Novartis's Sales Increase 17%
As Quarterly Volatility Persists
By STEPHEN D. MOORE
Staff Reporter of THE WALL STREET JOURNAL
4/13/2000
ZURICH -- Novartis AG reported a 17% jump in first-quarter sales -- but that heady growth rate was ballooned by exchange-rate fluctuations and an unexpected recovery at the agribusiness division, which isn't likely to continue for the full year, the Swiss drug concern cautioned.
The first-quarter revenue spurt is the latest example of volatile quarterly swings that Novartis's management has struggled to tame over the past few years. And prospects for profit and sales growth during the remainder of this year remain uncertain, some analysts said. "These numbers look good," said David Beadle, a London-based drug analyst with Warburg Dillon Read. "But we'll need to see a more consistent sales line before people start to say Novartis has come out of the worst of it."
Indeed, prospects for the remainder of this year remain uncertain amid volatile financial markets and sluggish sales growth at the flagship drug division. Novartis doesn't disclose quarterly profit for the group or individual divisions. In a guarded forecast, the company predicted that full-year group operating profit would increase -- but declined to elaborate.
Company executives acknowledged that the flagship drug division expects underlying mid-single digit sales growth this year, but profit growth would be slowed by heavy marketing outlays for several new drug launches. "Obviously, we're investing a lot of money preparing for the launch of these new medicines," Chief Financial Officer Raymund Breu said in an interview.
Good Investments
Last year, deft investing of the company's 12.7 billion Swiss franc (8.07 billion euro) cash pile gave a big boost to profit growth. "But I don't want to stick my neck out and forecast the financial markets these days," Mr. Breu said.
However, the news was more upbeat on another crucial front -- progress of new drugs through grueling reviews by regulatory authorities. Novartis said Zelmac, a promising treatment for irritable bowel syndrome, has been designated for so-called priority review by the U.S. Food and Drug Administration. Priority review status means the FDA is likely to decide within six months whether to approve the pending application for Zelmac. If the answer is positive, Zelmac would join new Novartis therapies against Alzheimer's disease and age-related macular degeneration, which also are poised for launch later this year.
The influx of new products is expected to lift the drug division's sales growth above the projected 8% world-wide market growth for prescription medicines. But Novartis still will lag behind major U.S. rivals -- and speaking to shareholders at the company's annual meeting Wednesday, Chairman Daniel Vasella once again held open prospects of a major takeover or merger to close that growth gap. "It is clear that neither we nor other comparable pharmaceutical companies can catch up with (competitors such as Pfizer Inc. or the proposed Glaxo SmithKline PLC) by means of internal growth," Dr. Vasella said.
Investors gave a positive reception to the upbeat first quarter -- plus prospects of future deal-making. Novartis shares jumped 1.4%, or 34 francs, to 2,404 francs in Zurich trading Wednesday.
Novartis said group sales jumped 17% to 9.34 billion francs during the first quarter, from 7.97 billion francs a year earlier. But 10 percentage points of the increase resulted from a decline in the value of the Swiss franc against major currencies -- particularly the dollar and the yen.
Fast-Growing Products
Sales at the drug division jumped 18% to 4.04 billion francs -- but underlying growth, excluding currency fluctuations, was a more modest 7%. The gains were fueled by fast-growing products such as Diovan, a heart medicine, and drugs against asthma and osteoporosis. At the same time, sales declined for Neoral and Voltaren, a pair of aging blockbusters facing generic competition.
Launches expected over the next three years will double the proportion of sales of new drugs to 30% of total drug division revenue, from 15% of division revenue last year. Many analysts consider Zelmac, the treatment for irritable bowel syndrome, as the most promising of those new medicines and the key to the drug division's recovery.
But there also have been jitters about pending regulatory reviews, because Zelmac failed to show any benefit among patients in one of three key clinical trials of the new drug. The FDA's decision to grant Zelmac a priority review doesn't completely allay cautious views about the clinical data, according to Mr. Beadle, the London analyst. He cautioned that the FDA still may delay its final verdict on Zelmac until results of another trial under way become available late this year. "But if the priority review is positive, Zelmac should be on the market before year end," he said, adding that "the odds of success are 70-30 in favor."
Perhaps the biggest surprise of Novartis's first quarter was the agribusiness division, where sales climbed 19% to 2.61 billion francs, from 2.19 billion francs the previous year. Company officials traced the sales improvement to an early spring in the U.S. and strong demand in markets as distant as Brazil, Germany and Japan.
It is a timely turnaround for agribusiness, amid the division's proposed spinoff and merger with the agrochemical division of AstraZeneca PLC to form a new agrochemical giant, Syngenta AG. Both Novartis and AstraZeneca had warned that global markets for agrochemicals and seeds would remain difficult this year, causing some analysts to question the timing of the transaction.
But Peter Laing, a London-based analyst with Societe Generale, said signs of a market recovery -- plus the valuation of BASF AG's recent $3.8 billion (3.96 billion euro) purchase of the agrochemical operations of American Home Products Corp. -- suggest that Syngenta's stock market value likely will approach $20 billion, rather than earlier projections of roughly $15 billion.
Write to Stephen D. Moore at stephen.moore@wsj.com
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The agri-business is what cause the stock to slump in the first place.
Jack |
