A Look at Novartis' Second Quarter

The story of the second quarter for Novartis (NYSE: NVS  ) offered mixed results for investors. The company's net sales were up 1%, and EPS was down 6% year over year. Novartis managed to narrowly beat Wall Street estimates on EPS -- $1.30 compared to $1.29 -- and revenue -- $14.49 billion compared to $14.39 billion. The company cited a weakening yen versus the dollar and increased generic competition as the major factors in its lackluster performance. Shares felt little effect from the report, down less than 1% after the release. Here is a little dive into some other notable takeaways from Novartis' second quarter.

The Diovan surprise
Novartis will continue to receive a boost in sales from its home run high blood pressure drug Diovan after Ranbaxy Laboratories' generic version of the drug ran into regulatory delays. Novartis was expecting to lose about $3.5 billion worth of sales worldwide to generic competition; however, with this delay in the United States that number has been adjusted down to $2.7 billion.

Diovan currently accounts for about 11.5% of pharmaceutical sales for Novartis, and continuing sales from the United States will bring in about $100 million a month until Ranbaxy is able to release its version. The windfall of unanticipated revenue led Novartis to upgrade its 2013 group outlook to include low-single-digit sales growth and low-single-digit decline in operating income.

This news is a fortunate surprise for Novartis, though it is not something that will continue to benefit the company over the long term. Once Ranbaxy is able to release its generic version of Diovan in the U.S. market, Novartis acknowledges that it will face even steeper sales erosion in the United States. Sales of Diovan will decrease dramatically as the far cheaper generic version will supplant much of its market share.

Business segment performances
Novartis experienced marginal sales growth in its Alcon (medical devices) and Sandoz (generic manufacturing) divisions and the Vaccines & Diagnostics and Consumer Health divisions posted double-digit sales growth. Most impressive of these was Consumer Health, which consists of over-the-counter medicines and veterinary products. That division grew sales 11% to $1 billion and managed an operating profit of $23 million compared to effectively zero in the same quarter last year.

The only division that saw sales decline was Pharmaceuticals, which shrunk 2% to $8.1 billion. Generic competition for Zometa, Diovan HCT, and Diovan (outside of the U.S.) brought negative price effects and significant sales decreases. The weakening yen was also a contributing factor. Some of the sales loses were balanced by increased sales volume in other drugs, but not enough to offset the market share taken by the generic competition.

Pipeline possibilities
Looking to the pipeline for indications of what Novartis may have coming up shows four drugs currently under review by regulating agencies and a multitude more currently undergoing phase 3 trials.

AIN457 is the experimental drug that has great potential for Novartis. A recently completed phase 3 trial proved AIN457 to be more effective than Pfizer and Amgen's Enbrel at treating moderate to severe plaque psoriasis, a disease that affects about 1.5 million Americans. It is also being tested to treat rheumatoid arthritis, psoriatic arthritis, and multiple sclerosis among other diseases. Regulatory submission of AIN457 is expected in the second half of 2013.

Foolish takeaway
The Q2 results from Novartis were lukewarm, slightly exceeding expectations with a marginally improved outlook thanks to some good fortune. Moving forward, much of the pressure will be on the pharmaceutical segment to boost sales of its other offerings to offset the patent expirations of Zometa and Diovan. Watch for new drugs from the pipeline, coupled with increasing sales outside of Europe and the U.S., to be the source of this boost.

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