Switzerland-based Novartis AG NVS, one of the leading players in the health care solutions, will be reporting its first-quarter 2015 results on Apr 23, 2015.
Novartis’ track record was mixed in 2014 with the company missing estimates twice in the last four quarters. Nevertheless, the average earnings beat over the last four quarters stood at 1.2%. Let’s see how things are shaping up for this announcement.
Factors Influencing this Quarter
Key drugs at Novartis – Gilenya, Afinitor, Tasigna, Galvus, Lucentis, Xolair, the chronic obstructive pulmonary disease portfolio and Jakavi – contribute substantially to sales.
However, we are concerned about the loss of patent protection for some of the key drugs in Novartis’ portfolio. Novartis’ blockbuster drug, Diovan lost exclusivity both in the U.S. and EU and entry of generics will hurt sales in 2015.
The patent on Gleevec will expire in 2015 in the U.S. and the EU in 2016 for all major indications. Sandostin and Exelon have lost patent protection as well.
Sales at 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. Generics are projected to impact sales by $2.5 billion in 2015.The loss of patent protection for these top-selling drugs will adversely impact sales. Competition will also intensify for Lucentis, thereby impacting its sales. Moreover, growth in emerging markets will likely slow down in 2015, given geopolitical risks and the impact of oil on some of these economies. Oncology drugs will experience pricing pressure in 2015 as new immuno-oncology therapies enter the market.
We expect investor focus to remain on the launch of Cosentyx.
Meanwhile, Novartis undertook a series of steps to reorganize its portfolio in 2014 in order to focus on its core businesses of pharmaceuticals, eye care and generics. In Mar 2015, Novartis acquired certain oncology products and pipeline compounds from GlaxoSmithKline GSK for $16 billion. In exchange, it sold the non-influenza Vaccines business to Glaxo for $7.1 billion. In Jan 2015, the company completed the divestment of its Animal Health Division. In Jan 2014, Novartis completed the sale of its blood transfusion diagnostics unit to Grifols S.A. for $1.7 billion. Although margins are expected to improve, it is still early to gauge the impact of the reorganization.
What Our Model Indicates
Our proven model does not conclusively show that Novartis is likely to beat the Zacks Consensus Estimate in the fourth quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. Unfortunately, this is not the case as you will see below.
Zacks ESP: The Earnings ESP for Novartis is 1.84% as the Most Accurate estimate currently stands at $1.11 while the Zacks Consensus Estimate is $1.09.
Zacks Rank: Novartis carries a Zacks Rank #4 (Sell). Although the ESP is positive, an unfavorable rank makes an earnings beat unlikely.
We generally caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks That Warrant a Look
Here are some health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.
ImmunoGen, Inc. IMGN has an Earnings ESP of +32% and carries a Zacks Rank #3. It is scheduled to report fiscal third-quarter 2015 results on Apr 24.
Biogen Inc BIIB has an Earnings ESP of +0.51% and carries a Zacks Rank #1. The company is scheduled to release first-quarter 2015 results on Apr 24.
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