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Morningstar | Novartis Posts in Line Q4, and Outlook Is Steady With New Drugs Offsetting Generic Pressures

Novartis reported fourth-quarter results and issued 2019 guidance largely in line with both our and consensus expectations, and we don't expect any major changes to our fair value estimate based on the results. The company continues to make strong progress developing new drugs offsetting patents losses, supporting our wide moat rating for the firm.

In the quarter, the branded drug division's 9% year-over-year growth helped offset slower growth from the eyecare business Alcon (4%) and declines from the generics business Sandoz (negative 2%), leading to total sales growth of 6%, a growth rate that should continue in 2019. However, we expect the strong growth from immunology drug Cosentyx and cardiovascular drug Entresto to continue, but at a slower rate, especially for Cosentyx due to competitive pressures from IL-23 drugs like Johnson & Johnson's Tremfya, which recently showed superiority data in psoriasis over Cosentyx. Multiple sclerosis drug Gilenya (company's top drug) posted 4% growth and legal procedures will likely delay a generic launch until 2020, but a less powerful dosing patent could hold off generics until December 2027, which would increase our fair value estimate by close to $3 a share. The increasing generic competition over the next two years on anemia drug Exjade, cancer drug Afinitor, and Gilenya should slow growth, but we expect new and recent drug launches to offset generic pressures and drive close to 3% annual growth over the next four years.

Strategically, Novartis continues to focus on the branded drug group, which should strengthen its moat. In particular, the divestment of the U.S. oral generics business will remove a no-moat segment from the firm. Also, the redeployment of capital from the consumer business sale toward new therapies like AveXis' gene therapy should drive stronger competitive positioning. Additionally, the company is on track to divest Alcon later in the first half of 2019, enabling more focus on innovative drugs.

Looking and the development of pipeline assets, Novartis holds a leading number of potential new important drugs, including brolucizumab (ophthalmology), siponimod (multiple sclerosis), Zogensma (spinal muscular atrophy), crizanlizumab (sickle cell), and aleplisib (PI3K-breast cancer) that could all launch over the next two years. Additionally, recently launched drugs Kymriah (CART blood cancer), Kisqali (breast cancer), and Aimovig (migraine) hold blockbuster potential. For a complete review of Novartis' pipeline and currently marketed portfolio, please see our annual pipeline report, "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."