Novartis (NVS) Beats Q4 Earnings, Might Spin-Off Alcon

Novartis AGNVS reported fourth-quarter 2016 core earnings of $1.12 per share, above the Zacks Consensus Estimate of $1.09 but below than the year-ago figure of $1.14. Revenues declined 2% to $12.3 billion and were marginally below the Zacks Consensus Estimate of $12.4 billion as volume growth was offset by the negative impact of generic competition.

A look at Novartis' share price movement in the last 12 months shows that the stock has underperformed the Zacks classified industry. Its shares have lost 14.2% compared with 2% decline for the industry.

A look at Novartis' share price movement in the last 12 months shows that the stock has underperformed the Zacks classified Large Cap Pharma industry. Its shares have lost 14.2% compared with 2% decline for the industry.

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, down 1%. Generic competition and pricing pressure dented sales at the segment, primarily due to the entry of generics for Gleevec in the U.S. Growth products - Gilenya, Tasigna, Cosentyx, Tafinlar + Mekinist, Promacta/Revolade, Jakavi and Entresto - surged 20% to $4.0 billion, and comprised 48% of net division sales.

Sales at the Sandoz division were $2.6 billion, up 3% as volume growth was offset by price erosion. Biopharmaceuticals sales surged 28% to $277 million.

Sales at the Alcon division were $1.4 billion, flat year over year. Surgical sales were down due to lower sales of cataract and refractive equipment along with competitive pressure in intraocular lenses (IOLs). The supply levels and customer service has improved in the surgical department. Vision care sales were up 5% fueled by strong performance of the daily contact lens portfolio, including continued double-digit growth of Dailies Total1 globally.

2016 Results

Revenues for 2016 came in at $48.5 billion, flat from 2015 and marginally below the Zacks Consensus Estimate of $48.6 billion. Earnings per share came in at $4.75, down from $5.01 in 2015 but surpassed the Zacks Consensus Estimate of $4.71.

2017 Outlook

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 U.S. and Europe. The impact of generic competition on sales is expected to be approximately $2.5 billion in 2017. Moreover, unfavorable currency movement is anticipated to hurt sales by 2% in 2016.

Pipeline Update

Novartis' pipeline progress has been encouraging. The company received EU approval for a label expansion of ophthalmology drug Lucentis. The drug is now approved to treat patients with visual impairment due to rare conditions causing choroidal neovascularization (CNV). The European Commission (EC) also approved Arzerra in combination with fludarabine and cyclophosphamide for the treatment of adult patients with relapsed chronic lymphocytic leukemia.

On the other hand, Novartis got positive opinion from CHMP for Votubia as an adjunctive treatment for patients aged two years and older whose refractory partial-onset seizures, with or without secondary generalization, are associated with tuberous sclerosis complex (TSC).

The CHMP also recommended the approval of Ilaris to treat three rare and distinct Periodic Fever Syndromes. Quite a few drugs/candidates received Priority Review status from the FDA. The FDA granted priority review to LEE011 (ribociclib) in combination with letrozole as first-line treatment for post-menopausal women with HR+/HER2- advanced or metastatic breast cancer. The application for the same was also accepted for review in the EU. The FDA also granted Priority Review to Tafinlar + Mekinist combination therapy for the treatment of BRAF mutant non-small cell lung cancer (NSCLC) and PKC412 (midostaurin) for the treatment of newly diagnosed FLT3 mutation-positive acute myeloid leukemia and advanced systemic mastocytosis.

Novartis is also looking to expand Zykadia's label in the U.S. and EU as a first-line treatment for patients with ALK+ NSCLC. The company has submitted applications for the same in the U.S. and EU.

Meanwhile, BACE inhibitor CNP520 was granted Fast Track designation in the U.S. We note that Novartis is developing CNP520 is being co-developed with Amgen, Inc. AMGN .

On the other hand, Sandoz continues to strengthen its biosimilars portfolio. The ASSIST-FL trial met its primary endpoint wherein biosimilar version of MabThera demonstrated equivalent efficacy in addition to safety, pharmacokinetics and pharmacodynamics to the reference product while the data from the EGALITY trial showed that there are no clinically meaningful differences between biosimilar version of Enbrel and reference drug.

Novartis AG Price and Consensus

Novartis AG Price and Consensus | Novartis AG Quote

Our Take

Novartis currently carries a Zacks Rank #4 (Sell). Novartis' fourth-quarter 2016 results were mixed with the company beating earnings estimates but missing on revenues. The company has been facing challenging conditions for the past few quarters.

Concurrent with the fourth-quarter results, Novartis announced that it is mulling strategic options for Alcon which includes retaining the business to separation via a capital markets transaction such as a spin-off or an initial public offering. Given its dismal performance Alcon seems to be a laggard for quite some time now. The company will throw more light on its plans for Alcon later in 2017.

Novartis has also initiated a share repurchase program of $5 million to return value to shareholders.

On a positive note, Cosentyx hit $1.1 billion in sales in 2016 thereby becoming a blockbuster drug for Novartis while Entresto is picking up gradually following positive treatment guidelines in the U.S and Europe and ongoing field force expansion in the U.S. The oncology portfolio (excluding Gleevec) also looks solid driven by new assets and Jakavi.

Going forward, strong performance in growth products should be able to offset the impact of generic for Gleevec. We are also impressed by the company's efforts to strengthen its biosimilars portfolio.

Key Picks in the Sector

Some better-ranked stocks in the health care sector include Sunesis Pharmaceuticals, Inc. SNSS and Sucampo Pharmaceuticals SCMP . While Sucampo sports a Zacks Rank #1 (Strong Buy), Sunesis carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Sucmapo's earnings estimates were stable at $1.22 for 2016 but have increased from $1.58 to $1.74 for 2017 over the last 60 days. The company posted a positive earnings surprise in all of the four trailing quarters with an average beat of 35.5%.

Sunesis' loss estimates narrowed 5.06% and 8.80% for 2016 and 2017, respectively, over the past 60 days. The company recorded a positive earnings surprise in three of the last four quarters, with the average being 0.54%.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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