Novartis AG (NVS - Analyst Report) reported third-quarter 2016 core earnings of $1.23 per share, above the Zacks Consensus Estimate of $1.18 but below than the year-ago figure of $1.27.

Moreover, revenues declined 1.1% to $12.1 billion and missed below the Zacks Consensus Estimate of $12.3 billion.

All growth rates mentioned below are on a year-over-year basis and at constant exchange rates.

The Quarter in Detail

Novartis operates under three segments: Innovative Medicines (Pharmaceuticals), Alcon (Ophthalmology unit) and Sandoz (Generics).

The Innovative Medicines division recorded sales of $8.2 billion, down 1%. Generic competition for Gleevec and pricing pressure dented sales at the segment. Growth products – Gilenya, Tasigna, Tafinlar+Mekinist, Jakavi and Promacta/Revolade – surged 21% to $3.8 billion, and comprised 46% of net division sales.

Sales at the Alcon division were $1.4 billion, down 3%. Surgical sales were down as strong performance of cataract consumables was more than offset by weak sales of intraocular lenses (IOLs). Vision care sales were flat as contact lenses, which were driven by persistently strong performance of Dailies Total1, offset the decline in contact lens care.

Sales at Novartis’ generic arm, Sandoz, slipped 1% to $2.5 billion, as volume growth was offset by price erosion. Sales were also impacted by lower year-over-year launch activity in the U.S. Biopharmaceuticals sales surged 41% to $262 million.

2016 Outlook

Novartis expects net sales to be broadly in line with the 2015 levels. Growth products are expected to offset the impact of generic competition (primarily Gleevec). Moreover, unfavorable currency movement is anticipated to hurt sales by 1% in 2016.

Pipeline Update

Novartis’ pipeline progress has been encouraging. Recently, the FDA approved expanded use of the company’s arthritis drug, Ilaris, for the treatment of three distinct types of periodic fever syndromes – tumor necrosis factor-receptor associated periodic syndrome (TRAPS), hyperimmunoglobulin D syndrome/mevalonate kinase deficiency (HIDS/MKD) and familial Mediterranean fever (FMF).

Meanwhile, Sandoz continues to strengthen its biosimilars portfolio. In August, the unit obtained FDA approval for Erelzi, the biosimilar version of Amgen Inc.’s (AMGN - Analyst Report) blockbuster drug Enbrel (etanercept).

NOVARTIS AG-ADR Price, Consensus and EPS Surprise

NOVARTIS AG-ADR Price, Consensus and EPS Surprise | NOVARTIS AG-ADR Quote

Our Take

Novartis’ third-quarter 2016 results were mixed with the company beating earnings estimates but missing on revenues. The company has been facing challenging conditions for the past few quarters. Going forward, strong performance in growth products should be able to offset the impact of generic for Gleevec as well as the weakness in Alcon. We are also impressed by the company’s efforts to strengthen its biosimilars portfolio.

Zacks Rank & Key Picks

Novartis currently carries a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the healthcare sector include Incyte Corporation (INCY - Analyst Report) , and Geron Corporation (GERN - Analyst Report) . Both stocks sport a Zacks Rank #1 (Strong Buy).

Incyte’s earnings estimates for 2016 and 2017 were up a respective 10% and 2.8% over the last 60 days. The company has beaten earnings estimates thrice in the last four quarters with an average surprise of 335.16%.

Geron has posted a positive earnings surprise in each of the four trailing quarters, bringing the average beat to 20.78%.