Vaccines Pull Down NVS Q4 Earnings - Analyst Blog

Novartis (NVS) reported earnings per share of $1.14 for the fourth quarter of 2010, much below the Zacks Consensus Estimate of $1.21 and the year-earlier earnings of $1.26 per share. The substantial drop from the base period was due to robust profits booked in 2009 from windfall sales of H1N1 flu vaccines, not repeated in the current year. High spending in the quarter also affected the earnings performance.

Fourth quarter revenues were up 10% from the prior-year quarter to $14.2 billion. Total revenues edged past the Zacks Consensus Estimate of $14.1 billion. Strong growth in the Pharmaceuticals and Sandoz divisions were offset by disappointing performance in the Vaccines and Diagnostic and Consumer Healthcare divisions.

For full year 2010, Novartis reported earnings per share of $5.15, up 14% from the year-ago figure of $4.50 owing to revenue growth. The full year 2010 earnings per share were also above the Zacks Consensus Estimate of $5.11. Full year 2010 revenues increased 14% over the prior year to $50.6 billion driven by strong growth across all business units of the Switzerland-based pharma giant. 2010 revenues were, however, a tad below the Zacks Consensus Sales Estimate of $50.7 million.

The Quarter That Was

The performance of each of the four segments is discussed below.

Pharmaceutical division sales were up 3% to $8 billion in the quarter. Growth from volume expansion and new product launches (accounting for 23% of pharmaceutical sales) was offset by slight price erosion. All the franchises performed well in the quarter.

Oncology sales growth of 9% was led by some established products like Gleevec (up 5% to $1.1 billion), Sandostatin (up 11% to $351 million) and Femara (up 3% to $351 million) as well as new products like Tasigna (up 85% to $126 million), Afinitor (up 150% to $80 million) and Exjade (up 14% to $209 million).

Galvus (up 88% to $124 million) led the 4% growth in the Cardiovascular and Metabolism franchise. The Neuroscience and Ophthalmics franchise experienced a 3% increase led by Lucentis (up 5% to $394 million) and Extavia (up 74% to $40 million). The franchise also benefited from a solid start to multiple sclerosis drug, Gilenya, which has been launched in the US. Novartis has received positive opinion from the Committee of Medicinal Products for Human Use (CHMP) for approval of Gilenya in the EU. Gilenya has also been approved in Switzerland and Australia.

Sandoz division sales were up 10% to $2.4 billion, benefiting from new product launches like gemcitabine (generic Gemzar), continued exclusivity of enoxaparin (generic Lovenox) and strong biosimilars growth.

The Vaccines and Diagnostics division, recording a sales decline of 74% to $361 million, pulled down overall revenues, thereby affecting earnings. Depressed sales of H1N1 pandemic flu vaccine in the quarter (due to the waning of the swine flu disease) as well as shipment delays (due to production issues at a vaccines plant) perpetrated the fall.

Consumer Health division sales were flat over the prior year at $1.6 billion. We note that the fourth quarter of 2009 reflected the impact of the over-the-counter (OTC) launch of Prevacid24 HR.

2011 Guidance

In 2011, Novartis expects double-digit constant currency growth for overall revenues with Pharmaceuticals growing in the low-to-mid single-digit range and Sandoz growing in the mid-single-digit range. Growth in both the divisions is expected to be driven by new product launches, expansion of existing products and also in emerging markets, slightly offset by pricing pressure and generic competition.

Novartis also aims to increase its operating margins in 2011, despite the pricing pressure, generic competition and decline in H1N1 pandemic flu sales.

Pipeline Update

In 2010, Novartis gained 13 product approvals and filed regulatory applications for 16 pipeline drugs. Important product approvals/label expansions in the fourth quarter include Tasigna in first-line chronic myeloid leukemia (in EU and Japan), Lucentis in diabetic macular edema (in EU), and Afinitor in subependymal giant cell astrocytomas associated with tuberous sclerosis (in the US).

Important regulatory filings in the quarter were for ACZ885 (Ilaris) in gouty arthritis (in EU), Lucentis in retinal vein occlusion (in EU), SOM230 in Cushing's disease (in EU), Afinitor in advanced neuroendocrine tumors (in EU and US) and meningococcal B vaccine, Bexsero (in EU).

Novartis presented Ilaris data from two phase III trials for the treatment of gouty arthritis, in the quarter which showed the drug met its primary endpoint. Based on this data, the company filed for approval in Europe in December with the US filing expected in the first quarter of 2011.

Novartis announced that it will not develop QMF149 in either the chronic obstructive pulmonary disease (COPD) or asthma indications for the US market and will only initiate EU filing for asthma and ex-US filing for COPD in 2014.

Our Recommendation

Currently, we have a Neutral recommendation on Novartis, which is supported by a Zacks #3 Rank. We are impressed by Novartis' wide range of products and its efforts to diversify further as is evident by the recent acquisition of a majority stake in Alcon (ACL). Novartis is looking to acquire the remaining stake in the eye-care company by the first half of 2011.  However, weighing in the risks, we prefer to remain on the sidelines due to the imminent patent cliff faced by Novartis as a number of Novartis drugs are about to come up against generic competition between 2011 and 2015.