EUR 850.00 For Business Accounts Only

Morningstar | Buoyed by Recently Launched Branded Drugs, Novartis Posts Steady 2Q

Novartis reported second-quarter results that were largely in line with our expectations and slightly better than consensus expectations, and we don’t expect any change to our fair value estimate. We continue to view the company as undervalued, with the investment community underappreciating the strength of its recently launched drugs and late-stage pipeline. We believe the continued strength in the branded drug division supports our wide moat rating.

In the quarter, innovative medicines (representing close to 80% of operating profits) grew 8% operationally year over year, helping to drive total sales up 5%. We expect branded drugs to continue to support this mid-single-digit level of overall growth through the remainder of the year with strong gains expected to continue for immunology drug Cosentyx and cardiovascular drug Entresto. Both these drugs have shown significantly better efficacy profiles over previous standards of care. While we expect steady growth through the end of the year, the potential for U.S. generic competition to multiple sclerosis drug Gilenya (4% of total sales) in August 2019 creates longer-term headwinds for the company. While Novartis won a Gilenya patent case upholding a dosing patent until December 2027, we still model in U.S. generic competition beginning in late 2019. If U.S. generic competition doesn't materialize until late 2027, our fair value would probably increase by close to $3 a share.

Beyond the currently marketed drugs, Novartis continues to make strong progress on its pipeline. We project peak annual sales of over $1 billion for migraine drug Aimovig (approved in the United States on May 18), secondary progressive multiple sclerosis drug BAF312 (filed with the Food and Drug Administration in the past quarter), spinal muscular atrophy drug AVXS-101 (U.S. filing expected later in 2018) and ophthalmology drug brolucizumab (global filing expected later in 2018).

Outside the branded drug group, weakening U.S. generic drug prices are weighing on Sandoz's results. We expect this will continue through the year, but the launches of biosimilars should return this segment to growth in 2019. Offsetting this weakness, Alcon's growth is accelerating, led by strong growth of implantable devices, which should help set up the division for the spin-off expected in 2019.

For a complete overview of Novartis’ currently marketed drugs and its pipeline, please see our Healthcare Observer "Steady Pipelines Offset Generic Threats, Securing Big Biotech and Big Pharma Moats."