Investors were caught off guard by a decision on the research and development front.
By most standards shares of drugmaker Novartis (NVS -4.10%) should be higher following this morning’s release of its second-quarter results. The drugmaker’s top and bottom lines were both better than expected, and up from year-earlier comparisons. And profit guidance for the remainder of the year was encouraging, lifted from its previously announced expectations.
And yet, Novartis stock is down 4.5% as of 1:55 p.m. ET Thursday, according to data from S&P Global Market Intelligence.
What gives? Blame the company’s decision to bow out of one particular sliver of the cancer market, mostly.
One red flag spoils an otherwise solid quarter
The second quarter’s numbers were solid enough. Novartis turned $12.5 billion worth of revenue into per-share earnings of $1.97 in Q2, topping expectations for a profit of $1.89 per share on sales of a little less than $12.4 billion. Better still, the company’s top line grew 11% year over year, pushing operating profits up by 21% on a constant-currency basis. Its heart failure drug Entresto along with psoriasis and psoriatic arthritis treatment Cosyntex led the growth charge.
Novartis is looking for more of the same in the near future. Its previous full-year projection for operating income growth in the low to mid teens was raised to an expectation of growth in the mid to high teens. That’s a considerable increase for a company of this size and ilk.
Not every developmental effort Novartis makes, however, pans out as well as things have for Cosyntex and Entresto. In conjunction with the release of its second-quarter numbers, the pharmaceutical outfit also announced on Thursday that it was discontinuing the development of its cancer-fighting Opnurasib. While the KRAS-based treatment performed reasonably well in recent phase 2 and phase 3 trials, the company’s dropping the effort to focus on more promising prospects.
This decision appears to be the big detail the market is fixated on today. It’s worth noting, however, that Novartis shares were arguably overextended headed into today’s trading session, leaving them vulnerable to a pullback regardless of any headlines.
Yes, this dip is a buying opportunity
The end of Opnurasib’s development is a letdown to be sure. But, don’t overreact to the news. Several major pharmaceutical companies are also working on KRAS-blocking therapies, and some of these organizations already have such drugs on the market. It was always going to be a challenging, crowded contest.
More to the point, the bullish growth-based argument for owning a stake in Novartis that was in place prior to today is still intact. Thursday’s dip is actually an entry opportunity for anyone who was too worried to buy the stock following its recent run-up.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.