Novartis books $2.2 billion hit from drug trial setbacks, but lifts guidance

By Patricia Weiss, Bhanvi Satija and Marleen Kaesebier

ZURICH/LONDON, Oct 27 (Reuters) - Novartis recorded about $2.2 billion in charges related to two drugs that failed in late-stage studies last month, even as it boosted its full-year profit expectations on Tuesday.

The Swiss drugmaker's operating income fell 61% in the third quarter, hurt by higher research and development costs and a $1.9 billion partial impairment charge for del-desiran, one of two consecutive major trial setbacks unveiled in September that sent its shares tumbling at the time.

The drug, which was being tested for myotonic dystrophy, a muscle-wasting disease with no approved treatments, was obtained through Novartis' $12 billion acquisition of Avidity that was announced in 2025.

The estimated value of the muscle-wasting drug was reduced from an original $7.48 billion because of delays in development. The company continues to believe it will succeed, Chief Financial Officer Mukul Mehta said in an interview, unlike for failed heart drug pelacarsen, the other September setback, which was completely written off.

Novartis recorded a $300 million charge for pelacarsen.

The company also lifted its full-year core operating income guidance to low single-digit percentage growth, compared with the low single-digit decline previously expected, after strong third-quarter demand for its key cancer and multiple sclerosis drugs. It maintained its forecast for low single-digit net sales growth.

The stock was trading up 1.5% at 1040 GMT.

NO CHANGE TO M&A STRATEGY

Despite the drug trial setbacks that heightened investor scrutiny around the drugmaker's business development strategy, and called its valuation into question, CEO Vas Narasimhan said he remained confident in the company's acquisition strategy.

Narasimhan said the setbacks were part of drug development and that there was an overreaction by some in the market.

"We don't need to change our M&A strategy," Narasimhan said in a call with journalists, adding his company remains happy with the Avidity deal, which also included other experimental drug candidates.

An improving free cash flow that should surpass $20 billion in the next five years will give enough room for bolt-on acquisitions in the $2 billion range, CFO Mehta said.

Artisan Partners, among Novartis' top 20 shareholders, had in September called for a shake-up of the board to improve corporate governance after the company lost nearly $30 billion in market value following the underwhelming trial updates.

In the third quarter, core operating income, adjusted for special items, increased 10% at constant exchange rates thanks to higher net sales, the Basel-based company said, beating analyst expectations.

(Reporting by Marleen Kaesebier, Bhanvi Satija and Patricia Weiss, Editing by Thomas Derpinghaus, Susan Fenton and Keith Weir)