Q2 net sales were flat (0% cc[1]) as Growth Products[2] offset Gleevec generic impact
•Gilenya (USD 811 million, +17% cc) continued to grow double-digit mainly due to volume growth
•Cosentyx (USD 260 million) grew strongly driven by its three approved indications


•Core[1] operating income declined (-4% cc) due to generic erosion and growth investments
•Core M&S expenses up 0.8 percentage points (cc) to 24.6% of sales, mainly driven by Cosentyx, Entresto and Alcon investments
•Core operating income margin declined 1.1 percentage points (cc) behind investments
•Core EPS was USD 1.23 (-1% cc)
•Free cash flow[1] was USD 2.5 billion (+22% USD)


•Significant positive innovation news in Q2
•Entresto given strong Class I recommendation in US and EU heart failure treatment guidelines
•JAMA Cardiology analysis found Entresto could prevent or postpone 28,000 US deaths per year
•Cosentyx data showed durability of response in AS[2] and PsA[2] patients after two years; head-to-head trials vs. Humira® planned
•Phase III trial of CDK4/6 inhibitor LEE011 in HR+/HER2- advanced breast cancer stopped early due to positive efficacy results at interim analysis
•Full results from FLAME study reinforce superiority of Ultibro Breezhaler to Seretide® in COPD
•Positive FDA AdCom[2] for biosimilar etanercept; biosimilar rituximab submitted in EU

•Entresto (USD 32 million) continued to grow steadily in Q2
•Based on positive treatment guidelines, decision was taken to increase spending significantly in H2 2016 to build a US primary care field force and add incremental medical support
•Entresto sales expected to be approximately USD 200 million for full year 2016

•Alcon growth plan progressing
•Operations: Improved supply stability and reinforcing customer relationships
•Innovation: CE Mark in Europe for Dailies Total1 Multifocal and PanOptix with UltraSert

•2016 Outlook:
•Net sales expected to be broadly in line with prior year (cc)
•Based on the increased spending for Entresto, and depending on Gleevec erosion curve, core operating income expected to be broadly in line or decline low single digit (cc)

Key figures[1] Continuing operations[3]
Q2 2016 Q2 2015 % change H1 2016 H1 2015 % change
USD m USD m USD cc USD m USD m USD cc
Net sales 12 470 12 694 -2 0 24 070 24 629 -2 1
Operating income 2 093 2 281 -8 -4 4 544 5 066 -10 -4
Net income 1 806 1 856 -3 0 3 817 4 162 -8 -2
EPS (USD) 0.76 0.77 -1 2 1.60 1.72 -7 -1
Free cash flow 2 526 2 064 22 3 888 3 529 10
Core
Operating income 3 332 3 593 -7 -4 6 593 7 244 -9 -4
Net income 2 930 3 074 -5 -2 5 718 6 273 -9 -4
EPS (USD) 1.23 1.27 -3 -1 2.40 2.60 -8 -3

1] Constant currencies (cc), core results and free cash flow are non-IFRS measures. An explanation of non-IFRS measures can be found on page 48 of the Condensed Interim Financial Report. Unless otherwise noted, all growth rates in this Release refer to same period in prior year.
[2] Growth Products are defined on page 2. AS = ankylosing spondylists; PsA = psoriatic arthritis; AdCom = advisory committee.
[3] Refers to continuing operations, defined on page 40 of the Condensed Interim Financial Report.

Basel, July 19, 2016 - Commenting on the results, Joseph Jimenez, CEO of Novartis, said:
"Performance in Q2 was solid despite a full quarter of Gleevec loss of exclusivity impact in the US. We have strong innovation momentum from earlier-than-anticipated Class I Entresto guidelines, positive Cosentyx data showing durability of response in AS and PsA, the early stop of the LEE011 trial, and positive FLAME results for Ultibro. We will increase investments behind these growth opportunities, particularly Entresto, in the second half of 2016 for long-term growth."

GROUP REVIEW

Novartis laid out five priorities for 2016: deliver strong financial results; strengthen innovation; improve Alcon performance; capture cross-divisional synergies; and build a higher-performing organization. We made progress in each of these areas in the second quarter.

