On January 29, 2020 Novartis reported an exceptional 2019 (Press release, Novartis, JAN 29, 2020, View Source [SID1234553638]). Strong sales growth drove double digit increases in core operating income and free cash flow. Significant margin expansion puts us on track to reach mid to high 30s core margin for Innovative Medicines in the mid-term. We launched an unprecedented 5 new molecular entities in 2019 and advanced a breadth of early programs in our pipeline that address significant unmet needs. Looking ahead, we expect to sustain our long-term growth and margin expansion driven by our in market growth drivers and the 15 ongoing or upcoming major launches, while advancing our rich pipeline."
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During 2019, we continued focusing Novartis as a leading medicines company powered by advanced therapy platforms and data science. We are now uniquely positioned with scale and diversification across therapeutic areas and we continue to execute our five strategic priorities: embrace operational excellence, deliver transformative innovation, go big on data and digital, build trust with society, and build a new culture by unleashing the power of our people.
We successfully spun-off Alcon as a separate public company, creating significant value for our shareholders. We acquired Xiidra, expanding our ophthalmic pharmaceuticals franchise, and in January 2020 we acquired The Medicines Company, adding inclisiran, a potentially transformational cholesterol-lowering therapy to address cardiovascular disease. Sandoz is in the process of becoming a more autonomous and leaner division within Novartis, and returned to sales growth (cc) and margin expansion in 2019 despite continued pricing pressure in the US.
Operationally, strong sales growth drove double digit growth in core operating income and free cash flow. Innovative Medicines core margin increased by 1.8 percentage points (cc) to 33.5% of sales, and we expect this margin to improve to the mid to high 30’s in the mid-term. Sales in China grew double digit and we expect to double our China business by 2024.
2019 was a breakthrough innovation year for Novartis, with five NME approvals with blockbuster potential including the first drug treatment for breast cancer with a PIKC3A mutation, the first oral drug to treat aSPMS, the first gene therapy to treat SMA and next generation treatments for sickle cell disease and wet AMD. Additionally we submitted regulatory filings for several major drugs, including inclisiran, and we had over 30 readouts supporting submissions or enabling transition to Phase 3. Our pipeline remains rich including many 2020 catalysts and we expect to maintain innovation momentum.
We are continuing our cultural journey and are seeing progress towards becoming more inspired, curious and unbossed. We advanced an enterprise-wide digital transformation spanning the entire value chain, from development to commercial operations. We continue our journey to rebuild trust with society based on four pillars; ethical standards, pricing and access, global health and corporate citizenship. We have introduced ESG targets for 2020 across these pillars which are transparent, systemically reviewed and linked to compensation.
Financials
In order to comply with International Financial Reporting Standards (IFRS), Novartis has separated the Group’s reported financial data for the current and prior years into "continuing" and "discontinued" operations. The results of the Alcon business are reported as discontinued operations. See page 45 and Notes 2, 3 and 11 in the Condensed Financial Report for a full explanation.
The commentary below focuses on continuing operations including the businesses of Innovative Medicines and Sandoz (including the US generic oral solids and dermatology portfolio), as well as the continuing Corporate functions. We also provide information on discontinued operations.
Continuing operations fourth quarter
Net sales were USD 12.4 billion (+8%, +9% cc) in the fourth quarter driven by volume growth of 13 percentage points, mainly from Entresto, Zolgensma, Cosentyx and Kisqali. Strong volume growth was partly offset by the negative impacts of pricing (3 percentage points) and generic competition (1 percentage point).
Operating income was USD 1.8 billion (+34%, +37% cc) mainly driven by higher sales and divestments, partly offset by growth investments, higher legal provisions and higher amortization.
Net income was USD 1.1 billion (-7%, -6% cc) due to higher taxes, including a one-time, non-cash deferred tax expense, partly offset by higher operating income. EPS was USD 0.50 (-6%, -4% cc), benefiting from lower weighted average number of shares outstanding.
Core operating income was USD 3.5 billion (+11%, +13% cc) mainly driven by higher sales, partly offset by growth investments. Core operating income margin was 27.9% of net sales, increasing by 0.8 percentage points (+0.8 percentage points cc).
Core net income was USD 3.0 billion (+11%, +13% cc) driven by growth in core operating income. Core EPS was USD 1.32 (+14%, +15% cc) growing faster than core net income driven by lower weighted average number of shares outstanding.
