Novartis AG (NVS) posted 2010 second-quarter results before the opening bell on Thursday. The company recorded a 19.2% growth in net income to $2.4 billion from $2.0 billion in the year-ago quarter. Excluding special items, adjusted earnings per ADR came in at $1.20, which were well ahead of both the year-ago results of $1.05 and the Zacks Consensus Estimate of $1.12 per ADR.

Quarterly Details

During the quarter, Novartis’ total sales logged a growth of 11% to $11.7 billion from $10.5 billion in the prior-year quarter. Higher sales were driven by a 12% growth in volumes, helped by the introduction of new products, including those related to the A(H1N1) flu pandemic, partially offset by a 1% decline caused by lower prices.

In terms of segments, Pharmaceuticals — the flagship division — grew 8% to $7.7 billion from $7.1 billion in the year-ago period. Novartis grew revenues across all sub-segments, including Cardiovascular & Metabolism (+4% y-o-y), Oncology (+11% y-o-y), Neuroscience & Ophthalmics (+14% y-o-y), Respiratory (+8% y-o-y) and Immunology & Infectious Diseases (+6% y-o-y).

The company’s two major drugs in the Pharmaceuticals segment, Diovan and Gleevec, posted growth rates of 1% and 9% to $1.6 billion and $1.1 billion, respectively. Geographically, Canada and Latin America, Asia/Africa/Australasia, U.S. and Europe grew 22%, 12%, 7% and 3%, respectively.

Novartis’ Sandoz division grew 11% to $2.0 billion from $1.8 billion in the year-ago quarter. The increase was mainly attributable to new product launches and contribution from the recently acquired Austria-based firm EBEWE Pharma’s specialty generic business. In terms of regions, U.S., Asia/Africa/Australasia, and Canada and Latin America recorded strong growth of 37%, 22% and 14%, respectively, while Europe fell 2% year over year.

Novartis’ Consumer Health segment rose 7% year-over-year to $1.5 billion driven by growth in over-the-counter (OTC), Animal Health and CIBA Vision businesses. The division recorded a 13% growth in Asia/Africa/Australasia followed by growth of 12%, 8% and 1% in the U.S., Canada and Latin America and Europe.

Vaccines and Diagnostics division’s sales logged an impressive growth of 128% to $564 million from $247 million in the year-ago period. The robust growth was primarily driven by revenues from A(H1N1) pandemic flu contracts in the U.S. and Japan coupled with the expansion of vaccines business in emerging markets.

Novartis’ operating income rose 25% year-over-year to $3.0 billion during the quarter, while operating margin expanded 290 basis points to 25.3%. The growth was mainly attributable to higher sales coupled with management initiatives to improve productivity and strict cost controls.

Balance Sheet and Cash Flow

The company ended the quarter with cash and cash equivalents of $5.6 billion and long-term debt-to-capitalization of 19.2%, compared to $3.6 billion of cash and long-term debt-to-capitalization of 15.4% in the year-ago period. During the reported quarter, Novartis generated $3.0 billion of cash from operations, received $947 million from borrowings and utilized $2.7 billion towards purchasing marketable securities and $355 million towards capital expenditures.

Outlook and Zacks Consensus

Buoyed by the better-than-expected quarterly performance, Novartis now expects sales to grow by mid-to-high single digits in 2010, compared to mid-single-digit growth predicted earlier. Moreover, the company also stated that it plans to move ahead with the planned acquisition of Nestle SA’s 52% stake in the U.S. eyecare major Alcon Inc. (ACL) for $28 billion. Novartis already owns a 25% interest in Alcon under a deal with Nestle in 2008. After completion of the transaction, Novartis plans to acquire the remaining 23% minority stake in Alcon for 2.8 Novartis ADR’s for each Alcon share.

The Zacks Consensus Estimate on Novartis’ earnings for 2010 is currently pegged at $4.84 per ADR, which moved down by 5 cents in just the past week as 3 of 8 covering analysts lowered expectations. For the next year, the Zacks Consensus Estimate has decreased by 10 cents to $5.17 per ADR over the past week as 4 of 7 covering analysts reduced projections.
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