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This morning, Novartis (NYSE:NVS) reported better than expected Q1/2017 results but only thanks to non-operating items.

The stock is up 2% given the bearish sentiment into the results and the underperformance in the previous weeks.

The question now is whether the reporting season has provided any encouraging improvements related to the key issues I pointed in my preview of this reporting and if we can say that the worst is behind the company.

Q1/2017 results

Novartis reported Q4/2016 sales of $11.5B, in-line with consensus expectation, while EPS of $1.13 were 2% higher than consensus, driven by better than expected associate income and lower interest expense. FY 17 guidance has been reiterated, as expected.

Why corporate signals are mixed

Despite it’s well understood that 2017 will be a “year of transition” for Novartis, I’m still not convinced that the worst is behind the company, because the corporate signals from the Q1/2017 results, related to four key growth drivers (Entresto, Cosentyx, Alcon and Sandoz), have been mixed.

In my previous article on Novartis, related to Entresto and Cosentyx, I said:

I assume limited growth for Entresto and Cosentyx in Q1/2017, as a result of increasing rebate offered by the company to improve the formulary coverage of these drugs.”

Today, Novartis reported better than expected results for Entresto and Cosentyx in Q1/2017 compared to street expectations. Entresto sales were $84M, 5% above consensus driven by some improvement of the formulary coverage in US and EU, while Cosentyx sales were $410M, 4% above consensus despite competition by Taltz in US.

Thus, I admit that the performance of the companies about these two growth drivers has been better than I expected, but I still believe that the target for Entresto of $500M of sales in 2017 looks stretched, taking into account the growth trajectory of this drug over the past 4 quarters.

On Alcon, I said:

“There is no visibility related to when this business will see the trough, thus I prefer to model a conservative assumption of -3% growth, waiting for more evidence of a strong recovery.”

Q1/2017 performance for Alcon has been in line with street expectations and better than my numbers. Q1/2017 sales were up 1% YoY but EBIT margin was only 13%, 400 bps down YoY. Thus, even if these numbers have been in line with consensus, I don’t see any tangible signs of improvement of the growth trajectory of Alcon. Despite the company is investing massively behind promotion and research, as demonstrated by the collapsing of the profitability, the top line growth acceleration has failed to materialize, with sales growing only 1%.

Lastly, on Sandoz, I said:

“I assume limited growth for Sandoz, given that the company has not been able to launch its generics of Copaxone 40 mg, given the warning letter to Pfizer’s (NYSE:PFE) manufacturing facility.”

My expectations were right on Sandoz, given that Novartis downgraded the guidance for 2017 sales growth of this division (from low single digit growth to in-line versus 2016), to take into account the delay of Glatopa 40 mg (Copaxone’s generic). In addition to that, the performance of Sandoz has been bad in Q1/2017, with a 9% miss compared to consensus related to operating income (EBIT margin down 100 bps YoY).

Conclusion

The key investor takeaway is that the corporate signals are mixed, with some good messages related to Entresto and Cosentyx, but some weaknesses related to Alcon and Sandoz. With the stock still trading at premium to 5 years average historical P/E, I see no rush to jump in the name.

Source: Bloomberg

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice

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