Novartis to Cut Jobs - Analyst Blog


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Continuing the cost-cutting trend which was started by its US counterparts, Swiss company Novartis ( NVS ) recently announced that it will lay off 1,960 employees in the US in anticipation of lower revenues from two of its hypertension medicines.

Novartis' blockbuster hypertension drug Diovan loses patent expiration in the US in September 2012. Diovan, which recorded revenue of $1.4 billion in the third quarter of 2011, will greatly weigh upon Novartis' top line once its patent expires.

Moreover, global sales of another hypertension medicine, Tekturna (marketed as Rasilez outside US), are expected to be hit by the failure of the ALTITUDE study. In December 2011 Novartis announced that it has stopped the ALTITUDE study which was investigating Rasilez/Tekturna in a high-risk population of patients with type-II diabetes and renal impairment following recommendation from a Data Monitoring Committee. As a result, Novartis is recommending against the use of Rasilez/Tekturna-based products in combination with an angiotensin converting enzyme ( ACE ) inhibitor or angiotensin receptor blocker ( ARB ) in hypertensive patients with diabetes. It has ceased promotion of any such combination medicines.

The layoffs will impact mostly Novartis' pharmaceuticals business in the US with a reduction of 1,630 positions in the field force and another 330 positions at the US headquarters. The layoffs will take effect in the second quarter of 2012.

The US workforce reduction will result in a charge of $160 million in the first quarter of 2012 but will lead to savings of approximately $450 million by 2013. Moreover, expectations for decline in sales of Rasilez/Tekturna will result in a charge of $900 million in the fourth quarter of 2011.

Last week, Novartis issued a voluntary recall for certain over-the-counter products in the United States, following the temporary suspension of operations from its Lincoln, Nebraska facility. Novartis plans to take a charge of $120 million in the fourth quarter of 2011 to account for the recall.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #4 Rank ("Sell" rating) in the short run. Though pleased with Novartis' wide range of products and its efforts to diversify further, as is evident by the acquisition of eye-care company Alcon, we prefer to remain on the sidelines in the long term due to the imminent patent cliff faced by the company. The latest workforce reduction justifies the short-term sell rating on the stock.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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