Novartis 1Q results remain insomnia cure; investors plead for something, anything to get excited about

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The News:

Novartis AG shares moved higher Tuesday (April 25, 2017) after the pharmaceuticals group clung to full-year earnings targets and barely beat analysts’ estimates for first-quarter earnings.

@Novartis barely beat analysts' estimates for 1st quarter earnings Click To Tweet

The Swiss drug titan said core net income for the three months ending in March came in at $2.69 billion, a tad ahead of the $2.67 billion estimate compiled by Reuters but down 3.5% from the same period last year. Revenues were clocked at $11.54 billion for the period, Novartis said, a figure that was largely in-line with the consensus forecast.

“Novartis delivered another solid performance in the first quarter,” said CEO Joseph Jimenez. “Growth drivers, including Cosentyx and Entresto, more than offset generic erosion, mainly due to Glivec.” He added, “The innovation momentum continued in the quarter, led by the launch of Kisqali, and the FDA Priority Review for CTL019 in the U.S. This reinforces our confidence in our next growth phase, which we expect to start in 2018.”

Novartis garnered “breakthrough” status from the US Food and Drug Administration last week for its genetically-altered cell therapy CTL019 based on a cell therapy cancer clinical trial known as JULIET that enrolled patients with diffuse large B-cell lymphoma (DLBCL) whose disease has returned or is unresponsive to prior treatments.

The data to emerge from Novartis’s JULIET study are of intense importance to investors because they will be compared with Kite Pharma’s competing “CAR-T” KTE-C19 in the same DLBCL patients, says TheStreet.

Sales of Novartis’s important new heart medicine, Entresto, rang up $84 million for the quarter, just short of the $85.3 million market estimate. Jimenez told analysts on a conference call following the earnings release that he expected Entresto sales to grow on a quarter-by-quarter basis. Psoriasis treatment Cosentyx registered sales of $410 million versus analysts’ consensus of $402 million.

Novartis shares gained 2% in Zurich Tuesday, compared to a 3.75% gain for the benchmark Stoxx Europe TMI Pharmaceuticals index.

Steve’s Take:

With its top line seemingly frozen at the same level year-over-year while its sales teams continue struggling to grow fran­chise rev­enue, No­var­tis out­lined its near-term R&D strat­egy. In a nutshell, it took a $200 mil­lion charge to write off the dis­ap­point­ing heart drug sere­laxin (RLX030) while look­ing be­yond a de­ci­sion later in the year on its ground-breaking CAR-T drug as it scrambles to submit new FDA fil­ings.

The pharma giant said that it’s concluded its ini­tial FDA ap­pli­ca­tion for CTL019. And Jefferies analyst Biren Amin pre­dicts that we’ll be see­ing the closely-watched follow-up data from the JULIET study at the In­ter­na­tional Con­fer­ence on Ma­lig­nant Lym­phoma on June 14 in Lugano, Switzer­land.

Fol­low­ing a hoped-for ap­proval in CAR-T, No­var­tis said Tuesday (April 25, 2017) that dis­cus­sions with reg­u­la­tors are leading it to aim for a 2018 fil­ing for SEG101 (crizan­l­izumab) for sickle cell pain crises after it wraps up the PK/PD com­pa­ra­bil­ity study. At the same time, the company’s R&D team will shoot for an FDA ap­proval of BAF312 (sipon­i­mod) for re­laps­ing mul­ti­ple scle­ro­sis.

What you shouldn’t look for: “Any big M&A pacts,” says John Carroll for Endpoints. Like a num­ber of its major league ri­vals, No­var­tis execs say that val­u­a­tions in biotech have reached a for­bid­ding high. CEO Jimenez adds that the com­pany’s business development team plans to move up­stream, to ear­lier-stage as­sets and deals, as the com­pany stays fo­cused on what you can get in a $2 bil­lion to $5 bil­lion bolt-on acquisition.

“The price of some of these as­sets has in­creased to the point that we don’t feel like we can cre­ate value for No­var­tis share­hold­ers,” Jimenez said on a con­fer­ence call Tues­day, ac­cord­ing to Bloomberg.

No­var­tis is left mak­ing slow progress with En­tresto, which has been grap­pling with wide­spread payor re­sis­tance. In the mean­time, its flag­ship cancer drug Gleevec continues being thrashed by generic com­pe­ti­tion.

No­var­tis is in an awk­ward po­si­tion, says Carroll, un­will­ing or un­able to gam­ble big on new clinical ef­forts and main­tain­ing a super cautious ap­proach to the top line minus a new, colossal blockbuster to fuel its growth. The com­pany is be­com­ing “one of the most pre­dictable play­ers in Big Pharma,” Carroll suggests. He’s correct about that, and has plenty of company thinking that’s not what you really want to project to investors.

Other analysts chimed in, with Bernstein’s Tim Anderson, for one, pointing to “decent growth,” even for eye unit Alcon, which expanded (by 1% in constant currencies) for the first time since 2015’s second quarter. Generics unit Sandoz also managed to eke out 1% growth despite the price erosion plaguing the sector.

Novartis “is moving out from the shadow of Gleevec genericization,” Anderson wrote. Faint praise, if I ever heard it.

Bottom Line:

Let’s close with the consensus forecast among 34 polled investment analysts covering Novartis that advises investors to hold their position in the company. This has been the consensus since the sentiment of analysts deteriorated on January 16, 2017. The previous consensus forecast advised that Novartis would outperform the market. It didn’t.

Recommendations     1yr ago  Latest

Buy                               6            5

Outperform                   7            7

Hold                             19          16

Underperform               2            3

Sell                               0            0

The 1-year change in Novartis’s share price is exactly -1%.

Steve's Take: @Novartis is way overdue to vault back to the very top echelon in this space Click To Tweet

Hard to go against the Hold strategy while waiting for something, anything stimulating about growth prospects to get excited about. With the stock still trading at a premium to its 5-year average historical P/E, there’s no apparent reason to depart from the consensus and buy this name right now.

Novartis is way overdue for a vault back to the very top echelon in this space. Will 2017 guide us to that conclusion? Hold on.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.