Novartis : Strong results, Entresto & Lutathera

Novartis reported yet another strong quarter, reflecting strong performance by Cosentyx, Entresto and Alcon, although Sandoz remains a worry. The guidance reiterates the same mood – strong pharma and Alcon but weak Sandoz. As the new CEO comes, he benefits from the turned around Alcon business, high-potential new launches, a rich pipeline and a strong balance sheet, but also inherits the deteriorating generics business, as biosimilars see a sluggish start. Delivery is the key. Novartis reports good set of numbers for Q4. Sales grew by 2% at constant currency (cc), with volume growth of 7ppts more than offsetting the 3ppts negative impact of generic erosion and 2ppts negative impact of pricing. Additional support of 3ppts from favourable currency led the group sales to $12.9bn (vs our estimate of $12.5bn and consensus estimate of $12.7bn). NB all sales growth numbers in cc. The innovative medicines segment led the growth at 4%, followed by Alcon (+6%), while the Sandoz further deteriorated by 4%. For the full year, sales were up by 2% in cc and 1% reported to $49.1bn (vs our estimate of $48.7bn). The innovative medicines business was up by 2% and Alcon by 4%, while Sandoz languished at 2% decline. Reported net profit was slightly behind our estimate, at $7.7bn (vs our estimate of $7.8bn) The guidance for 2018: low-to-mid single-digit growth in group sales – mid-single digit growth in innovative pharma, in-line to a slight decline in Sandoz and low-to-mid single digit growth in Alcon. Core operating income in 2018 is expected to grow mid-to-high single-digit.

Cosentyx surges as Entresto paces up in the pharma business

The pharma business generated sales of $8.8bn in Q4 and $33bn for the full year. While the volume growth (+9%) picked up further from Q3 (+8%), generic competition (largely pertaining to Gleevec/Glivec) moderated at 4% (vs 6% in Q3). Pricing seems to be marginally on the higher side during the quarter at 1% vs negligible reported in Q3. At the sub-segment level, oncology (37% of the innovative medicines sales) declined by 1%, due to 43% decline in Gleevec/Glivec sales, excluding which the segment grew by 13%. Cosentyx has crossed $2bn mark, while although Entresto is still stuck at a quarter of it at $507m, it seems to have picked up momentum. Management has maintained its confidence on Entresto and after the investments going behind its sales and marketing, it expects Entresto to be margin accretive from 2019. Novartis has a strong line-up of drugs in its pipeline and smooth delivery on all will make a case for re-rating. Lutathera, added as a part of ~$4bn acquisition of Advanced Accelerator Applications late last year, has been approved in the US for a specific type of neuro-endocrine tumor. The second approval, due for the year, Aimovig, should also have a needle-moving impact. Approval for Kymriah in diffuse large B-cell lymphoma (also due this year) is critical for its blockbuster potential.

No respite for Sandoz

Pricing erosion-led decline of 17% in the US pulled down the segment performance by 8ppts to -4% during the quarter. Price erosion at 8ppts, was mitigated to only some extent by volume growth of 4ppt. Europe grew by 3%, driven by Germany, UK and France. While on one hand, the chemical-based generics continued to reel under pricing pressure and commoditisation, the high-potential biosimilars have been thwarted by competition and patent litigations. The company reports that Biopharmas, which includes biosimilars, have shown double-digit growth after the recent launches of biosimilars Rixathon (rituximab) and Erelzi (etanercept) in Europe, but clearly this is not enough. Management’s guidance of a flat to slight decline in 2018 does not provide much hope either. This has also prompted management to consider selling the oral solids generics business.

Hopes high on Alcon

The 6% growth during the quarter was weak sequentially, although the strong performance continued, led by a 9% growth in the Surgical and 2% growth in vision care, as management reconfirmed that the H1 2019 capital markets exit for the business. For the full year, the growth averaged 4% to $6bn. Reported operating loss came in at $78m for the quarter and $190m for the year.

Management changes at a crucial time

Vasant Narasimhan will take over the reins from Joseph Jimenez from 1 February. He sounded confident about the agenda ahead of him and highlighted turnaround of Sandoz and the uptake of Kisqali (given the competition from Pfizer’s Ibrance) on top of his priority. Novartis has also poached the oncology head of Pfizer Elizabeth Barrett to head its oncology business. Her rich career in oncology is good for Novartis, particularly the focus on Kisqali should benefit from her appointment, given her association with Ibrance while at Pfizer. She has worked at Pfizer (2009-2018), Cephalon (2006-2009) and J&J (1993-2006) prior to joining Novartis. Strong results and better 2018 guidance, Entresto gaining traction and the FDA approval of Lutathera, these changes have had a positive impact on valuation.