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2017 to look like 2016...disappointing; buy-back provides a cushion

  • 01 Feb 17

Novartis’s Q4 sales met our expectations, coming in flat at CER to $12.3bn, taking the full-year sales to $48.5bn (again flat yoy). Volume growth of 6ppts was nullified by the 4ppts loss to generics and 2ppts loss to pricing during the quarter. The strong dollar scooped out another 2ppts at the reported level. All revenue growth numbers at CER, unless specified otherwise. Generic erosion of Gleevec/Glivec led the decline in Innovative medicines (-1% for Q4 and nearly flat sales for the year), while Sandoz picked up after a disappointing Q3 (+3% for Q4 and +2% for the year). Alcon, on the other hand, did not offer much to cheer, barring the announcement of an exit optionality by the year end. Profitability too remained lacklustre, pulled down further by the impairment of R&D assets worth $433m in the innovative medicines (pharma) segment. In effect, the company-reported operating profit fell by 9% at CER (-13% in USD) during the quarter and by 3% (-8%) for the full year. Segment-wise, Sandoz held up well at 22% growth (although the growth is inflated by a legal provisioning in 2015), while pharma (-4%) and Alcon (-$120m vs +$29m last year) remained in the red during the quarter. This setback, however, was offset at the net level by higher associate income from GSK-consumer healthcare JV ($36m income vs $76m loss last year) and Roche ($120m vs $85m in 2015) during the quarter; net profit came in at $936m (flat at CER and -11% in USD) for the quarter and at $6.7bn for the year. The 2017 guidance wasn’t encouraging either, indicating flat revenue (at CER) and a flat/low single-digit decline in core operating income, with growth largely in H2. Based on the mid-January rates, forex is expected to have a negative impact of 2ppt on sales and 3ppt on core operating income. As compensation to the uninspiring performance and a weak outlook, a share buy-back programme worth ~$5bn for 2017 (to be financed by debt) will be launched.

Uneventful performance

  • 03 Nov 16

No surprises in Q3 from Novartis, with most of the dampeners, including Gleevec’s patent erosion in the US, being in the wash. Sales declined by 1% (all revenue growth numbers at CER, unless specified otherwise) to $12.1bn, marked by volume growth of 5%, nullified by generic competition (-4%) and an unfavourable pricing environment (-2%); there was no currency impact on sales during the quarter. The main defaulters were Gleevec/Glivec (-30%) and subdued growth in the Sandoz business (-1%), while Alcon remained in the red (-3% vs -1% in Q2 and -3% in Q1; the variation in Q1 and Q2 is, however, attributable to inventory phasing. Geographically, the weak US (-9%) weighed on a strong Europe (+5%) and a sluggish Asia/Africa/Australasia region (+1%). The core operating profit (company-reported metric) was down by 3% (15% volume growth being nullified by 7% negative price impact and 11% generic erosion), marked by weakness in the Alcon business and the investments behind Cosentyx and Entresto. Adjusted operating profit (as per our calculations) also fell by the same magnitude. Segment-wise, Alcon’s top-line woes were aggravated by higher investments, resulting in a significant profit plunge, although the pharma and the Sandoz businesses came in ahead of our expectation. The profit share from Roche and GSK Consumer Healthcare JV, however, pushed the growth to +7% at the net income level to $1.9bn. The guidance has been maintained at flat revenue growth and flat/low-single digit decline in core operating profit.

