Novartis (NVS) Tops Q2 Earnings & Sales, Expenses To Grow

Novartis AG (NYSE:NVS) reported second-quarter 2016 core earnings of $1.23 per share. On an adjusted basis, earnings were $1.22 per share beating the Zacks Consensus Estimate of $1.18.

Revenues also declined 2% to $12.5 billion but were above the Zacks Consensus Estimate of $12.1 billion.

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

The Quarter in Detail

Novartis operates under three divisions: Innovative Medicines (Pharmaceuticals), Alcon and Generics (Sandoz).

The Innovative Medicines (pharmaceuticals) division recorded sales of $8.4 billion, down 1%. Generic competition for Gleevec and pricing negatively impacted sales. Growth Products (Gilenya, Tasigna, Tafinlar + Mekinist, Jakavi and Promacta/Revolade) increased 23% to $3.8 billion, and comprised 45% of net division sales.

The Alcon division recorded sales of $1.5 billion, down 1%. Surgical sales were down as the strong performance of cataract consumables was more than offset by weak sales of intraocular lenses (IOLs). Vision care sales were flat as growth in contact lenses offset the decline in contact lens care.

In a bid to revamp its beleaguered Alcon business, Novartis has moved its ophthalmic pharmaceuticals business to the pharmaceuticals division.

Sales at the Sandoz division, Novartis’ generic arm, were $2.6 billion, as volume growth was offset by price erosion. Sales of Biopharmaceuticals surged 11% to $249 million.

2016 Outlook Reiterated

Novartis expects net sales to be broadly in line with the 2015 levels. Growth products are expected to offset the impact of generic competition (primarily Gleevec). In a bid to boost Entresto sales, Novartis decided to significantly increase spending in the second half of 2016 to create a primary care field force in the U.S. and improve medical support for the drug. Consequently, additional spending on Entresto and generic erosion of Gleevec will lead to a decline in operating income. Moreover, unfavorable currency movement will hurt sales by 3% in 2016. For the third quarter, sales and earnings will be down 1% and 2%, respectively, due to foreign exchange fluctuations.

Pipeline Update

Novartis’ pipeline progress in the reported quarter was encouraging. Afinitor was approved in the EU for the treatment of unresectable or metastatic, well-differentiated nonfunctional neuroendocrine tumors of gastrointestinal or lung origin in adults with progressive disease. The FDA approved an expanded label for Xolair to include children aged 6 to 11 years with moderate-to-severely persistent asthma.

Additionally, 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). Novartis has also entered into collaboration and licensing agreement with Xencor, Inc. (NASDAQ:XNCR) to add bispecific antibodies to its growing immuno-oncology portfolio.

Moreover, an independent Data Monitoring Committee recommended stopping the phase III trial on LEE011 early as a pre-planned interim analysis showed that the candidate was able to meet the primary endpoint in postmenopausal women who had received no prior therapy for their HR+/HER2- advanced breast cancer. Novartis also presented encouraging data on Cosentyx, while the three-year follow-up results of a phase III study on the Tafinlar+Mekinist combination showed a survival benefit in patients with BRAF V600E/K+ advanced melanoma on combination therapy versus Tafinlar monotherapy.

On the other hand, the ENESTfreedom trial on Tasigna for the treatment of Ph+CML patients did not meet the primary endpoint.

Meanwhile, Sandoz continues to strengthen its biosimilars portfolio and pipeline. The biosimilar versions of Enbrel and MabThera showed pharmacokinetic bioequivalence to their reference products. The FDA advisory committee has recommended the approval of biosimilar of Enbrel for five indications of the reference product. However, Sandoz received a complete response letter from the FDA for Neulasta biosimilar and the company is working with the agency to resolve the issues. The company is planning to file for two more biosimilars in 2016.

Our Take

Novartis’ second-quarter 2016 results were encouraging with the company beating both top- and bottom-line estimates. Novartis has been facing challenging conditions for the past few quarters. Nevertheless, uptake of newly launched products (Cosentyx) should be able to offset the impact of entry of generics for Gleevec as well as weakness in Alcon. Moreover, the company is working to boost Entresto sales. We are also impressed by the company’s efforts to strengthen its biosimilars portfolio.

Novartis currently carries a Zacks Rank #3 (Hold). Investors interested in the health care sector may consider Johnson & Johnson (NYSE:JNJ) JNJ and Gilead Sciences (NASDAQ:GILD) GILD. Both the stocks carry a Zacks Rank #2 (Buy).