Novartis Q2 FY07 positive but Zelnorm withdrawal could prove disruptive

Novartis has reported Q2 FY07 results up on that of Q2 FY06, although the company is expected to suffer from the withdrawal of irritable bowel syndrome (IBS) drug Zelnorm (tegaserod) from the market.

The Swiss drugs major reported improved net profit of USD 2bn, up from USD 1.7bn in Q2 FY06, citing growth across all divisions, while reaffirming expectations for another year of record operating and net income in FY07.

EBIT in in Q2 was USD 2.2bn, up from USD 2.1bn in Q2 FY06, exceeding analysts average forecasts of USD 2.15bn. Sales in the period rose to USD 10.1bn, from USD 9.2bn, also exceeding consensus forecasts of USD 9.3bn.

Analysts are waiting for company comments regarding the recent launch of hypertension medicine Tekturna (aliskiren) in the US and will be checking to what extent sales were affected by rival generic erosion caused by copies of Novartisí antihypertensive Lotrel (amlodipine/ benazepril) and nail infection treatment Lamisil (terbinafine). They are also anticipating an update over the upcoming launch of Galvus (vildagliptin), a treatment for type 2 diabetes, which is still under FDA review.

In a Thomson Financial News poll of analysts, the forecasts of net profit for Novartis was set at between USD 1.8bn and USD 2bn, with a median value of USD 1.9bn. The median value compares with that of USD 1.7bn in Q2 FY06. Operating income was forecast to reach between USD 2bn and USD 2.3bn, with the median observation placed at USD 2.1bn, flat on the year earlier period.

Analysts had estimated Novartis' pharmaceutical unit's sales as reaching between USD 5.8 and USD 6.1bn, with a median observation at USD 6bn , an increase from the Q2 FY06 figure of USD 5.7bn in Q2 FY06.

Societe Generale analysts warned that such earnings comparisons could be inaccurate, as Novartis should report its profits and loss alongside continuing and discontinued businesses. In the first quarter, Gerber was still included in the continuing Consumer Health business, but Medical Nutrition was reported as discontinued.

Societe Generale expects a negative reaction to an anticipated lowering of guidance. Kepler Equities added that while Novartis expected record operating and net income, H2 FY07 will see the full impact of generic Lotrel and Lamisil, as well as the continued loss of Zelnorm, which will affect results adversely. They added that Novartis' profitability will likely be flattened by costs incurred by its acquisition of US vaccines business, Chiron.

Morgan Stanley analysts advised that significant negatives for revenue drivers, together with pipeline delays, have intensified Novartis' momentum to plug its pipeline gaps.
They also cite the delayed launch of diabetes treatment Galvus, which will increase likely cost significant market share, as will US generic competition for key drugs anticipated in mid term for Zometa (2013) and Tekturna (2015).

Mid-stage pipeline assets, they added, looked light following announced delays and/or disappointing clinical data. Lastly, Novartis' CFO has indicated expressed interest in biotech group, Medimmune, and there was a notable change in position on Novartis' commitment to maintaining an Aaa credit rating.

Despite the negative assessments, Edwards analysts have said that Novartis is ìwell-positionedî for long-term growth. The company's top-line growth is being driven by a combination of well established franchises, such as antihypertensive Diovan (valsartan) and cancer drug Gleevec (imatinib), both of which are expanding.

Novartis' guidance is for net sales growth of continuing operations for the group of above five per cent and for the pharma division at a low to mid-single-digit rate, both in local currencies.