Novartis AG (NVS - Free Report) reported encouraging results for first-quarter 2018 wherein both earnings and revenues beat estimates driven by strong performance of Cosentyx and Entresto.

First-quarter 2018 core earnings of $1.28 per share beat the Zacks Consensus Estimate of $1.25 and were up from $1.13 recorded in the year-ago quarter.

Novartis AG Price, Consensus and EPS Surprise

Novartis AG Price, Consensus and EPS Surprise | Novartis AG Quote

Revenues increased 10% to $12.7 billion as volume growth driven by Cosentyx and Entresto was partially offset by the negative impact of generic competition and pricing. Revenues also beat the Zacks Consensus Estimate of $12.3 billion.

Novartis’ stock has lost 1.2% in the last six months compared with the industry’s 5.0% decline.

All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.

Quarter in Detail

Novartis operates under three segments: Innovative Medicines (Pharmaceuticals), Alcon (Ophthalmology unit) and Sandoz (Generics).

The Innovative Medicines division recorded sales of $8.4 billion, up 6% driven by volume growth of Cosentyx and Entresto. Generic competition impacted sales at the segment, primarily due to the entry of generics for Gleevec in the United States and Europe and ophthalmology. Pricing too impacted sales.

Psoriasis Cosentyx continues to gain traction. Cosentyx sales increased to $580 million, up 35% driven strong growth in all indications and expanded access. Entresto’s sales increased 126% to $200 million driven by increased uptake.

Oncology franchise (excluding Gleevec) grew 6% driven by Promacta/Revolade, Tafinlar + Mekinist, Jakavi and recent launches

Sales at the Sandoz division were $2.5 billion, down 4% due to price erosion in the Unites States. Sales in the United States declined 18% due to competitive pressure. Biopharmaceuticals sales grew 13% mainly driven by launches of Rixathon, the biosimilar version of Rituxan (rituximab) and Erelzi, the biosimilar of Enbrel in EU.

Sales at the Alcon division were $1.8 billion, up 7%. Surgical sales increased 8% driven by implantables, which include intraocular lenses (IOLs) and CyPass Micro Stent, and continued consumables growth. Vision Care sales were up 5% fuelled by the continued double-digit growth of Dailies Total1.

Earlier, Novartis announced that it is mulling over strategic options for its lagging eye-care unit Alcon which includes retaining the business, or a separation via capital market transactions such as a spin-off or an initial public offering.  The company updated its strategic plan and announced that it has the potential to grow sales at or above market while delivering profitability in line with the industry. The company also made significant progress on developing a potential capital markets solution, including financial carve-outs, tax and legal entity structuring, and identifying listing and incorporation locations.  A final decision will be taken depending on Alcon’s sales performance which is not likely to happen before the first half of 2019.

2018 Outlook Reiterated

Novartis expects net sales in 2018 to grow low to mid-single digit. Innovative Medicines is projected to grow in mid-single digit. Revenues from Sandoz is expected to be broadly in line or decline slightly. Alcon sales are estimated to grow in low to mid-single digits.

Pipeline Update

Novartis’ pipeline candidates’ progress has been encouraging in the first quarter.  Lutathera was approved by FDA for treatment of gastroenteropancreatic neuroendocrine tumors. The drug was added to Novartis’ portfolio as part of the Advanced Accelerator Applications acquisition. Oncology drug Tasigna was approved by FDA for the treatment of first- and second-line pediatric patients one year of age or older with Philadelphia chromosome-positive chronic myeloid leukemia in the chronic phase (Ph+ CML-CP).

The label of Cosentyx was updated in the United States to include moderate-to-severe scalp psoriasis, one of the difficult-to-treat types of psoriasis.

Sandoz continues to progress with its generics and biosimilars pipeline. Glatopa 40 mg/mL, three-times-a-week treatment for relapsing forms of multiple sclerosis that is a generic version of Copaxone, was approved by FDA. The division also obtained positive CHMP opinion for the proposed biosimilar of Remicade (infliximab). However, the company suffered a setback when the FDA issued a complete response letter for the generic version of asthma drug Advair Diskus.

Separately, Novartis also obtained licensed Luxturna (voretigene neparvovec-rzyl), an investigational one-time gene therapy to restore functional vision, from Spark Therapeutics (ONCE - Free Report). Novartis will develop and commercialize the treatment outside the United States while Spark Therapeutics will retain rights in the United States.

Novartis also decided to sell its stake in the OTC joint venture with Glaxo (GSK - Free Report) for $13 billion. Thereafter, the company also announced that it will acquire AveXis (AVXS - Free Report) and position Novartis in a leadership position in spinal muscular atrophy and gene therapy in a move to use up the funds.

Our Take

Novartis' first-quarter results beat both earnings and sales estimates on strong performance of Cosentyx and Entresto. Both the drugs continue to perform well. Meanwhile, Novartis is looking to solidify its presence in the gene therapy space with the announce AveXis acquisition and deal with Spark Therapeutics.

However, the generic division, Sandoz continues to face pricing pressure.

The division also suffered a blow when the FDA issued a CRL to its generic Advair Diskus.