Free cash flow from continuing operations amounted to USD 3.5 billion (+20%) compared to USD 2.9 billion in the prior year quarter. The increase was mainly driven by higher cash flows from operating activities and higher proceeds from the divestment of intangible assets.
Innovative Medicines net sales were USD 9.9 billion (+10%, +11% cc) in the fourth quarter. Pharmaceuticals BU sales grew 14% (cc), driven by continued momentum on Entresto and Cosentyx and the launch uptake of Zolgensma. Oncology BU grew 8% (cc) driven by continued momentum on Kisqali and Kymriah and the launch uptake of Piqray. Volume contributed 15 percentage points to sales growth. Generic competition had a negative impact of 2 percentage points. Net pricing had a negative impact of 2 percentage points.
Sandoz net sales were USD 2.5 billion (+1%, +2% cc), driven by strong volume growth of 5 percentage points partially offset by 3 percentage points of price erosion. Excluding the US, net sales grew strongly (+8% cc). Global sales of Biopharmaceuticals grew to USD 425 million (+11% cc), mainly driven by continued strong double-digit growth in Europe.
Novartis continues to expect the previously-announced divestment of the Sandoz US oral solids and dermatology portfolio to be completed in Q1 2020, pending regulatory approval. Novartis remains fully committed to this business until it is divested to Aurobindo. The results of this business are included in continuing operations.
Continuing operations full year
Net sales were USD 47.4 billion (+6%, +9% cc) in 2019 driven by volume growth of 12 percentage points, mainly from Cosentyx, Entresto and Zolgensma for the Pharmaceuticals BU and Promacta/Revolade, Kisqali and Lutathera for the Oncology BU. Strong volume growth was partly offset by the negative impacts of pricing (2 percentage points) and generic competition (1 percentage point).
Operating income was USD 9.1 billion (+8%, +14% cc) mainly driven by higher sales, higher divestments and productivity programs, partly offset by growth investments, legal provisions and higher impairments.
Net income was USD 7.1 billion (-44%, -41% cc) as prior year benefited from a USD 5.7 billion net gain recognized from the sale of our stake in the GSK consumer healthcare joint venture. EPS was USD 3.12 (-43%, -40% cc) benefiting from lower weighted average number of shares outstanding.
Core operating income was USD 14.1 billion (+12%, +17% cc) mainly driven by higher sales and productivity programs, partly offset by growth investments. Core operating income margin was 29.7% of net sales, increasing by 1.6 percentage points (+1.9 percentage points cc).
Core net income was USD 12.1 billion (+11%, +15% cc) driven by growth in core operating income partly offset by the discontinuation of core income from the GSK consumer healthcare joint venture. Core EPS was USD 5.28 (+12%, +17% cc) growing faster than core net income driven by lower weighted average number of shares outstanding.
Free cash flow from continuing operations amounted to USD 12.9 billion (+15%) compared to USD 11.3 billion in 2018. The increase was mainly driven by higher operating income adjusted for non-cash items.
Innovative Medicines net sales were USD 37.7 billion (+8%, +11% cc) in 2019. Pharmaceuticals BU grew 12% (cc) driven by Cosentyx reaching USD 3.6 billion, Entresto USD 1.7 billion and Zolgensma USD 361 million. Oncology BU grew 10% (cc) driven by Promacta/Revolade reaching USD 1.4 billion, Kisqali USD 0.5 billion and Lutathera USD 0.4 billion. Volume contributed 13 percentage points to sales growth. Generic competition had a negative impact of 1 percentage point. Net pricing had a negative impact of 1 percentage point.
Sandoz net sales were USD 9.7 billion (-1%, +2% cc) driven by strong volume growth of 8 percentage points partially offset by 6 percentage points (of price erosion, mainly in the US. Excluding the US, net sales grew strongly (+7% cc). Global sales of Biopharmaceuticals grew to USD 1.6 billion (+16% cc), driven by continued strong double-digit growth in Europe from Hyrimoz (adalimumab), Rixathon (rituximab) and Erelzi (etanercept).
Discontinued operations
Discontinued operations include the business of Alcon and certain Corporate costs directly attributable to Alcon up to the spin-off date. As the Alcon spin-off was completed on April 9, 2019, there were no operating results in the fourth quarter of 2019.
