Novartis Posts Strong 4Q, Offers Solid Long-Term Guidance

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Novartis reported fourth-quarter results that slightly exceeded consensus expectations. The company also issued long-term operating income growth guidance through 2015: a mid-single-digit decline in 2013 followed by high-single-digit growth in both 2014 and 2015.

While analysts continue to believe long-term growth prospects are improving, 2013 will face several headwinds. The patent loss on cardiovascular drug Diovan alone will probably shave 400 basis points off Novartis’ total growth in 2013. The patent losses on another cancer drug Zometa and osteoporosis drug Aclasta will also weigh on growth. Further, increased competition from Eylea (age-related macular degeneration) and BG-12 (multiple sclerosis) will probably decelerate growth from Novartis’ Lucentis and Gilenya. Offsetting the weakness, Novartis is launching new drugs NVA237/QVA149 (chronic obstructive pulmonary disease), Bexsero (meningococcus B), Jakavi (myelofibrosis), and Signifor (Cushing’s). Manufacturing improvements to the consumer and generics business should also boost the top line.

Looking further ahead to 2014 and 2015, Novartis is in a strong position to return to growth. Excluding the patent loss on cancer drug Gleevec in 2015, the majority of major patent losses will be behind the company. Additionally, recent studies showed increased efficacy for patients on Gleevec who have switched to Novartis’ nextgeneration cancer drug Tasigna, which should enable the firm to continue to switch patients to Tasigna (which holds patent protection until 2023). With 29% of total sales derived from products launched since 2007, the company is set up for steady long-term growth. Lastly, we believe the pipeline products offer significant upside to Novartis’ longterm prospects, with RLX030 for heart failure representing a key opportunity.

While investors hope to see steady long-term growth, their top two concerns regarding long-term operating income growth is the growing contribution from lower-margin emerging markets and the loss of the high-margin income from Gleevec. While emerging markets offer strong top-line growth, the contribution on the bottom line is not as strong.

 

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