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Novartis (NVS - Analyst Report) reported second quarter 2014 earnings per share of $1.05, up 8% from the year-ago period. Core earnings per share came in at $1.34, up 7% from the year-ago period but missed the Zacks Consensus Estimate of $1.36 by a couple of cents.

All growth rates mentioned below are on a year-on-year basis and at constant exchange rates (CER).

Second quarter revenues increased 2% year over year to $14.6 billion but missed the Zacks Consensus Estimate of $14.7 billion.

Quarter in Detail

Following the divestiture of the diagnostics business in Jan 2014 and the agreement to sell Vaccines business in Apr 2014, Novartis now operates in three divisions: Pharmaceuticals, Alcon, and Generics (Sandoz).

The Pharmaceuticals division recorded sales of $8.2 billion in the reported quarter, up 1% driven by strong volume growth and positive pricing. Key drugs at Novartis - Gilenya, Afinitor, Tasigna, Galvus, Lucentis, Xolair, the chronic obstructive pulmonary disease portfolio and Jakavi - contributed 42% to total sales in the second quarter of 2014, compared with 36% in the year-ago quarter. However, the division was impacted by generic competition for Zometa/Aclasta and Diovan Mono.

The Alcon Division recorded sales of $2.8 billion in the second quarter, up 4%, driven by growth in Surgical franchise and Ophthalmic Pharmaceuticals. Growth in the Surgical franchise was driven by equipment sales. Additionally, the Vision Care business increased driven by strong sales in contact lenses.

Sales in the Sandoz division increased 4% to $2.3 billion primarily due to volume growth, partially offset by price erosion. Biosimilars generated sales of $128 million, up 23%.

We remind investors that Novartis divested its blood transfusion diagnostics unit to Grifols S.A., for approximately $1.7 billion in cash, in Jan 2014. In Apr 2014, Novartis announced that it will sell its Vaccines business to GlaxoSmithKline (GSK - Analyst Report) for $7.1 billion.

Novartis and Glaxo have entered into a joint venture (JV), combining their consumer divisions (Novartis OTC and GSK Consumer Healthcare) to form a larger consumer healthcare business. Novartis will own 36.5% share of the JV and will have four of eleven seats on the JV’s board.

Novartis expects to close the transaction with Glaxo in the first half of 2015.

Moreover, Novartis also entered into a definitive agreement with Eli Lilly and Company (LLY - Analyst Report)) to divest the Animal Health Division for $5.4 billion in a separate transaction in Apr 2014. Novartis expects to close this transaction in the first quarter of 2015.

2014 Outlook Reiterated

Novartis expects sales to increase in low-to-mid single digits in 2014. A generic version of the hypertension drug Diovan Mono was launched in the U.S. earlier this month and Sandoz also launched an authorized generic version of the same. Generics are projected to impact sales by $2.6 billion in 2014.

Pipeline Update

During the quarter, the FDA granted fast track designation to pipeline candidate LCZ696. Novartis is evaluating the candidate for the treatment of patients suffering from chronic heart failure. 

Meanwhile, Novartis’ Zykadia received FDA approval for the treatment of patients with anaplastic lymphoma kinase positive (ALK+) metastatic non-small cell lung cancer (NSCLC) who have progressed on or are intolerant to crizotinib.

Novartis expects an opinion from the Committee for Medicinal Products for Human Use (CHMP) for secukinumab in the fourth quarter of 2014 and the FDA action date is Jan 2015. The candidate is being evaluated for the treatment of psoriasis.

Our Take

Second quarter results were disappointing as Novartis missed the Zacks Consensus Estimate on both counts. We remind investors that Diovan Mono was one of the key drugs of Novartis and the entry of generics will hit sales  in the second half.

Nevertheless, we will cautiously watch Novartis' efforts to realign its portfolio in order to focus on its core portfolio of pharmaceuticals, eye care and generics. We believe the deal to acquire oncology products from GlaxoSmithKline and the divestiture of the Vaccines business is a step in the right direction. It will broaden Novartis’ portfolio and enable it to focus better on its core capabilities besides contributing immensely to the top line.

Novartis, a large cap pharma, currently carries a Zacks Rank #3 (Hold). Right now, Allergan (AGN - Analyst Report) looks well positioned among the large cap pharmas. It carries a Zacks Rank #2 (Buy).

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