WASHINGTON, Jan. 18 (UPI) -- Novartis' fourth quarter 2006 profits rose 23 percent but fell short of Wall Street's expectations, leaving analysts split on the future outlook of the pharmaceutical giant.
J.P. Morgan analyst Craig Maxwell called the performance "a disappointment" that may get worse next year.
"Some of this quarter's (earnings before interest and tax) miss will be due to launch costs which can only accelerate next year, with several major product launches (Exforge, Galvus & Tekturna) and some generic erosion (Lamisil)," Maxwell stated in a research report issued Thursday.
He attributed Novartis' slide to a CIBA Vision contact lens recall and merger related charges and costs related to a product recall in the vaccines and diagnostics division.
Maxwell noted the margins were significantly weaker than expectations in the pharmaceuticals division. Novartis reported 27 percent increase versus his forecast of 29 percent.
"Novartis has delivered the sales growth, but clearly at a cost, with all major line items coming in higher than expected," Maxwell stated.
Key catalysts for the stock going forward include the U.S. approval of Galvus for diabetes and Tekturna for hypertension, but there is some regulatory risk, he said.
J.P. Morgan did not respond to UPI's request for comment from Maxwell.
Novartis said Thursday net income came in at $1.65 billion and sales increased 16 percent to $10.05 billion.
"All divisions, particularly Pharmaceuticals, performed very well," said Daniel Vasella, Novartis' chairman and CEO. "I also have high expectations for further dynamic growth in our new Vaccines and Diagnostics Division," he added.
Vasella said the company intends to keep investing aggressively in research and development to sustain its performance. "I am confident of another year of record sales and earnings in 2007," he said.
Dresdner Kleinwort analyst Benjamin Yeoh saw a positive story, calling Novartis "a top pick in the large caps for the year."
Yeoh reiterated his "buy" rating of the stock and said launches of Galvus, Tekturna and Exforge will help power Novartis this year.
"To some extent Novartis' year will be driven more by new drug launches than by changes to forecasts," he stated in a research report issued Thursday.
Yeoh said he expects Galvus to receive approval from the Food and Drug Administration at the end of February followed by Tekturna in late March. Exforge's launch is slated for later in the year due to a patent expiration.
Yeoh acknowledged there is some concern about Novartis' expense in adding 1,000 sales reps to support new product launches, but said he thinks this will be offset by efficiency savings and "will be more than paid back for in profit."
Yeoh did not respond to UPI's request for comment.
Bank of America analyst Chris Schott also liked Novartis going forward.
"Novartis is our favorite name in the Major Pharmaceuticals sector heading into 2007 based on its promising upcoming launches and diversified business model coupling a healthy base pharmaceuticals business with limited near-term patent exposure and an attractive late-stage pipeline," Schott stated in a research report issued Thursday.
Schott dismissed the lower than expected quarter as being mainly due to a modest, one-time charge in the consumer division related to the CIBA Vision recall.
"Importantly, the Pharmaceuticals division met our expectations with regards to major product lines and margin structure with sales of over $6 billion and operating income of $1.6 billion," he stated.
Schott also noted there were solid trends in Novartis' core pharma products, including Diovan, which grew 16 percent to $1.15 billion, and Gleevec, which grew eight percent to $702 million despite competition from Bristol-Myers Squibb's Sprycel.
Bank of America did not respond to UPI's request for comment from Schott.
