A Look at Novartis AG (ADR) (NVS)’ Second Quarter

The story of the second quarter for Novartis AG (ADR) (NYSE:NVS) offered mixed results for investors. The company’s net sales were up 1%, and EPS was down 6% year over year. Novartis AG (ADR) (NYSE:NVS) 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 AG (ADR) (NYSE:NVS)’ second quarter.

The Diovan surprise
Novartis AG (ADR) (NYSE:NVS) 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 AG (ADR) (NYSE:NVS) 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 AG (ADR) (NYSE:NVS), 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.