Novartis Beats Soundly

Zacks

Swiss pharmaceutical giant Novartis (NYSE:NVS - News) reported yet another strong quarter delivering earnings per share of $1.48 for the second quarter of 2011, much above the year-earlier earnings of $1.20 per share as well as the Zacks Consensus Estimate of $1.39. Earnings were supported by strong top-line and operating margin growth.

First quarter revenues were up a solid 27% over the prior year to $14.9 billion. Total revenues also edged past the Zacks Consensus Estimate of $14.4 billion driven by particularly strong performances from the Alcon, Sandoz and Consumer Health segments. Newly launched products, particularly Gilenya, Tasigna and Lucentis, demonstrated solid volume growth which helped offset the negative impact of pricing, generic competition and divestments.

Behind the Headlines

The performance of each of the five segments is discussed below.

Pharmaceutical division sales were up 10% to $8.3 billion in the quarter. Growth from volume expansion and new product launches (accounting for 28% of pharmaceutical sales) was partly offset by price erosion, the negative impact of patent expirations and product divestments. All the franchises performed well in the quarter.

Oncology sales growth of 10% was led by some established products like Gleevec (up 12% to $1.2 billion) and Sandostatin (up 17% to $365 million) as well as new products like Tasigna (up 91% to $170 million) and Afinitor (up 85% to $102 million).

Galvus (up 83% to $165 million) led the 4% growth in the Cardiovascular and Metabolism franchise. The Neuroscience and Ophthalmics franchise experienced a 25% increase led by Lucentis (up 44% to $541 million), which was approved for two additional indications in the first half of 2011, namely visual impairment due to diabetic macular edema (:DME) and macular edema following retinal vein occlusion (:RVO). Lucentis is currently marketed for the treatment of wet age-related macular degeneration (wet AMD). The franchise also benefited from the strong performance of recently launched (US and parts of Europe) multiple sclerosis drug, Gilenya, which recorded revenues of $79 million.

In early April, 2011, Novartis completed the merger with Alcon following which Alcon became the second largest division within Novartis. Novartis’ CIBA Vision, select eye care medicines and an Alcon business wing were integrated into Alcon. The Alcon Division recorded revenue of $2.6 billion in the quarter. Growth was witnessed across all geographical markets.

Sandoz division sales were up 25% to $2.5 billion benefiting from solid volume growth, new product launches like the generic version of Eli Lilly’s (NYSE:LLY - News) Gemzar, continued exclusivity of generic version of Sanofi Aventis’ (NYSE:SNY - News) Lovenox and strong biosimilars growth. The segment posted strong revenues in the US, Western Europe, and Latin America.

The Vaccines and Diagnostics division recorded a sales decline of 47% to $299 million. Depressed sales of H1N1 pandemic flu vaccine in the quarter (due to the waning of the swine flu disease) as well as delays in product shipments perpetrated the fall.

Consumer Health division sales were up 13% over the prior year to $1.2 billion driven by strong sales of over-the-counter (:OTC) products, particularly Prevacid24HR and the Animal Health business.

2011 Guidance

Novartis maintained its guidance for 2011 with growth pegged roughly in the double digits in constant currency. The Pharmaceuticals segment is expected to grow in the low- to mid-single digits while the Alcon division is expected to record growth at a mid- to high-single digit rate on a pro forma basis. Sandoz is estimated to post mid- to high-single digit sales growth.

Novartis also hopes to increase its operating margins in 2011, overcoming pricing pressure, generic competition and decline in H1N1 pandemic flu sales.

Product Approvals and Pipeline Update

In the second quarter, Novartis received two approvals in Europe. These are for Rasilamlo, a combination pill to treat high blood pressure and Lucentis to treat RVO. In the US, Novartis received approval to expand use of its renal cancer drug Afinitor for advanced pancreatic neuroendocrine tumors and to market Arcapta Neohaler for chronic obstructive pulmonary disease.

In the quarter, Novartis filed an application for approval of Janus kinase inhibitor INC424 in the EU for the treatment of myelofibrosis. Novartis’ partner Incyte Corporation(NasdaqGS:INCY - News) has also filed an application to the US Food and Drug Administration (:FDA) for marketing the candidate in the US.

Novartis also filed an application with the FDA to broaden the use of its meningitis vaccine Menveo to infants and toddlers (aged 2-24 months). Menveo is already approved for use in individuals aged 2-55 years in the US. The vaccine is approved in Europe for initial use from age 11 and older.

Novartis is banking on new drug approvals and successful label expansions to overcome the adverse impact of the upcoming patent cliff following genericization of key drugs such as Diovan for blood pressure and Femara for cancer. Positive pipeline developments can bolster the company’s plans.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #3 Rank (“Hold” 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 due to the imminent patent cliff faced by the company. We would like to wait and see how Novartis’ wide range of new products deliver in order to offset the impact of generic competition to its key drugs.

SANOFI (SNY): Read the Full Research Report

ELI LILLY & CO (LLY): Read the Full Research Report

INCYTE GENOMICS INC (INCY): Read the Full Research Report

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