Novartis Tests the Limits of Its 'Project Forward' Cost-Cutting Drive

Novartis announced a great quarter yesterday but the stock didn't move. Here's one argument why: The company's business is treading water, and all its gains -- net income up 32 percent to $2.08 billion -- have come from its cost-cutting program, the creepily named "Project Forward."

Companies always announce their earnings in comparison to the year before, but I like to look at the numbers with the quarters in sequence. Showing improvement on something you did a year ago can be relatively easy. For instance, if currency markets shift in your direction you can tread water and still show growth. That kind of thing particularly affects international companies like Novartis. By contrast, grinding out quarter-on-quarter improvement is a much sterner test of the effectiveness of management. In Novartis' case, the company had been achieving just that, steadily, all through 2007 and the beginning of 2008.

But revenue and gross profit growth (the two measures of the raw health of its business) have slowed to a plateau this quarter, at about $11 billion and $8 billion each. On the other hand, the company has deeply cut its spending on marketing -- down 22 percent from the prior quarter. The company heralded this news by announcing another 550 jobs to go.

Unsurprisingly, this led to the nice jump in the net income number you saw yesterday. The question is, can Novartis actually grow the businesses it is in? If it cannot, further gains can only come from more cuts. At which point "Project Forward" should be renamed "Project Downward."

In other news: Novartis reshuffled its management with the result that virtually everyone in the company now has a new boss. The guy in charge of Animal Health is now in charge of Human Health, for instance. Perhaps these new managers will more finely grind the flour of Novartis' mill, but I'm always slightly worried when an apparently effective team is given a new learning curve to climb.