Novartis A.G. (NVS) reported fourth-quarter 2014 earnings of 62 cents per share, down 23% from the year-ago period. Core earnings per share came in at $1.21, up from $1.18 in the year-ago period and beat the Zacks Consensus Estimate of $1.13. Subsequently, shares went up 2.53%.
Fourth-quarter revenues increased 4% year over year (down 2% on a reported basis) to $14.6 billion and surpassed the Zacks Consensus Estimate of $14.1 billion.
All growth rates mentioned below are on a year-on-year basis and at constant exchange rates (CER).
Quarter in Detail
Following the divestiture of the diagnostics business in Jan 2014 and the agreement to sell its Vaccines business in Apr 2014, Novartis now operates in three divisions: Pharmaceuticals, Alcon and Generics (Sandoz).
The Pharmaceuticals division recorded sales of $7.9 billion in the reported quarter, flat year over year as volume growth was offset by the negative impact of generic competition primarily for Diovan monotherapy and Exforge (generic entry in the U.S. in Sep 2014 and for Exforge HCT in Dec 2014). Growth products (any product launched in the last five years or have exclusivity through 2018) – Gilenya, Afinitor, Tasigna, Galvus, Lucentis, Xolair, the chronic obstructive pulmonary disease portfolio and Jakavi – contributed 46% to total sales in the fourth quarter of 2014, compared with 39% in the year-ago quarter.
The Alcon Division recorded sales of $2.7 billion in the fourth quarter, up 7% driven by growth in Surgical and Ophthalmic Pharmaceuticals.
Sales in the Sandoz division increased 11% to $2.5 billion primarily due to volume growth, partially offset by price erosion. Sales of retail generics in the U.S. and biosimilars generated strong growth due to recent launches. Biosimilars generated sales of $132 million, up 18%.
We remind investors that in Apr 2014, Novartis announced that it will sell its Vaccines business to GlaxoSmithKline (GSK) for $7.1 billion. In exchange, Novartis would acquire Glaxo’s oncology products. Novartis and Glaxo entered into a joint venture, combining their consumer divisions (Novartis OTC and GSK Consumer Healthcare) to form a larger consumer health care business.
Novartis also completed the divestment of its animal health division to Eli Lilly and Company (LLY) in Jan 2015.
2014 Results
Revenues came in at $58.0 billion, up 3% from a year ago and in line with the Zacks Consensus Estimate. Generics impacted sales by $2.4 billion. Core earnings per share came in at $5.23, up from $5.01 in 2013 and easily beat the Zacks Consensus Estimate of $5.19.
2015 Outlook
Novartis expects sales to grow in mid-single digits in 2015. Generics are projected to impact sales by $2.5 billion in 2015 (accounting for the recent launch of generics for Exforge in the U.S).
Pipeline Update
Novartis’ pipeline progress in 2014 was impressive. Cosentyx (secukinumab) received approval in the U.S. and EU for psoriasis in Jan 2015. The FDA and European Commission approved Signifor long-acting release formulation for acromegaly.
The FDA’s Oncologic Drugs Advisory Committee recommended the approval of Sandoz’s experimental biosimilar filgrastim in the U.S. for use in all indications as Neupogen (reference drug).
Meanwhile, Novartis submitted the regulatory applications for LCZ696 in both the U.S. and the EU. The company is evaluating the candidate as a treatment for heart failure patients with reduced ejection fraction. The Committee for Medicinal Products for Human Use granted the candidate accelerated assessment, thereby shortening the review process.
Novartis submitted regulatory applications for Seebri Breezhaler and Ultibro Breezhaler to the FDA and a tentative approval is expected by 2015-end.
However, there have been a few setbacks as well. The phase III trial on oncology drug Afinitor (BOLERO-1) in women with HER2+ advanced breast cancer failed to meet its primary objective for progression-free survival. Moreover, the phase III study INFORMS on Gilenya in primary progressive multiple sclerosis did not show a significant difference from placebo on a combination of disability measures.
Our Take
Novartis is expected to face challenging conditions in 2015. We remind investors that Diovan Mono was one of the key drugs of Novartis and the entry of generics will hit sales in 2015. Exforge and Gleevec are also facing generic competition. Sales from the eye care division Alcon is also expected to be challenged by the entry of generics. Moreover, currency headwinds will continue to negatively impact sales in 2015. Growth in emerging markets will likely be slower in 2015, given geopolitical risks and the impact of oil on some of these economies. Oncology drugs will be under pricing pressure in 2015 as new immuno-oncology therapies enter the market.
Nevertheless, we cautiously watch Novartis' efforts to realign its portfolio in order to focus on its core segments of pharmaceuticals, eye care and generics. We expect investor focus on the launch of two key drugs in 2015 – LCZ696 and Cosentyx.
Novartis, a large-cap pharma, currently carries a Zacks Rank #4 (Sell). Right now, AbbVie (ABBV), carrying a Zacks Rank #2 (Buy), looks favorably placed among the large-cap pharmas.
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