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Morningstar | Novartis Spins Off Alcon, Leaving a Well Positioned and Focused Drug Company

Novartis completed its spin-off of ophthalmology device company Alcon, which we expect will reduce our fair value estimate by close to 10%. However, we continue to view the company with a wide economic moat and with the majority of cash flows driven by patent protected branded drugs. Further, the divestment should lead to stronger profitability, and we expect core operating margins to expand to over 30% by 2022, up almost 500 basis points from 2018. We also expect the company's dividend to remain largely stable despite the spin-off as the cash flows from the drug division should support the dividend.

The divestment of Alcon follows several years of streamlining the business to allow Novartis to focus on the core competitive advantages in the drug unit. Novartis' divestments of its animal health business, vaccines, and consumer products along with its announced sale of some generics products is moving Novartis toward a much more focused drug company. We believe the increased focus on this wide-moat segment should drive higher returns and reinforce our wide moat rating.

On the drug side, Novartis remains well positioned for growth with several new blockbusters poised to reach the market over the next two years. We are most bullish on wet AMD drug brolucizumab, multiple sclerosis drug Mayzent, and spinal muscular atrophy drug Zolgensma. Further, we expect continued strong gains from cardiovascular drug Entresto, immunology drug Cosentyx, and migraine drug Aimovig. These new drugs should more than offset expected pressures from generic competition on multiple sclerosis drug Gilenya and cancer drug Exjade. Further, we expect recently launched drugs to drive strong margins, with the firm retaining most of the economics and not on the hook to pay many royalties.

For a complete review of Novartis' pipeline and currently marketed portfolio, please see our Healthcare Observer, "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."