What You Need To Know Ahead of Novartis’ Earnings

Novartis’ overview

Novartis is one of the largest global drug manufacturers. $14 billion in first quarter sales. 50 marketed products across 5 segments:

Pharmaceuticals: $7.8 billion in Q1 sales. Alcon: An eye care portfolio with $2.6 billion in Q1 sales. Sandoz: A generics manufacturer with $2.3 billion in Q1 sales. Vaccines: $215 million in Q1 sales (exiting). Consumer healthcare: $1 billion in Q1 sales (shifting to a joint venture).

Novartis’ overview

Patent risk may weigh down results.1. Diovan

– Sales fell 20% in 2013.– Sales fell 13% year-over-year to $803 million in Q1.– Diovan monotherapy generic entering the U.S. market.

• Diovan monotherapy represents 90% of U.S. Diovan sales.2. Zometa

– Sales fell 53% in 2013.– Sales fell 69% to $74 million in Q1.

Revenue risk & opportunityBrand name drugs account for the majority of Novartis’ sales.

• Patent threat.• New drug launches/pipeline.

Restructuring consolidates focus.

Novartis’ sales remain steady despite patent losses last year.

Reasons for sales optimismFast growing therapies in the

first quarter:– Gilenya: An oral treatment for

relapsing MS.• Sales up 31% to $552 million in Q1• Competition this year from Biogen’s

Tecfidera and Sanofi’s Aubagio.

– Tasigna: A therapy for chronic myeloid leukemia.• Sales up 19% to $337 million in Q1.

– Galvus: A diabetes drug sold overseas.• Sales up 15% to $308 million

Reasons for sales optimismRestructuring for growth:•Novartis’ acquires Glaxo’s cancer products.• $1.6 billion in 2013 sales.• Will pay $16 billion to Glaxo.

•Novartis’ divests non-flu vaccines.• Receives $5.3 billion from Glaxo.

•Creates a consumer health joint venture.•Sells its animal health business.• Receives $5.4 billion from Eli Lilly.

•Net cash outflow = $7.6 billion.

Pipeline opportunity:28 phase 3 or pivotal programs.•6 new molecules.•Significant biosimilars program.

What to look for in the Q2 report Progress on the restructuring.Updated timing for filings.

Earnings outlookNovartis has a poor track record of out-pacing analyst estimates.

Delays in launching a Diovan competitor have analysts boosting their outlook for the quarter over the past 90 days, but the launch of Ranbaxy’s generic has them less optimistic for the year. Enthusiasm for 2015; however, is increasing thanks to the restructuring.

5 Fool-worthy questionsHow quickly will Diovan sales fall now that Ranbaxy’s generic has been approved?Are Novartis’ restructuring plans progressing as promised? Any updates to FDA or EU filings for new drugs?Did Gilenya sales continue to grow in the face of rising competition?

• Biogen’s Tecfidera launch overseas.• Sanofi’s Aubagio growth is outpacing Gilenya.

Any insight into future cash flow?• Historically returns a significant amount of its cash flow to

investors.• Currently yields 3%.

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