Financial results

On January 27, 2016, Novartis announced plans to further focus its divisions, integrating businesses that share therapeutic areas to better leverage our development and marketing capabilities. These plans included a new divisional structure. In compliance with International Financial Reporting Standards (IFRS), Novartis updated its segment financials to reflect the new structure, both for the current and prior year, to aid comparability of year-on-year results. As a result, all comparisons of divisional results from 2016 to 2015 reflect the new structure.

In addition, as a result of the portfolio transformation transactions completed in 2015, Novartis reported the Group's financial results in 2015 as "continuing operations" and "discontinued operations." All comparisons from 2016 to 2015 are versus continuing operations, unless otherwise noted. See page 40 of the Condensed Interim Financial Report for a full explanation.

Second quarter

Continuing operations

Net sales were USD 12.5 billion (-2%, 0% cc) in the second quarter, as volume growth of 5 percentage points offset the negative impact of generic competition (-4 percentage points) and pricing (-1 percentage points). Growth Products[1] contributed USD 4.4 billion or 35% of net sales, up 19% (USD) over the prior-year quarter.

Operating income was USD 2.1 billion (-8%, -4% cc). Core adjustments amounted to USD 1.2 billion (2015: USD 1.3 billion), broadly in line with the prior-year quarter.

Core operating income was USD 3.3 billion (-7%, -4% cc). Core operating income margin in constant currencies decreased 1.1 percentage points, mainly due to loss of exclusivity on Gleevec, investments behind new launches and the Alcon growth plan. Currency had a negative impact of 0.5 percentage points, resulting in a net decrease of 1.6 percentage points in US dollar terms to 26.7% of net sales.

Net income was USD 1.8 billion (-3%, 0% cc), down less than operating income mainly due to higher income from associated companies.

EPS was USD 0.76 (-1%, +2% cc), benefitting from a reduction in the number of shares outstanding.

Core net income was USD 2.9 billion (-5%, -2% cc), down less than core operating income mainly due to higher income from associated companies.

Core EPS was USD 1.23 (-3%, -1% cc), benefitting from a reduction in the number of shares outstanding.

Free cash flow was USD 2.5 billion (+22% USD), an increase of USD 0.5 billion compared to the prior-year quarter. The increase was driven by lower investments in property, plant, equipment and intangible assets and higher cash flows from operating activities from continuing operations, which includes lower operating income and dividends received from GSK Consumer Healthcare Holdings Ltd.

[1] "Growth Products" are an indicator of the rejuvenation of the portfolio, and comprise products launched in a key market (EU, US, Japan) in 2011 or later, or products with exclusivity in key markets until at least 2020 (except Sandoz, which includes only products launched in the last 24 months). They include the acquisition effect of the GSK oncology assets.

Innovative Medicines (formerly named the Pharmaceuticals Division) net sales were USD 8.4 billion (-3%, -1% cc) in the second quarter, with volume growth of 6 percentage points. Generic competition had a negative impact of 6 percentage points and pricing had a negative impact of 1 percentage point, both largely due to Gleevec/Glivec genericization in the US, which impacted a full quarter for the first time. Growth Products grew 23% (cc) to USD 3.8 billion, or 45% of division net sales.

Operating income was USD 1.9 billion (-6%, -3% cc). Core operating income was USD 2.7 billion (-7%, -4% cc), reflecting generic erosion and launch investments. Core operating income margin in constant currencies decreased by 1.0 percentage points; currency had a negative impact of 0.5 percentage points, resulting in a net decrease of 1.5 percentage points to 31.8% of net sales.

Sandoz net sales were USD 2.6 billion (+2%, +3% cc) in the second quarter, as volume growth of 8 percentage points more than offset 5 percentage points of price erosion. Global sales of Biopharmaceuticals, which include biosimilars, biopharmaceutical contract manufacturing and Glatopa, grew 11% (cc) to USD 249 million, despite lapping the Glatopa launch in the prior-year quarter. Anti-Infectives franchise sales were USD 324 million (-3% cc), reflecting the discontinuation of low-margin products.

Operating income was USD 380 million (+35%, +43% cc), driven by lower restructuring charges for site exits compared to the prior-year quarter. Core operating income was USD 535 million (0%, +4% cc). Core operating income margin in constant currencies increased 0.2 percentage points; currency had a negative impact of 0.6 percentage points, resulting in a net decrease of 0.4 percentage points to 20.8% of net sales.

