NVS Novartis AG

By Denise Roland and John Letzing 

ZURICH--Novartis AG said Tuesday that third-quarter profit fell 42% from the same period last year, as the Swiss drug giant settled claims that it paid rebates to encourage specialty pharmacies to increase prescriptions.

The Basel-based pharmaceuticals giant said agreed to pay $390 million as part of a settlement with the U.S. Justice Department regarding claims that the company induced specialty pharmacies to boost prescriptions for Novartis drugs by paying kickbacks in the form of rebates.

Chief Executive Joe Jimenez said the rebates were designed to incentivize specialty pharmacies to ensure that patients completed a course of medicine. He added that Novartis still used this "quite common" practice at specialty pharmacies in the U.S. "We continue to maintain that specialty pharmacies must continue to play a role in ensuring patient adherence," he said. "How that's going to play out as to whether we change our behavior or not remains to be seen."

Novartis said the settlement hasn't been finalized and that it neither admits nor denies liability. It is "something we want to put behind us and that's why we've reached an agreement and settlement in principle," said Mr. Jimenez.

The settlement hurt Novartis' net income, which fell to $1.81 billion, or $0.75 a share in the quarter ended in September, compared with $3.1 billion, or $1.27 a share a year earlier. The year-earlier figure included a one-time gain of around $800 million from a divestment.

Core net income, which strips out one-time events such as settlements, impairments, or gains, fell 2% to $3.06 billion, Novartis said. Net sales fell 6% to $12.27 billion.

Stripping out the effect of the strong dollar, core net income increased 13% and sales increased 6%.

Analysts had expected core net income of $3.2 billion for the third quarter, and sales of $12.7 billion.

The miss was largely due to a weak performance by Novartis' eye-care division, Alcon, which is facing increased competition for its surgical products and the entry of cheaper generics on a number of its drugs. Net sales at Alcon were $2.3 billion and core operating income was $703 million, down 2% and 12% in constant currencies. Mr. Jimenez said the company was developing a "growth acceleration plan" for Alcon which would involve increasing innovation.

Third-quarter sales at Novartis' dominant pharmaceuticals division increased 7% at constant currencies to $7.6 billion, missing analyst expectations of $7.8 billion. Core operating income was $2.4 billion, up 18% in constant currencies.

Sandoz, the company's generics division, posted sales of $2.3 billion, 9% higher than a year earlier in constant currencies, in line with analysts' expectations. The company attributed this to volume growth offsetting price erosion.

Earlier this year, Sandoz launched a copycat version of Amgen's Neupogen in the U.S., making it the first so-called biosimilar to enter the American market. Mr. Jimenez said the launch had gone "quite well" but warned it would "take some time to build up" since pharmacies didn't automatically substitute Neupogen with Sandoz's product Zarxio.

Novartis said it was on track to deliver net sales growth in the mid-single-digits and core operating income growth in high-single-digits, on a continuing operations and constant currency basis, confirming earlier guidance.

Write to Denise Roland at Denise.Roland@wsj.com and John Letzing at john.letzing@wsj.com

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(END) Dow Jones Newswires

October 27, 2015 04:42 ET (08:42 GMT)

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