distributions.