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
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
"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.
[to top of second column]
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
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
(Reporting by Caroline Copley; Editing by Himani Sarkar and Jane
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