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Generic drugs give bumpy ride to Novartis

NovartisThe Diovan drug manufacturer Novartis (NYSE: NVS) has shown little movement, so far, after the release of its fiscal 2016 second-quarter results that beat the analysts’ estimates. One of the main reasons for the range bound movement between 80 and 82 is the poor fiscal 2016 core operating income outlook issued by the management.

However, as explained underneath, there are also few more equally important reasons, which keep the share price unmoved. The share price of Novartis closed at $81.06 on Tuesday.

The Basel, Switzerland-based company reported second-quarter net sales of $12.47 billion, down 2% from $12.69 billion in the corresponding quarter of fiscal 2015. For the quarter ended June 2016, the surgical equipment manufacturer reported net income of $1.81 billion or $0.76 per share, compared to $1.856 billion or $0.77 per share in the quarter ended June 2015.


The company posted Q2 2016 core net income of $2.93 billion or $1.23 per share, compared to $3.074 billion or $1.27 per share in Q2 2015. During the second-quarter, the core operating income of the company declined 4% on a constant currency basis to $3.33 billion, from $3.59 billion in the second quarter last year.

The analysts anticipated Novartis to post earnings of $1.18 per share on revenue of $12.1 billion. The company was able to beat the analysts’ estimates only once in the past four quarters.

The reason is that the company had lost its exclusivity in the blockbuster drug Diovan in the EU and US. Competition and pricing pressure is increasing from generic medicines. The company stated that it would likely increase its spending on Entresto, the drug for heart. The data compiled by Bloomberg indicate that in the past three months, the analysts have cut the sales estimates of Entresto by 25% to $34 million.

Novartis also recorded a decline in the sales of its cancer treatment drug Gleevec. Even Alcon, the ophthalmology division, is facing severe competition and fall in revenue. The revenue from Alcon declined 2% y-o-y in the quarter ended June 2016. This forced the company to revamp its operations and move the ophthalmic segment to the pharmaceuticals division.

The company is now heavily dependent on drugs such as Entresto and Cosentyx (psoriasis treatment) for its growth. Reflecting the headwinds faced by the company, the management stated that the core operating income will remain flat on a constant currency basis, compared to 2015, or decline by low single digits.

Technically, the momentum indicator is descending further into the bearish zone. The price chart also indicates resistance at 84. The support on the downside is seen at 75. Considering the fact that the path towards the next support has the least resistance, we anticipate the share price to decline further.

Novartis Stock Price: September 21st 2016

Novartis Stock Price: September 21st 2016

To benefit from the anticipated downtrend, a binary trader can purchase a one touch put option. Of the different contract expiry periods offered by the binary broker, the trader should select the one expiring in the middle of October. Likewise, it is advisable for the trader to pick a target price of $75 or greater for the put option trade.

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