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, Switzerland-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."

The settlement relates to a June court filing by the Justice Department based on earlier whistleblower allegations from a former sales manager, who accused the company of using illegal kickbacks to boost sales of two drugs and sought up to $3.35 billion in damages and fines. The case centered on separate issues from those currently plaguing Valeant Pharmaceuticals International Inc. over its relationship with mail-order specialty pharmacy Philidor Rx Services LLC.

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's 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's 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. He said Novartis would update its outlook for Alcon in its full-year results in January.

Third-quarter sales at Novartis's dominant pharmaceuticals division increased 7% at constant currencies to $7.6 billion, missing analyst expectations of $7.8 billion. The company said growth was mostly driven by seven products, including a combination treatment for metastatic melanoma that it acquired as part of its $20 billion asset-swap deal with GlaxoSmithKline PLC. Core operating income was $2.4 billion, up 18% in constant currencies.

Mr. Jimenez said this "tremendous margin improvement" was down to the company's efforts to eliminate duplication between its three business units on back-office functions such as IT, accounting and procurement.

The Novartis boss also said he expected uptake of new potential blockbuster Entresto, for chronic heart failure, to speed up next year after federal health-care plans make decisions on reimbursement. The drug, introduced in July, has had a slow start since two-thirds of heart failure patients are covered by Medicaid, which can delay reimbursement decisions for six months post-launch, said Mr. Jimenez.

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 Inc.'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 percentage net-sales growth in the mid-single digits and core-operating-income growth in the high single digits, based on continuing operations at constant currencies, confirming earlier guidance.

Novartis shares were down 1.6% in afternoon trading Tuesday.

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 11:00 ET (15:00 GMT)

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