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What's Behind Novartis' Disappointing Q2 Results

By Keith Speights – Jul 21, 2020 at 12:40PM

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The big drugmaker missed analysts' revenue and earnings estimates due to one primary reason.

Novartis (NVS -1.47%) hasn't fared as well as some of its peers have so far in 2020. Shares of the big drugmaker rebounded from the stock market crash in February and March but have mainly been in a holding pattern since April.

The company had a potential catalyst on Tuesday, with Novartis announcing its second-quarter results before the market opened. However, there wasn't enough good news in those results to excite investors. Here are the highlights of Novartis' Q2 update.

A lab worker holding a micro pipette

Image source: Getty Images.

By the numbers

Novartis reported that its revenue in the second quarter fell 4% year over year to $11.3 billion. Analysts were expecting that the company's revenue for the second quarter would be close to $12 billion.

The company generated net income of $1.9 billion, or $0.82 per share, in the second quarter, based on International Financial Reporting Standards (IFRS). In the prior-year period, Novartis posted generally accepted accounting principles (GAAP) earnings of $2.1 billion, or $0.91 per share.

Novartis announced non-IFRS core net income of $3.1 billion, or $1.36 per share. This result narrowly missed the consensus Wall Street analysts' estimate of earnings of $1.35 per share.

Behind the numbers

In Novartis' first-quarter conference call, the company's management team noted that revenue was boosted by forward purchasing related to the COVID-19 pandemic. However, this trend reversed for the most part in Q2. The COVID-19 outbreak hurt sales for several products.

Sales of eye-disease drug Lucentis were especially impacted by the pandemic, tumbling 24% year over year on a constant-currency basis to $401 million. And while sales for autoimmune-disease drug Cosentyx rose 12% on a constant-currency basis to $944 million, the drug's growth was held back somewhat by the effects of the COVID-19 outbreak on dermatology and rheumatology practices.

Novartis had several bright spots in the second quarter, though. Sales for spinal muscular atrophy gene therapy Zolgensma skyrocketed to $205 million thanks to increased screening of newborns in the U.S. Heart failure drug Entresto was another big winner in Q2, with sales jumping 40% on a constant-currency basis to $580 million.

Sales for breast-cancer drug Kisqali soared 49% year over year on a constant-currency basis to $159 million. Novartis also reported that Q2 sales more than doubled year over year to $118 million for cancer cell therapy Kymriah.

The company attributed its IFRS net income decline primarily to higher impairments. However, lower sales for some products also contributed to the year-over-year earnings drop.

Looking ahead

Novartis expects that net sales for full-year 2020 will grow by a mid-single-digit percentage. However, the company thinks that its Sandoz unit will grow sales by a low single-digit percentage. But Novartis projects that its core operating income will increase in full-year 2020 by a low double-digit percentage.

CEO Vas Narasimhan said, "We are on track to deliver on our commitment to drive consistent margin expansion and are excited by the progress of our deep mid to late stage pipeline to drive long-term growth." One late-stage program for which Novartis has high hopes is Entresto in treating heart failure with preserved ejection fraction (HFpEF). Potential U.S. Food and Drug Administration approval is expected in the first half of 2021.

The primary wild card for the pharma stock, though, continues to the COVID-19 pandemic. The impact of the coronavirus outbreak on Novartis appeared to diminish in the latter part of the second quarter. However, a worsening of the pandemic in the fall and winter could cause more problems for the big drugmaker.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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