• Group sales up 2% in Swiss francs to CHF 32.5 billion, operating income up 6% to CHF 7.3 billion
• Sales of continuing activities climb 9% to CHF 25.2 billion; operating income rises 9% to CHF 6.2 billion
• Proposed dividend increase of 10% to CHF 32 per share

In 1999, the Novartis Group achieved sales of CHF 32.5 billion, an increase of 2% in Swiss francs. Group operating income increased 6%, lifting net income to record levels of CHF 6.7 billion, a rise of 11% over 1998. In the course of the year, the Group divested several non-core nutrition activities and announced plans to spin off its Agribusiness. Excluding these "discontinuing'' activities, the "continuing'' healthcare activities achieved sales of CHF 25.2 billion, an increase of 6% in local currencies or 9% in Swiss francs. Operating income from continuing activities climbed 9% to CHF 6.2 billion.

Daniel Vasella, Chairman and CEO noted: "During 1999 we further focused our business portfolio on healthcare and, in spite of a weak year in Agribusiness, achieved a record net income. On the basis of this performance, we propose raising the dividend by 10% to CHF 32 per share.''

Focusing and prioritizing the portfolio in 1999

Novartis took further steps in 1999 to focus its business portfolio, moving from a life sciences company towards a pure healthcare company.

In December, it announced plans to spin off its Crop Protection and Seeds units and to merge them with the Agrochemicals business of AstraZeneca forming Syngenta. Headquartered in Basel, Switzerland, the new company will be the world's first dedicated global agribusiness company with pro-forma combined sales of approximately USD 7.9 billion (based on 1998 figures). Pending regulatory and shareholder approvals, its launch is expected in the second half of this year.

Earlier in the year Novartis completed the program -- initiated in 1998 -- to divest six non-core nutrition businesses (Redline, Roland, OLW, the Italian sugar-free business, Eden and Wasa) as part of the merger of its OTC (over-the-counter) and Nutrition activities.

The continuing activities were further strengthened by acquisitions and collaborations, several of which were in pharmaceutical R&D. As the product portfolios were further prioritized, resources were shifted to growth products, which as a result made an increased contribution to sales. Overall the Marketing & Distribution (M&D) and Research & Development (R&D) organizations were further strengthened by increased investments. Productivity gains helped to reduce General & Administration (G&A) expenses. 

Continuing activities

• Sales from continuing activities climb 6% in local currencies 
• Operating income from continuing activities climbs 9% to CHF 6.2 billion, driven by Generics, CIBA Vision and Pharmaceuticals, while a high level of investment in M&D and R&D is maintained

Sales from continuing activities were driven by strong performances in Generics, Consumer Health and key pharmaceutical products. Operating income margin remained almost constant at 24.7% in 1999 compared with 24.8% in 1998. 

Pharmaceuticals

• Sales of leading ten products up 12% in local currencies

Pharmaceuticals sales grew 4% in local currencies, with the leading ten products expanding by 12%. This underscores the positive impact of shifting marketing resources towards key strategic products and reflects efforts to rejuvenate the portfolio. Among the star performers, the anti-hypertensive Diovan (+78%) outperformed the strongly growing angiotensin II receptor blocker category and has captured a market share of 18% worldwide (25% in the US). The leading antifungal Lamisil (+8%) sustained momentum -- particularly its tablet formulation -- and achieved prescription sales above CHF 1 billion. The cream formulation for athlete's foot was successfully switched to prescription-free status in the US and transferred to the OTC business of Consumer Health. Despite generic competition, the flagship immunosuppressant Sandimmun/Neoral (transplantation, +5%) continued to grow in all major regions and overall sales passed the CHF 2 billion mark. Aredia (cancer, +44%), Foradil (asthma, +21%), Sandostatin (acromegaly, +18%),
Miacalcic (osteoporosis, +19%), Lescol/Lochol (cholesterol reduction, +7%), and Lotrel (hypertension, +36%) all continued to grow well. As anticipated, the introduction of generics and new COX II competitor products affected Voltaren (antirheumatic, -13%), particularly its Cataflam formulation in the US. In contrast, Voltaren sales grew in Japan and were stable in Europe. Novartis consolidated its leading presence in women's health by acquiring marketing rights for the hormone replacement therapies Menorest and Estalis.