Discontinued operations net sales in 2019 were USD 1.8 billion compared to USD 7.1 billion in 2018 and operating income amounted to USD 71 million compared to an operating loss of USD 234 million in 2018. Net income from discontinued operations in 2019 amounted to USD 4.6 billion compared to a net loss of USD 186 million in 2018 driven by the non-taxable non-cash net gain on distribution of Alcon Inc. to Novartis AG shareholders which amounted to USD 4.7 billion. For further details see Note 3 "Significant transactions – Completion of the spin-off of the Alcon business through a dividend in kind distribution to Novartis AG shareholders".
Total Group fourth quarter
For the total Group, net income amounted to USD 1.1 billion compared to USD 1.2 billion in prior year, and basic earnings per share was USD 0.50 compared to USD 0.52 in prior year. Cash flow from operating activities for the total Group amounted to USD 3.5 billion and free cash flow to USD 3.5 billion.
Total Group full year
For the total Group, net income amounted to USD 11.7 billion compared to USD 12.6 billion in prior year, and basic earnings per share was USD 5.12 compared to USD 5.44 in prior year. Cash flow from operating activities for the total Group amounted to USD 13.6 billion and free cash flow to USD 12.9 billion.
Key growth drivers (Q4 performance):
Underpinning our financial results in the fourth quarter is a continued focus on key growth drivers including:
Entresto (USD 518 million, +65% cc) continued to deliver strong double-digit performance, benefiting from the PIONEER data on hospital initiation and higher demand in ambulatory settings.
Zolgensma (USD 186 million) US launch continued to progress well. Policies are in place covering ~97% of commercial patients and >50% of Medicaid patients. Currently, 16 states representing ~32% of newborns are screening for SMA in the US.
Cosentyx (USD 965 million, +21% cc) continued to grow strongly across indications and regions. In the US sales grew 25% with broad first line access in all three indications.
Kisqali (USD 155 million, +166% cc) accelerated in the US driven by use in metastatic breast cancer patients, independent of menopausal status or combination partner, and benefiting from overall survival data, as well as strong uptake and patient share gain in Europe and other regions.
Kymriah (USD 96 million) grew driven by ongoing uptake in the US and Europe. There are over 200 qualified treatment centers and more than 20 countries worldwide have coverage for at least one indication.
Piqray (USD 67 million) US launch continued to progress well. Piqray is the first and only treatment for the 40% of HR+/HER2- advanced breast cancer patients who harbor a PIK3CA mutation.
Promacta/Revolade (USD 380 million, +16% cc) grew at a double-digit rate in most regions driven by increased use in chronic immune thrombocytopenia (ITP) and further uptake as first-line treatment for severe aplastic anemia (SAA) in the US.
Tafinlar + Mekinist (USD 356 million, +15% cc) grew double-digit due to demand in metastatic and adjuvant melanoma as well as NSCLC, with ongoing uptake of the adjuvant melanoma indication in Europe.
Jakavi (USD 293 million, +17% cc) grew double-digit across all regions driven by demand in the myelofibrosis and polycythemia vera indications.
Beovu (USD 35 million) was launched in the US following FDA approval in October. Initial launch uptake has been strong and broad access has been established including a permanent J-code from CMS effective January 1, 2020.
Lutathera (USD 107 million, +31% cc) continued to grow led by the US, with over 170 centers actively treating patients, and ongoing launches in Europe. Sales from all AAA brands (including Lutathera and radiopharmaceutical diagnostic products) were USD 168 million.
Mayzent (USD 17 million) launch is progressing and efforts are ongoing to accelerate patient on-boarding and drive urgency to treat.
Biopharmaceuticals (biosimilars, biopharmaceutical contract manufacturing and Glatopa) grew to USD 425 million (+11% cc), driven by continued strong double-digit growth in Europe.
Emerging Growth Markets, which comprise all markets except the US, Canada, Western Europe, Japan, Australia and New Zealand, sales grew 12% (cc), driven by China (USD 544 million) growing 21% (cc) from strong volume growth, including the launches of Cosentyx and Entresto.
Net sales of the top 20 Innovative Medicines products in 2019
R&D Update – Key developments from the fourth quarter
New approvals and regulatory update
Adakveo (crizanlizumab, formerly SEG101) was launched in the US following approval by FDA to reduce frequency of pain crises in individuals living with sickle cell disease. The approval came approximately two months ahead of the FDA’s priority review action date. Adakveo reduced the annual rate of sickle cell pain crises by 45% and the median annual rate of days hospitalized by 42% compared to placebo.
Beovu (brolucizumab, formerly RTH258) was launched in the US in October and received a positive CHMP opinion in December. Beovu is the only anti-VEGF in wet AMD approved in the US to maintain eligible patients on up to three-month dosing intervals immediately after the loading phase.
