Novartis (NVS) Q3 Earnings & Sales Top on New Drugs Strength

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Novartis AG NVS reported encouraging results for third-quarter 2017 wherein both earnings and revenues beat estimates driven by strong performance of Cosentyx and Entresto.

Third-quarter 2017 core earnings of $1.29 per share beat the Zacks Consensus Estimate of $1.25 and were up from $1.23 recorded in the year-ago quarter.

Revenues increased 2% to $12.4 billion as volume growth driven by Cosentyx and Entresto was partially offset by the negative impact of generic competition and pricing. Revenues also beat the Zacks Consensus Estimate of $12.2 billion.

Novartis' stock has rallied 21.5% year to date compared with the industry 's 23.7% gain.

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 segments: Innovative Medicines (Pharmaceuticals), Alcon (Ophthalmology unit) and Sandoz (Generics).

The Innovative Medicines division recorded sales of $8.3 billion, up 2%. Generic competition impacted sales at the segment, primarily due to the entry of generics for Gleevec in the United States and Europe. Nevertheless, growth products - Cosentyx, Entresto, Promacta/Revolade, Jakavi, Tafinlar + Mekinist and Gilenya boosted sales.

Psoriasis Cosentyx sales surged 83% on the back of strong growth in its three approved indications while Entresto's sales benefited from continued access improvements and expansion of sales force in the United States. Oncology franchise (excluding Gleevec) grew 11% driven mainly by Promacta/Revolade, Jakavi, Tafinlar + Mekinist.

Sales at the Sandoz division were $2.6 billion, up 1% as volume growth was offset by price erosion in the Unites States. Sales in the United States declined 13% due to pricing pressure. Biopharmaceuticals sales grew 9% mainly driven by Zarxio in the United States and launches of Rixathon, the biosimilar version of Roche Holdings, Inc.'s RHHBY Rituxan (rituximab) and Erelzi, the biosimilar of Amgen, Inc.'s AMGN Enbrel in EU.

Sales at the Alcon division were $1.5 billion, up 7%. Surgical sales increased 9% driven by broad recovery across most market segments, including strong growth from vitreoretinal products. Vision Care sales were up 4% fueled by the continued double-digit growth of Dailies Total1.

Earlier, Novartis announced that it is mulling strategic options for its lagging eye-care unit Alcon which includes retaining the business, or a separation via capital market transactions such as a spin-off or an initial public offering.  The company updated its strategic plan and announced that it has the potential to grow sales at or above market while delivering profitability in line with the industry. The company also made significant progress on developing a potential capital markets solution, including financial carve-outs, tax and legal entity structuring, and identifying listing and incorporation locations.  A final decision will be taken depending in Alcon's sales performance which is not likely to happen before the first half of 2019.

Meanwhile, Novartis will move the Ophthalmic OTC products to the Alcon Division, effective Jan 1, 2018, to allow the Innovative Medicines Division to focus on pharmaceutical pipeline. However, the Ophthalmic prescription business will remain with the Innovative Medicines Division.

2017 Outlook Reiterated

Novartis expects net sales to be broadly in line with the 2016 levels after including the impact of continued genericization of Gleevec/Glivec in the United States and Europe. Management had earlier estimated the impact of generic competition on sales to be approximately $2.5 billion in 2017.

Novartis AG Price and EPS Surprise

Novartis AG Price and EPS Surprise | Novartis AG Quote

Pipeline Update

Novartis' pipeline candidates' progress has been encouraging. The oncology portfolio continues to gain traction.  In a significant boost, the FDA approved its breakthrough gene transfer treatment, Kymriah suspension for the treatment of patients up to 25 years of age with B-cell precursor acute lymphoblastic leukemia that is refractory or in second or later relapse.  Kymriah has been launched in the United States.

Breast cancer drug Kisqali was approved in Europe as a first-line option for HR+/HER2- advanced or metastatic breast cancer in combination with any aromatase inhibitor. The drug is already approved in the United States. The company also received approval of Rydapt in Europe for the treatment of newly diagnosed FLT3-mutated acute myeloid leukemia and three types of systemic mastocytosis.

Meanwhile, the FDA accepted Novartis' regulatory application of AMG 334 (erenumab) filing for the prevention of migraine in patients experiencing four or more migraine days per month. The FDA also accepted the supplemental New Drug Application for Tasigna and granted priority review. The sNDA seeks the addition of attempting Treatment-Free Remission for the drug's label. On the other hand, Tafinlar + Mekinist received Breakthrough Therapy designation in adjuvant melanoma.

Sandoz's proposed biosimilar of Roche's Rituxan was accepted for regulatory review by the FDA. The proposed biosimilar version of AbbVie. Inc.'s ABBV Humira (adalimumab) matched the reference drug in terms of efficacy and safety in a 51-week clinical study. The biosimilar is currently under review the EU for the treatment of several immunological diseases.

Our Take

Novartis third-quarter results beat both earnings and sales estimates on strong performance of Cosentyx and Entresto. The generic division, Sandoz also combatted pricing pressure strongly buoyed by biosimilar launches of Rixathin and Erelzi. In the first half of 2017, Novartis announced that it is mulling strategic options for Alcon which includes retaining the business separation via capital market transactions such as a spin-off or an initial public offering. The company believes that the Alcon division has revived well for now and hence a decision on a possible spin-off will be taken in 2019. The recent approvals of Kymriah and Kisqali will further boost the oncology portfolio and drive growth.

Zacks Rank

Novartis currently carries a Zacks Rank #3 (Hold). You can see  the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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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 , Earnings , Stocks
Referenced Symbols: RHHBY , NVS , ABBV , AMGN

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