In the course of 1999, important milestones were reached with pipeline products and further progress was made with new product introductions. Among a number of product applications, filings were submitted in the US for Zometa (cancer complications), Starlix (diabetes) and Lescol XL (cholesterol-lowering agent). Comtan, a novel treatment for Parkinson's disease, was successfully introduced in the US and sales are quickly gaining momentum. Apligraf, the first living human skin equivalent, was launched in Switzerland and in the EU. The Alzheimer's drug Exelon received approvable status in the US and, having been launched in over 50 countries, has gained significant market share, especially in major European countries. 

• Operating income up 7%: further productivity gains; resources shifted to M&D and R&D

The sector sustained the prior year's high level of operating income margin of 31.0%. Tight cost control helped to keep G&A expenses steady at the previous year's level, while the cost of goods sold continued to benefit from cost savings. Investments in M&D and R&D were increased in order to support strategic products on the market and key projects in development. The pharmaceuticals sales force was augmented -- particularly in the critical US market -- bringing the total number of sales representatives to approximately 13 000 worldwide. Novartis' strong commitment to innovation is reflected in its high level of pharmaceutical R&D spending, which amounts to 18% of sales.

Exceptional gains of CHF 208 million and CHF 130 million resulting from the divestments made by Chiron in 1999 and 1998 respectively are not included in the operating income of Pharmaceuticals, but are posted in the income statement separately as part of the income from associated companies. 

Generics

• Sales growth driven by retail generics in the US and Germany

At Generics (+18% in local currencies), the dynamic growth trend in finished pharmaceuticals continued. New products fueled sales expansion. Geneva Pharmaceuticals launched terazosin (antihypertensive) in the US while Azupharma successfully put omeprazole, a highly effective anti-ulcer treatment, on the market in Germany. In a number of countries, Biochemie introduced the generic combination of amoxicillin with clavulanic acid, a valuable supplement to penicillin therapy.

Sales in bulk generics were dynamic, with very strong increases in cephalosporin antibiotics and their intermediates. The integration and expansion of the recently acquired Hoechst fermentation plant and long-term contracts with industrial clients will contribute to the long-term success of this business. 

• Operating income up 25%: strong volume expansion; new product launches

The operating income margin rose from 18.2% in 1998 to 19.0% in 1999. The main contribution came from the outstanding expansion in volumes, particularly in the US retail generics business and in the cephalosporin business. 

CIBA Vision

• Sales driven by new-generation contact lenses; breakthrough Visudyne therapy launched in first market

The growth trend continued at CIBA Vision (+4% in local currencies). Ophthalmics reported very dynamic sales expansion with Zaditen (anti-allergy eyedrops) in Japan and with Arteoptic (glaucoma beta-blocker treatment) in the US, which more than compensated for the generic erosion of Voltaren Optha. Visudyne, the first effective treatment for age-related macular degeneration was launched in Switzerland. Zaditen eyedrops were introduced under the brand name Zaditor in the US.

While the lens-care and conventional contact lens businesses faced strong competition in the US, the new-generation contact lenses developed very dynamically: Focus DAILIES (daily disposable contact lenses) more than doubled sales to above CHF 100 million and Focus NIGHT & DAY (extended-wear contact lenses) were launched in more than 40 countries. The acquisition of Mentor Corporation's MemoryLens business, with annual sales of approximately CHF 23 million, provided an entry into the ophthalmic surgical market. 

