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Is a Beat in the Cards for Novartis' (NVS) Q2 Earnings?

Ekta Bagri

Swiss pharma-giant Novartis AG NVS is scheduled to report second-quarter 2019 results on Jul 18.

The company has a mixed track record, beating earnings expectations twice and missing twice in the trailing four quarters. In the last reported quarter, the company beat expectations. It delivered average positive earnings surprise of 0.14% in the trailing four quarters.

Novartis AG Price, Consensus and EPS Surprise

Novartis AG Price, Consensus and EPS Surprise

Novartis AG price-consensus-eps-surprise-chart | Novartis AG Quote

Let's see how things are shaping up for this announcement.

Why a Likely Beat?

Our proven model shows that Novartis is likely to beat on earnings this quarter. This is because it has the right ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for the same.

Earnings ESP: Earnings ESP for Novartis is +0.69%.  You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Zacks Rank: Novartis currently carries a Zacks Rank #2, which when combined with a positive ESP makes us confident of an earnings beat.

Note, we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Driving Growth

Novartis operates under two segments — Innovative Medicines (pharmaceuticals) and Sandoz (generics).

The company did not provide any quarterly guidance. It expects net sales in 2019 to grow mid-single digit. Operating income is now expected to increase high-single digits compared with the earlier guidance of mid-single-digit growth. Innovative Medicines revenues are projected to grow mid-single digit. Revenues from Sandoz are expected to be broadly in-line with that in 2018.

The Innovative Medicines division maintains momentum on the back of strong oncology performance. Novartis has a robust oncology portfolio of drugs like Afinitor, Exjade, Jakavi, Zykadia, Tasigna, Jadenu and Kisqali. Oncology franchise continues to grow on the back of Promacta/Revolade, Tafinlar + Mekinist, Jakavi and recent launches. The addition of Luthathera has further boosted performance.

Psoriasis drug, Cosentyx, continues to gain traction on the back of strong growth in three approved indications, while Entresto’s sales benefited from continued access improvements and expansion of sales force in the United States. We expect the division to record similar growth in the second quarter and combat generic pressure for key drugs — Diovan, Gleevec and Exforge.

However, the generic division faces challenges in the form of price erosion in the United States due to competitive pressure. The trend might continue in the second quarter as well.  Nevertheless, the launches of Rixathon, the biosimilar version of Rituxan (rituximab), and Erelzi, the biosimilar of Enbrel in EU and Hyrimoz (filgrastim) in Europe, should partially offset the decline in the United States.

Apart from the top and bottom-line numbers, we expect investors to focus on the company’s pipeline updates. The FDA had earlier approved Mayzent for the treatment of adults with relapsing forms of multiple sclerosis (MS), including secondary progressive multiple sclerosis (SPMS) with active disease, relapsing remitting multiple sclerosis (RRMS) and clinically isolated syndrome (CIS). Investors will be keen on updates on the initial uptake of the drug. 

The focus will also be on other drug approvals. The FDA approved Piqray (alpelisib, formerly BYL719) for breast cancer in May 2019.  The agency also approved Zolgensma, which is the first and only gene therapy for pediatric patients with spinal muscular atrophy (SMA), a rare genetic disorder. 

Management should also throw more light on its acquisition plans for 2019.

Business Restructuring

Meanwhile, the Alcon business was spun-off as a separate public company on Apr 9, following the shareholder vote on Feb 28.

Novartis expects to complete the previously-announced divestment of the Sandoz US oral solids and dermatology businesses in 2019. 

Share Price Performance

The stock has gained 4.1% in the year so far against the industry's decline of 0.8%.


Stock to Consider

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Bristol-Myers Squibb Company BMY has an Earnings ESP of +0.28% and a Zacks Rank #3. The company is scheduled to release results on Jul 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

Merck MRK has an Earnings ESP of +0.80% and a Zacks Rank #2. The company is scheduled to release results on Jul 30.

Allergan, plc AGN has an Earnings ESP of +1.85% and a Zacks Rank #3.

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