Alcon net sales were USD 1.5 billion (-2%, -1% cc) in the second quarter. Surgical sales (-1% cc) were down slightly, as strong performance of cataract consumables was more than offset by weaker sales of intraocular lenses (IOLs). Vision Care sales were flat (0% cc), with growth in contact lenses offsetting a decline in contact lens care.

Operating income was USD 7 million (-87%, -77% cc). Core operating income was USD 238 million (-17%, -15% cc), primarily impacted by higher investment spending in M&S and R&D behind the growth plan. Core operating income margin in constant currencies decreased by 2.6 percentage points; currency had a negative impact of 0.3 percentage points, resulting in a net decrease of 2.9 percentage points to 15.8% of net sales.

Total Group

For the total Group, net income amounted to USD 1.8 billion, broadly in line with the prior-year quarter, and basic earnings per share was USD 0.76.

Total Group free cash flow amounted to USD 2.5 billion, compared to USD 2.0 billion in the prior-year quarter.

First half

Continuing operations

Net sales were USD 24.1 billion (-2%, +1% cc) in the first half. Growth Products contributed USD 8.2 billion or 34% of net sales, up 21% (USD) over the prior-year period.

Operating income was USD 4.5 billion (-10%, -4% cc). Core adjustments amounted to USD 2.0 billion (2015: USD 2.2 billion), slightly below prior year mainly due to higher divestment gains in the first half of 2016.

Core operating income was USD 6.6 billion (-9%, -4% cc). Core operating income margin in constant currencies decreased 1.5 percentage points, mainly due to loss of exclusivity on Gleevec, investments behind new launches and the Alcon growth plan. Currency had a negative impact of 0.5 percentage points, resulting in a net decrease of 2.0 percentage points to 27.4% of net sales.

Net income was USD 3.8 billion (-8%, -2% cc), down less than operating income mainly due to higher income from associated companies.

EPS was USD 1.60 (-7%, -1% cc), broadly in line with net income.

Core net income was USD 5.7 billion (-9%, -4% cc), in line with core operating income.

Core EPS was USD 2.40 (-8%, -3% cc), broadly in line with core net income.

Free cash flow was USD 3.9 billion (+10% USD), an increase of USD 0.4 billion compared to the prior-year period. The increase was driven by lower net investments in property, plant, equipment and intangible assets, partially offset by lower cash flows from operating activities from continuing operations.

Innovative Medicines net sales were USD 16.1 billion (-3%, 0% cc) in the first half, as volume growth (+7 percentage points) was fully offset by the impact of generic competition (-6 percentage points) and pricing (-1 percentage point).

Operating income was USD 4.0 billion (-9%, -4% cc). Core operating income was USD 5.3 billion (-8%, -3% cc). Core operating income margin in constant currencies decreased by 1.2 percentage points; currency had a negative impact of 0.6 percentage points, resulting in a net decrease of 1.8 percentage points to 32.7% of net sales.

Sandoz net sales were USD 5.0 billion (+1%, +4% cc) in the first half, as volume growth of 10 percentage points more than offset 6 percentage points of price erosion. Global sales of Biopharmaceuticals grew 27% (cc) to USD 462 million, benefitting from the performance of prior-year launches in the US (Glatopa in June 2015 and Zarxio in September 2015). Anti-Infectives franchise sales were USD 684 million (-3% cc), reflecting discontinued low-margin products and the weak flu season in the first quarter.

Operating income was USD 726 million (+17%, +25% cc), driven by higher restructuring charges for site exits in the prior-year period. Core operating income was USD 1.0 billion (0%, +5% cc). Core operating income margin in constant currencies increased by 0.4 percentage points; currency had a negative impact of 0.6 percentage points, resulting in a net decrease of 0.2 percentage points to 20.3% of net sales.

Alcon net sales were USD 2.9 billion (-4%, -2% cc) in the first half. Surgical sales (-2% cc) declined, driven by a slowdown in cataract equipment placements and weaker sales of IOLs, partially offset by continued growth in cataract consumables. Vision Care performance (-2% cc) was impacted by weaker contact lens sales in the US and a decline in contact lens care.

