NVS Novartis AG

By John Letzing and Denise Roland 

Novartis AG outlined plans to revive its ailing eye-care business as the unit contributed to a 57% decline in fourth-quarter net profit, but earnings were also hit by the strength of the U.S. dollar and a one-time charge related to losses at the Swiss drug giant's Venezuela business.

The company said it would narrow Alcon's focus to surgical equipment and vision-care products, such as contact lenses, by hiving off ophthalmic drugs into the company's giant pharmaceuticals division.

The Swiss firm also appointed former Hospira boss Mike Ball to lead the slimmed-down Alcon division, replacing Jeff George. Chief Executive Joe Jimenez said of Mr. George's departure: "He's had a tough year at Alcon and with all the changes Jeff felt now was a good time to step down." Mr. Ball left Hospira last year, after it was acquired by Pfizer Inc.

Novartis shares were down 3% at 81.15 Swiss francs on Wednesday afternoon.

Alcon has struggled recently amid increased competition in the lens implant market and the entry of cheaper copycats of some ophthalmic drugs. Stripping out the effect of the strong dollar, sales at the unit fell 6% in the fourth quarter, to $2.3 billion, while operating income decreased 36% to $132 million.

Mr. Jimenez said Novartis would invest about $200 million in a plan that should boost Alcon's performance, and that he expects the unit would begin to "return to growth by the end of this year."

Novartis's CEO, who had previously said he was open to selling off underperforming parts of Alcon, said that "for now" the company planned to keep all of the business.

Mr. Jimenez said separating the eye drugs from the surgical equipment and contact lenses would mean the remainder of Alcon could focus on a "surgical innovation model" which is centered on making incremental improvements based on feedback from surgeons, in contrast to the much longer time scale involved in pharmaceutical innovation. He said Novartis would license in new technologies to bolster the innovation pipeline for surgical devices. He added that the slimmed-down Alcon would also improve its customer service, which he admitted had suffered due to cost cuts.

The Alcon overhaul comes at a tough juncture for Novartis, which is bracing for its best-selling cancer drug Gleevec losing U.S. exclusivity in February. It said it expected revenue and profit for 2016 to be "broadly in line" with results in 2015.

The company is leaning heavily on two new launches--Entresto for heart failure and Cosentyx for psoriasis and certain rheumatic ailments--to help offset the expected sharp drop-off in Gleevec sales this year.

Entresto, which analysts expect to generate $5 billion in annual sales at its peak, has got off to a slow start as two-thirds of heart failure patients are covered by Medicare, which can delay reimbursement decisions for six months post-launch. The heart failure drug generated just $5 million in sales in the fourth quarter. David Epstein, head of Novartis' pharmaceuticals unit, said reimbursement for Entresto had improved "substantially" during January, with 70% of Medicare patients now covered. "In many ways, the full launch of the product is only just starting," he said.

Cosentyx by contrast, has progressed "strongly," said Novartis, bringing in $121 million of revenue in the fourth quarter.

For Novartis as a whole, net income fell to $1.05 billion in the quarter ended in December, compared with $2.45 billion in the same period a year earlier.

Revenue dipped 4% to $12.52 billion, the company said. Core net income, which strips out one-time events such as impairments or gains, fell 5% to $2.7 billion, Novartis said. Analysts had expected revenue of $12.7 billion and core net income of $2.7 billion.

As well as the drag from the weak Alcon unit, profit took a hit from a $346 million write-down on Novartis' Venezuela business, related largely to the currency impact of high inflation in the country. The decline was also sharpened by a one-off gain in the previous year of around $400 million from the sale of Novartis' shares in LTS Lohmann Therapie-Systeme AG.

Stripping out the effect of the strong dollar, revenue increased 4% and net income fell 34%. Mr. Jimenez said he expected the strong dollar to continue to affect reported results through 2016, but said the effect would lessen.

Novartis pharmaceuticals unit provided a bright spot for the results. Excluding the impact of the strong dollar, the unit posted a 9% increase in both revenue and operating income to $7.9 billion and $1.5 billion respectively. The company said its newer products generated nearly half of these sales.

On top of the Alcon restructuring, Novartis said it planned to move off-patent drugs worth around $900 million in sales from its pharmaceuticals unit into Sandoz, its generics business. Mr. Jimenez said he believed this would generate growth since those products would be more strongly promoted as part of Sandoz.

In addition, Novartis said it plans to take steps including centralizing manufacturing to reduce costs by $1 billion annually by 2020. The effort will involve one-time restructuring costs of about $1.4 billion spread over five years, Novartis said.

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

(END) Dow Jones Newswires

January 27, 2016 09:42 ET (14:42 GMT)

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