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Morningstar | Led by Innovative Drugs, Novartis Posts Steady 3Q Results and Announces Endocyte Acquisition

Novartis reported third-quarter results largely in line with both our and consensus expectations, and we don't expect any major changes to our fair value estimate. We continue to view the stock as fairly valued. Strong sales from recently launched drugs helped propel overall sales growth of 6%, and Novartis slightly raised its full-year 2018 sales growth expectations, but we expect sales growth will moderate over the next two years due to patent pressures.

Overall, we view Novartis' moat as wide, supported by strong innovation in the branded drug segment, where we expect several new blockbusters to enter the market in 2019, including AVXS-101 (for rare disease type 1 spinal muscular atrophy), BAF312 (secondary progressive multiple sclerosis), BYL719 (breast cancer), and brolucizumab (age-related macular degeneration). These drugs, combined with the recent drug launches of Cosentyx (immunology), Entresto (heart failure), Aimovig (migraine), and Kisqali (breast cancer), should help mitigate the generic pressures from cancer drug Afinitor and multiple sclerosis drug Gilenya in 2019, leading to overall top-line growth of 4% annually over the next three years. Despite a Gilenya legal decision upholding a dosing patent until December 2027, we still model in U.S. generic competition beginning in late 2019 as we have less confidence in the dosing patent.

Along with the earnings release, Novartis announced the acquisition of Endocyte for $2.1 billion, largely to obtain a radioligand therapy (Lu-PSMA-617) for prostate cancer. While recent innovation in prostate cancer has been strong with advancements from Pfizer's Xtandi and Johnson and Johnson's Zytiga and Erleada, we expect radioligand therapy will still be needed as patients' cancer eventually progresses following these competitive treatments. Novartis' guidance of blockbuster potential for Lu-PSMA-617 seems achievable based on strong phase 2 data, and we expect positive phase 3 data in late 2019/early 2020.

Beyond the branded drug group, the weakening of U.S. generic drug prices continues to weigh on Sandoz's results. We expect this will continue through the remainder of year, but the launches of biosimilars and the divestment of the U.S. small molecule generics business should return Sandoz to growth in late 2019. Mitigating the weakness in generic drugs, Alcon continues to post steady gains, which should help set up the division for the spin-off expected in 2019.

Novartis management is participating in the Management Behind the Moat conference at Morningstar's Chicago office Nov. 7-8. If you are interested in attending the conference, please contact your sales representative for registration information.