On February 2, 2022 Novartis reported that delivered another year of solid operational performance with mid-single digit top-line growth, margin expansion, and strong free cash flow (Press release, Novartis, FEB 2, 2022, View Source [SID1234607630]). Our in-market growth drivers continue to perform well across geographies, supporting our confidence in our mid and long-term growth outlook. Despite some pipeline setbacks, we delivered important innovation milestones including for: Entresto, 177Lu-PSMA-617, iptacopan, Kisqali, and Leqvio. Looking ahead, we are focused on delivering on our pipeline and key technology platforms, which includes 20+ potential assets with significant sales, to be approved by 2026. We remain balanced in our capital allocation priorities as we continue to invest in innovation alongside returning capital to our shareholders".
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Strategy Update
Novartis is a focused medicines company. During 2021 we continued to build depth in five core therapeutic areas (Cardio-Renal, Immunology, Neuroscience, Oncology and Hematology), strength in technology platforms (Targeted Protein Degradation, Cell Therapy, Gene Therapy, Radioligand Therapy, and xRNA), and have a balanced geographic footprint. Our confidence to grow sales in the near-term is driven by multi-billion-dollar sales from: Cosentyx, Entresto, Kesimpta, Zolgensma, Kisqali and Leqvio. To fuel further growth through 2030 and beyond, we have 20+ new assets with at least USD 1 billion sales potential, that could be approved by 2026. Novartis is also pioneering the shift to advanced technology platforms.
Novartis sold its investment in Roche Holding AG (Roche), in a single bilateral transaction for USD 20.7 billion, consistent with our strategy as a focused medicines company.
The strategic review of Sandoz is progressing, we expect to provide an update, at the latest, by the end of 2022. The review will explore all options, ranging from retaining the business to separation, in order to determine how to best maximize value for our shareholders.
We remain disciplined and shareholder focused in our capital allocation as we balance investing in our business, through organic investments and value-creating bolt-ons, with returning capital to shareholders via our growing annual dividend and share buybacks.
Novartis continued to make significant strides in building trust with society. We committed to carbon neutral emissions: Scope 1 and 2 by 2025, Scope 1, 2 and 3 by 2030, and net zero emissions across our value chain by 2040. Novartis ESG efforts have been recognized by upgrades from several third party ESG rating agencies. Our culture journey towards an inspired, curious and unbossed organization continues, in order to drive performance and competitiveness in the long-term.
Financials
Fourth quarter
Net sales were USD 13.2 billion (+4%, +6% cc) in the fourth quarter driven by volume growth of 11 percentage points, including 1 percentage point relating to a reclassification of contract manufacturing from other revenues to sales. Volume growth was partly offset by price erosion of 3 percentage points and the negative impact from generic competition of 2 percentage points.
Operating income was USD 2.6 billion (-3%, -1% cc) as higher sales were more than offset by higher M&S and R&D investments and lower gains from divestments, financial assets, and contingent considerations.
Net income was USD 16.3 billion, benefiting from the Roche divestment gain of USD 14.6 billion. EPS was USD 7.29.
Core operating income was USD 3.8 billion (+9%, +12% cc) driven by higher sales, partly offset by higher investments in M&S and R&D. Core operating income margin was 28.9% of net sales, increasing by 1.5 percentage points (+1.6 percentage points cc).
Core net income was USD 3.1 billion (+3%, +6% cc), mainly driven by growth in core operating income, partly offset by lower income from associated companies due to the divestment of our investment in Roche and a higher tax rate. Core EPS was USD 1.40 (+4%, +7% cc), growing ahead of core net income.
Free cash flow amounted to USD 3.0 billion (-9% USD), compared to USD 3.3 billion in the prior year quarter. Higher operating income adjusted for non-cash items was more than offset by higher income taxes paid and lower divestment proceeds.
Innovative Medicines net sales were USD 10.7 billion (+5%, +7% cc) with volume contributing 11 percentage points to growth, including 1 percentage point relating to contract manufacturing revenue reclassification. Generic competition had a negative impact of 3 percentage points, mainly due to Afinitor, Gleevec/Glivec and Travatan. Pricing had a negative impact of 1 percentage point. Pharmaceuticals BU sales grew +9% (cc), driven by strong growth from Entresto, Cosentyx, Kesimpta and Zolgensma. The USD 108 million reclassification of contract manufacturing revenue recognized in Established Medicines contributed 2 percentage points to Pharmaceuticals BU sales growth. Oncology BU sales grew 3% (cc) with strong performance from Kisqali, Tafinlar + Mekinist, Promacta/Revolade and Jakavi.
