Novartis Reports Savings from Procurement and Manufacturing Rationalization
Novartis reported gains to its ongoing productivity initiatives, including procurement savings and an update to its manufacturing footprint as part of the company’s first-quarter earnings release.
For the first quarter of 2015, Novartis reported net sales from continuing operations net sales amounted of $11.9 billion (-7%, +3% constant currency) in the first quarter. Growth products contributed $3.7 billion or 31% of net sales, up 15% (in US dollars) over the prior-year quarter. The results reflect the completion, in March 2015, of a series of transactions by Novartis with GlaxoSmithKline plc (GSK). These comprise the acquisition of certain oncology products and right of first negotiation to the pipeline compounds from GSK, the creation of a consumer healthcare business through a joint venture combining the two companies’ consumer divisions, and the divestment of the Novartis non-influenza Vaccines business to GSK. The three-part deal follows the divestment of Novartis’ Animal Health to Eli Lilly and Company, in a deal completed in January 2015.
On the cost-savings front, Novartis Business Services (NBS), the company’s shared services organization, was fully operational in the first quarter, with organizational structure and financial systems in place as of January 2015 and over 8,700 full-time-equivalent associates by the end of the first quarter. NBS is designed to enhance profitability by harmonizing high-quality services at better price across Novartis. Synergies generated by the organization are expected to improve margin over time. The cost within the scope of NBS was stable from the prior year. Five strategic locations were selected for Global Service Centers. Moving from division-specific services to a cross divisional model, NBS is securing delivery of the majority of transactional services through the five Global Service Centers. In the first quarter of 2015, the company generated approximately $350 million in procurement savings by leveraging scale.
On the manufacturing front, the company continues to optimize its manufacturing footprint. In the first quarter of 2015, the company announced two site closures: the over-the-counter manufacturing site in Humacao, Puerto Rico, and its chemical production site in Resende (Brazil). Further, the company finalized the divestment of the pharmaceutical manufacturing site in TaboÃ£o da Serra (Brazil) to UniÃ£o QuÃmica.
For Novartis as a whole, this brings the total number of production sites that have been, or are in the process of being, restructured, closed, or divested to 26. Related to this initiative, Novartis recorded exceptional charges of $48 million in the first quarter of 2015, bringing total exceptional charges to $746 million cumulatively since the program began in the fourth quarter of 2010. For continuing operations, the total number of production sites that have been, or are in the process of being, restructured, closed or divested is 20, the exceptional charges recorded in the first quarter amount to $45 million, and the exceptional charges recorded cumulatively since the program began amount to $620 million.
In total, the company’s productivity initiatives generated gross savings that contributed approximately $650 million in the first quarter of 2015.