Drugmaker Novartis to eke out more cost savings to lift margins

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[July 17, 2014]  By Caroline Copley

ZURICH (Reuters) - Swiss drugmaker Novartis <NOVN.VX> posted a quarterly rise in sales that missed expectations and said it would focus on eking out gradual cost savings to boost margins as it prepares a radical business overhaul.

Despite the sales miss, the Basel-based company confirmed its full-year guidance for a rise in sales and profit, expecting revenue from new products to offset generic competition to its blood pressure pill Diovan.

Novartis unveiled a series of deals worth more than $25 billion in April to get out of underperforming businesses such as vaccines and animal health operations while adding higher-margin cancer drugs from GlaxoSmithKline <GSK.L>.

Weak performance from the outgoing vaccines and animal health businesses weighed on second-quarter group sales that were up 2 percent at $14.64 billion, slightly short of the average forecast of $14.72 billion in a Reuters poll.

Sales at the vaccines unit were down 13 percent, hit by the timing of some bulk pediatric shipments, while animal health faced a tough year-on-year comparison after last year's relaunch of flea control product Sentinel.

Analysts at Sanford C. Bernstein described the results as "weak" but noted that the company's full-year guidance remained intact and has retained its "outperform" rating on the stock.

Shares in Novartis, which have advanced 14 percent this year as investors cheered its overhaul, were trading down 0.9 percent at 80.40 francs by 0803 GMT (4.03 a.m. EDT).


Under the new structure, Novartis will concentrate on three "powerhouse divisions" - pharmaceuticals, its Alcon eyecare unit and generics division Sandoz - hoping a focus on a smaller number of leading businesses will help to drive growth as healthcare budgets come under pressure.

It is also consolidating some back-office functions into a single shared-service organization. These operations are currently spread across all divisions and account for more than $6 billion in expenses.

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Chief Executive Joe Jimenez said the restructuring gives Novartis "a lot of runway" to reduce costs further, albeit gradually.

"You shouldn't look for a 'Big Bang' of Novartis Business Services; for example, us coming out and saying we're resetting our cost base," Jimenez said. "This is going to be a process over time that allows us to continually lower our costs and continually drive margin growth."

Novartis confirmed its full-year guidance for sales to grow in the low-to-mid-single digit percentage range this year as it braces for generic competition to lop $2.7 billion off its top line.

Quality control issues at manufacturing sites for India's Ranbaxy Laboratories <RANB.NS> - which holds the rights to launch the first copycat version of Diovan - spared Novartis from a cheaper rival to its once best-selling blood pressure pill for 20 months.

But Ranbaxy was granted approval to launch a copycat version at the end of June, meaning Novartis will now face the full force of competition.

Novartis refined its guidance for core operating income, saying it expected growth at a mid-to-high single-digit rate compared with a previous outlook for it to grow ahead of sales.

Core second-quarter operating income of $3.8 billion fell slightly shy of the $3.83 billion analyst consensus.

(Editing by David Goodman)

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