Novartis AG

Net sales grew 1% at constant currency and core operating income was flat. Management reiterated its full-year guidance of low-single-digit growth in sales and a low-single-digit decline in core operating income. Shares rallied July 21 2%-3% from the previous day's close.

Why it matters: The results are slightly better than our forecasts due to phasing effects that benefited net sales by 1% and core operating income by 5%. This will reverse in the second half of the year. Entresto (cardiology) declined 51% year on year, with no meaningful net sales in the US. Growth products broadly outperformed our expectations, including Kisqali (breast cancer, up 43%), Kesimpta (multiple sclerosis, up 32%), and Leqvio (metabolic, up 59%). Core operating margin was 41.2%, which is only 70 basis points lower than the previous year and better than our expectation. It benefited from one-time phasing effects, including delayed research and development costs that will impact the third quarter.

The bottom line: The first half of the year is in line with management's full-year guidance. We maintain our fair value estimates for wide-moat Novartis of USD 140/CHF 109 and view shares are slightly overvalued. In its six-year follow-up analysis of the NATALEE trial, Kisqali demonstrated clinically meaningful overall survival benefit in early breast cancer patients, which is important to compete with Eli Lilly's Verzenio in node-positive early breast cancer. Novartis submitted its application for del-zota to the US Food and Drug Administration, which is its first approval application for the rare disease assets obtained in its acquisition of Avidity. If approved, this drug should be able to launch in 2027.

Coming up: Key Phase 3 readouts this year include remibrutinib in multiple sclerosis and hidradenitis suppurativa, ianalumab in first line immune thrombocytopenia, and del-desiran (from its Avidity acquisition) in myotonic dystrophy Type 1. All these are expected in the second half.

BLANK PAGEFor more perspective, please see our April 2025 Industry Landscape on the biopharmaceutical industry.

We maintain our fair value estimate of $140 per US ADR.

In October 2025, the firm increased its five-year revenue growth target to 6% from 5%, which is worth over $3 billion of additional revenue by 2029. We think this is a reasonable target, given pipeline progress and the acquisition of Avidity Biosciences.

Major growth drivers include Kesimpta (subcutaneous treatment for multiple sclerosis), Leqvio (cardiovascular drug), Fabhalta (complement inhibitor for rare immunology diseases), and cancer drugs such as Kisqali (breast cancer), Scemblix (a type of blood cancer), and Pluvicto (leading radioligand therapy). These growth drivers should offset exclusivity losses on cardiovascular drug Entresto, cancer drug Tasigna, and blood treatment Promacta over the next five years.

We forecast core operating margin to initially fall to the high 30s due to increased R&D costs associated with Avidity's clinical trials but to return to about 40% by 2030, as margins in its overall portfolio improve.

In the pipeline, Novartis is making strides and holds several drugs that could offer upside to our fair value, including Rhapsido (already approved in chronic spontaneous urticaria and undergoing Phase 3 trials for various other immunology indications), pelacarsen (cardiometabolic), and ianalumab (Sjögren's disease, immune thrombocytopenia).

Patents, economies of scale, and a powerful distribution network support Novartis’ wide moat. Novartis’ patent-protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital. Furthermore, the patents give the company time to develop the next generation of drugs before generic competition arises.

While Novartis holds a diversified product portfolio, there is some product concentration with its largest drugs, Entresto (15% of 2025 sales) and Cosentyx (12% of 2025 sales). However, we expect its newly launched products and pipeline assets can mitigate the generic competition while maintaining core operating profit margins of high 30s to 40%. The company has been especially strong at bringing cutting-edge new modalities to the market, including radioligand therapies, cell and gene therapies, and oligonucleotide therapies.

Novartis’ operating structure allows for cost-cutting following patent losses to reduce the margin pressure from lost high-margin drug sales. Novartis’ established product line creates the enormous cash flows needed to fund the average $800 million in development costs per new drug. In addition, a powerful distribution network sets up the company as a strong partner for smaller drug companies that lack Novartis’ resources.

We think the firm does face environmental, social, and governance risks, particularly related to potential US drug price-related policy reform to increase access by lowering drug prices (close to one-third of total sales are generated by prescription branded drug sales in the US). Ongoing product governance issues, including litigation related to side effects and patents, also weigh on the company. While we have factored these threats into our analysis, we don't see them as material to our moat rating.

Novartis' research and development focuses on therapeutic areas that have historically been amenable to commercial innovation, including oncology, immunology, rare disease, and cardiology.

The company has a plethora of growth drivers in its commercial portfolio, including Kesimpta (neurology), Leqvio (metabolic), cancer drugs Kisqali, Pluvicto, and Scemblix, and Fabhalta (renal/rare immunology).

Novartis continues to invest heavily in pipeline innovation, including radioligand cancer therapies, B-cell mediated immunology, and drugs that reduce cardiovascular risks.

The company is undergoing declines in older drugs, including Entresto, Tasigna, and Promacta/Revolade.

The company will need more progress in its immunology portfolio over the next five years to offset Cosentyx's loss of exclusivity, which we expect to occur around 2029 or so for the US market.

Novartis is not as active in immuno-oncology, which may hurt its overall cancer presence, given the potential that this class of drugs has for combination therapies.