Mayzent (siponimod) was approved in the EU for the treatment of adult patients with active secondary progressive multiple sclerosis (SPMS).
Ziextenzo (Sandoz biosimilar pegfilgrastim) was approved and launched in the US.
Regulatory submissions and filings
Inclisiran was submitted in the US for primary hyperlipidemia and in the EU for mixed dyslipidemia, which include FH, ASCVD or ASCVD risk equivalent patients.
Ofatumumab (OMB157) was submitted to FDA and EMA (Jan) for treatment of RMS.
Capmatinib (INC280) was submitted to FDA with breakthrough therapy designation for NSCLC.
Cosentyx was submitted to FDA for treatment of non-radiographic axial spondyloarthritis (nr-axSpA) if approved, nr-axSpA would be the fourth indication for Cosentyx.
Results from ongoing trials and other highlights
Inclisiran, an investigational cholesterol-lowering therapy to address cardiovascular diseases, was added to the pipeline from our acquisition of The Medicines Company. If approved, inclisiran will be the first and only LDL-lowering siRNA medicine that can be given twice yearly by subcutaneous injection and integrate seamlessly into routine healthcare visits, potentially improving adherence and patient outcomes.
MBG453 anti-TIM-3 antibody phase Ib data in combination with decitabine in patients with high-risk myelodysplastic syndrome (MDS) and acute myeloid leukemia was presented at ASH (Free ASH Whitepaper), showing that MBG453 was safe and well tolerated and exhibited evidence of anti-leukemic activity with encouraging preliminary response rates. These findings validate TIM-3 as a promising therapeutic target in MDS and AML.
Tropifexor (LJN452) FLIGHT-FXR phase IIb positive interim results showed robust and dose-dependent reductions in several key biomarkers of NASH including hepatic fat content, body weight and both alanine aminotransferase and gamma glutamyl transferase levels compared to placebo at 12 weeks. Full 48-week biopsy data from the study are expected in Q2 2020.
Cosentyx PREVENT trial in patients with nr-axSpA showed 41.5% of patients treated with Cosentyx had improved ASAS40 scores through Week 16 and improvements continued through Week 52. Cosentyx narrowly missed statistical significance for superiority in ACR 20, the primary endpoint of the EXCEED head-to-head trial in psoriatic arthritis, while showing numerically higher results versus Humira.
Kisqali MONALEESA-3 data were published in the NEJM showing superior overall survival compared to fulvestrant and consistent efficacy across advanced breast cancer patient subgroups, reducing the risk of death by almost 30% compared to fulvestrant alone.
Kymriah data presented ASH (Free ASH Whitepaper) demonstrated consistent efficacy and safety outcomes in US patients when used in real-world setting. Understanding the Kymriah safety profile, and increased experience with administration in real-world practice supports use in the outpatient setting.
Sickle cell disease global survey results were presented at ASH (Free ASH Whitepaper) showing profound and often under-reported effects, for example more than 90% of patients surveyed experienced at least one vaso-occlusive crisis (VOC) in the past 12 months.
QMF149 positive phase III results showed statistically significant improvement in lung function compared to monotherapy. QMF149 showed improvement in peak expiratory flow, exacerbation rates, rescue medication use versus mometasone furoate among other secondary endpoints.
Fevipiprant analysis of phase III LUSTER 1 and 2 phase trials did not support further development in asthma as a primary indication.
Sandoz US Generic Advair development program in the US was discontinued.
Capital structure and net debt
Retaining a good balance between investment in the business, a strong capital structure and attractive shareholder returns remains a priority.
In 2019, Novartis repurchased a total of 60.3 million shares for USD 5.4 billion on the SIX Swiss Exchange second trading line, including 46.5 million shares (USD 4.2 billion) bought back under the up to USD 5 billion share buyback and 13.8 million shares (USD 1.1 billion) to mitigate dilution related to participation plans of associates. In addition, 1.7 million shares (USD 0.2 billion) were repurchased from associates. In the same period, 15.8 million shares (for an equity value of USD 1.1 billion) were delivered as a result of options exercised and share deliveries related to participation plans of associates. Consequently, the total number of shares outstanding decreased by 46.2 million versus December 31, 2018. These treasury share transactions resulted in a decrease in equity of USD 4.5 billion and a net cash outflow of USD 5.3 billion.