2
Sandoz net sales were USD 2.5 billion (0%, +2% cc) with volume contributing 11 percentage points to growth, including 1 percentage point relating to contract manufacturing revenue reclassification. Pricing had a negative impact of 9 percentage points. Sales in Europe grew +4% (cc), while sales in the US declined -8% (cc). Global sales of Biopharmaceuticals grew to USD 555 million (+8%, +11% cc) across all regions.
Full year
Net sales were USD 51.6 billion (+6%, +4% cc) in the full year. Volume contributed 8 percentage points to sales growth, partly offset by price erosion of 2 percentage points and the negative impact from generic competition of 2 percentage points.
Operating income was USD 11.7 billion (+15%, +13% cc), mainly driven by higher sales and lower legal expenses, partly offset by increased M&S and R&D investments and higher amortization.
Net income was USD 24.0 billion, benefiting from the USD 14.6 billion gain from the divestment of our investment in Roche. EPS was USD 10.71.
Core operating income was USD 16.6 billion (+8%, +6% cc) benefiting from higher sales, partly offset by increased M&S and R&D investments. Core operating income margin was 32.1% of net sales, increasing by 0.4 percentage points (+0.5 percentage points cc).
Core net income was USD 14.1 billion (+7%, +5% cc). Core EPS was USD 6.29 (+9%, +7% cc), growing faster than core net income and benefiting from lower weighted average number of shares outstanding.
Free cash flow increased to USD 13.3 billion (+14% USD). This was mainly driven by higher operating income adjusted for non-cash items and lower payments for legal provisions, partly offset by the USD 650 million upfront payment to in-license tislelizumab from an affiliate of BeiGene, Ltd.
Innovative Medicines net sales were USD 42.0 billion (+8%, +6% cc), with volume contributing 9 percentage points to growth. Generic competition had a negative impact of 3 percentage points, mainly due to Ciprodex, Afinitor, Diovan and Gleevec/Glivec. Pricing had a negligible impact on sales growth. Pharmaceuticals BU grew +7% (cc) driven by Entresto, Cosentyx, Zolgensma and Kesimpta. Oncology BU grew 4% (cc) driven by Promacta/Revolade, Kisqali, Jakavi and Tafinlar + Mekinist.
Sandoz net sales were USD 9.6 billion (0%, -2% cc), with volume contributing 7 percentage points to growth, including 1 percentage point relating to contract manufacturing revenue reclassification. Volume growth was more than offset by a negative price impact of 9 percentage points. Sales in Europe declined -2% (cc), sales in the US declined -15% (cc). Global sales of Biopharmaceuticals grew to USD 2.1 billion (+10%, +7% cc), driven by continued growth ex-US and Ziextenzo (pegfilgrastim) US.
Q4 key growth drivers
Underpinning our financial results in the quarter is a continued focus on key growth drivers (ranked in
order of contribution to Q4 growth) including:
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 2021, Novartis repurchased a total of 30.7 million shares for USD 2.8 billion on the SIX Swiss Exchange second trading line, including 19.6 million shares (USD 1.8 billion) under the up to USD 2.5 billion share buyback announced in November 2020, 8.6 million shares (USD 0.8 billion) to mitigate dilution related to participation plans of associates and 2.5 million shares (USD 0.2 billion) under the up to USD 15 billion share buyback announced in December 2021. In addition, 1.5 million shares (USD 0.1 billion) were repurchased from associates. In the same period, 10.3 million shares (for an equity value of USD 0.8 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 21.9 million versus December 31, 2020. These treasury share transactions resulted in a decrease in equity of USD 2.1 billion and a net cash outflow of USD 3.0 billion.
As of December 31, 2021, the net debt decreased to USD 0.9 billion compared to USD 24.5 billion at December 31, 2020. The USD 23.6 billion decrease was mainly driven by the proceeds received from the Roche divestment of USD 20.7 billion and free cash flow during 2021 of USD 13.3 billion, partially offset by the USD 7.4 billion annual dividend payment and the net cash outflow for treasury share transactions of USD 3.0 billion.
