Novartis Misses Estimates, Guidance Upped

Zacks

Novartis (NVS) reported third quarter 2013 earnings per share of 91 cents, down 8% (flat in constant currency) from the year-ago period. Third quarter 2013 core earnings per share came in at $1.26, down 4% from the year-ago period, (up 1% in constant currency), missing the Zacks Consensus Estimate of $1.32.

All growth rates mentioned below are on a year-on-year basis and at constant exchange rates (:CER).

Third quarter revenues of $14.3 billion were up 6% year over year, marginally missing the Zacks Consensus Estimate of $14.4 billion.

Quarter in Detail

Novartis operates in five divisions: Pharmaceuticals, Alcon, Generics (Sandoz), Vaccines & Diagnostics and Consumer Health.

The Pharmaceuticals division recorded sales of $7.9 billion in the reported quarter, up 4% driven by strong volume growth and a favorable pricing, which more than offset the impact of generics.

Key drugs at Novartis such as Gilenya, Afinitor, Tasigna, Galvus, Xolair, Arcapta Neohaler/Onbrez Breezhaler, Seebri Breezhaler and Jakavi contributed 39% to total sales in the third quarter of 2013, up 28%.

The Alcon Division recorded revenues of $2.5 billion in the third quarter, up 6% driven by growth in the Surgical Franchise. The growth in the Surgical Franchise was driven by the cataract segment due to continued rebound in markets and demand for laser technology. Additionally, vision care business also showed solid growth driven by strong sales in contact lenses. Sales in Ophthalmic Pharmaceuticals were driven by market share gains across fixed dose combination glaucoma and infection/inflammation products, offset by U.S. generic prostaglandin competition.

Sales from the Sandoz division increased 11% to $2.3 billion primarily driven by strong volume growth, attributable to Fougera acquisition, which more than offset the price erosion. Retail generics and biosimilars sales in the U.S., Western Europe (excluding Germany) and the emerging markets also positively impacted sales.

Sales at the Vaccines and Diagnostics division were up 1% to $594 million. The growth in this division was driven by Menveo sales. During the reported quarter, the U.S. Food and Drug Administration (:FDA) approved an indication expansion for Menveo to include infants and toddlers from two months.

Consumer Health sales at Novartis were up 12% to $1.0 billion driven by strong growth in key brands along with re-launches of several products that were adversely impacted by supply issues in 2012.

2013 Outlook Upped Again

Novartis upped its 2013 guidance once again based on solid performance from the pharmaceuticals division in the first nine months of 2013 and lower-than-expected generic erosion. The delayed entry of generic Diovan Mono in the U.S. continues to positively impact results at Novartis.

Novartis now expects sales to increase in low to mid single digits in 2013 as compared to the earlier expectation of low single digit growth as the company now expects generic competition to impact sales by $2.3 billion in 2013, down from the previous estimate of $2.7 billion.

Pipeline Update

We note that Novartis received EU approval for Ultibro Breezhaler for the chronic obstructive pulmonary disease (:COPD) during the third quarter. Novartis plans to file both Seebri Breezhaler and Ultibro Breezhaler for approval in the U.S. in 2014.

Moreover, the FDA granted Breakthrough Therapy designation to pipeline candidate BYM338. The designation was granted for sporadic inclusion body myositis (sIBM). This designation should speed up the development and review process for the candidate.

Novartis also reported encouraging phase III data on its psoriasis candidate, secukinumab (AIN457).

Investors reacted positively as shares increased 3.27% after the earnings release.

Although we are encouraged by the consecutive increase in guidance, we expect the delayed entry of generics to impact 2014 results.

Novartis currently carries a Zacks Rank #3 (Hold). Right now, companies like Roche (RHHBY), Bayer (BAYRY) and GlaxoSmithKline (GSK) look well-positioned. 

While Roche is a Zacks Rank #1 (Strong Buy) stock, Glaxo and Bayer are Zacks Rank #2 (Buy) stocks.

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