Two words and an exclamation point summed up Novartis’ second-quarter earnings surprise: “Alcon grew (!),” declared Bernstein analyst Tim Anderson in a note to investors.
Indeed, Novartis’ long-flailing eye division saw Q2 sales rise 3% to $1.5 billion, driven by strong demand for vision care and surgical products, the company said. That helped deliver total revenue in line with the same quarter last year at $12.2 billion.
Alcon, coupled with strong performance from Novartis’ new products, helped cushion a shortfall in its generics business, Sandoz—another source of concern for the company’s investors. Sandoz’s revenue fell 4% to $2.5 billion thanks to pricing pressure, mainly in the U.S., the company said.
Sandoz has been shifting its focus to developing biosimilars, and it did get two of those meds approved and launched in Europe during the quarter: Erelzi (etanercept) and Rixathon (rituximab), its low-priced versions of the blockbusters Enbrel to treat autoimmune disorders and Rituxan for blood cancers. But analysts aren't confident that these and future biosimilars will fill the revenue gaps plaguing the rest of Sandoz' portfolio.
“We believe that U.S. pricing could stay challenging or even worsen in the coming year,” warned Wells Fargo analyst David Maris in a note to investors.
On the earnings side, Novartis' net income rose 14% to nearly $2 billion (84 cents per share). Both sales and earnings surpassed Wall Street expectations, sending the company’s stock up 3% in premarket trading to $85.79.
Novartis CEO Joe Jimenez has been touting the company’s new products as linchpins of future growth, and during a conference call with analysts Tuesday he pointed to two of the usual suspects: Entresto for heart failure and Cosentyx to treat psoriasis. Cosentyx sales were particularly strong, nearly doubling to $490 million. During the call, Jimenez said getting that drug to $2 billion per year is “within reach.”
But Cosentyx is facing stepped-up competition, most recently from Johnson & Johnson, whose rival psoriasis drug Tremfya won FDA approval last week. When asked about the new J&J med during the call, Paul Hudson, CEO of Novartis Pharmaceuticals, said he believes Tremfya doesn’t “raise the bar on efficacy."
Novartis’ recently released five-year data on Cosentyx, Hudson pointed out, providing “a very well-differentiated product profile.” He added that Cosentyx’s future market potential could be enhanced by additional approvals in psoriatic arthritis and ankylosing spondylitis
As for future prospects, investors remain focused on Novartis' groundbreaking cell therapy to treat leukemia, tisagenlecleucel-T (CTL019), which just last week scored a unanimous vote for approval from an FDA advisory committee. The agency doesn’t have to follow the guidance of its advisory panels but it usually does, and the treatment is expected to win approval in October.
But just how lucrative a product tisagenlecleucel-T will be is a nagging question for Novartis analysts, one of whom asked during the earnings call for some hint of how the company plans to price the product. Given that it’s designed to be a one-time cure, some have speculated Novartis will price it based on how it performs in individual patients. Bruno Strigini, CEO of Novartis Oncology, didn’t satisfy analysts’ curiosity, though; he merely stated that the company will disclose the product’s price when it launches.
As for Alcon, Novartis brightened its full-year expectations for the unit, saying it now expects low-single-digit growth. But during the earnings call, some analysts expressed concerns about whether that growth would be sustainable. Michael Ball, CEO of Alcon, said it’s too early to declare all-out victory, but all signs are pointing to sustained stability for the unit.
“We had to come back to supply and service excellence as a condition to get this business turned around,” Ball said. “I’m very pleased as to where we are,” he said, pointing specifically to a turnaround of the company’s intraocular lens business. New technology introductions, including multifocal lenses, and the company’s success at cutting backorders in half has “allowed our sales representatives to get back into the office and start selling again and also to start going after new accounts.”
Analysts have long predicted Novartis would sell or spin off Alcon. Jimenez held the company’s plans close to the vest during the earnings call, reiterating a promise to update investors on an ongoing review of the unit at the end of this year. The good quarter for Alcon “does increase optionality,” Jimenez said, making a spinoff possible, but “we have to show a few quarters of solid sales growth” and margin expansion, he added.
Sanford’s Bernstein believes Alcon’s strong quarter provides a strong signal about the company’s intentions, however. “Alcon goes but not immediately, closing a painful chapter in the company’s history, and potentially providing investors with an interesting stand-alone vehicle to invest in,” he predicted.