Novartis Investors Cheer Strong Earnings and New CEO

Novartis (NVS) reported a remarkable 54% increase in fourth-quarter net income to $2.3 billion, just slightly below analysts' expectations of $2.4 billion. The Swiss drugmaker's net sales also shot up 28% to $12.9 billion, helped by its H1N1 swine flu vaccines. Novartis also announced its new chief executive and a slimmed-down board. Joe Jimenez (left), currently division head of the pharmaceutical business, will replace Daniel Vasella (right) as the company's new CEO. Vasella, who has led the company since it was formed in 1996 through the merger of Ciba-Geigy and Sandoz Labs, will remain chairman.Who is Joe Jimenez? A Stanford and University of California, Berkeley, graduate, the 50-year-old American worked at U.S. consumer-products companies such as Heinz (HNZ), Clorox (CLX) and ConAgra (CAG) before joining Switzerland-based Novartis in 2007. It now falls to Jimenez to guide the company through the ever-increasing challenges facing the industry, among them, patent expirations and weak pipelines.

Back to Novartis's results. Pharmaceuticals sales rose 13% in local currencies. More than 30 major regulatory approvals in 2009 included the new cancer medicine Afinitor, and Onbrez Breezhaler for chronic obstructive pulmonary disease, as well as biosimilars in Japan and Canada. Several major submissions in oncology and other areas were also completed in 2009, and many are planned for 2010, with up to five in oncology.

A Swine Flu Booster

Novartis expects to continue the strong volume growth achieved in 2009 in the pharmaceuticals segment, but foresees pressures that could affect pricing in some markets. In addition, generic competition for the high blood pressure medication Diovan is set to start in Japan; patent protection for the drug expires in Europe in 2011 and the U.S. in 2012. Diovan's net sales in 2009 were $6 billion. Novartis expects pharmaceuticals net sales in 2010 to grow at a mid- to high-single digit rate in local currencies.

Vaccines and diagnostics shot up 166% in local currencies, the result of $1 billion order of its A(H1N1) pandemic vaccine and adjuvant sales. Novartis is preparing the launch of Menveo, a developmental vaccine against meningitis. European approval is expected in early 2010, while a U.S. regulatory decision is also expected in the first half of the year.

Sandoz sales rose 10% in local currencies, benefiting from the EBEWE Pharma specialty generics business acquisition in September, which added five percentage points to sales growth. Novartis expects the segment to increase its pace of growth in 2010. The addition of EBEWE Pharma's specialty injectables business has given Novartis access to price competitive quality oncology medicines. Novartis is also confident its generic copy of Sanofi-Aventis's (SNY) blockbuster anti-clotting drug Lovenox will gain U.S. approval, the head of its generics unit said on Tuesday, but gave no indication as to timing.

Heartburn Remedy

Sales in the Consumer Health division increased by 13% in local currencies, with notable gains in the over-the-counter segment with the first-to-market OTC launch of Prevacid24HR for frequent heartburn pain in the U.S. Novartis expects sales in that segment to keep growing ahead of its markets in 2010. Novartis will launch an OTC version of pantoprazole, a proton pump inhibitor, in 14 European countries in the second quarter of 2010 after gaining rights from Nycomed.

Then there is the acquisition of Alcon, which Novartis says will strengthen its health-care portfolio and provide a greater presence in the fast-growing global eye care sector.

The Novartis board has proposed a dividend payment of 2.10 Swiss francs ($2.18) per share for 2009, up 5% from 2.00 Swiss francs per share for 2008 and representing the 13th consecutive dividend increase since the creation of Novartis in December 1996.

Positive Response

With margin expansion and improving productivity, Novartis said it expects its net sales to rise "at a mid-single-digit percentage rate in local currencies in 2010 based on the rapidly growing contributions of recently launched products and targeted investments in emerging growth markets."

Investors reacted favorably to the quarterly results and the management shuffle, pushing Novartis shares 1.7% higher by the close of trading to $54.37, near its 52-week high of $56.42. If the company can deliver on its promises, the 12 forward P/E might be expanded.
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