Novartis Misses on Earnings & Revs in Q1 - Analyst Blog

Novartis NVS reported first quarter 2014 earnings per share of $1.21, up 30% from the year-ago period. Core earnings per share came in at $1.31, up 6% from the year-ago period but below the Zacks Consensus Estimate of $1.33.

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

First quarter revenues increased 3% year over year to $14.0 billion but missed the Zacks Consensus Estimate of $14.6 billion.

Quarter in Detail

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

The Pharmaceuticals division recorded sales of $7.8 billion in the reported quarter, up 1% driven by strong volume growth. The division was impacted by generic competition for Zometa/Aclasta. Emerging markets continue to be strong with 9% growth led by China (+17%).

Key drugs at Novartis - Gilenya, Afinitor, Tasigna, Galvus, Lucentis, Xolair and Jakavi - contributed 41% to total sales in the first quarter of 2014.

The Alcon Division recorded revenues of $2.6 billion in the first quarter, up 6% driven by growth in the Surgical Franchise tempered by moderate growth in Ophthalmic Pharmaceuticals. The growth in the Surgical Franchise was driven by equipment growth. The growth in the Surgical Franchise was driven by equipment growth. Additionally, vision care business increased driven by strong sales in contact lenses. However, sales in Ophthalmic Pharmaceuticals were down.

Sales in the Sandoz division increased 4% to $2.3 billion primarily due to volume growth, partially offset by price erosion.

Sales at the Vaccines were up 13% to $215 million. We remind investors that Novartis divested its blood transfusion diagnostics unit to Grifols S.A., for approximately $1.7 billion in cash, in Jan 2014. Earlier this week, Novartis announced that it will sell its Vaccines business to GlaxoSmithKline GSK for $7.1 billion.

Consumer Health (comprising OTC and Animal Health) sales at Novartis were up 8% 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.

We note that Novartis and GlaxoSmithKline have entered into a joint venture (JV), combining their consumer divisions (Novartis OTC and GSK Consumer Healthcare) to form a larger consumer healthcare business. Novartis will own 36.5% share of the JV and will have four of eleven seats on the JV's Board.

Moreover, Novartis also entered into a definitive agreement with Eli Lilly and Company LLY to divest the Animal Health Division for $5.4 billion in a separate transaction.

2014 Outlook Reiterated

Novartis expects sales to increase in low-to-mid single digits in 2014. Assuming generic versions of drug Diovan Mono will be launched in the U.S by the third quarter of 2014, generics are projected to impact sales by $2.7 billion in 2014 as compared to $2.2 billion in 2013.

Pipeline Update

During the quarter, Xolair was approved in the EU and U.S. for chronic spontaneous/idiopathic urticaria while Lucentis was approved in Japan to treat patients with diabetic macular edema (DME).

Meanwhile, the Data Monitoring Committee unanimously recommended early closure of the phase III trial, PARADIGM-HF, which was evaluating LCZ696 in patients suffering from chronic heart failure due to positive interim results.

However, there were a few setbacks also. Novartis submitted a revised dossier for RLX030 (serelaxin) for the treatment of acute heart failure (AHF) to the Committee for Medicinal Products for Human Use (CHMP) following a negative opinion in Jan 2014. A revised opinion is expected by the end of May. Moreover, the FDA's Cardiovascular and Renal Drugs Advisory Committee also voted against recommending approval of RLX030 for the treatment of AHF in the U.S.

Our Take

First quarter results were disappointing as Novartis missed the Zacks Consensus Estimate on all fronts. We expect the entry of generic Diovan Meno to impact sales in the second half of 2014. We remind investors that Diovan was one of the key drugs of Novartis, generating over $3.5 billion in sales in 2013.

Nevertheless, we will cautiously watch Novartis' efforts to realign its portfolio in order to focus on its core portfolio of pharmaceuticals, eye care and generics. We believe the acquisition of oncology products from GlaxoSmithKline and divestment of Vaccines business is a step in the right direction. It will broaden Novartis' portfolio and enable it to focus better on its core capabilities besides contributing immensely to the top line. Margins are also expected to get a significant boost.

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