Novartis delivers strong new product momentum; raises full-year 2009 guidance

Swiss drug major Novartis reported third-quarter 2009 results with 3% growth in group net sales to $11.1 billion, in line with consensus expectations of $11.0 billion. Net income edged up 1% to $2.11 billion, hit by the impact of currency and costs related to the acquisition of a majority stake in Alcon.

Pharmaceutical turnover contributed $7.217 billion, also in-line with consensus, with weaker performances for blood pressure drug Diovan (valsartan) and cancer gent Glivec (imatinib), offset by a better-than-expected showing from Lucentis (ranibizumab), for age-related macular degeneration. Sales of generics unit Sandoz were a little below consensus, comment analysts at Credit Suisse, but were made up for by better Consumer sales.

Earnings per share stood at $0.93 versus consensus estimates of $0.94. The company has raised 2009 guidance; forecasting pharma sales growth to be double digit (previously mid-high single digit) and group sales to grow at high single digit (previously mid single digit). Earnings (in local currencies) to achieve record levels (as before). All of this excludes sales of pandemic flu vaccine for which guidance has been increased to $400 million-$700 million for the fourth quarter of 2009.

Commenting on the results, Daniel Vasella, chairman and chief executive of Novartis, said: "I am pleased with our strong underlying performance, led by the momentum of our Pharmaceuticals business, outpacing the competition and benefiting from innovative product growth rejuvenating the portfolio. Our investments in R&D show excellent results, with many key approvals in 2009, most notably the anti-cancer therapy Afinitor (everolimus) and the biotechnology medicine Ilaris (canakinumab)). Deliveries of H1N1 pandemic flu vaccines are underway as Novartis works at full capacity to meet public health demands. The Sandoz generics business also made good progress, coupled with a turnaround in the USA. We expect record full-year underlying results based on the significant progress to date in 2009."

Product sales

Turnover of Diovan, Novartis' biggest-selling drug, increased just 1% to $1.46 billion, while sales of Glivec/Gleevec were up 3% to $974 million. Femara (letrozole), for hormone-sensitive breast cancer, climbed 14% to $329 million and Zometa (zoledronic acid), for cancer complications, reported $376 million in sales, up 4%. Turnover of the acromegaly therapy Sandostatin (ocreotide) rose 2% to $300 million, the company noted

Among Novartis' newer products, the combination cardiovascular agent Exforge (amlodipine plus valsartan) generated revenues of $171 million, a year-on-year rise of 49%, while Exjade (deferasirox), the first once-daily oral therapy for patients with iron overload, saw sales increase18% to $174 million. Revenues from Lucentis rocketed 52% to $335 million, while Reclast/Aclasta (zoledronic acid) for osteoporosis leapt 89% to $125 million.

Performance 'masked by one-offs,' says analyst

As expected, the robust operating performance was masked at the headline level by a number of 'one-offs,' noted Charles Stanley Research analyst Jeremy Batsone-Carr. Specifically, he said, these amounted to a swing in the Associates line from $88 million over third-quarter 2008 to $21 million, in part a reflection of the group's 25% stake in Alcon whose results were included for the first time in third-quarter 2008 and where an impairment charge of $92 million was taken to cover the decision to halt the manufacture of anecortave acetate, a drug intended for the treatment of glaucoma.

On the basis that Novartis will continue to bear down on its cost base and that Mr Batsone-Carr. expects news at the full-year stage regarding possible expansion of the $1.6 billion target, and believes that the 11x 2010 P/E multiple on which the shares trade, falling to just 9.5x 2011, continues to miss a significant investment opportunity. The shares trade at an around 10% discount to the sector, which itself stands well below its historic average rating. Novartis offers a prospective yield in excess of 4%, adding to the shares' attraction for UK-based investors, he noted.