Novartis Earnings: How Will They Grow?

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Novartis (NYSE: NVS), one of the world’s largest pharmaceutical companies, is set to report earnings on Jan. 21.  A favorite among investors due to its high dividend yield and extensive product line, Novartis has done well for its investors over the past decade, averaging around a 7% annual gain, including the awful drop in 2009, from which it has rebounded nicely.  During the earnings report and conference call, investors will be looking for signs that despite several patent expirations and the European economic drama (Novartis is based in Switzerland and derives 36% of its sales from Europe), the company is still on track to deliver growth and returns for its shareholders.

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While most of Novartis’ revenue comes from prescription pharmaceuticals (56%), the company also has several other product lines.  These include Alcon vision care products (17%), vaccines (3%), generic drugs (16%), and consumer health products (8%) including over-the-counter medications and CIBA Vision. 

The most well-known products include Diovan, which accounted for $5.7 billion of 2011 sales, but is expected to drop sharply in 2012 as a result of the patent’s expiration, as well as Gleevac ($4.7 billion), Lucentis ($2.1 billion), Zometa ($1.5 billion), and many others.  As mentioned previously, pay particular attention to the effects of patent expirations on Diovan as well as the company’s anticipated effect of future expirations.

The company intends to grow through three primary areas going forward.  First, they intend to develop innovative new products that offer clear benefits.  According to a recent report the company issued, they plan to make regulatory filings on over 60 new products by 2015.  There are also many other products in various stages of development, and research and development spending has been on an uptrend.  Novartis spent $9.6 billion on R&D in 2011, up from $9.1 billion in 2010.  During the earnings call, make a note of 2012’s final R&D number, as this could give some insight into how aggressively the company is pursuing new products.  Next, they want to aggressively expand their generics business.  Finally, they want to develop new platforms, such as the vaccines division, which formed through Novartis’ 2006 acquisition of Chiron.

As I mentioned at the beginning of this article, Novartis pays a very nice dividend, which currently stands at $2.48 per share, or a yield of 3.8% annually.  They also have a great record of raising the dividend (see below), and I wouldn’t be surprised to hear about a substantial increase for 2013.

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As far as valuation goes, Novartis looks pretty attractive right now, trading at just 12.5 times the consensus for 2012.  Growth is expected to be a little slow in 2013, as a result of the aforementioned patent expirations, with earnings expected to rise from $5.22 to $5.32, or only 1.9%. However, once the Diovan patent expiration’s effects play out growth is expected to pick up, with consensus calling for $5.91 in 2014, a projected 11% gain from ’13.

For comparison’s sake, let’s look at the valuations of two of Novartis’ closest competitors, GlaxoSmithKline (NYSE: GSK) and Pfizer (NYSE: PFE).  Glaxo trades at the same earnings multiple of 12.5, with a forward growth rate of 8.1% as the consensus.  Pfizer trades at a slightly lower P/E of 12.3, with a much lower 4.4% annual earnings growth projected between now and 2015. 

So, to sum it up, although Novartis looks fairly valued right now, there are several things to pay attention to next Monday.  More important than the earnings numbers themselves is the company’s outlook for the future after the patent expirations take effect.  If the company sees a nice growth rate in 2014 and beyond, that could be a very positive catalyst going forward.  Also, remember to listen to R&D spending, as well as plans to expand their generic business.  I like Novartis as a company, but before I could make an investment, I want to hear their plans for sustainable growth going forward.


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