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Novartis Reported Operational Growth in Its 1Q16 Earnings

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Novartis’s growth rate

Novartis (NVS) reported a rise of ~1% in its revenue on a constant currency basis in its 1Q16 earnings. The earnings released on April 21, 2016. The company’s 1Q16 revenue was $11.6 billion. This was slightly lower than analysts’ estimates of $11.79 billion for 1Q16.

The above chart shows that foreign exchange rates had a constant negative impact on Novartis’s growth rate in each quarter. This was mainly because nearly 50% of the company’s revenues are reported from sales outside the US.

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Revenues by segment

Since 2014, Novartis divested its business segments. It divested its animal health business to Eli Lilly & Co. (LLY). It divested part of its vaccines business and consumer healthcare business to GlaxoSmithKline (GSK). It divested its influenza vaccines business to the CSL Group. The company also acquired GlaxoSmithKline’s oncology business in March 2015.

The company restructured its segments. A few products from Alcon have been included in pharmaceuticals. A few mature pharmaceutical products have been reported under Sandoz’s business since January 27, 2016.

The pharmaceutical revenue reported a decline of 3% to $7,729 million in 1Q16—compared to $7,960 million for 1Q15. This included an operational increase of 1%. It was offset by the negative impact of foreign exchange. During 1Q16, products including Gilenya, Tasigna, Tafinlar and Mekinist, Jakavi, Promacta and Revolade, and Cosentyx generated 42% of the segment sales. There was an impact of -6% for products like Diovan monotherapy, Exforge, and Vivelle-Dot losing their share to the generic competition. Ophthalmic Pharmaceuticals’ products including Patanol were transferred from Alcon to pharmaceuticals. These products had a negative impact on the segment’s revenue due to generic competition. We’ll provide more details on the products and therapeutic areas later in this series.

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Alcon is the eye care division. It reported a fall of 7% in its 1Q16 revenue—including a 3% decline in operations with a -4% impact of foreign exchange. This segment reported revenue of $1,426 million in 1Q16—compared to $1,531 million for 1Q15. Both of the franchise, including surgical and vision care products, reported a decline in revenue during 1Q16. The decline was mainly due to strong competition from competitors including Johnson & Johnson’s (JNJ) Acuvue range of products and products from Bausch & Lomb.

Sandoz is Novartis’s generic pharmaceuticals business. It reported flat revenue at $2,445 million for 1Q16—compared to $2,444 million for 1Q15. This included 4% growth in operational revenue, but a -4% negative impact of foreign exchange. Operationally, the volume growth of 11% was offset by a decline of 7% due to price erosion.

Investors can consider ETFs like the First Trust Long Short Equity ETF (FTLS) in order to divest the risk. FTLS holds 2.6% of its total assets in Novartis. The VanEck Vectors Pharmaceutical ETF (PPH) holds ~5.2% of its total assets in Novartis.

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