Novartis says slimmer structure to boost profitability

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[June 18, 2014]  By Caroline Copley

ZURICH (Reuters) - Novartis AG on Wednesday shed some light on how an overhaul of its business could boost profitability even in a "brutal" era for health spending, saying the shake-up would have lifted core operating margins by 2.5 percentage points last year.

The Swiss drugmaker unveiled a series of deals worth over $25 billion in April in which it will get out of underperforming businesses and add higher margin cancer drugs from GlaxoSmithKline PLC.

Novartis' actions are part of a wider trend among drugmakers to weed out weaker assets to concentrate on a smaller number of leading business as they expect aging populations to pressure healthcare budgets and increase the hurdles for reimbursement.

Basel-based Novartis said its new structure which focuses on its three so-called "powerhouse" divisions - pharmaceuticals, eye care and generics - would have lifted its core operating margin to 27.2 percent had the deals been completed last year.

The company reported a core operating income margin of 24.7 percent for 2013.

"We have shaped this company in a way that positions us incredibly well for next 10 years," Chief Executive Joe Jimenez said in opening remarks for the company's investor day in Basel.

"If you think about the three powerhouse divisions, we're going to be a more focused company, a more profitable company, with the potential to grow faster."

Jimenez told investors and analysts the 2.5 percentage point margin improvement was a "one-time" reset and said there was still work to do to grow the company's margin over time.

He held off from guiding for an improvement in margins each year for the next five years since Novartis may need to invest in new product launches, but said the trend will be upwards.

Novartis also wants to consolidate some back-office functions - which are currently spread across all divisions and account for over $6 billion in expenses - into one shared service organization to further reduce costs.

Shares in Novartis were trading 0.4 percent higher at 81.15 francs by 0909 GMT, ahead of the European healthcare sector index.

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FROM SIX UNITS TO THREE

As part of the overhaul, Novartis is hiving off its three smaller units which it said lacked global scale to compete in what could be a "brutal" environment if economic growth slows and authorities cut healthcare spending.

It is selling its animal health business to Eli Lilly and Co and its vaccines, excluding flu to GSK. Novartis will also form a joint venture with GSK for its consumer health unit. The deals are expected to close in the first half of next year.

Adding GSK's cancer drugs should help the company continue to grow even once leukemia drug Glivec - it's biggest seller in 2013 - loses patent protection from 2016, Jimenez said.

In its Alcon eye care business, Jimenez said he was not happy with the growth rate and the priority would be to accelerate sales in the division while maintaining the margin.

He said the Sandoz generics business would serve as an important foothold into emerging markets and should help it push ahead with growth in developing regions.

One non-core asset that was not addressed in Novartis' portfolio review is its $16 billion stake in cross-town rival Roche. Jimenez poured cold water on expectations the holding could also be divested, saying the company currently had no intention of exiting the stake.

(Reporting by Caroline Copley; Editing by Himani Sarkar and Jane Merriman)

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