In the last year, shares of Novartis (NVS) are down 14%. The company has been hit by a wave of patent expirations, and it's become more difficult than expected to replace that revenue. The company reports third-quarter fiscal 2016 results on Tuesday.
Novartis was formed through the merger of Ciba-Geigy and Sandoz. Prescription pharmaceuticals accounted for about 62% of sales. Alcon vision care accounts for about 20% of revenue and Sandoz represents about 18%.
In July, Novartis reported second-quarter fiscal 2016 earnings of 75 cents per share, down 1%. Sales of $12.6 billion were down 2%. Net income was $1.8 billion. Adding the first and second quarters together, first-half sales were down 2.4% to $24.1 billion. Earnings before interest and taxes fell 4% to $6.6 billion and caused operating margins to fall 200 basis points to 27%.
For the third quarter, analysts are looking for earnings per share of $1.16, down 8%, on sales of $12.0 billion, down 2%. Operating income is expected to be down 10% and operating margins could fall to 26.2%.
Generic drugs are wrecking the company's growth.
Gleevec, which is used to treat a type of blood cancer called myeloid leukemia, lost its patent protection. Sun Pharma rolled out an approved generic in February 2016. In 2015, Gleevec had total worldwide sales of $4.65 billion. This year sales could be down as much as 35% to $3.0 billion.
Diovan was Novartis' No. 1 product until generics hit the market. Sales went from $3.5 billion in 2013 to $1.3 billion in 2015. Sales of Diovan could be down 20% this year.
And that's the problem with an investment in Novartis. The sales erosion is dramatic. It is difficult for the company to replace billions of dollars lost to generics.
Sales are expected to decline 2% this year to $48.5 billion, but earnings per share will be down almost 7%. The lack of operating leverage is throwing a monkey wrench into the company's results. The company needs to cut expenses in order to grow earnings because sales are slowing so fast.
Novartis is expected to earn about $4.67 per share in 2016 and $4.96 next year. Historically, this stock trades between 14 and 16 times forward estimates. So, at the current quote, the stock is already there.