Company Reports

Novartis reported first-quarter results ahead of our expectations, and we've increased our fair value estimate to $105 (CHF 96 local share class) from $98 (CHF 88). Strong top-line growth combined with core margin expansion sets up the company well to meet management’s raised 2024 guidance of low-double-digit to midteens earnings growth.

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term cash flows. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on multiple sclerosis drug Gilenya and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure a steady long-term outlook.

We are not making any changes to our fair value estimate following the announced acquisition of MorphoSys by Novartis for close to $3 billion. We believe pelabresib represents the key driver in the deal. Since pelabresib has been successfully studied in combination with Novartis’ Jakafi (U.S. rights reside with Incyte), we believe Novartis can leverage its strong entrenchment in the myelofibrosis community to launch pelabresib efficiently. Further, the new drug helps build out Novartis’ innovative drug pipeline, a core element in the firm’s wide moat.

Wide-moat Novartis reported fourth-quarter earnings slightly below our expectations on higher-than-expected expenses, but we are not making any changes to our fair value estimate. With the stock trading at a 3-star rating, we believe the market is largely appropriately valuing the company’s growth prospects.

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.

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term cash flows. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on multiple sclerosis drug Gilenya and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure a steady long-term outlook.

Novartis posted third-quarter earnings largely in line with our expectations and we are not making any changes to the firm’s fair value estimate of CHF 85. At the current stock price, we believe the market is appropriately viewing the firm’s growth potential with a mix of major patent losses, offset by a strong innovative pipeline that supports the firm’s wide moat.

Following the Sandoz spinoff, we are lowering our Novartis fair value estimate to $92/CHF 85 for the ADR and local shares, respectively. We are maintaining our wide moat rating for Novartis as we believe the firm remains well-positioned to develop the next generation of innovative drugs, which is the core pillar of its wide moat. The loss of the more commoditized generic business of Sandoz will not likely affect the core branded drug division.

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term cash flows. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on multiple sclerosis drug Gilenya and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure a steady long-term outlook.

Following the recently announced shareholder support for the Sandoz spin-off, we expect Novartis to divest the unit in early October, likely by Oct. 4. We estimate the Sandoz generic drug business contributes just under 10% of Novartis' fair value estimate. Also, we believe the innovative drug segment provides most of the support for Novartis' wide moat, which largely rests on intangible assets driven by continual innovative drug development.

As part of the Inflation Reduction Act, the U.S. Department of Health and Human Services on Aug. 29 announced the first 10 drugs selected for mandated 2026 Medicare price negotiations. This doesn’t have a major impact on our valuations or moat ratings for the biopharma industry. The 10 drugs have been on the market for a prolonged period (seven years for small-molecule drugs and 11 years for biologics) and were selected based on the largest gross (before discounts) spending in Medicare Part D.

Novartis reported solid second-quarter results and slightly increased its full-year guidance, but these updates were largely in line with our projections, and we don’t expect any major changes to our fair value estimate. We continue to view the stock as largely fairly valued.

Novartis’ $3.5 billion acquisition of Chinook Therapeutics (including $0.3 billion of contingent milestone payments) brings two late-stage rare kidney disease drugs that should help drive long-term sales growth. Since we believe Novartis largely paid a fair price for Chinook and the deal size was relatively small, we don’t expect the transaction to have a major impact on our fair value estimate or wide moat rating. However, the acquisition provides Novartis with two phase 3 drugs, atrasentan and zigakibart in immunoglobulin A nephropathy (IgAN, a rare kidney disease) with potentially pivotal data later in 2023. In early studies, atrasentan and zigakibart showed encouraging efficacy data with reasonable side effects, setting up increased probabilities of approvals. The acquisition also complements Novartis’ growing efforts in rare diseases overall, including its own pipeline drug (iptacopan) also targeting IgAN. We like the rare-disease area, as pricing power tends to be very strong and payers typically allow for exceptionally high prices, partly because the small patient populations limit the overall cost of the drugs. We expect the deal to close later in 2023, even though U.S. antitrust regulators have been increasingly pushing back on acquisitions. Since limited treatment options exist for IgAN, we expect regulators to allow this acquisition.

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term cash flows. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on multiple sclerosis drug Gilenya 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 reported first-quarter results ahead of our projections, and we expect to increase Novartis’ fair value estimate based on the strong performance and pipeline advancements. The solid portfolio growth and pipeline strength reaffirms Novartis’ wide moat rating. Plans to spin off the generics division Sandoz remain on track for later in the year, which will likely strengthen Novartis’ competitive position by exiting the weaker-positioned generics business.

Novartis reported favorable top-line data for breast cancer drug Kisqali in the adjuvant setting, but we don’t expect a major change to our fair value estimate for the company as we had already factored in a high probability of success in this expanded indication. Since Kisqali had shown strong efficacy in the metastatic setting, we already had higher expectations that the drug would work well in the earlier adjuvant setting. Nevertheless, the important data is likely to expand Kisqali’s label into the large adjuvant setting, showcasing the solid innovation that is core to Novartis’ wide moat.

Novartis reported fourth-quarter results and provided 2023 guidance largely in line with our expectations, and we don’t expect any major changes to our fair value estimate. With the stock trading close to our fair value, we believe the market is appropriately assessing Novartis’ outlook. Solid recent drug launches and pipeline opportunities look well positioned to offset patent losses, which reinforces our wide moat rating.

Novartis reported third-quarter results slightly below our projections, but we don’t expect any major changes to our fair value estimate. We continue to view the stock as undervalued, with the market not fully appreciating the growth of marketed drugs and pipeline treatments that also support the firm’s wide moat.

After taking a closer look at what we consider the three key elements of the Inflation Reduction Act that will affect the biopharma industry over the next decade, we're reducing our fair value estimates for 17 of the biggest biopharma names in Morningstar's coverage by an average of 2%. We think the step-down in U.S. branded drug sales from capping Medicare price increases to inflation (fully rolled out in 2023), redesigning Medicare Part D (beginning in 2025), and Medicare negotiation (beginning in 2026 for small molecules) will result in a 3% reduction in total sales for these firms by 2031, with firm-level reductions depending on the firm's reliance on the U.S. market, proportion of the portfolio targeting seniors, history of price increases, and relative size of its small molecule and biologics portfolios (as biologics are immune from Medicare negotiation for 13 years instead of nine). Our estimates factor in some ability for the industry to either benefit from certain changes (like potential increased prescription fill rates in Part D with lower out-of-pocket costs) or compensate for headwinds (like responding to inflation caps on price increases with higher launch prices). Overall, we think the effect of the Inflation Reduction Act is manageable for the industry, and we see the competitive advantages and economic moats of these firms remaining intact.

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While 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.