Novartis's Bad Decision

published 8 June 2006

Novartis, Europe's sixth biggest drugmaker, put its investors at ease yesterday, reporting an impressive 9% hike in net profit in its second quarter. Despite worries that sales of the companies top-selling drugs could suffer, Novartis's patented drugs beat all sales expectations, with the group amassing net profit of $1.65bn. Analysts had reckoned the group would generate some $1.59bn, says Tom Armitage on Reuters.com.

So in light of the good result, the obvious question is: just why is Novartis spending so much money on buying off-patent drugmakers, when it's the patented industry that's making all the profit? The Swiss group recently bought two copycat drugmakers, Germany's Hexal AG and American group Eon Labs for some $7bn. Yet following the integration of the two groups into its Sandoz generic drugs unit, Sandoz has suffered from a $30m restructuring charge, and one very tough year compared to last year, with operating profit falling 40% to $79m. Its operating margins were 9% - less than a third of what the company's patented drugs earned.