Novartis Misses; Reaffirms Guidance

Swiss pharmaceutical giant Novartis (NVS - Snapshot Report) reported third quarter 2012 earnings per share of $1.01, down 1% from the year-ago period. Third quarter 2012 core earnings per share came in at $1.34, down 8% from the year-ago period. Core earnings also missed the Zacks Consensus Estimate $1.38 per share. Lower revenues led to the year-over-year decline in earnings.

Third quarter revenues of $13.8 billion declined 7% from the year-ago period. Revenues also missed the Zacks Consensus Estimate of $14.4 billion. Divisions like Pharmaceuticals, Alcon, Vaccines and Diagnostics, Sandoz and Consumer Health recorded declining sales. Foreign exchange negatively impacted third quarter revenues by 5%.

Quarter in Detail

Novartis reported that Pharmaceuticals division sales declined 5% to $7.8 billion in the reported quarter. Revenues were impacted by the Diovan patent expiration in the EU, generic competition for key products and negative pricing. Moreover, Diovan lost exclusivity in the US on September 21, 2012. Revenues from the segment are expected to decline further in the future.

Products like Lucentis, Tasigna, Afinitor, Gilenya and Galvus continued to perform well. Newly launched products accounted for 29% of the total sales recorded by the Pharmaceutical division during the third quarter of 2012.

Gilenya could, however, face competition from Biogen Idec’s (BIIB - Analyst Report) oral multiple sclerosis (MS) candidate BG-12, which is currently under regulatory review in the EU and US.

Meanwhile, Afinitor is now approved in both the US and the EU to treat patients suffering from advanced breast cancer. Approval for this indication is expected to boost Afinitor sales significantly. During the quarter, Novartis also received EU approval for Jakavi (myelofibrosis) and Seebri Breezhaler (chronic obstructive pulmonary disease).

The Alcon Division recorded revenues of $2.5 billion in the quarter, down 1% affected by the slower procedures and competition in the EU.

Sales from the Sandoz division declined 13% to $2.0 billion mainly due to price erosion of 6 percentage points. Sales at the Vaccines and Diagnostics division declined 11% from the year-ago quarter to $582 million. the decline was primarily due to lower northern hemisphere flu sales.

Consumer Health sales at Novartis were down 22% from the prior-year quarter to $938 million. Sales continued to be affected by supply shortages due to the suspension of operations at Novartis’ Lincoln facility in Nebraska.

2012 Guidance Reaffirmed

Novartis reaffirmed its 2012 sales guidance at constant currency and expects it to be in line with 2011 levels. Sales are expected to be negatively impacted by about 3-4% due to foreign currency movements.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #3 Rank (Hold rating) in the short run.