Novartis turns bearish on poor Q1-2017 estimates

The failure of serelaxin, a medicine intended to treat acute heart failure, in the phase 3 trial resulted in a near 3% decline of the stock of Novartis Ag (NYSE: NVS) to $74.17 last week. Since then, the stock is trying to consolidate at 74 levels. However, considering the facts provided below, we forecast the stock to remain bearish in the short-term.

The Basel, Switzerland-based company announced that it had entered into a licensing agreement with Boston, Massachusetts-based PureTech Health PLC to develop two promising drugs, which prevent age-related deterioration in the immune system.

For the sole purpose of developing the two licensed drugs, which has completed phase 2a studies under Novartis, PureTech is establishing a subsidiary named resTORbio. The drug will be developed on the basis of the work done so far by Novartis. PureTech has also allocated about $15 million for the drug development program. As per the agreement, if PureTech invests another $10 million, then its stake in resTORbio will increase from 58% to 67%.

Novartis

Divesting business segments is not new for Novartis. In 2014, the company divested its Animal Health business to Eli Lilly. Later, Novartis divested its vaccine and consumer healthcare business to GlaxoSmithKline.

Novartis did not disclose its stake in resTORbio. However, it was revealed that Novartis would receive future milestone payments and royalties based on sales volume of drugs. The announcement held the stock from falling below 74 levels.

However, it should be noted that these are future payments with no official estimates. Thus, it can be argued that the stock price would soon begin its move on the basis of earnings outlook for the current quarter.

For the current quarter, Novartis is expected to report revenues in the range of $11.75 billion to $11.85 billion. The earnings are expected to be between $1.11 and $1.18 per share. In the same period last year, the company reported earnings of $1.42 per share on revenues of $12.41 billion. Thus, it can be inferred that analysts are anticipating poor performance, compared with last year. So, fundamentally, investors would stay away from the stock at this point in time.

The stock failed to break the 21-period moving average last week and still trades below it. The MACD main line is below the signal line. This indicates a decline in momentum. Furthermore, price chart shows that sellers are active at 75.80. So, a trader can expect the stock to decline towards the next major support level of 71.80.

To capitalize on the downtrend, a low or below contract can be bought from a binary broker. The contract should be preferably valid for a week. Furthermore, it would be advisable to invest when the stock trades near $75 in the NYSE.

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