• Operating income up 11%: lower R&D expenses; investments in key product launches

Despite increased price pressures, especially in the lens-care segment, CIBA Vision managed to increase its operating margin from 15.0% in 1998 to 15.3 % in 1999. R&D expenses were lower than in the previous year, when exceptionally high investments were required to develop new-generation contact lenses. M&D outlay increased because of the launch programs for key products (Focus DAILIES, Focus NIGHT & DAY, and Zaditor in the US). 

Consumer Health

• Sales: OTC products and Medical Nutrition post strong performances

At Consumer Health (+8% in local currencies), the OTC business gained market share both in the US and in Europe, thanks to the strong performance of the cough and cold brands Neo-Citran and Triaminic and to the successful OTC switches of Lamisil cream in the US and Voltaren Emulgel in Germany. Medical Nutrition posted strong sales expansion in Europe, the US and Latin America with impressive volume expansion of the Impact (tube feeding) product range.

In Health & Functional Nutrition, growth was driven by the Gerber business, which gained further market share in the US and strengthened sales growth in Latin America. The fourth quarter saw the introduction of novel functional foods. Aviva, a range of products with clinically proven heart, bone and digestive benefits was launched in the UK and in Switzerland. Oclea, an innovative breakfast drink based on nutrients from plant extracts, vitamins and minerals was initially launched in Switzerland. Operating income up 1%: investment in building functional foods

Consumer Health's operating income margin decreased by 1.2% to 12.4% in 1999, as the sector invested heavily in the promising functional food segment to support the launch of the Aviva and Oclea brands and to expand the functional food R&D portfolio. On the other hand, there were cost savings, principally in G&A, generated by the merger of the OTC and Nutrition businesses. 

Animal Health

• Sales: position in flea control market defended

Animal Health (0% in local currencies) expanded in the Asia/Pacific region and defended its position in the competitive flea control market for pets, particularly in the US and in Europe. Interceptor (intestinal and heartworm treatment) and Sentinel (combined flea, intestinal and heartworm treatment for dogs) were the brands driving growth. In contrast, the strong price pressure for commodities affected the farm animal market in the Americas and Europe.

Econor, a new veterinary treatment for intestinal and respiratory diseases in farm animals, made good progress with introductions in 21 countries. The new fast-acting flea treatment Capstar was successfully launched in four countries. The acquisition, announced in November, of UK-based animal health specialist Vericore, will provide entry into the attractive animal vaccine business. Vericore had sales of approximately CHF 80 million in 1998.

• Operating income up 2%: tight cost control; higher investments in R&D

The sector successfully maintained its position among the most profitable in the industry, with the 1999 operating margin of 23.3% just 0.1% off the previous year's level. Structural improvement projects led to cost savings, particularly in G&A. Freed resources were funneled into R&D, where major efforts are under way to broaden the sector's companion animal franchise.

Discontinuing activities

The sales from the divested Consumer Health activities amounted to CHF 182 million in 1999. Operating income including the divestment gain of these activities came to CHF 375 million. 

Agribusiness (-7% in local currencies)

• Difficult market conditions

Crop Protection sales were affected by weak farming economies, strong price competition and the difficult economic situation in Brazil, Russia and Ukraine. Herbicides came under heavy pressure in corn, and fungicides sales were impacted by strong competition from the strobilurins. Insecticides sales were stable while Turf & Ornamentals posted double-digit growth. Good sales expansion was recorded in the Asia/Pacific region. Achievements in 1999 included the registration of the new strobilurin fungicide Flint in the US and several other markets, and the rollout of the insecticide Actara/Cruiser in Brazil. In Seeds, sales in the NAFTA region declined, with corn-seed sales suffering from price pressure and acreage reductions, and soybean sales being impacted by the increased use of farm-saved seed. Good growth was achieved in Europe
in particular with vegetables, sugar beet, and flowers seed. 

• Operating income down 33%: price pressure, decreasing volumes, restructuring and litigation costs

Agribusiness had to cope with a difficult market environment, which squeezed the operating income margin from 14.7% in 1998 to 10.4% in 1999. There were exceptional costs of CHF 100 million from the "Project Focus'' restructuring program, and litigation expenses for the protection of intellectual property. Agribusiness maintained its high level of investment in R&D to further build on new technologies. 

