Novartis Cuts 2,000 Jobs In Switzerland And U.S., Pricing Pressures To Blame

Novartis intends to improve productivity and absorb pricing pressures by closing two Swiss manufacturing facilities and transferring some research to the U.S.

Novartis AG delayed issuing its third-quarter 2011 financial results for an hour on the morning of Oct. 25 while it told its employees the bad news - around 2,000 jobs are to be cut at the company over the next three to five years, mainly in Switzerland and the U.S., in order to improve productivity and to absorb pricing pressures.

Two manufacturing facilities in Switzerland will be closed and their activities will be transferred to other parts of the company. Some research activities are to be transferred from Switzerland to the U.S., and the company is restructuring its global "development" activities, including further outsourcing of some functions, like data management and clinical trial work.

Roughly 1,100 positions will be lost in Switzerland and 900 in the U.S., while 700 positions are to be created in "low cost" countries, said CEO Joe Jimenez. The restructuring will result in a $300 million charge in the fourth quarter, but will lead to annual cost savings of around $200 million a year.

Until now, Novartis has remained relatively apart from the R&D restructuring and cost cutting programs instituted by other Big Pharma companies, such Roche Holdings, Bayer AG and Pfizer Inc. (Also see "R&D Restructurings Aim To Placate Investors While Pharma Waits For Results" - Pink Sheet, 12 Sep, 2011.)).

Despite the restructuring, Jimenez highlighted Novartis' strength in innovation. In the third quarter, the company had two approvals, which Jimenez described as "significant" - for the oral MS therapy, Gilenya (fingolimod), in Japan and additional indications for Afinitor/Votubia (everolimus) in the EU and the U.S.

But, as well as pricing pressures, the continuing strength of the Swiss Franc, which has increased the company's costs in Switzerland (the company reports in U.S. dollars) and the approaching patent cliff for one of its blockbuster products, the antihypertensive Diovan (valsartan), were doubtless also considerations for the move. Diovan, which had sales of $1.4 billion in the third quarter, 9% of total sales, is expected to lose market exclusivity in Europe in the fourth quarter and in the U.S. in 2012.

The head of Novartis's pharma division, David Epstein, blamed the restructuring on European austerity programs. "European austerity is here to stay and having a pricing impact of around 5%," he commented. "It is one of the reasons we are focused on allocating resources to the right place and driving productivity."

The ophthalmics division, Alcon, which Novartis acquired in December 2010, was the strongest performing of Novartis's five divisions in the quarter, with a "solid" 7% in growth in its sales in constant currencies to reach $2.5 billion (" (Also see "With 100% Alcon Ownership, Novartis Forms New Eye Care Unit" - Pink Sheet, 15 Dec, 2010.)). In the same period, Novartis' pharmaceuticals division net sales increased by 3% to $8.2 billion. Products launched since 2007 accounted for 29% of the division's sales, compared with 22% a year ago. The generics division, Sandoz, had a 1% increase in sales to $2.3 billion.

Jimenez was particularly bullish about the sales prospects for Afinitor, which he believes is a potential billion-dollar blockbuster product for the treatment of ER-positive, HER2-negative, metastatic breast cancer. The results of the BOLERO-2 study showed that Afinitor doubled progression-free survival when added to exemestane therapy in this group of patients, he noted; approval filings are expected in the fourth quarter in the U.S. and the EU.

In turn, Epstein highlighted Gilenya as having one of the best launches ever of a multiple sclerosis therapy; it now accounts for 6% of the U.S. MS market and 5.1% of the German MS market, 12 and six months after launch, respectively.

The use of Novartis's wet age-related macular degeneration (AMD) therapy Lucentis (ranibizumab) has come under pressure from the cheaper off-label use of Roche's Avastin (bevacizumab) and the implementation of price reductions in some markets like Switzerland, but the product still turned in a 19% year-on-year sales increase in the quarter, to $515 million. Jimenez remarked the sales increase was driven mainly by expansion of the number of AMD patients treated, and not new indications. It was recently launched for diabetic macular edema in Canada, Denmark, Germany, Greece, the Netherlands, Sweden, Switzerland and Spain, and for macular edema secondary to retinal vein occlusion in Germany and Greece.

Novartis however has been affected by a divergence of regulatory opinion with its potential chronic obstructive pulmonary disease (COPD) therapy, NVA237 (Seebri Breezhaler; glycopyrronium bromide). This has been filed for approval in the EU, but FDA would like further data on the optimal dose, and production of this additional clinical data will result in the filing being delayed (Also see "With LABA Safety Under Fire, Novartis Addresses Post-Market Studies" - Pink Sheet, 25 Apr, 2011.). The U.S. filing for QVA149 (a combination of glycopyrronium and indacaterol) will also be delayed in the US for the same reason, although filings in the EU and the rest of the world are still on track for 2012, Novartis said. The products are being developed in collaboration with the U.K. biotech, Vectura Group PLC.

Novartis's total sales increased to $14.8 billion in the 2011 third quarter, a rise of 12% in constant currencies over the same quarter last year. Net income increased by 15% to reach $2.5 billion.

- John Davis ([email protected])