Novartis to rein in pharma costs

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Novartis announces good heart drug results
Novartis announces good heart drug results

A 1% uptick in pharmaceutical sales is not enough to spare the Novartis division from cuts, according to a February 12 note from Leerink analyst Seamus Fernandez. The analyst's source: a meeting with CEO Joe Jimenez in which the executive said Novartis has what Fernandez described as a “zero-tolerance policy for budgets that include declining operating margins given performance over the last two years.”

Up for the knife: pharma R&D and general & administrative (G&A) costs. Fernandez said Jimenez's plans include eliminating redundant G&A functions as well as “reducing what has historically been a relatively unconstrained budget in pharma R&D.”

This pullback is not unique to Novartis, and the reasons behind these reductions do not necessarily reflect a de-emphasis on exploration and discovery.

Sanofi, for example, cut its 2013 R&D budget by 2.8%. The French drugmaker's fourth-quarter R&D budget's 8% drop from the previous year's fourth quarter sounds like it just about shriveled, but the company explained in its February 6 earnings call that it did not need to put up the cash because it did not have to invest in as many post-marketing studies as it did the year before.

Merck and Bristol-Myers Squibb have also reshuffled their R&D budgets, within the context of reorganizing and refocusing.

Novartis has had its layoffs, as have its peers, but Jimenez's Leerink talk notes that while investors have paid attention to non-pharma business cuts, “90% of the business is not affected” by those moves and Novartis is determined to set goals pharma needs to meet if it's going to add air to its margins.

The company's need to transform also appears to go beyond its numbers. Fernandez notes that although the company's consumer business is a high point because of its premium pricing, Novartis “views itself as a research as opposed to a consumer company,” and that the firm is determined to be a vaccines leader even though it has been a cash-bleeding division.

The consumer division's relatively strong rep does not mean the rumored consumer-for-animal health swap with Merck would be a bad idea: Fernandez wrote that the animal health business is a costly one to develop, and Bernstein analyst Tim Anderson noted in January that pharma remains the core business for both companies and that the profitability of these respective divisions is unclear.

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