Tuesday, February 1, 2011

Novartis 4Q10 1/27/2011

Novartis released earnings Thursday, and reported $14.2 billion in sales for the fourth quarter and $50.6 billion in sales for year 2010. Novartis increased their fourth quarter sales by $1.3 billion, or 10%, from fourth quarter 2009, and increased their annual sales by $6.3 billion, representing an increase of 14%. In addition to sales, profit also exceeded last year’s numbers, but did not exceed analyst expectations. Profits for the year jumped to $10 billion, representing an increase of 18% over the previous year’s $8.4 billion in profits. Quarterly profits fell by 2% from $2.32 billion to $2.27 billion.

Despite fairly positive numbers, Novartis shares dropped 2.7%, as the reported earnings did not meet analyst recommendations. Wall Street analysts had expected Novartis to report earnings of $1.25 per share, but the company only returned $1.14. The earnings underperformed analyst expectations mainly due to restructuring charges and currency impacts. However, the company praised its acquisition of Alcon, and expects the new eye-care division to be a driver of earnings growth in the future. In addition, the company saw 13 major products approved, and filed 16 new products during the 2010 year. Novartis saw strong growth in its generic division, which saw sales increase 14% from $7.5 billion to $8.5 billion. The generic arm of Novartis capitalized on patent expirations of other large pharmaceutical companies such as Sanofi-Aventis and Merck. Novartis created generic version of Sanofi-Aventis’ Lovenox, a blood thinning drug, and Cozaar, a major cardiovascular drug created by Merck. Novartis also has some potential blockbuster drugs in the pipeline. The company is currently working on an experimental respiratory drug called QVA149, which is expected to be a major drug if it is approved. A new blockbuster drug is necessary, as Novartis is about to face patent expirations of some of its biggest drugs. Diovan, the company’s best-selling heart drug, drove $6 billion in sales in 2009, and is now facing patent expiration in 2011. In addition, Gilvec drove nearly $4 billion in sales, and is facing patent expiration in 2015.

To summarize, Novartis saw increase in annual and quarterly sales, and an increase in annual earnings. Despite these increases, the company missed analyst expectations, and the stock dropped by 2.7%. Going forward, the company needs to find a new blockbuster drug to help alleviate the earnings loss that will come when two major drugs, Diovan and Gilvec, face patent expiration. Considering the patent expirations the company is facing, and the uncertainty surrounding healthcare reform, I am cautious about Novartis’ return potential and its place in our portfolio.

-Ryan M. Kennedy

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