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Earnings Beat for Novartis

Zacks Equity Research

Swiss pharmaceutical giant Novartis (NVS) reported second quarter 2012 earnings per share of $1.12, down 1% from the year-ago period. Second quarter 2012 core earnings per share came in at $1.38, down 7% from the year-ago period. Core earnings, however, were above the Zacks Consensus Estimate $1.30 per share. Lower revenues led to the year-over-year decline in earnings.

Second quarter revenues of $14.3 billion, while in-line with the Zacks Consensus Estimate, declined 4% from the year-ago period. While the Alcon and Vaccines and Diagnostics divisions recorded growth in sales, other divisions like Pharmaceuticals, Sandoz and Consumer Health recorded a decline in sales. Foreign exchange negatively impacted second quarter revenues by 5%.

Quarter in Detail

Novartis reported that Pharmaceuticals division sales declined 1% to $8.3 billion in the reported quarter. Revenues were impacted by the Diovan patent expiration in the EU, generic competition for key products and negative pricing. We note that Diovan is slated to lose exclusivity in the US in September 2012.

Products like Lucentis, Tasigna, Afinitor, Gilenya and Galvus continued to perform well. Newly launched products accounted for 34% of the total sales recorded by the Pharmaceutical division during the second quarter of 2012.

Gilenya could, however, face competition from Biogen Idec’s (BIIB) oral MS candidate BG-12, which is currently under regulatory review in the EU and US.

Meanwhile, the Committee for Medicinal Products for Human Use (CHMP) recently voted in favor of using Afinitor in advanced breast cancer patients. Novartis expects to gain FDA approval shortly as well. Approval for this indication could boost Afinitor sales significantly. Sales could exceed a billion dollars.

The Alcon Division recorded revenues of $2.6 billion in the quarter, up 1% driven by strong sales of cataract products in the US and emerging markets.

Sales from the Sandoz division declined 13% to $2.1 billion mainly due to price erosion of 7 percentage points. Overall volume growth was flat as double-digit growth in Western, Central and Eastern Europe, Asia and biosimilars was offset by a decline in Germany. Performance was also affected by lower sales of Sandoz’s generic version of Sanofi’s (SNY) Lovenox.

Sales at the Vaccines and Diagnostics division grew 17% from the year-ago quarter to $349 million. Meningitis vaccine Menveo was a major contributor to growth.

Consumer Health sales at Novartis were down 24% from the prior-year quarter to $904 million. Sales continued to be affected by supply shortages due to the suspension of operations at Novartis’ Lincoln facility in Nebraska. However, Novartis resumed production of both over-the-counter (:OTC) and animal health products and expects to start shipping a limited portfolio in the fourth quarter 2012.

2012 Guidance Reaffirmed

Novartis reaffirmed its 2012 sales guidance at constant currency and expects it to be in line with 2011 levels. Sales could be negatively impacted by about 4% due to the appreciation of the dollar against other currencies, assuming the June average exchange rates prevail.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #3 Rank (Hold rating) in the short run.

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