Novartis Earnings: Solid Results, but Generic Pressures Will Likely Decelerate Long-Term Growth

Novartis NOVN 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.

Total sales increased 9% operationally in the quarter, but we expect this growth rate to slow over the next few years as growth for key drugs decelerates and generic pressures increase. The firm’s top drug, Entresto for cardiovascular disease, increased an impressive 37% despite being more mature. Novartis recently lost a U.S. court case supporting an Entresto patent, but we expect an appeal will delay generic competition until late 2025. The firm’s next-largest drug, Cosentyx for immunology, only gained 1%, which we believe is more reflective of its future growth due to increasing competition, partly offset by gaining new smaller indications. Additionally, we expect generic pressures to cancer drug Tasigna and multiple sclerosis drug Gilenya to weigh on the top line over the next two years.

Offsetting maturing drugs and generic pressures, Novartis is launching several key new drugs and is making progress with its pipeline. The firm’s new multiple sclerosis drug, Kesimpta, is annualizing at close to $2 billion in sales, and we expect it to gain share from older treatments. Also, Kisqali’s excellent data in adjuvant breast cancer should support a doubling in the drug’s sales over the next three years. Further, the strong iptacopan data in rare disease paroxysmal nocturnal hemoglobinuria puts the drug on course to develop into a major new blockbuster.

Novartis remains on track to spin off generic drug unit Sandoz in the fourth quarter. The remaining Novartis will focus on the innovative drug business, which we believe is the core of the firm’s wide moat.