Sandoz: Initiating Coverage on Generics and Biosimilars Specialist With a CHF 28.50 Valuation

We are initiating coverage on Sandoz SDZ with a fair value estimate of CHF 28.50 per share and a no-moat rating. Sandoz is one of the largest generic pharmaceutical manufacturers in the world, earning over $9 billion annually from off-patent drugs. Once part of Novartis, Sandoz spun off and went public in October 2023. The firm generates roughly 75% of its sales from generic drugs and the remainder from biosimilars, and it has a significant presence in Europe, a region that generates around half of its total sales. Generics, on average, face low- to mid-single-digit year-over-year price erosion due to competition and pricing pressures from external forces in the drug supply chain. We expect Sandoz to absorb these headwinds and work to offset them through continuous product launches and tuck-in acquisitions in opportunistic areas. We expect biosimilars to be one of Sandoz’s key catalysts for future growth. Several blockbuster innovative drugs are set to expire over the next five years, and Sandoz has many upcoming launches to benefit from these losses of exclusivity.

On the margin, we expect a moderate year-over-year improvement from enhanced manufacturing efficiencies and a better product mix. Biosimilars, on average, post higher gross margins compared with small-molecule generics, and we expect Sandoz to enjoy margin tailwinds as they make up a larger portion of sales. And while biosimilars usually require higher selling, general, and administrative spending, we think Sandoz can utilize its wide network of salesforce and its pre-existing relationships with healthcare professionals to manage this cost.

We assign Sandoz a no-moat rating because we do not believe the company possesses any structural advantages strong enough to earn excess returns and generate a return on invested capital above its cost of capital over the next 10 years.