By InsightArea Editorial Team
A company can report a sharp fall in profit and stronger underlying sales in the same quarter. Novartis’s third-quarter results provide a concrete example of why investors should read both the standard accounting figures and management’s adjusted measures.
In its results released on October 27, Novartis reported net sales of $14.5 billion, up 4% in U.S. dollars from a year earlier. Reported operating income fell 59% to $1.8 billion, while core operating income rose 11% to $6.0 billion.
The role of an impairment
The company said the decline in reported operating income was mainly associated with higher research and development expenses, including a $1.9 billion partial impairment of its del-desiran in-process research and development asset. An impairment reduces the accounting value of an asset when its carrying value no longer reflects the relevant valuation assessment.
It is not the same thing as a routine cash payment made in that quarter. But calling it non-cash does not make the economic information irrelevant: it can reflect a lower assessment of the value of earlier investment. Readers should examine what changed rather than simply removing the charge from view.
Why the core figure is different
Novartis uses core measures to adjust for specified items. Core operating income rose as sales grew, and core EPS increased 9% in U.S. dollars to $2.46. Reported EPS, by contrast, was $0.63. These measures have different definitions; the company’s reconciliation explains the differences.
Management also raised its full-year core operating income guidance. Guidance is an estimate based on current assumptions, not a guarantee. The company reported free cash flow of $5.1 billion for the quarter, down 18% in U.S. dollars, another reminder that earnings and cash flow are not interchangeable.
What investors can take away
For pharmaceutical companies, revenue from established medicines, competition from generics and the value of research pipelines can pull results in different directions. A single adjusted number cannot capture them all. A more complete reading asks how products are performing, why an asset was impaired, and whether cash generation supports future research and investment.
This article is educational and is not personalized investment advice.
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