Novartis Earnings Beat Forecasts, Dollar Helps

Second-quarter net profit at Novartis rose 17 percent to $2.27 billion, helped by the weak U.S. dollar and cost cutting efforts, beating forecasts and boosting its shares.


The Swiss drugmaker confirmed its full-year forecast on Thursday for group sales to grow at a mid single-digit percentage rate and drug sales at a low single-digit rate.

Its drug unit was boosted by a one-time accounting benefit of $104 million, which helped numbers to beat forecasts.

"Second-quarter figures are amazingly strong," said DZ Bank analyst Thomas Maul. "In the short term the Novartis shares are likely to further benefit from the restructuring story and growing earnings momentum in the second half of the year."

Big pharmaceutical companies -- including Europe's two largest GlaxoSmithKline and Sanofi-Aventis -- have benefited in recent weeks from safe haven status as investors flee embattled sectors such as financials, but still face problems in their own businesses as competition from generic drugs increases.

Novartis faces the loss of exclusivity on top-selling high blood pressure drug Diovan in 2012, pricing pressures and more complicated paths to market, but its shares have fallen by just 7 percent in 2008, significantly outperforming the Swiss blue-chip index, which has lost 22 percent.

These pressures have prompted the company to cut costs and it said it had already achieved about 65 percent of its anticipated 2008 savings of $670 million.

Novartis said it had trimmed back drug marketing and sales expenses and had started on the previously announced 2,500 job cuts, with nearly all of those affected already informed.

Product Setbacks

Group and drug sales both rose 14 percent in dollar terms. In local currencies, stripping out the effect of the weak U.S. currency, second-quarter sales were 5 percent higher.

But Basel-based Novartis had some bad news on two products on Thursday: it does not plan to resubmit diabetes drug Galvus, once seen as a potential blockbuster, for approval in the United States.

It also said a generic maker was challenging the validity of a patent on its Zometa bone drug. Two other important products are on track.

Afinitor, also known as everolimus or RAD001, is expected to be filed for approval in advanced kidney cancer this year, as is meningitis vaccine Menveo.

"In early trading we expect a positive reaction to the significant beat on headline numbers, but see a risk that this reverses as consensus EPS upgrades beyond 2008 look unlikely," Societe Generale analysts said in a note.

"Looking beyond these results, the shares should be well supported near-term by a sector rotation into defensive pharma names," the analysts said.

Novartis now trades at nearly 14 times forecast 2009 earnings, a premium to competitors like Glaxo, Sanofi and AstraZeneca thanks to its greater diversity, promising new drugs and longer exclusivity on key products.

Novartis -- which was expected to post second-quarter profit of $2.12 billion and sales of $10.30 billion -- has closed the gap with Roche Holding AG, now trading roughly in line with its local Basel rival.

Shares of Novartis closed at 0.9 percent.