Net financial income

• Strongly performing bond portfolio

Net financial income amounted to CHF 793 million, CHF 34 million above the previous year's level. Financial expenses were CHF 198 million lower than in 1998, primarily due to lower average debt levels throughout 1999. Financial income dropped CHF 136 million owing to lower gains from financial investments. The bond portfolio, Novartis' largest asset category, performed strongly, benefiting from successful interest rate management and currency gains. The return on the portfolio of stocks reflected a conservative policy of limiting investments in volatile stocks in the high-tech area, which were the main market drivers. At market values, the return on liquid funds was 8.9%, significantly above the risk-adjusted benchmarks based on comparable investments. 

Net income

• Up 11% to record levels owing to higher operating income, divestment gains and lower taxes

Net income as a percentage of total sales amounted to 20.5%, up from 19.0% in 1998 despite the sharp drop in Agribusiness operating income. Income from associated companies increased by 60%, mainly because of an exceptional gain of CHF 208 million from the divestment of the Chiron diagnostics business (CHF 130 million in 1998). The tax rate decreased from 23.8 % in 1998 to 21.5 % in 1999 owing to changes in the business mix, the exceptional Consumer Health divestment gain, and successful tax planning measures. 

Net liquidity

• Strong balance sheet with net liquidity at CHF 12.7 billion

Cash flow from operations increased by CHF 1.0 billion to CHF 6.9 billion, corresponding to an increase of 18%. Investment in tangible fixed assets decreased 13% to CHF 1.4 billion. As a result of these developments free cash flow jumped 34% to CHF 3.5 billion.

The Group's financial strength is reflected in the CHF 1.9 billion increase in net liquidity to CHF 12.7 billion. Total equity increased by CHF 5.8 billion, leading to a further improvement in the debt/equity ratio from 0.28:1 to 0.27:1 at the end of 1999. 

Equity strategy

• New York Stock Exchange listing expected by mid-2000

The Group advanced its program to enhance the attractiveness of its shares. In the first half of 1999, the share structure was simplified through the conversion of all bearer shares into registered shares. Later in the year, an agreement was signed with SEGA Aktienregister AG to offer shareholders the possibility of depositing Novartis shares free of charge. In August, a program was initiated to repurchase shares in the open market for an amount of up to CHF 4 billion. By year-end, approximately 927 000 shares had been repurchased for a total of CHF 2.2 billion. The shares will be kept as treasury stock and are not taken into account for earnings-per-share calculation. The buy-back program will continue this year. 

Novartis has been preparing for a listing of its American Depositary Receipts (ADRs) on the New York Stock Exchange. This will expand the company's visibility in the financial markets and broaden the shareholder base in the key US market. The Group is confident that a listing will be obtained by mid- 2000.

Outlook

The Group will continue to re-invest productivity gains in growth opportunities and further increase its high level of investment in M&D in order to prepare for the stream of product launches over the coming years.

Pharmaceuticals will press ahead with the filing and introduction of late- stage potential blockbuster products, which will contribute significantly to near future growth. Generics is expected to benefit from opportunities arising from patent expiries and the favorable growth trend in cephalosporins. CIBA Vision will expand with new generation contact lenses and expects further launches of Visudyne to significantly augment sales growth. Consumer Health sales are expected to grow above industry average, driven by further entries into the functional food segment and the expansion of the Medical Nutrition and OTC businesses. Animal Health will
concentrate its marketing and distribution efforts on key products such as Sentinel and Capstar.

The market environment in Agribusiness will remain difficult with pressure on prices and volumes but is projected to bottom out in 2000. Efforts will further concentrate on the roll-out of new products such as Actara/Cruiser and Flint. Good growth is expected in vegetables and sunflower seeds. Initial cost savings generated by the "Project Focus'' restructuring program will be realized this year.

Company news release
N2507