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Novartis sees first benefits from efficiency drive

Made $1.6bn in savings in 2014

Novartis building 

Novartis made $1.6bn in savings last year thanks in part to the creation of an internal business unit to handle back-office functions across the sprawling group.

Novartis Business Services was set up last year to streamline business support operations like procurement, IT, payroll and accounting and facility management, and free up the company's pharma and eyecare divisions units to concentrate on customer-facing activities.

"The most significant savings of the $1.6bn came from ongoing efforts in procurement to manage spending on goods and services across all our divisions," said the company, which noted that represented 7% of its annual procurement spend of $22bn. Overall, costs were trimmed by $2.9bn in 2014.

The main impact of the creation of NBS has been to keep the costs of these core services flat in 2015 - at around $5bn - but Novartis chief executive Joe Jimenez expects continual improvements in the coming years that will boost margins at the group.

The overall objective is to fund initiatives driving innovation and growth by "taking cost out of NBS," he told investors.

"If NBS can hold our cost base flat by taking cost down in some areas as we reinvest in other areas, that's going to be highly margin accretive to Novartis," he said.

The savings came as the Swiss healthcare giant reported a drop in both revenues and profits in the fourth quarter of 2014. Both the top and bottom lines were impacted by generic competition and restructuring costs associated with the divestment of its animal health and vaccines units and the creation of consumer health joint venture with GlaxoSmithKline (GSK), as well as negative effect of strong Swiss franc.

Revenues dipped 2% to $14.63bn while net profit fell 27% to $1.49bn, with both results failing to meet analyst expectations, although for the full-year the picture was rosier with net profit up 12% to more than $10bn. 2014 sales inched up 1% to $58bn.

Entering growth phase

Jimenez said that 2014 was a transitional year and Novartis is now poised for a renewed growth spurt thanks to encouraging growth from a portfolio of newer products and some imminent products launches with very high sales potential, including psoriasis treatment Cosentyx (secukinumab) and LCZ696 for heart failure, both of which are predicted to become blockbusters.

Novartis' crop of newer products - for example, those launched in the last five years or with patent protection through 2018 at least - now account for around a third of the company's total sales, he said.

In fact, Novartis' pharma unit has "one of the youngest and healthiest" product portfolios in the sector, said David Epstein, who leads the division.

Among the highlights of the year was Novartis' oral multiple sclerosis (MS) Gilenya (fingolimod), which climbed 32% to $666m in the fourth quarter and Tasigna (nilotinib) which brought in $428m, a rise of 30%.

Novartis also made significant in-roads into the chronic obstructive pulmonary disease (COPD) sector last year with its portfolio of new drugs - headed by combination therapy Ultibro - adding almost half a billion dollars to its coffers in 2014, double the previous year's tally.

Meanwhile, another 10 brand new drugs are due to be submitted for approval in 2015 and 2016, including P13K inhibitor buparlisib, RLX030 for acute heart failure and CAR T therapy CTL019 for acute lymphoblastic leukaemia (ALL).

Additional momentum in the business will lead to mid-single digit sales growth in 2015 while core operating income would increase at a high-single digit rate, said Novartis.

Article by
Phil Taylor

28th January 2015

From: Sales



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