Novartis: Sandoz Spinoff Leaves a Well-Positioned Branded Drug Company

Following the Sandoz spinoff, we are lowering our Novartis NOVN 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.

The Sandoz spinoff follows the strategy of several other big biopharma divestitures, with the largely shared goal of increasing the focus on the remaining innovative drug companies. Over the past five years, Eli Lilly, Johnson and Johnson, Merck, Pfizer, and GSK have all divested major segments, including generic drugs, animal care drugs, and consumer products. Novartis itself has also divested several noncore assets before the spinoff of Sandoz, including the vaccine and diagnostics division, the consumer products group, and the ophthalmology unit Alcon. Novartis is now focused on the branded drug business.

With the increased focus on branded drugs and lack of a diversified portfolio beyond branded drugs, we are increasing the firm’s uncertainty to Medium from Low. While we continue to view Novartis as well positioned within the branded drug group, the increased branded drug focus supports a slightly higher uncertainty rating that is also in line with most of Novartis’ Big Pharma peer group.

Operationally, we expect Novartis’ margin and growth rate to improve with the remaining branded drug business. Branded drugs hold much stronger pricing power versus generic drugs, which should enable significant margin expansion. Further, we expect Novartis’ branded drug business to post faster growth than the Sandoz business based on recently launched drugs gaining more share and relatively few patent losses in the near term.