Novartis (NVS) Q3 Earnings: Stock To Beat Estimates Again?

Novartis AG (NYSE:NVS) is scheduled to report third-quarter 2016 results on Oct 25.

In the last reported quarter, it recorded a positive earnings surprise of 3.39%. Overall, Novartis has posted an average negative earnings surprise of 2.38% in the four trailing quarters. Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Novartis is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: The Earnings Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.84%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank: Novartis carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 have a significantly higher chance of beating earnings. The sell-rated stocks (#4 or #5), on the other hand, should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

The combination of Novartis’ favorable Zacks Rank and positive ESP makes us reasonably confident of a positive earnings beat on Oct 25.

Factors to Impact the Quarter

Novartis operates under three segments: Innovative Medicines (Pharmaceuticals), Alcon and Sandoz (Generics). Although the company expects 2016 to be a transformative year, it has been facing challenging conditions over the past few quarters.

Innovative Medicines is expected to continue being impacted by generic competition due to the genericization of Gleevec/Glivec in the U.S. The company’s ophthalmologic division, Alcon, continues to face challenges due to a slowdown in cataract equipment placements and weak sales of intraocular lenses. Going forward, we expect these factors to dampen sales at the segment. On the other hand, Novartis’ generic arm, Sandoz, in its efforts to strengthen the biosimilars portfolio and pipeline, should offset weakness in Alcon.

Last quarter, the company’s heart failure drug, Entresto, obtained a strong Class I recommendation in both the U.S. and the EU as per the heart failure treatment guidelines. These guidelines establish Entresto as the standard of care for symptomatic patients with heart failure with reduced ejection fraction (HFrEF). The company’s decision to increase spending on Entresto to build a U.S. primary care field force and add incremental medical support will drive expenses in the third quarter. Entresto sales are expected to be approximately $200 million in 2016.

In the third quarter, unfavorable movements in foreign exchange rates are estimated to impact sales by 1% and earnings by 2%.

Meanwhile, investor focus should remain on the sales ramp-up of newly launched drugs Entresto, Glatopa and Cosentyx. Main growth drivers at the oncology segment will include Jakavi, Tasigna, Promacta/Revolade, Tafinlar+Mekinist and the improved formulation of Exjade. Multiple sclerosis drug, Gilenya, should also perform well.

Stocks to Consider

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

Amgen Inc. (NASDAQ:AMGN) is expected to report results on Oct 26. The company has an Earnings ESP of +1.79% and a Zacks Rank #3. the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for ImmunoGen, Inc. (NASDAQ:IMGN) is +5.41% and it carries a Zacks Rank #3. The company is scheduled to release earnings on Oct 28.

Infinity Pharmaceuticals, Inc. (NASDAQ:INFI) has an Earnings ESP of +5.81% and a Zacks Rank #1. The company is expected to report quarterly numbers on Nov 3.

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