Morningstar | Novartis looks poised for strong operating margin gains, buoyed by several new specialty drugs.
With strong positions in multiple key healthcare businesses, Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multi-billion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While upcoming patent losses on anemia drug Exjade and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure steady long-term growth.Novartis' pharmaceutical segment is poised for long-term growth driven by new pipeline products and existing drugs. Novartis' strategy to focus largely in areas of unmet medical need should strengthen the firm's pricing power. Additionally, Novartis differentiates itself by its sheer number of blockbusters, including Gilenya for multiple sclerosis, Cosentyx for immunology diseases and Tasigna for cancer. Also, it has generated a strong late-stage pipeline with recent launches of migraine drug Aimovig and cancer drug Kisqali. Despite the upcoming patent losses on Exjade and Afinitor (and potentially multiple sclerosis drug Gilenya), the combination of a strong pipeline of new products and a diverse, well-positioned operating platform should translate into steady growth.Novartis is getting more focused with its recent spin off its eyecare division, Alcon. While the drug division markets eyecare drugs, we have viewed the overlap with Alcon's surgical and vision-care products as relatively minor. As a result, we don't expect many dissynergies by spinning off the Alcon business. The spin-off is in line with Novartis' strategy to focus on human prescription drugs, which has been playing out over the past several years with the divestitures of the vaccine, animal health, and consumer healthcare businesses. Additionally, the company's move to sell its small molecule U.S. generic business should move the firm to be more focused on innovative branded drugs. Given the weak pricing power of generic drugs, we believe the move to divest this division will strengthen the company's overall competitive positioning.
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