Operating income was USD 38 million (-81%, -59% cc). Core operating income was USD 481 million (-28%, -21% cc), primarily impacted by higher spending in M&S and R&D behind the growth plan. Core operating income margin in constant currencies decreased by 4.3 percentage points; currency had a negative impact of 1.1 percentage points, resulting in a net decrease of 5.4 percentage points to 16.4% of net sales.

Total Group

For the total Group, net income amounted to USD 3.8 billion compared to USD 14.8 billion in the prior-year period, and basic earnings per share decreased to USD 1.60 from USD 6.15. The decrease was due to the net income from discontinued operations, which in the prior-year period included USD 12.8 billion exceptional pre-tax divestment gains from the portfolio transformation transactions and USD 0.5 billion additional pre-tax transaction related expenses.

Free cash flow was USD 3.9 billion compared to USD 3.2 billion in the first half of 2015.

Key growth drivers

Underpinning our financial results in the second quarter is a continued focus on key growth drivers, including Gilenya, Tasigna, Cosentyx, Tafinlar + Mekinist, Jakavi, Promacta/Revolade and Entresto, as well as Biopharmaceuticals and Emerging Growth Markets.

Growth Products
•Growth Products, an indicator of the ongoing rejuvenation of our portfolio, contributed 35% of Group net sales in the second quarter, and were up 19% (USD). In Innovative Medicines, Growth Products contributed 45% of division net sales in the quarter, and sales for these products were up 23% (cc).
•Gilenya (USD 811 million, +17% cc) continued to grow double-digit, mainly due to volume growth.
•Tasigna (USD 458 million, +15% cc) continued to show strong growth, including in the US, where a generic version of Gleevec launched on February 1, 2016.
•Cosentyx (USD 260 million) continued its strong launch trajectory across all regions, driven by its three approved indications.
•Tafinlar + Mekinist (USD 172 million, +31% cc) grew strongly as the first approved combination therapy for patients with BRAF V600 mutation-positive unresectable or metastatic melanoma.
•Promacta/Revolade (USD 158 million, +36% cc) was mainly driven by continued uptake in the chronic immune (idiopathic) thrombocytopenic purpura indication worldwide.
•Jakavi (USD 146 million, +49% cc), growth was driven by patient gains in the myelofibrosis indication across regions and the launch of the polycythemia vera indication in key markets.
•Entresto (USD 32 million) continued to grow steadily. The decision was taken to build a US primary care field force following the earlier-than-expected publication of strong heart failure treatment guidelines, and increase medical investments to ensure disease awareness and up-to-date medical education. Ongoing launch experience in Europe continues to show a more rapid uptake than in the US. Entresto sales are expected to be approximately USD 200 million for full year 2016.
•Biopharmaceuticals (USD 249 million, +11% cc) showed solid growth, despite lapping the launch of Glatopa in the prior-year quarter.

Emerging Growth Markets
•Net sales in Emerging Growth Markets - which comprise all markets except the US, Canada, Western Europe, Japan, Australia and New Zealand - grew 2% (cc) in the second quarter, led by Russia (+20% cc) and Brazil (+11% cc). China grew 2% (cc), while some countries including India (-16% cc) and Venezuela (-14% cc) declined.

Strengthen innovation

The second quarter saw pipeline progress with positive regulatory decisions and significant clinical trial data released. Key developments are included below.

New approvals and regulatory opinions
•The EC approved Afinitor (everolimus) for the treatment of unresectable or metastatic, well-differentiated nonfunctional neuroendocrine tumors of gastrointestinal or lung origin in adults with progressive disease.
•The FDA approved an expanded age range for Xolair (omalizumab) to include children six to 11 years of age with moderate to severe persistent asthma.
•Alcon achieved CE Mark in Europe for AcrySof IQ PanOptix IOL with UltraSert and Dailies Total1 Multifocal.

Regulatory submissions and filings
•In July, the FDA's Arthritis Advisory Committee voted unanimously to support approval of Sandoz proposed biosimilar etanercept for all five indications of the reference product (Enbrel®).
•The FDA granted three separate Breakthrough Therapy designations, as well as Priority Reviews, for Ilaris (canakinumab) to treat three rare types of Periodic Fever Syndromes.
•Sandoz biosimilar rituximab candidate (for Roche's EU-licensed MabThera®) was accepted by the EMA for regulatory review.

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