2Q Solid For Novartis


Novartis reported second-quarter results that largely matched expectations and those of consensus. No significant changes are made to the estimate of $78 per share based on the quarterly results. During the quarter, the strength in recently launched products as well as favorable clinical data offset increased generic competition, showcasing the strong intellectual property at the core of Novartis’.

Additionally, the company increased its full-year 2013 operating income outlook to a low-single-digit decline, up from a mid-singledigit decline largely due to slightly delayed generic competition for cardiovascular drug Diovan in certain geographies. On the pharmaceutical front, several key recently launched products posted strong gains and should help the company through the patent loss on Diovan. Specifically, multiple sclerosis drug Gilenya, cancer drugs Afinitor and Tasigna, and diabetes drug Galvus all posted gains well over 30% year over year. While it is expected that competition will slow Gilenya’s gains, the remaining drugs should all continue to post robust gains over the next several quarters. This growth should help mitigate the company’s large patent loss on Diovan, which represented just under 10% of total sales in 2012.

Balancing the patent losses and the strong new product launches, we expect slight growth in Novartis’ drug division in 2014, followed by increasing growth as patent losses fade. Beyond current products, Novartis is making strides in creating the next generation of blockbusters, which we believe is underappreciated by the investment community. Most importantly, we believe serelaxin for acute heart failure, AIN457 in psoriasis, and QVA149 in respiratory disease hold blockbuster potential in major therapeutic categories.

Turning to the other divisions, Novartis posted steady gains across all its nonbranded pharmaceutical divisions. Improving manufacturing ability helped gains in this group. We project continued steady growth for these divisions over the next several quarters as manufacturing continues to improve and strength in Sandoz’s biosimilar launches expands. On the bottom line, earnings per share fell 2% year over year despite 1% sales growth, as increased generic competition cut high-margin drug sales of Diovan in several geographies. However, productivity initiatives helped mitigate the margin erosion.

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