NVS

Novartis AG Form 6-K Summary: First Quarter 2009

Business Context and Reporting Period

This report covers the first quarter of 2009 (ended March 31, 2009) for Novartis AG, a global healthcare company headquartered in Basel, Switzerland. The period was characterized by strong underlying operational growth in the Pharmaceuticals division, driven by recently launched products, which was significantly offset in reported results by adverse currency movements due to a stronger US dollar. The company also navigated the global economic crisis and ongoing integration of the Alcon acquisition.

Key Financial Metrics

Material Changes vs. Prior Period

• Currency Impact: A stronger US dollar negatively impacted reported net sales by 10 percentage points and operating income by 11 percentage points. Without currency effects, net sales grew 8% and operating income grew 7%.
• Pharmaceuticals Growth: The division delivered 12% growth in local currencies, driven by double-digit growth in all regions and recently launched products (e.g., Lucentis, Exelon Patch, Exforge) which contributed $0.9 billion in sales.
• Sandoz Performance: Sandoz reported a 9% decline in USD sales but a 4% increase in local currencies. The US segment declined 3% due to FDA-related distribution blocks at a manufacturing site and price erosion, while other regions showed solid growth.
• Financial Results: Net income declined 14% due to currency effects, lower average net liquidity, and financing costs associated with the 25% Alcon stake. Income from associated companies fell 39% to $83 million, largely due to a negative adjustment from Roche.
• Balance Sheet: Total assets decreased slightly to $78.0 billion. Equity declined $4.2 billion to $46.2 billion, impacted by currency translation losses ($1.4 billion) and actuarial pension losses ($0.7 billion). The debt-to-equity ratio increased to 0.25:1 following a $5 billion bond issuance.

Guidance, Outlook, and Risks

• 2009 Outlook: Management expects Group net sales to grow at a mid-single-digit rate and Pharmaceuticals net sales at a mid- to high-single-digit rate in local currencies. Underlying operating and net income are expected to reach record levels, though reported results may be offset by currency losses if exchange rates remain unfavorable.
• R&D Milestones: Key approvals include Afinitor (anti-cancer) in the US and Ixiaro (Japanese encephalitis vaccine) in the US and Europe. The pipeline includes over 130 planned regulatory submissions between 2009 and 2011.
• Cost Efficiency: The "Forward" productivity program is ahead of schedule, delivering $329 million in incremental savings in Q1 2009, with a goal to exceed $1.3 billion in savings for the full year.
• Risks and Contingencies:
  • Legal Proceedings: Ongoing litigation includes Zometa/Aredia (osteonecrosis of the jaw), Zelnorm (cardiovascular injuries), and patent disputes with Johnson & Johnson regarding contact lenses. A recent jury verdict in Alabama awarded $28 million in compensatory and $50 million in punitive damages against a Sandoz subsidiary regarding Average Wholesale Price claims; Novartis plans to appeal.
  • Regulatory: Sandoz faces challenges in the US regarding FDA concerns at a manufacturing site.
  • Economic: Uncertainty regarding the global financial crisis and exchange rates remains a primary risk.

Investor Verification Checklist

• Verify the extent of the currency impact on reported earnings versus underlying operational performance.
• Monitor the resolution of FDA concerns regarding the Sandoz US manufacturing site and its impact on US generic sales.
• Track the progress of the "Forward" cost-saving initiative against the $1.3 billion 2009 target.
• Review the status of major legal proceedings, specifically the Zometa/Aredia and Average Wholesale Price litigation, for potential financial exposure.
• Assess the commercial uptake of new product launches (Afinitor, Ixiaro, Lucentis) as drivers for future growth.