Novartis Settles $3.3 Billion Lawsuit as Profit Dips

Novartis 3Q Profit Missed Analysts' Estimates
  • Swiss drugmaker agrees to pay $390 million in preliminary deal
  • Core profit, sales miss analysts' estimates in quarter

Novartis AG agreed to pay $390 million to settle a lawsuit in which the U.S. government claimed the Swiss company paid kickbacks to pharmacies to boost sales of some of its prescription drugs and reported lower-than-expected third-quarter earnings.

Europe’s biggest drugmaker reached a preliminary agreement with the U.S. Department of Justice, which sought $3.3 billion in fines and damages. A measure of profit called core net income fell 2 percent to $3.06 billion, missing the $3.13 billion average of 10 analyst estimates complied by Bloomberg.

The stock declined as the Alcon eye-care unit acted as a drag on growth for a second straight quarter, causing sales to fall short of analysts’ estimates as well. The Basel, Switzerland-based drugmaker had to disclose the legal settlement before it’s final along with earnings because it set aside $400 million to cover its cost in the third quarter, Chief Executive Officer Joe Jimenez said.

"We are not admitting liability, we are also not denying it," Jimenez said in a telephone interview. "We are just settling it and putting it behind us."

Marketing Questions

The U.S. sued Novartis over two drugs, Exjade and Myfortic, claiming the company had referred patients to specialty pharmacies and paid kickbacks in the form of rebates to get those pharmacies to recommend the drugs to patients and to increase sales. Novartis said in a statement today the agreement covers claims on the two medicines, one designed to remove excess iron from the blood of transfusion patients and the other to prevent rejection of kidney transplants, as well as another three: Tasigna, Gleevec and TOBI.

The settlement is the latest by the Justice Department in a group of suits targeting drug companies with claims they cheated the government through fraudulent marketing practices. In 2012, GlaxoSmithKline Plc agreed to pay $3 billion to resolve criminal and civil claims that it illegally promoted two drugs and failed to provide clinical data on another.

Beginning in 2005, Novartis gave pharmacies rebates to recommend Exjade and Myfortic to patients over generic alternatives, or to keep dispensing them, the U.S. said. Specialty pharmacies also submitted thousands of fraud-tainted reimbursement claims to Medicare and Medicaid for the two drugs, the government said.

Novartis said in a court filing that the program was intended to encourage patient compliance with doctor-prescribed treatments, and that policies were reviewed and approved by the drugmaker’s lawyers. The settlement lets it avoid a trial that was set for Nov. 2 in Manhattan federal court.

Alcon’s Struggle

Novartis shares fell 1.9 percent to 88.80 Swiss francs at 1:37 p.m. in Zurich. The stock has dropped about 4 percent so far this year, more than Glaxo’s or Basel neighbor Roche Holding AG’s.

"The settlement is something that has removed some potential uncertainties," said Florent Cespedes, an analyst at Societe Generale in Paris. On the earnings front, "Alcon is even worse than expected."

Alcon continued to struggle to sell more intra-ocular lenses amid competition from rival products at Bausch & Lomb Inc. and Abbott Laboratories. Surgeons implant the lenses directly in the eye to correct vision problems. Sales at the unit fell 12 percent to $2.3 billion. Novartis is investing in a new generation of products to revive growth. It formed an alliance with Google Inc. last year to develop “smart” contacts, betting it can help diabetics monitor their disease or restore the ability to focus among the far-sighted.

Sandoz Copies

Like earnings, sales fell short of estimates last quarter, dropping 6 percent to $12.3 billion. They rose 6 percent excluding currency effects, Novartis said in its earnings report. Core net income, a profit measure that Novartis provides every quarter saying it better reflects the company’s underlying performance, excludes results from operations that have been sold or discontinued as well as some costs.

The company is introducing new proprietary drugs such as Cosentyx for psoriasis and Entresto for heart failure while challenging rivals Amgen Inc. and Teva Pharmaceutical Industries Ltd. with cheaper copies of their own blockbusters. The Swiss drugmaker introduced the first copycat of Teva’s top-selling drug, the multiple sclerosis injection Copaxone, in June and followed with a me-too version of Amgen’s biotechnology cancer medicine Neupogen last month.

Glatopa, the Copaxone copycat, showed "continued progress" in the quarter, Novartis said. It didn’t comment on demand for Zarxio, the Neupogen challenger that’s also the first biosimilar to ever win approval from the U.S. Food and Drug Administration. The Swiss company even introduced a cheaper version of one of its own treatments, the dementia medicine Exelon, last quarter to combat sagging sales after the drug lost patent protection. 

Novartis repeated its full-year forecast, saying it expects core operating income to grow by a high-single digit percentage and sales to expand at a mid-single digit rate, excluding currency fluctuations.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE