Novartis (NVS) reported earnings per share of $1.41 for the first quarter of 2011, below the year-earlier earnings of $1.45 per share but well ahead of the Zacks Consensus Estimate of $1.31. The drop from the base period resulted from financing costs for the Alcon acquisition completed in April this year. An increase in the number of shares outstanding, in the quarter, following dilution from the merger also affected earnings. Also marring earnings were robust profits booked in 2009 from windfall sales of H1N1 flu vaccines that were not to be repeated in the current quarter.
First quarter revenues were up a solid 16% over the prior year to $14.0 billion. Total revenues also edged past the Zacks Consensus Estimate of $13.4 billion, driven by strong performance of newly launched products like Gilenya, Tasigna, Exforge and Lucentis. All the segments performed well in the quarter, reporting strong volume growth, except for the Vaccines and Diagnostic segment, which was down due to a lack of H1N1 pandemic flu sales.
The Quarter That Was
The performance of each of the four segments is discussed below.
Pharmaceutical division sales were up 7% to $7.8 billion in the quarter. Growth from volume expansion and new product launches (accounting for 25% of pharmaceutical sales) was offset by 2 percentage points of price erosion and negative impact of generic launches. All the franchises performed well in the quarter.
Oncology sales growth of 8% was led by some established products like Gleevec (up 4% to $1.1 billion), Sandostatin (up 9% to $337 million) and Femara (up 3% to $354 million) as well as new products like Tasigna (up 104% to $153 million) and Afinitor (up 120% to $90 million).
Galvus (up 74% to $132 million) led the 7% growth in the Cardiovascular and Metabolism franchise. The Neuroscience and Ophthalmics franchise experienced a 16% increase led by Lucentis (up 22% to $444 million) and Extavia (up 70% to $34 million). The franchise also benefited from the strong performance of recently launched multiple sclerosis drug, Gilenya, which recorded revenues of $59 million in the US. Novartis received approval to market Gilenya in the EU in the first quarter. Gilenya has also been approved in Switzerland and Australia.
Sandoz division sales were up 16% to $2.3 billion, benefiting from new product launches like the generic version of Eli Lilly’s (LLY) Gemzar, continued exclusivity of generic version of Sanofi Aventis’ (SNY) Lovenox and strong biosimilars growth outside Germany. The segment posted strong revenues in the US, Canada, Western Europe, and Central and Eastern Europe, which made up for the decline in Germany due to healthcare cost containment measures.
The Vaccines and Diagnostics division recorded a sales decline of 73% to $371 million. Depressed sales of H1N1 pandemic flu vaccine in the quarter (due to the waning of the swine flu disease) perpetrated the fall. Excluding the expected decline in H1N1 vaccine sales, the segment grew 43% (in constant currency) driven by growth of the meningitis vaccines (Menveo and MenB).
Consumer Health division sales were up 11% over the prior year at $1.6 billion driven by strong sales of over-the-counter (OTC) products, particularly Prevacid24HR, and the Animal Health business.
In early April, 2011, Novartis completed the merger with Alcon following which Alcon became the second largest division within Novartis. Moreover, Novartis’ CIBA Vision, select eye care medicines and an Alcon business wing will be integrated into Alcon. This new divisional structure will be implemented from the second quarter of 2011. In the first quarter, Alcon sales rose 12% to $1.9 billion driven mainly by strong sales of pharmaceutical products.
2011 Guidance
Novartis maintained its 2011 revenue expectations, aiming to post double-digit constant currency growth. Novartis also hopes to increase its operating margins in 2011, despite the pricing pressure, generic competition and decline in H1N1 pandemic flu sales.
Product and Pipeline Update
Important product approvals/label expansions in the first quarter include Gilenya for highly active relapsing-remitting multiple sclerosis (RRMS) in EU, Lucentis in vision loss due to diabetic macular edema in EU, and Menveo for active immunization to prevent invasive meningococcal disease in children aged 2-10 years in the US.
In the quarter, Novartis received a positive recommendation from an advisory panel of the US Food and Drug Administration (FDA) for expanding use of its renal cancer drug Afinitor. The approval is sought for the treatment of patients with advanced neuroendocrine tumors (NET) of pancreatic origin, a rare form of pancreatic cancer.
Novartis also received a positive opinion from an FDA panel recommending approval of only the lower 75 mcg dose and not the higher 150 mcg dose of QAB149 for the treatment of chronic obstructive pulmonary disease (COPD). QAB149 is already marketed as Onbrez Breezhaler in more than 50 countries all over the world. QAB149 will be marketed as Arcapta Neohaler in the US, if approved.
Novartis also received positive opinion from the Committee for Medicinal Products for Human Use (CHMP) for approving Lucentis for the treatment of visual impairment due to macular edema secondary to retinal vein occlusion (RVO) in Europe.
In the quarter, Novartis’ partner, Incyte Corporation (INCY), announced positive data from a late-stage study of JAK inhibitor INC424, which showed significant reduction in spleen size in myelofibrosis (MF) patients treated with INC424 compared to those treated with the best available therapy for MF. Based on the data, Novartis expects to file global regulatory applications for the candidate in the second quarter of 2011.
Our Recommendation
Currently, we have a Neutral recommendation on Novartis, which is supported by a Zacks #3 Rank (short-term “Hold” rating). We are highly encouraged by the Swiss company’s strong performance in the first quarter. Though pleased with Novartis’ wide range of products and its efforts to diversify further, as is evident by the acquisition of eye-care company Alcon, we prefer to remain on the sidelines due to the imminent patent cliff faced by the company.
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