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Foreign Exchange Impacts Novartis’s Growth in 2Q17

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Novartis’s revenues

In its earnings release on July 8, 2017, Novartis (NVS) reported flat revenues at constant currencies for 2Q17. Revenues fell due to a 2.0% negative impact of foreign exchange. The company missed analyst estimates of $12.27 billion, reporting revenues of $12.24 billion for 2Q17.

The above graph shows Novartis’s revenues in each quarter for the last two years. More than 55.0% of its revenues are reported from sales outside the United States, so growth was affected by the negative impact of foreign exchange.

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Revenues by segment

Novartis has restructured its business segments over the last few years. Below are the segment performances for 2Q17:

  • Innovative Medicines, formerly the Pharmaceuticals segment, includes two business units: Novartis Pharmaceuticals and Novartis Oncology. The segment reported a marginal fall in revenues to $8.27 billion in 2Q17 compared to $8.39 billion in 2Q16. That included a ~1.0% operational growth, which was more than offset by a ~2.0% negative impact of foreign exchange. Ophthalmic pharmaceutical products such as Patanol that were transferred to Innovative Medicines have reported lower sales due to generic competition.
  • Sandoz, the generic pharmaceuticals segment, reported a 5.0% fall in revenues at $2.45 billion for 2Q17 compared to $2.58 billion in 2Q16. The segment had an operational fall of 4.0% and a 1.0% negative impact of foreign exchange.
  • Alcon, the eye care segment, reported a 1.0% rise in 2Q17 revenues, including a ~3.0% growth in revenues at the operational level and a ~2.0% negative impact of foreign exchange. This segment reported revenues of $1.52 billion in 2Q17 compared to $1.51 billion in 2Q16.

To divest the risk, you can consider the VanEck Vectors Pharmaceutical ETF (PPH), which holds ~6.3% of its total assets in Novartis. PPH also holds 5.0% in Novo Nordisk (NVO), 5.0% in Merck & Co. (MRK), and 4.9% in AstraZeneca (AZN).

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