Stock Watch: Novartis And Lilly Pour Cold Water On Q1 Earnings
The Second Week Of Earnings Season Took A Bad Turn
Executive Summary
Novartis’s comparatively anemic revenue growth and Lilly’s sales shortfall suggest that hopes for an immediate sector recovery from the pandemic are premature.
Week one of first-quarter 2021 earnings season seemed to allay concerns that a strong comparator quarter at the start of the pandemic, seasonal US reimbursement challenges and lower hospital healthcare utilization would depress revenues. Week two, however, brought all these concerns, and more, back to the fore.
Novartis Leads Out The Big Caps
Novartis AG opened an unusually busy second week of first-quarter earnings season for pharmaceutical companies with results that met with a 1.6% fall in its stock price compared with the NYSE Arca Pharmaceutical Index’s 0.7% same-day drop. The initial headlines featured Novartis modestly missing analysts’ consensus estimates of revenue by $50m and non-GAAP earnings per share by $0.10, which did not, initially, seem too bad.
Novartis’s first quarter net sales rose by just 1.0% over the same quarter of 2020, but fell by 2.8% on the most recent, fourth quarter of 2020. These changes were worse than Johnson & Johnson’s badly received report of sales over the same periods. (Also see "Stock Watch: J&J And Roche Invite Comparison" - Scrip, 26 Apr, 2021.)
Novartis’s anemic first-quarter revenue growth was at odds with its guidance which assumes a return to normal prescription dynamics by mid-2021. This return to normality seems most unlikely at Novartis’s generics division, Sandoz. Sandoz’s sales fell by 8.7% over the same quarter of 2020 and by 9.1% on those of the last quarter of 2020. Part of revenue shortfall was due to a weaker cough and cold season, and part was due to lower antibiotic sales – both indirect results of the pandemic.
In addition, while other generic companies are anticipating 2% to 4% generic price erosion (depending on geography) in 2021, Sandoz experienced 10% erosion in the first quarter. Novartis’s guidance revision for Sandoz, and the commentary on its expectations for Sandoz in 2021 suggests a worse outlook than other generic companies with a low- to mid-single digit percentage sales decline, and a stabilization in the near-term, respectively.
The gradient of Sandoz’s revenue decline is, however, becoming less important to the group over time. Sandoz accounted for 18.6% of total first-quarter 2021 sales, down from 20.6% a year ago. Other companies such as Pfizer Inc. and Allergan plc (acquired by AbbVie Inc.) with generic pharmaceutical franchises had listened carefully to the generic drug price erosion mood music and divested their generic divisions during a period of pharmaceutical musical chairs. Since these assets have already proven their wasting nature, if Novartis now attempts to follow suit with Sandoz, it is likely to find that all the chairs have been taken away.
With over 81% of Novartis’s revenues deriving from its innovative drugs division, it would have needed a few star performers to offset Sandoz’s decline. One of those stars was Entresto (sacubitril/valsartan) for heart failure where sales rose to $789m, or by 38.7% on the same quarter of 2020, and by 10.2% on the last quarter of 2020. Entresto continues to emerge like a bear from a winter hibernation − caused by pricing and reimbursement mis-steps between the 2015 launch and 2018 − to roar louder than ever in the first quarter of 2021. (Also see "Novartis Big Earners Beat Q1 Forecasts" - Scrip, 27 Apr, 2021.)
Lilly Meets Rocks At Hard Place
Eli Lilly and Company* reported volume-driven total revenue that rose by 16.1% on the first quarter of 2020 to $6.8bn, but also fell by 8.5% on the last quarter of 2020. Lilly also demonstrated that drug price erosion in the first quarter was not just limited to generics and, although a fraction of Sandoz’s generic erosion, pricing was a 6% and 4% drag on Lilly’s US and total revenue growth, respectively. Lilly’s sales growth was greater than Novartis’s over their respective calendar first quarters, but Lilly’s fall between the ends of the last two sequential quarters was three times greater. Although Lilly had attempted to flag its expectations that its first quarter could be distorted by seasonal wholesaler stock-building at its full year 2020 results, this appeared to have been forgotten nearly three months on. (Also see "Stock Watch: Lilly’s Fourth Quarter − Pandemic Benefits And Challenges" - Scrip, 8 Feb, 2021.) As a result, analysts’ estimates of revenue were missed by just under $200m.
Lilly devoted chapter and verse to its non-COVID-19 pipeline and products in its conference call while its analysts, who may have been red-faced for being unable to make two changes to their models at the same time – a one-off first-quarter 2020 inventory-build and lower 2021 COVID-19 antibody sales – largely played along with their questions. The commercial nuances of its products Taltz (ixekizumab) for inflammatory indications and Trulicity (dulaglutide) for type 2 diabetes, and the recent clinical trial results for tirzepatide – its new GLP-1 receptor agonist – may have been germane, but investors’ attention was probably elsewhere in the portfolio. (Also see "Lilly Tries To Keep Investors Focused On The Pipeline, Not Performance" - Scrip, 27 Apr, 2021.)
The $250m channel build benefit a year ago seemed to be the more minor concern in Lilly’s revenue shortfall and while most of my worry had been for Trulicity’s inventory drawdown from the fourth quarter, the new anti-hero in Lilly’s portfolio seems to have emerged in the form of its COVID-19 antibodies (bamlanivimab and etesevimab).
The Products That Were Almost Not Named
Whereas Trulicity’s revenues grew by 18.1% over those of the same quarter of 2020 and then only declined by 3.3% on the final quarter of 2020, sales of its COVID-19 antibodies that did not exist a year ago fell by 7.0% between the ends of the fourth quarter of 2020 and the first-quarter of 2021. This followed concerns that coronavirus variants have escaped the effect bamlanivimab monotherapy, which had resulted in its distribution being curtailed. Adding insult to injury, lower-than-expected COVID-19 antibody sales also resulted in a full-year revenue guidance cut by 0.6% at the midpoints, from expectations that were only issued in late January.
While Novartis attempted to paint a more palatable picture by recalculating its 4% revenue growth without 2020’s first-quarter pandemic-related stock-build comparison, Lilly’s sales grew by 7% without both the stock-build comparison and $810.1m in revenue from its COVID-19 antibodies. This did not appear to help though, and Lilly’s stock price closed down 2.7% on its announcement; the same day as Novartis’s.
A new pandemic take-home message for big pharmaceutical companies may be emerging. The development of treatments and vaccines to address the pandemic has gone a long way to rehabilitate the sector’s reputation away from the drug pricing debate (which has been subdued, but with the US drug pricing bill HR 3 in the background not eliminated by the pandemic). But as Johnson & Johnson, AstraZeneca PLC and now Lilly have found, even supplying those products at virtually no profit can negatively affects stock prices when for one reason or another, those products underwhelm. Not so much howling bear, but possibly altruistic albatross?
* One of Andy’s pensions owns Lilly stock.
Andy Smith gives an analyst and former investor's view on life science companies. He joined the independent research house Equity Development in October 2019 having previously been an analyst at Edison group and a Senior Principal in ICON PLC’s Commercialization, Pricing and Market Access consulting practice. Smith has been the lead fund manager for four life science–specific funds, including 3i Bioscience, International Biotechnology and the AXA Framlington Biotech Fund, and was chief investment officer at Mannbio Invest. He was awarded the techMark Technology Fund Manager of the year for 2007 and was a global product manager at SmithKline Beecham Pharmaceuticals until 2000.