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Is a Surprise in the Cards for Novartis in Q2 Earnings?

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Is a Surprise in the Cards for Novartis in Q2 Earnings?

Swiss-giant Novartis (NVS) is all set to report second-quarter 2018 earnings on Jul 18. While the pharma business should maintain growth, the generic division is expected to be laggard.

Swiss pharma-giant Novartis AG NVS is scheduled to report second-quarter 2018 results on Jul 18.

Novartis has an excellent track record. In the last reported quarter, Novartis delivered a positive earnings surprise of 2.4%. The company posted an average positive earnings surprise of 3.34% in the trailing four quarters. Let's see how things are shaping up for this announcement.

Novartis AG Price and Consensus


Novartis AG Price and Consensus | Novartis AG Quote

Factors at Play

The company did not provide any quarterly guidance. Novartis expects net sales in 2018 to grow in low- to mid-single digit.

The Innovative Medicines division recorded sales of $8.4 billion in the first quarter as it combated generic pressure. We note that Novartis has a strong oncology portfolio of drugs like Afinitor, Exjade, Jakavi, Zykadia, Tasigna, Jadenu, and Kisqali. Oncology franchise continues to drive growth, driven by Promacta/Revolade, Tafinlar + Mekinist, Jakavi and recent launches. The approval of Kymriah for acute lymphoblastic leukemia is a major boost for Novartis, given the potential in the CAR-T therapy space. Psoriasis Cosentyx continues to gain traction on the back of strong growth in its three approved indications, while Entresto’s sales benefited from continued access improvements and expansion of sales force in the United States. Innovative Medicines is projected to grow in mid-single digit in 2018.

Meanwhile, the loss of exclusivity of some of the key drugs in Novartis' portfolio will continue to hurt the company's top line. The company's blockbuster drug, Diovan, is facing stiff generic competition in the United States, the EU and Japan. Gleevec too lost exclusivity, both in the United States and Europe. Exforge is also facing generic competition in the United States and the EU. Further, the oncology drugs are facing new competition in the form of immuno-oncology therapies.

Novartis' generic arm, Sandoz, is making efforts to strengthen its biosimilars portfolio. The launches of Rixathon, the biosimilar version of Rituxan (rituximab) and Erelzi, the biosimilar of Enbrel in EU have boosted the company’s portfolio. However, sales from this division are projected to decline, due to continued industry-wide pricing pressures in the United States. The division also suffered a setback when the FDA issued a complete response letter for the generic version of GlaxoSmithKline’s GSK asthma drug, Advair Diskus.

On the other hand, Novartis recently announced that it intends to spin-off its ophthalmology division, Alcon, into a separately-traded standalone company in order to grow as a medicines company solely. Nevertheless, Alcon sales are estimated to grow in low to mid-single digits. The company is all set to exit its antibacterial and antiviral research program, and reduce the headcount at Emeryville, CA, campus of Novartis Institutes for BioMedical Research (NIBR) by about 140. The company has restructured its business and plans to focus on becoming a core drug-focused company, powered by data and digital technologies. Novartis is looking to solidify its presence in the gene therapy space. It acquired U.S.-based clinical stage gene therapy company, AveXis, Inc. Earlier in 2018, Novartis announced a licensing agreement with Spark Therapeutics ONCE covering development, registration and commercialization rights to voretigene neparvovec, outside the United States.

Novartis’ stock has declined 2.8% in year so far compared with the industry's 1.1% growth.


Earnings Whispers

Our proven model does not conclusively show that Novartis will beat on earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. Unfortunately, that is not the case here, as you will see below.

Zacks ESP: Earnings ESP for Novartis is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.27. 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 #3. Although the rank is favorable, the company's 0.00% ESP makes surprise prediction difficult.

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

Stock to Consider

Here is one stock that you may want to consider, as our model shows that it has the right combination of elements to post earnings beat this quarter.

Amgen, Inc. AMGN has an Earnings ESP of +0.40% and a Zacks Rank #2. The company is slated to release results on Jul 26. You can see the complete list of today’s Zacks #1 Rank stocks here.

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