Novartis reported on January 27, 2016, that net sales from continuing operations reached $49.4 billion for the year ended December 31, 2015, with its Pharmaceuticals division providing most of the total. Operating income from continuing operations was $9.0 billion, down 19% from 2014. Novartis attributed its year-on-year decline mainly to amortization of acquired oncology assets. Total group net income reached $17.8 billion, up 73% from 2014, including substantial gains from business disposals.
The results reflected a portfolio organized around three operating divisions: Pharmaceuticals, Alcon and Sandoz. They also separated the performance of retained businesses from discontinued operations, because disposal gains accounted for much of the difference between continuing-operation earnings and total group profit.
Prescription medicines accounted for most 2015 sales
Pharmaceuticals generated $30.445 billion in net sales to third parties, followed by Alcon at $9.812 billion and Sandoz at $9.157 billion. Together, the three divisions accounted for the $49.414 billion continuing-operations total.
| Division | Net sales, US$ millions | Share of total, rounded |
|---|---|---|
| Pharmaceuticals | 30,445 | 61.6% |
| Alcon | 9,812 | 19.9% |
| Sandoz | 9,157 | 18.5% |
| Total | 49,414 | 100.0% |
These figures describe the company’s 2015 structure. Pharmaceuticals covered innovative, patent-protected prescription medicines, Alcon was the eye-care division, and Sandoz supplied generic pharmaceuticals and biosimilars.
Novartis reported that continuing-operations net sales fell 5% in US dollars from 2014 but rose 5% at constant exchange rates. The currency-adjusted measure excluded the effect of exchange-rate movements; it was distinct from the reported dollar result.
How the pharmaceutical business generated revenue
The Pharmaceuticals division researched, developed, manufactured, distributed and sold patented prescription medicines. Its commercial model combined pharmaceutical research and development with production and distribution, while sales and marketing activities supported the use of its medicines by healthcare providers.
Customers included medication wholesalers and retailers, hospitals, government agencies and health maintenance organizations. Patients were the eventual users of the medicines, while those organizations formed the commercial channels through which the products reached the market.
The pharmaceutical model also involved direct and indirect communication with prescribers. Commercial activities focused on prescriptions for new medicines, use of existing medicines by additional patients, and additional indications for established products.
Novartis said Pharmaceuticals generated $30.4 billion in full-year sales, down 4% in dollars but up 6% at constant currencies. The company attributed volume growth partly to oncology assets acquired from GSK, while generic competition reduced sales growth.
Alcon’s eye-care portfolio
Novartis described Alcon’s 2015 business as comprising three franchises:
- Surgical: Ophthalmic surgical equipment, instruments, disposable products and intraocular lenses.
- Ophthalmic Pharmaceuticals: Medicines for chronic and acute eye conditions, including over-the-counter eye medicines.
- Vision Care: Contact lenses and lens-care products.
The company reported that Alcon’s net sales fell 9% in US dollars and 1% at constant currencies in 2015.
Sandoz combined generics, ingredients and biotechnology services
Sandoz sold products in more than 160 countries. Its business extended beyond finished generic medicines to pharmaceutical ingredients and biotechnology manufacturing services. Its three franchises were Retail Generics, Anti-Infectives, and Biopharmaceuticals & Oncology Injectables.
Retail Generics developed, manufactured and marketed active ingredients and finished dosage forms for third parties. Its portfolio covered areas including dermatology, respiratory medicine, ophthalmics, cardiovascular treatment, metabolism, the central nervous system, pain, gastrointestinal conditions and hormonal therapies. Finished anti-infective medicines sold to third parties were also included in this franchise.
Anti-Infectives manufactured active pharmaceutical ingredients and intermediates, mainly antibiotics. Production served both Sandoz’s Retail Generics operations and outside customers.
Biopharmaceuticals developed and marketed biotechnology-based products, including biosimilars, and provided biotechnology manufacturing services to other companies. The Oncology Injectables business developed, manufactured and marketed cytotoxic medicines for hospitals.
The generic-medicine model involved supplying alternatives to branded products with comparable dosage forms, strengths, routes of administration, quality, performance and intended use. Sandoz used sales channels similar to those for patented medicines, including wholesalers, retailers, hospitals and government purchasers. Licensing arrangements also formed part of the model in selected markets.
For 2015, Novartis reported Sandoz sales of $9.2 billion, down 4% in dollars but up 7% at constant currencies. The company said volume growth of 15 percentage points more than offset price erosion of eight percentage points.
Operating profit differed from disposal-driven group earnings
The restructuring included the divestment of Animal Health to Lilly and transactions with GSK involving vaccines and the contribution of the over-the-counter business to a consumer healthcare joint venture. Novartis said all portfolio-transformation transactions had closed by the end of July 2015.
Discontinued operations generated $601 million in sales during 2015, reflecting the periods before the relevant transactions closed. These sales were reported separately from the $49.414 billion continuing-operations total. The disposal gains were recorded in discontinued-operations earnings, alongside the operating results of the businesses before their sale.
Novartis recorded $17.404 billion in cost of goods sold and $32.983 billion in gross profit from continuing operations. Its income statement also included $947 million in other revenues, separate from net sales, and $26 million in sales to discontinued operations.
Expenses below gross profit included $11.772 billion for marketing and sales, $8.935 billion for research and development, and $2.475 billion for general and administration. After other operating income and expenses, continuing operations produced $8.977 billion in operating income, equivalent to an 18.2% return on net sales.
Net income from continuing operations was $7.028 billion after associated-company income, financing items and taxes. Discontinued operations contributed another $10.766 billion, bringing total group net income to $17.794 billion. Novartis attributed the discontinued-operations earnings mainly to exceptional gains from transactions with GSK and Lilly.
The company also reported $13.790 billion in core operating income from continuing operations, with a core operating margin of 27.9%. Core net income from continuing operations was $12.041 billion. These core results were non-IFRS measures that excluded specified acquisition, disposal and other exceptional items. The core operating-income figure was separate from the $8.977 billion reported under IFRS.
