Novartis: Increasing Our Fair Value Estimate Based on Increased Conviction in Margin Expansion

We are increasing Novartis’ fair value estimate to $98/CHF 88 from $92/CHF 85 largely based on expected margin improvement over the next five years. At Novartis’ R&D day, the firm provided a compelling outlook for margin improvement over the next five years, guiding to over 40% core operating margin by 2027 from 37% currently. We believe this margin expansion looks increasingly likely. Novartis’ main levers in margin improvement are reduced sales and marketing expenditures as a percent of sales. We believe there is operating leverage as future sales growth will largely come from therapeutic areas in which Novartis is already entrenched. The increasing margin outlook also helps support the firm’s wide moat rating.