As of December 31, 2019, net debt decreased by USD 0.3 billion to USD 15.9 billion versus December 31, 2018. The decrease was mainly driven by USD 12.9 billion free cash flow from continuing operations during 2019 and USD 2.9 billion net inflows related to the Alcon spin-off, partly offset by the USD 6.6 billion annual dividend payment, net cash outflow for treasury share transactions of USD 5.3 billion and M&A transactions of USD 3.8 billion (mainly the Xiidra acquisition).
In January 2020, Novartis acquired The Medicines Company for USD 9.7 billion and in connection borrowed USD 7 billion under a short term credit facility.
As of Q4 2019, the long-term credit rating for the company is A1 with Moody’s Investors Service and AA- with S&P Global Ratings.
2020 Outlook
Barring unforeseen events
Focused medicines company guidance
Excluding Alcon and the Sandoz US oral solids and dermatology business from both 2019 and 2020
Net sales: expected to grow mid to high-single digit (cc)
From a divisional perspective, we expect net sales performance (cc) in 2020 to be as follows:
Innovative Medicines: expected to grow mid to high-single digit
Sandoz: expected to grow low-single digit
Core operating income: expected to grow high-single to low double digit (cc)
The guidance above includes the forecast assumption that no Gilenya and no Sandostatin LAR generics enter in 2020 in the US.
Foreign exchange impact
If late-January exchange rates prevail for the remainder of 2020, the currency impact for the year would be zero to negative 1 percentage point on net sales and negative 1 to negative 2 percentage points on core operating income. The estimated impact of exchange rates on our results is provided monthly on our website.
Annual General Meeting
Dividend proposal
The Novartis Board of Directors proposes a dividend payment of CHF 2.95 per share for 2019, up 4% from CHF 2.85 per share in prior year, representing the 23rd consecutive dividend increase since the creation of Novartis in December 1996. Shareholders will vote on this proposal at the 2020 Annual General Meeting.
Reduction of Share Capital
The Novartis Board of Directors proposes to cancel 60 313 900 shares (of which 59 483 900 shares were repurchased under the eighth and 830 000 shares were repurchased under the seventh share repurchase program in 2019) and to reduce the share capital accordingly by CHF 30 156 950, from CHF 1 263 687 410 to CHF 1 233 530 460.
Nominations for election to the Board of Directors
The Novartis Board of Directors announced today that it is nominating Bridgette Heller, for election to the Board at the Annual General Meeting on February 28, 2020. Bridgette Heller brings more than 35 years of experience at Fortune 100 companies and held several executive positions in the consumer goods and healthcare industry among others at Danone, Merck & Co as well as Johnson & Johnson. Furthermore, Bridgette Heller serves on several Boards. Bridgette Heller is the co-founder and CEO of The Shirley Proctor Puller Foundation which is committed to generating better educational outcomes for underserved children in St. Petersburg, Florida. Her extensive track record in global leadership roles coupled with her broad experience in both the consumer products as well as healthcare area will be a great addition to the Novartis Board’s commercial expertise.
As previously announced on October 22, 2019, the Board of Directors also proposes the election of Simon Moroney to the Board.
Re-elections of the Chairman and the members of the Board of Directors
The Novartis Board of Directors proposes the re-election of Joerg Reinhardt (also as Chairman), Nancy C. Andrews, Ton Buechner, Patrice Bula, Srikant Datar, Elizabeth Doherty, Ann Fudge, Frans van Houten, Andreas von Planta, Charles L. Sawyers, Enrico Vanni, and William T. Winters as members of the Board of Directors.
Re-elections and elections to the Compensation Committee
The Novartis Board of Directors proposes the re-election of Patrice Bula, Srikant Datar, Enrico Vanni, and William T. Winters and the election of Bridgette Heller as a new member of the Compensation Committee. Ann Fudge is no longer standing for re-election as a member of this committee. The Board of Directors intends to designate Enrico Vanni again as Chairman of the Compensation Committee, subject to his re-election as a member of the Compensation Committee.
1 Continuing operations include the businesses of Innovative Medicines and Sandoz Division including the US generic oral solids and dermatology portfolio and Corporate activities. See page 45 of the Condensed Financial Report for full explanation
2 Discontinued operations include the business of Alcon. Net income of discontinued operations for 2019 includes a USD 4.7 billion gain on distribution of Alcon Inc. to Novartis AG shareholders. See page 45 and Notes 2, 3 and 11 of the Condensed Financial Report for full explanation
Detailed financial results accompanying this press release are included in the Condensed Financial Report at the link below:
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