Novartis (NVS) is an appealing asset to own in 2012's high-performing health sector. Despite Diovan patent expiration in late 2011, Novartis showed revenue growth in multiple segments throughout its recent earnings report. Growth in revenue was primarily driven by recently launched products and success in emerging markets. Novartis also had growth from Alcon and recently announced an innovative eye treatment to be launched in the near term. Novartis achieved a fifth indication for its breast cancer treatment as well, while recently announcing a new partnership with the University of Pennsylvania for new cancer treatments and a new development center.
Novartis is most comparable to the European large-caps with over $100 billion market caps like GlaxoSmithKline (GSK) and Sanofi (SNY). With a considerable degree of penetration in the west, Novartis is also comparable to large U.S pharmas with market caps over $100 billion like Pfizer (PFE), Johnson & Johnson (JNJ) and Merck (MRK). At around 4.1%, Novartis has the second-highest dividend yield among these pharmas, trailing only GlaxoSmithKline by around 80 bps. Novartis has a lower price-to-earnings ratio than Merck and Johnson & Johnson while it has the lowest price to sales ratio of all of the aforementioned pharmas.
Only Sanofi has a lower price-to-book ratio than Novartis. At 11.08%, Novartis has the second-highest sales growth over the past five years behind Merck's 16.24%. But only Pfizer has a larger deficit than Novartis in sales performance for the past quarter year-over-year (YOY). Novartis has the lowest current and quick ratios among all of these pharmas while it has a slightly higher debt-to-equity ratio than Johnson & Johnson, Sanofi and Merck. Novartis has the lowest gross margin and operating margin of all of these pharmas, while it has the third-highest net margin. At around 0.53, Novartis has the lowest beta among these pharmas while it is the only one that's surpassed its 52-week high. Novartis stock has increased by around 5.8% since its last earnings release.
According to the recent earnings release, Novartis net sales increased 1% cc (constant currencies) YOY to $14.3 billion in the second quarter and were flat at $28.03 billion through the first half of 2012. Novartis operating income increased by 1% cc YOY to $3.19 billion and was 22.3% of net sales in the second quarter. In the first half of 2012, operating income decreased 7% cc YOY to $6 billion and was 21.4% of net sales. In the second quarter, net income increased 5% cc YOY to $2.73 billion while it decreased 5% cc YOY to $5.06 billion for the first half of 2012. In the second quarter, free cash flow decreased 30% YOY to $2.31 billion while it decreased 11% to $4.37 billion in the first half of 2012.
Revenue from products launched in 2007 increased 8% YOY to $4.1 billion. Lucentis, Gilenya, Afinitor and Tasigna accounted for 29% of Novartis net sales in the second quarter; this was an increase of 400 bps YOY. Sales for Gilenya, the first oral treatment for multiple sclerosis, increased 268% cc YOY to $283 million in the second quarter and increased 292% cc YOY to $530 million in the first half of 2012. Sales for Tasigna, a treatment for chronic myeloid leukemia, increased 45% cc YOY in the second quarter and increased 42% cc YOY in the first half of 2012. For Pharmaceuticals during the second quarter, net sales increased 4% cc YOY to $8.3 billion.
Products launched since 2007 increased 28% cc YOY to $2.8 billion and accounted for 34% of pharmaceutical sales, an increase of 600 bps YOY. Pharmaceuticals for Europe decreased 6% cc YOY to $2.6 billion while U.S sales increased 10% cc YOY to $2.8 billion. Net sales in emerging markets increased 6% cc YOY to $3.4 billion, accounting for 24% of Novartis net sales. Emerging Markets in Pharmaceuticals increased 5% cc YOY in the second quarter. Alcon in Emerging Markets increased 14% cc YOY in the second quarter. Net sales in China increased 23% cc YOY during the second quarter, primarily due to the approval of Onbrez Breezhaler for COPD.
Through Alcon, Novartis recently acquired commercialization from ThromboGenics for ocriplasmin outside of the U.S. ThromboGenics will retain exclusive rights in the U.S for ocriplasmin, the first treatment for Vitreomacular adhesion and Vitreomacular traction, a debilitating eye-disease that progresses with age. Over 300,000 Europeans suffer from this disease, eventually leading to central blindness and visual distortion. The EMA is currently reviewing the treatment, while the FDA gave ocriplasmin a positive recommendation in July 2012. Success with this treatment would help bolster Alcon's position as the worldwide leader in eye care.
Novartis recently received approval for Afinitor, tablets for advanced breast cancer treatment, from both the FDA and the European Commission. Afinitor now has up to five indications; this new option is the most advanced treatment for women with breast cancer in the past 15 years. Over 200,000 women are diagnosed annually with advanced breast cancer. Aside from approval in U.S, 27 EU member states, Iceland and Norway, there are additional submissions for regulatory approval underway worldwide.
Novartis and the University of Pennsylvania recently announced a multi-year R&D alliance for studying and developing chimeric antigen receptor (CAR) treatments for different types of cancer. Novartis will provide the initial investment and funds for research and the establishment of CACT, a Center for Advanced Cellular Therapies. Novartis will provide continual funds towards clinical and regulatory achievements in order to commercialize the CAR treatments. Novartis will retain exclusive licenses worldwide for the developed CARs and all indications from the collaborative efforts in the CACT on campus. Novartis and the University of Pennsylvania have already had success with CART-19, an investigational CAR therapy in a pilot program, for chronic lymphocytic leukemia, B-cell acute lymphocytic leukemia and diffuse large B-cell Lymphoma. CART-19 is expected to enter phase II clinical trials in the last quarter of 2012.
I urge current shareholders to hold onto Novartis for the high dividend yield and high probability for substantial organic growth and capital appreciation. Interested investors should consider buying Novartis now for promising growth throughout the short and long-term. Novartis has had advancements across its portfolio, thus increasing its leadership position in the industry looking forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.