Bloomberg News

Novartis Nebraska Factory Restart Delayed; OTC Sales Drop

October 25, 2012

Novartis AG (NOVN) backed off a prediction that a U.S. factory will resume making products such as the athlete’s foot gel Lamisil this year after shutting the facility in January because of manufacturing flaws.

Consumer-health sales plunged 22 percent in the third quarter, a fourth straight drop, because of lost revenue from the Lincoln, Nebraska, site, the Basel, Switzerland-based company said today. Novartis, Europe’s biggest drugmaker by sales, has new woes as well -- Italy and Switzerland yesterday halted sales of the company’s flu vaccines because unwanted clumps of protein were found in some doses, and Germany today withdrew some lots as well.

The setbacks are overshadowing the company’s success in introducing new patented pharmaceuticals and raising profit margins. Novartis’s Sandoz generic-drug unit also received a warning letter from U.S. regulators last year over manufacturing missteps at three North American plants.

“That brings the number of divisions with manufacturing quality issues to three out of five,” Alexandra Hauber, an analyst at JPMorgan Chase & Co., wrote in a report today. “The strong profitability trends are overshadowed by manufacturing issues.” She has a neutral rating on the stock.

In April, Novartis predicted the Lincoln plant would be back on line by mid year, and in July the company said it would be the fourth quarter before shipments resumed. Today, Chief Executive Officer Joe Jimenez said recovery at the site is taking longer than expected.

Stock Drop

“What I would like to do is stop making projections because we have proven that we’re not able to accurately project,” Jimenez said on a conference call with reporters today. Consumer-health sales accounted for 7.9 percent of Novartis revenue last year.

Novartis fell 0.7 percent to close at 56.80 Swiss francs in Zurich. The shares have returned 11 percent this year including reinvested dividends, compared with a 15 percent return for the Bloomberg Pharmaceuticals Index (BEPHARM) of 19 companies.

Novartis in December halted production in Lincoln, and in January the company recalled shipments of Excedrin, NoDoz stimulant, Bufferin pain reliever and Gas-X Prevention anti-gas treatment. The products may have contained stray tablets, capsules or caplets from other products, or contained broken or chipped tablets.

Novartis hired outside companies to make three of the products -- Lamisil, the Excedrin headache pill and the Triaminic pain and flu medicine -- and shipments have resumed to retailers, Jimenez said today.

‘Credibility Issues’

The Lincoln plant accounts for about 25 percent of Novartis’s sales of over-the-counter products. Goods from the site are sold in the U.S., Canada and Latin America. The division’s sales totaled $938 million in the third quarter, down from $1.2 billion a year earlier.

“Eventually manufacturing issues like these tend to fix themselves, and slippage happens more often than not, so this is neither a big negative nor a great surprise, but it does raise credibility issues,” Timothy Anderson, an analyst at Sanford C. Bernstein & Co., wrote in a report today. He has an outperform rating on the stock.

Naomi Kelman, hired in February 2011 from Johnson & Johnson to run the consumer-products unit, left Novartis in March this year after the recall.

Other pharmaceutical companies have struggled with product recalls and manufacturing woes. Johnson & Johnson’s revenue was hurt by at least 50 product recalls over two years.

Flu Vaccine

“There are investors who think that quality controls may be taking a hit because of cost-cutting pressure,” Martin Voegtli, a Zurich-based analyst with Kepler Capital Markets SA, said of Novartis in a telephone interview. “J&J’s production problems are a never-ending story, and there’s speculation that something similar will play out here.” Eric Althoff, a Novartis spokesman, declined to comment on the effect of cost reductions.

Jimenez said the company can’t say when the vaccines will be sold again in Italy and Switzerland. The shots, made in Italy, were shipped to Europe and parts of Asia, he said. The U.S., Novartis’s biggest vaccine market, isn’t served from Italy, he said.

“Manufacturing vaccines is a difficult process and there are deviations,” Jimenez said. “That is part of a normal process of making vaccines. We are confident that efficacy and safety is assured.”

Warning Letter

Sandoz received a warning in December from the U.S. Food and Drug Administration about plants in Canada, Colorado and North Carolina. The Canada plant failed to report contamination of a drug batch within the required three days, and lacked procedures to prevent contamination. The two U.S. plants were cited for a lack of procedures to assure drug quality. Sandoz is on track to meet its commitments to fix the problems, Jimenez said today.

Novartis’s third-quarter profit dropped 8 percent to $3.26 billion on competition from generic drugs and the strength of the dollar against most major currencies. Earnings met analyst estimates and the company reaffirmed its forecast for the year.

New drugs such as the Afinitor cancer treatment are helping to make up for declining sales of Diovan, for blood pressure, and Gleevec, a cancer medicine. The two drugs, the company’s biggest-selling products, generated revenue of $10 billion last year and may reap just $5.4 billion by 2015 after losing patent protection.

‘Excellent Profitability’

“Overall a solid set of numbers and the excellent profitability performance in pharma is offsetting growing difficulties elsewhere,” Alistair Campbell, an analyst with Berenberg Bank, said in an e-mailed message today.

Novartis sales fell 7 percent to $13.8 billion, missing the average analyst forecast of $14.2 billion. The company gets about a third of revenue from Europe, yet reports earnings in dollars.

Revenue in the pharmaceutical division fell 5 percent to $7.8 billion. Diovan sales dropped 32 percent to $969 million after it started facing competition from cheaper copycat pills in Europe and the U.S. The Alcon eye-care division had a sales drop of 1 percent, to $2.5 billion.

Sales of Gilenya were $316 million, up 107 percent. Revenue from the eye treatment Lucentis advanced 15 percent to $593 million. Afinitor, approved to treat cancers of the kidney and pancreas, climbed 75 percent to $206 million.

To contact the reporter on this story: Eva von Schaper in Munich at evonschaper@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net


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