Core earnings rose 9% to $2.46 a share, and Novartis now expects core operating income to hold steady or grow this year rather than decline. A partial impairment of a pipeline asset cut net income to $1.2 billion.
Novartis delivered two very different profit numbers on Tuesday, and raised its outlook on the better one.
Net income fell 70% to $1.20 billion in the third quarter, and earnings per share fell to 63 cents from $2.04, after the Swiss drugmaker took a $1.94 billion partial impairment on its del-desiran asset. Operating income fell 59% to $1.84 billion.
On the core basis Novartis uses to guide investors, the picture was the opposite. Core operating income rose 11% to $6.04 billion, the core margin widened to 41.6%, and core earnings rose 9% to $2.46 a share. Net sales rose 4% to $14.52 billion.
Novartis shares rose 1.87% to 129.86 Swiss francs in early trading in Zurich.
The guidance change
Novartis now expects core operating income, at constant currencies, to be flat to up by a low-single-digit percentage this year. It had previously expected a low-single-digit decline. Its sales outlook, for low-single-digit growth, was unchanged.
That is a change of direction for the profit line, even if the size of the change is modest.
What's working
The growth brands carried the quarter. At constant currency, sales of Kisqali rose 37%, Kesimpta 22%, Scemblix 67% and Leqvio 63%. Cosentyx grew 9%.
Free cash flow was about $5.1 billion, down 18% from a year earlier.
What the write-down says
An impairment is an accounting recognition that an asset is worth less than the company paid for it or expected. It does not affect cash in the quarter, which is why core earnings exclude it. But it does reflect a lower view of the asset's prospects, and at $1.94 billion it is larger than the quarter's entire reported net income.
Two readings
One reading is that the core business is strengthening. Margins are widening, the newer drugs are growing quickly, and management is confident enough to lift its profit outlook despite the setback.
The other is that the reported numbers are a reminder of pipeline risk. A large impairment on a development asset, an 18% decline in free cash flow and an unchanged sales forecast suggest the upgrade rests on margins rather than faster growth.
What to watch
Details of the impairment on the call, fourth-quarter growth of Kisqali and Kesimpta, and any update on pipeline programs after this quarter's setback.