The Group has not experienced liquidity or cash flow disruptions during 2021 due to the COVID-19 pandemic. We are confident that Novartis is well positioned to meet its ongoing financial obligations and has sufficient liquidity to support its normal business activities.
As of Q4 2021, the long-term credit rating for the company is A1 with Moody’s Investors Service and AA- with S&P Global Ratings.
Our guidance assumes that we see a continuing return to normal global healthcare systems, including prescription dynamics, and that no Sandostatin LAR generics enter in the US.
Foreign exchange impact
If late-January exchange rates prevail for the remainder of 2022, the foreign exchange impact for the year would be negative 3 percentage points on net sales and negative 4 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 3.10 per share for 2021, up 3.3% from CHF 3.00 per share in the prior year, representing the 25th consecutive dividend increase since the creation of Novartis in December 1996. Shareholders will vote on this proposal at the Annual General Meeting on March 4, 2022.
Reduction of Share Capital
The Novartis Board of Directors proposes to cancel 30,699,668 shares (repurchased under the authorizations of February 28, 2019 and March 2, 2021) and to reduce the share capital accordingly by CHF 15.3 million, from CHF 1,217,210,460 to CHF 1,201,860,626.
Further Share Repurchases
On December 16, 2021 Novartis announced a share buyback of up to USD 15 billion to be executed by the end of 2023. To cover the amount exceeding CHF 8.8 billion still available under the existing shareholder authority granted in 2021, the Novartis Board of Directors proposes that shareholders authorize the Board of Directors to repurchase shares up to an additional CHF 10 billion between the Annual General Meeting 2022 and the Annual General Meeting 2025.
Nominations for election to the Board of Directors
On October 26, 2021 the Novartis Board of Directors announced the nomination of Ana de Pro Gonzalo for election to the Board.
The Novartis Board of Directors announced today that it is also nominating Daniel Hochstrasser, Partner and Chairman of the Board of Directors of Bär & Karrer, for election to the Board. Daniel Hochstrasser co-leads Bär & Karrer’s arbitration practice and brings more than 30 years of experience as legal counsel. His primary focus has been on representing parties in complex disputes arising from M&A transactions, industrial and infrastructure projects, banking and finance, as well as license, distribution and development agreements, particularly in the pharmaceutical field. His extensive track record in M&A and commercial litigation, and international arbitration coupled with his knowledge of the pharmaceutical industry will be a valuable addition to the Novartis Board’s expertise.
Due to the business relationship between Novartis and Bär & Karrer, Daniel Hochstrasser will fulfill the independence criteria outlined in the Regulations of the Board of Novartis upon his already announced resignation from Bär & Karrer as of the end of 2022. Until then, Daniel Hochstrasser will not belong to any Board committee of Novartis. If elected to the Board of Directors of Novartis, Daniel Hochstrasser will not be involved in any Novartis mandates, as was the case in the recent past.
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 Board Chair), Nancy C. Andrews, Ton Buechner, Patrice Bula, Elizabeth Doherty, Bridgette Heller, Frans van Houten, Simon Moroney, Andreas von Planta, Charles L. Sawyers, and William T. Winters as members of the Board of Directors.
For Andreas von Planta, who has already announced that he will not stand for re-election in 2023, the Board proposes that to ensure continuity he is granted an exception to serve for one additional year, pursuant to article 20, paragraph 3 of the Articles of Incorporation, given the 12-years term limit introduced last year. After the shareholder meeting 2022 he will hand over the chair of the Governance, Nomination and Corporate Responsibilities Committee to Patrice Bula.
Ann Fudge and Enrico Vanni have decided to retire from the Board of Directors. The Board of Directors and the Executive Committee of Novartis thank both for many years of distinguished services on the Board and their outstanding contributions to the company.
The Board is planning to split the combined Vice-Chair and Lead Independent Role held by Enrico Vanni and to appoint Simon Moroney as the new Vice-Chair and Patrice Bula as the new Lead Independent Director after the shareholder meeting 2022.
Re-elections and elections to the Compensation Committee
The Novartis Board of Directors proposes the re-election of Patrice Bula, Bridgette Heller, Simon Moroney, and William T. Winters as members of the Compensation Committee. The Board of Directors intends to designate Simon Moroney again as Chairman of the Compensation Committee.