Novartis (NVS) Beats on Q3 Earnings, Revenues; Keeps View

Novartis (NVS) reported third-quarter 2014 earnings per share of $1.33, up 48% from the year-ago period. Core earnings per share came in at $1.37, up 10% from the year-ago period and beat the Zacks Consensus Estimate of $1.29.

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

Third-quarter revenues increased 5% year over year to $14.7 billion and surpassed the Zacks Consensus Estimate of $14.1 billion.

Quarter in Detail

Following the divestiture of the diagnostics business in Jan 2014 and the agreement to sell its Vaccines business in Apr 2014, Novartis now operates in three divisions: Pharmaceuticals, Alcon and Generics (Sandoz).

The Pharmaceuticals division recorded sales of $7.9 billion in the reported quarter, up 1% driven by strong growth in volumes. The key drugs at Novartis – Gilenya, Afinitor, Tasigna, Galvus, Lucentis, Xolair, the chronic obstructive pulmonary disease portfolio and Jakavi – contributed 44% to total sales in the third quarter of 2014, compared with 38% in the year-ago quarter.

However, the division was impacted by generic competition for Diovan Mono in the U.S. (launched in Jul 2014), continued decline of Diovan monotherapy in Japan (generic entry in Jun 2014), the biennial price cut of many brands and the impact of issues related to investigator-initiated trials.

The Alcon Division recorded sales of $2.7 billion in the third quarter, up 6%, driven by growth in the Surgical franchise and moderate growth in Vision Care and Ophthalmic Pharmaceuticals. Growth in the Surgical franchise was driven by equipment sales.

Sales in the Sandoz division increased 7% to $2.4 billion primarily due to volume growth, partially offset by price erosion. Biosimilars generated sales of $137 million, up 30%.

We remind investors that Novartis had divested its blood transfusion diagnostics unit to Grifols S.A. for approximately $1.7 billion in cash in Jan 2014. In Apr 2014, Novartis had announced that it will sell its Vaccines business to GlaxoSmithKline (GSK) for $7.1 billion.

Novartis and Glaxo have entered into a joint venture (:JV), combining their consumer divisions (Novartis OTC and GSK Consumer Healthcare) to form a larger consumer health care business.

Novartis also had entered into a definitive agreement with Eli Lilly and Company (LLY) to divest its Animal Health Division for $5.4 billion in a separate transaction in Apr 2014.

On October 26, 2014, Novartis entered into a definitive agreement to divest its influenza vaccines business to CSL Limited for $275 million. This transaction is expected to be completed in the second half of 2015.

2014 Outlook Reiterated

Novartis expects sales to increase from low-to-mid single digits in 2014. A generic version of the hypertension drug, Diovan Mono, was launched in the U.S. in Jul 2014 and Sandoz also launched an authorized generic version of the same. Generics are projected to impact sales by $2.5 billion in 2014 (accounting for the recent launch of generics for Exforge in the U.S).

Pipeline Update

Pipeline progress at Novartis in the third quarter and in the year so far has been impressive. The company expects to submit LCZ696 to the FDA by 2014-end and targets 2015 for a filing in the EU. Novartis is evaluating the candidate for the treatment of patients suffering from chronic heart failure.

Meanwhile, the FDA Advisory Committee unanimously recommended the approval of secukinumab (AIN457) for psoriasis. The Committee for Medicinal Products for Human Use (CHMP) rendered a positive opinion for Signifor (pasireotide) long acting release (LAR.V) formulation as a treatment of adult patients with acromegaly. Simbrinza eye drops suspension was approved in the EU to decrease elevated intraocular pressure (:IOP) in adult patients with open-angle glaucoma or ocular hypertension.

Novartis submitted a regulatory application for LDE225 (sonidegib) to the FDA for the treatment of advanced basal cell carcinoma (EU submission in the second quarter). The FDA accepted Sandoz’s biosimilar application for Zarzio (filgrastim).

Our Take

Third-quarter results were encouraging as Novartis beat the Zacks Consensus Estimate on both counts. We remind investors that Diovan Mono was one of the key drugs of Novartis and the entry of generics will hit sales in the fourth quarter. In total, generics impacted third-quarter sales by $600 million and $1.7 billion so far in 2014.

Nevertheless, we will cautiously watch Novartis' efforts to realign its portfolio in order to focus on its core segments of pharmaceuticals, eye care and generics. We believe that the deal to acquire oncology products from GlaxoSmithKline and the divestiture of the Vaccines business is a step in the right direction. It will broaden Novartis’ portfolio and enable it to focus on its core capabilities besides contributing immensely to the top line.

Novartis, a large-cap pharma, currently carries a Zacks Rank #3 (Hold). Right now, Allergan (AGN), carrying a Zacks Rank #2 (Buy), looks well positioned among the large-cap pharmas.

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