Zacks_Analysts' Blog : Novartis Misses, Plans Job Cuts - Analyst Blog

Swiss pharmaceutical giant Novartis (NVS) reported a lukewarm quarter delivering earnings per share of $1.45 for the third quarter of 2011, below the Zacks Consensus Estimate of $1.47 as well as the prior-quarter earnings of $1.48 per share. An unimpressive top-line led to the lower-than-expected bottom-line. Earnings however beat the year-ago figure of $1.36.

Third quarter revenues were up 18% over the prior year to $14.8 billion. Total revenues were however slightly down sequentially as well as below the Zacks Consensus Estimate of $15.1 billion. The Pharmaceuticals, Alcon and Sandoz divisions were all down sequentially while the Consumer Health segment remained flat quarter over quarter.

Novartis announced a restructuring plan at the third quarter conference call. It plans to lay off 2000 jobs, mostly in Switzerland and the US. It will however hire 700 new people in low-cost and other countries. The company also plans to carry out cost cuts over the next three to five years which include closure of two sites in Switzerland and one in Italy.

Behind the Headlines

The performance of each of the five segments is discussed below.

Pharmaceutical division sales were up 9% to $8.2 billion in the quarter. Revenues were however slightly below $8.3 million recorded in the second quarter of 2011. Growth from volume expansion and new product launches (accounting for 29% of Pharmaceutical sales) was partly offset by price erosion, the negative impact of patent expirations and product divestments. All the franchises performed well in the quarter.

Oncology sales growth of 7% was led by some established products like Gleevec (up 13% to $1.1 billion) and Sandostatin (up 15% to $367 million) as well as new products like Tasigna (up 71% to $186 million) and Afinitor (up 76% to $118 million). Femara sales (down 47% to $182 million) were negatively impacted by generic erosion.

Galvus (up 79% to $181 million) led the 4% growth in the Cardiovascular and Metabolism franchise. The Neuroscience and Ophthalmics franchise experienced a 31% increase led by Lucentis (up 29% to $515 million), which was approved for two additional indications in the first half of 2011, namely visual impairment due to diabetic macular edema (DME) and macular edema following retinal vein occlusion (RVO). Lucentis is currently marketed for the treatment of wet age-related macular degeneration (wet AMD). The franchise also benefited from the strong performance of recently launched (US and Europe) multiple sclerosis drug, Gilenya, which recorded revenues of $153 million.

In early April, 2011, Novartis completed the merger with Alcon following which Alcon became the second largest division within Novartis. Novartis’ CIBA Vision, select eye care medicines (except Lucentis) and an Alcon business wing were integrated into Alcon. The Alcon Division recorded revenue of $2.5 billion in the quarter, representing a pro-forma growth of 12%. Growth was witnessed across all geographical markets.

Sandoz division sales were up only 6% to $2.3 billion as growth from volume expansion was partially offset by price erosion. New products like the generic version of Eli Lilly’s (LLY) Gemzar and Sanofi Aventis’ (SNY) cancer drug Taxotere (docetaxel), which was launched in the US, did well in the quarter.  However, the generic version of Sanofi Aventis’ Lovenox was down year over year due to difficult comparisons. The segment posted strong revenues in Canada, France, Spain, Russia and Japan as well as from biosimilars.

The Vaccines and Diagnostics division rebounded with a growth of 4% over the year ago quarter. Revenues were up a huge 119% sequentially to $655 million. Strong performance of meningococcal vaccines particularly Menveo offset lower sales of H1N1 pandemic flu vaccine in the quarter (due to the waning of the swine flu disease) and delays in product shipments.

Consumer Health division sales were up 8% over the prior year to $1.2 billion but were flat sequentially. Strong sales of over-the-counter (OTC) products, particularly the priority brands like Voltaren in Germany, were offset by a weak summer season in Germany and Poland, product shipment delays, expiry of distribution contract and product divestments.

2011 Guidance

Novartis slightly modified its revenue guidance for 2011 with growth pegged roughly in the low double-digit range in constant currency from prior expectations of double-digit growth. The Pharmaceuticals segment is expected to grow in the low- to mid-single digits while the Alcon division is expected to record growth at a mid- to high-single digit rate on a pro-forma basis. Sandoz is estimated to post high single-digit sales growth.

Novartis continues to expect to increase its operating margins in 2011, overcoming pricing pressure, generic competition and the decline in H1N1 pandemic flu sales.

Foreign exchange is expected to have a positive impact of 4% on sales and a negative impact of 6% on operating income in 2011 at current exchange rates.

Product and Pipeline Update

Novartis drug Afinitor was approved for two additional indications in the European Union in the reported quarter. First, it was approved under the trade name of Votubia for the treatment of subependymal giant cell astrocytomas (SEGA), a benign brain tumor associated with tuberous sclerosis (TS). Following which Afinitor was approved in the EU for the treatment of patients with advanced neuroendocrine tumors (NET) of pancreatic origin with progressive disease. Afinitor is already marketed in the US for both the indications. Afinitor is also marketed for the treatment of advanced renal cell carcinoma (kidney cancer) after an anti-VEGF therapy like Roche’s (RHHBY) Avastin, Pfizer’s (PFE) Sutent or Onyx Pharmaceuticals’(ONXX) Nexavar in the US and EU.

Novartis also witnessed approval of two drugs in Japan in the third quarter. Gilenya was approved for the treatment of multiple sclerosis and Ilaris for the treatment of cryopyrin-associated periodic syndrome (CAPS).

Early in the quarter Novartis’ once-daily long-acting beta2-agonist (LABA) Arcapta Neohaler (75 mcg) was cleared by the FDA for the long-term maintenance bronchodilator treatment of airflow obstruction in patients with chronic obstructive pulmonary disease (COPD) including chronic bronchitis and/or emphysema. With the approval, Arcapta became the first therapy in the LABA class to be approved for the indication in the US.

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 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.