Cosentyx and growth products underpin top-line outperformance

  • 22 Jul 16

Novartis’s Q2 top-line showed resilience at flat growth (NB all revenue growth numbers at constant currency unless specified otherwise), delivering sales of $12.5bn. These numbers were ahead of our as well as consensus estimates, strongly driven by the outperformance of Cosentyx, Gilenya and oncology assets bought from GSK, offsetting the underperformance primarily of Afinitor and ophthalmology assets shifted to the pharma business (including Lucentis). The 5% volume growth was offset by a 4% negative impact from generic erosion and a percentage point adverse impact from pricing. The strong dollar sliced out another 2% from the top-line and 3% from the bottom-line. Growth products were up 19% to $4.4bn, now contributing 35% to net sales. The core operating profit (company reported metric) declined by 4% (at cc) to $3.3bn. The margin declined by 1.6ppts to 26.7%, as a result of the investments in Entresto, Cosentyx and other new products. The underlying operating profit (as per our adjustments) came in at $2.4bn, in line with our expectations. For the full year, the company maintained its revenue guidance of flat growth (in CC). Profitability, however, will take a hit from the additional $200m investment in Entresto, resulting in a flat to low single-digit decline in core operating profit for the year. For the next quarter, the core operating profit outlook stands at a decline in the low to mid-single digits. In terms of currency impact, going by July’s levels, negative forex is expected to dilute the top-line by 1% and the bottom-line by 3% for the year (-1% for top-line and 2% for bottom-line in Q3). The CEO, Joseph Jimenez, warned of pricing pressure in the US, irrespective of who wins the elections and reiterated the change of winds towards newer pricing models. He also sounded non-committal on dealing with the Roche stake, reiterating that it would be sold at the right time, even without any premium.

Recovery efforts continuing

  • 01 Jun 16

As expected, Novartis begins the year with a whimper. However, sales growth of 1% at CER to $11.6bn came in marginally ahead of our expectation which had factored in a deeper generic erosion of Gleevec. NB all revenue growth numbers at CER unless specified. Excluding Gleevec, the revenue growth was 4%. Volume growth of 7% was offset by generic competition (-4%), pricing pressure (-2%) and negative forex (-4%), culminating in a decline of 3% in reported $ sales. Growth products (contributing 34% of group sales) were up 24% (in $). Underlying operating income (differs both from the company reported operating profit as well as company reported core operating profit), however fell short of our expectations, coming in at $2.3bn (-20% in $). Company reported core operating profit declined by 5% (-11% in $) to $3.3bn, while net profit came in at $2bn (-4%, -13% in $). Additional debt of $6.5bn was taken for the dividend payment during the quarter. FY16 guidance has been maintained. As a reminder, management has guided for flat (CER) revenue as well as for core operating profit for 2016. Segment-wise, pharma is expected to be flat or to decline slightly (attributable to Gleevec’s generic erosion, without which the growth should come in at mid single-digit), Alcon guided to grow at low single-digit while Sandoz is expected to grow at low-to-mid single-digit growth. Based on March exchange rates, the negative impact of forex has been trimmed to 2% (from 3%) on sales and 3% (from 5%) on core operating profit.

Gleevec erosion and Alcon weakness to weigh on H1 2016

  • 02 Feb 16

*Q4 below expectations* Languishing Alcon and flat Sandoz slowed Q4 sales growth to 4% (vs 6% in Q3) in cc (all revenue growth numbers in cc unless specified). Strong dollar against most currencies wiped out 8% points from top-line, which came in 4% lower at reported level to $12.5bn for the quarter. For the full year, net sales (from continuing operations) grew by 5% to $49.4bn, which was slightly behind our estimate of $50.2bn. Unfavourable currency impact of 10% pulled down reported growth to -5%. Underlying EBIT for the year came in at $10.8bn (-1.6% yoy, margin 21.8% vs 20.9% in 2014), which was a shade better than our expectation of $10.7bn. Currency dented core operating income to the extent of 15%. Negative return on plan asset (-$286m vs +$1.4bn in 2014), negative currency impact ($254m) on financial income (not factored in our forecast) and lower-than-anticipated income from associates (Roche and GSK Consumer Healthcare) resulted in lower-than-estimated attributable net profit of $17.8bn. Sales growth was in line with company targets in the pharma (mid-single digit sales growth) and Sandoz (high single-digit sales growth), but lower in Alcon (low single- digit sales growth). Dividend was upped by 4% to CHF2.7 per share, largely in line with our expectation. *Followed by unimpressive guidance* Management has guided a flat (at cc) revenue as well as core operating profit for 2016. Segment-wise, pharma is expected to be flat or to decline slightly (attributable to Gleevec generic erosion, without which the growth should come in at mid-single-digit), Alcon guided to grow at low single-digit while Sandoz is expected to grow at low to mid-single-digit growth. Management expects the year to be back-end loaded with Q1 seeing additional spending (launch cost on Cosentyx and Entresto, and planned investments towards restructuring) and tough comps for Sandoz taking over growth. Forex (based on January level) is guided to have a negative impact of 5% on Q1 16 and 3% on full-year sales; 7% in Q1 and 5% on full-year core operating profit.