Novartis defies downturn

The Novartis half-yearly results beat analysts expectations (picture: Novartis) Le buone nuove sono giunte soprattutto da Novartis (foto: Novartis)

Novartis has beaten market expectations with its first half results, prompting nervous investors to pick up its stock, after heavy selling last week.

The Basel-based pharmaceutical group reported a three per cent increase in net income – to SFr3.848 billion ($2.66 billion) – compared with the same period last year.

Sales rose by six per cent to SFr16,254 billion.

Second quarter results were less impressive – net profit fell by eight per cent to SFr2.06 billion, dragged down by a plunge in financial income and the strength of the Swiss franc.

At the stock exchange, the recent declines in the Novartis share price were reversed on Monday. By late morning, shares were trading at SFr51.55, some two per cent higher than Friday’s close.

Commenting on the result, analyst Patrick Burgermeister at the cantonal bank of Zurich, said he was pleased.

“My first impression was relief when I saw the solid figures that Novartis published because in recent weeks the share price suffered somewhat,” he told swissinfo.

“It now seems that this was mainly due to profit taking after the strong outperformance that the share had prior to the decline,” he added.

Strong US demand

The group reported higher sales in all regions, with overall growth of nine per cent. Sales in the United States were particularly strong, climbing by 19 per cent, and generating 43 per cent of pharmaceuticals and 28 per cent of group sales.

“In an uncertain economy and a critical industry environment, our strategic focus on innovation and sustained growth resulted in a continued solid performance,” commented chairman and CEO, Daniel Vasella.

In a statement, the group said that pharmaceuticals sales were expected to increase in local currencies by about ten per cent, based on the performance of key brands, new product introductions and new indications.

It added that barring any unforeseen events, both operating and net income were expected to exceed the previous year’s levels.

Analyst Burgermeister echoed the company’s optimism. “Novartis has the best risk profile in the industry. It has really low patent exposure, a good pipeline and an excellent management, both operationally and financially,” he said.

“The now earlier-than-expected introduction of Zelmac (treatment against irritable bowel syndrome) in the United States and the strong launch of Elidel (eczema) will ensure that also next year we will see double-digit growth,” he added.

Strong franc

However, Novartis warned that if sustained, the weakness of the US dollar and the Japanese yen versus the Swiss franc would have a “major impact” on financial results.

The company commented that the impact on 2002 was expected to be reduced since transactional exposures in US dollars and Japanese yen for the current year had been fully hedged.

Novartis chief financial officer Raymond Breu told Reuters that the company remained on track to boost pharmaceuticals sales by double-digit annual rates over the next five years.

“For Novartis, we think this is achievable… Innovation is the key here and we are currently enjoying the fruits of a fairly productive research and development organisation,” he said.

Investors dumped shares in the company last week on fears that the first-half figures would fail to impress, a move that contributed to a plunge of Switzerland’s blue chip share index – the Swiss Market Index – by more than five per cent last Friday.

There were also concerns after the news that an Indian drug-maker, Dr Reddy’s Laboratories, had applied to sell a generic version of Novartis’s Lamisil anti-fungal drug in the US from 2005.

Merger speculation

Novartis has been the subject of much speculation for months over a possible merger with its cross-town rival Roche, in which it has a 21.3 per cent stake.

Vasella himself said in a German magazine interview last week that there would be distinct advantages to both companies working together.

“Roche and Novartis together would without a doubt be a great company,” he commented.

Analyst Bugermeister also sees the sense of closer ties between the two companies.

“I think a merger would make sense because the overlap in the products is minimal and the cultural fit is clearly better than it would be with a merger over the Atlantic,” he told swissinfo.

However, Roche CEO Franz Humer and the families controlling the company have made it clear on more than one occasion that they are opposed to such a move.

Last week’s merger of US groups Pfizer and Pharmacia has prompted speculation that a new round of consolidation may be imminent in the drugs business.

Analysts say the industry remains fragmented, and upcoming patent expiries along with the market downturn mean that firms need to boost their drug pipelines.

Share buyback scheme

Novartis also announced a SFr4 billion share buyback on Monday, the third in a row. The programme applies exclusively to Swiss-listed shares and is aimed at returning liquidity to shareholders according to the company.

by Robert Brookes