NVS Beats by a Penny, View Guarded - Analyst Blog

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Swiss pharmaceutical giant Novartis ( NVS ) reported earnings per share of $1.23 for the fourth quarter of 2011, marginally beating the Zacks Consensus Estimate of $1.22. Earnings were also above the prior-year figure of $1.14 per share. An unimpressive top-line was countered by higher adjusted operating income resulting in the nominal beat.

Reported earnings were only $0.49, down 48% year over year, due to huge exceptional and one-time charges of $1.5 billion in the quarter. The exceptional charges related primarily to the Tekturna/Rasilez sales decline, discontinuation of some pipeline candidates and temporary suspension of production at the Lincoln, Nebraska facility.

Fourth quarter revenues of $14.8 billion fell short of the Zacks Consensus Estimate of $15.0 billion mainly due to poor performance of the Sandoz and Consumer Health segments. Foreign exchange further affected fourth quarter revenue by 1%. Revenues were however ahead of $14.2 billion recorded in the year-ago period.

For the full year 2011, Novartis announced earnings of $5.57 per share, slightly below the Zacks Consensus Estimate of $5.63. Revenues were $58.6 billion, minimally below the Zacks Consensus Estimate of $58.8 billion. Revenues, however, grew 16% and earnings were up 8% over the prior year.

The Fourth Quarter in Detail

Novartis operates in five segments. The financial details from these segments are discussed below.

Pharmaceutical division sales were up 4% to $8.3 billion in the quarter. Growth from volume expansion and new product launches (accounting for 30% of Pharmaceutical sales) was partly offset by price erosion, the negative impact of patent expirations and product divestments.

Oncology sales growth of 1% was led by some established products like Gleevec (up 8% to $1.2 billion) and Sandostatin (up 7% to $374 million) as well as new products like Tasigna (up 64% to $207 million) and Afinitor (up 66% to $133 million). Femara sales (down 62% to $134 million) were negatively impacted by generic erosion.

The Cardiovascular and Metabolism franchise recorded a sales decline of 8% due to weakness in Diovan (down 16% to $1.3 billion) and Tekturna (marketed as Rasilez outside US)(down 19% to $108 million). Novartis' blockbuster hypertension drug Diovan loses patent expiration in the US in September 2012 and is already facing generic erosion in the European Union ( EU ). Diovan will greatly weigh upon Novartis' top line once its patent expires. Tekturna sales were hit by the failure of the ALTITUDE study. In December 2011 Novartis announced that it has stopped the ALTITUDE study which was investigating Tekturna/ Rasilez in a high-risk population of patients with type-II diabetes and renal impairment following recommendation from a Data Monitoring Committee. As a result, Novartis is recommending against use of Rasilez/Tekturna-based products in combination with an angiotensin converting enzyme ( ACE ) inhibitor or angiotensin receptor blocker ( ARB ) in hypertensive patients with diabetes. It has ceased promotion of any such combination medicines.

The Neuroscience and Ophthalmics franchise experienced a 33% increase led by eye drug Lucentis (up 40% to $550 million) and new multiple sclerosis drug Gilenya, which recorded revenues of $203 million.  The respiratory franchise recorded a growth of 20% driven by Onbrez Breezhaler (up 88% to $32 million) and Xolair (up 27% to $130 million).

Last year, Novartis completed the merger with Alcon following which Alcon became the second largest division within Novartis. The Alcon Division recorded revenue of $2.4 billion in the quarter, representing a pro-forma growth of 6% driven by strong growth of ophthalmic pharmaceuticals and surgical products.

Sandoz , Novartis' generic arm, recorded a sales decline of 5% to $2.3 billion as growth from volume expansion was offset by price erosion. Moreover, the generic version of Sanofi 's ( SNY ) Lovenox was down year over year, which significantly impacted Sandoz' US retail generics and biosimilars growth. Softer pricing resulting from increased competition affected generic Lovenox sales. The volume growth was driven by strong performances in France, Spain, Russia, Italy and Japan as well as from biosimilars.

Sales at the Vaccines and Diagnostics division grew 86% over the year-ago quarter to $671 million. Strong performance of meningococcal vaccines (particularly Menveo), brisk diagnostics sales and resolution of shipment delays (which affected prior quarters) drove the upsurge. One time revenue from pre-pandemic flu vaccine also boosted sales in the quarter.

Consumer Health sales were down 7% over the prior year to $1.1 billion due to weakness in sales of over-the-counter (OTC) products. In early January 2012, Novartis issued a voluntary recall for certain OTC products in the United States, following the temporary suspension of operations from its Lincoln, Nebraska facility which affected OTC sales. The Animal Health division however did well in the quarter.

2012 Guidance

Novartis expects 2012 total constant currency sales to be in line with 2011 levels. The newly launched products are expected to make up for Diovan generic erosion, decline in Tekturna/Rasilez sales, price erosion and ongoing issues at the Lincoln plant. The Lincoln plant would resume shipments in mid-2012. Management expects to lose about $1.2 billion in Diovan sales in 2012. This combined with the Femara patent expiration will affect Pharmaceuticals revenue by about $2.6 billion. Moreover, Tekturna/ Rasilez sales are forecast to be reduced to half of what they are in 2011.

Novartis estimates a year-over-year decline in core operating margins (in constant currencies) in 2012 due to pricing pressure, generic competition and the suspension of operations at Lincoln.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #3 Rank ("Hold" rating) in the short run. Though pleased with Novartis' wide range of products and its business diversity, we prefer to remain on the sidelines in the long term due to the imminent patent cliff faced by the company.

NOVARTIS AG-ADR ( NVS ): Free Stock Analysis Report
SANOFI-AVENTIS ( SNY ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: ACE , ARB , EU , NVS , SNY

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