It amuses me that some sell-side analysts have already turned on Novartis (NVS) management and are calling for a break-up of the company. Such is the nature of working in a business where you always have to fight to get the buy-side to listen, I suppose. In any case, Novartis management has done itself no favors with a execution blunders across the enterprise and unimpressive growth. As such, there are still plenty of better ideas out there in pharma-land.
Mediocre Results Par For The Course
The first quarter results from Novartis largely fit the overall pattern of what's wrong with Novartis - there's nothing really terrible, but just a lot of "blah" performance. Overall revenue fell 2% and missed sell-side expectations, while core operating income fell 8%.
The two relative bright spots for the first quarter were the pharmaceuticals and Alcon businesses. Pharma sales rose 2% (or 3% in constant currency), as strength in newer products like Galvus and Gilyena offset the patent-related declines in Diovan, but for the most part the performance was just okay. At Alcon, revenue rose 5%, while operating profits rose 7%.
Sandoz, consumer, and vaccines/diagnostics were much weaker. Sandoz revenue fell more than 10%, while consumer dropped 20% and vaccines/diagnostics fell 19% on a weak flu season.
Execution Still Lacking
So why do I criticize execution at Novartis? Well, for starters, only Alcon had a good, clean quarter. Three divisions did pretty poorly and Pharma met income expectations only due to the contribution of "other". Consequently, the thesis that having these other businesses on hand would help Novartis smooth earnings and bridge patent cliffs looks optimistic.
Moreover, I'm concerned about timeline slippage in the pipeline. QVA149 (a drug that should challenge Glaxo (GSK) in COPD) got pushed back, as did a drug for psoriasis and a fairly significant investigational oncology drug. Novartis also pushed back the timeline on Bexsero - a meningitis B vaccine that looks pretty critical to the vaccine business ever really working out as planned.
Last and not least is the problems in the consumer business. Like Johnson & Johnson (JNJ), Novartis has had some serious quality control issues in its consumer business - Novartis had to shut down a plant in Nebraska and recall products and the remediation is taking a while.
Still A Company Worth Watching
I wouldn't completely give up on Novartis at this point. Clearly the company is going to see more competition for Gilyena as next-gen multiple sclerosis drugs from Biogen Idec (BIIB), Sanofi (SNY), and Teva (TEVA) presumably reach the market. Moreover, the company arguably lacks scale and a serious foothold in therapeutic areas like diabetes and Hep C.
But the company does have a very deep and expansive pipeline with a few potential blockbusters like a drug for acute heart failure. Moreover, the operational problems in businesses like Sandoz do still appear to be fixable. It's also worth noting that Novartis owns quite a lot of Roche (RHHBY.PK) - another Swiss drug giant with an arguably better business right now.
The Bottom Line
I expect Novartis to post broadly the same sort of long-term growth as other pharma names like Merck (MRK), Pfizer (PFE), and Sanofi. Right now, though, Novartis just doesn't look that cheap and I think investors could do better with any of those three names than with Novartis.
Disclosure: I am long RHHBY.PK.