Strong Pipeline With Scemblix And Kisqali Will Strengthen Future Prospects

Key Takeaways

• Strong product pipeline and strategic growth in priority brands signal potential for stable revenue and margin improvement, overcoming generic competition.
  
• International market expansion with effective protection strategies is expected to drive sustained revenue and earnings growth for Novartis.
  
• Looming patent expirations, Medicare reforms, and increased competition pose significant risks to Novartis's revenue growth and profit margins.

Catalysts

Engages in the research, development, manufacture, distribution, marketing, and sale of pharmaceutical medicines in Switzerland and internationally.

• The strong pipeline highlights for products like Scemblix and Kisqali, as well as others, indicate potential for significant sales growth and margin improvement, impacting revenue positively.
  
• Novartis aims for over 5% sales growth through 2029 driven by robust growth in priority brands, which signals resilience against generic competition and potential revenue stability.
  
• Expansion in international markets for key products like Entresto, with protection strategies and growing prescription rates, is expected to drive sustained revenue and earnings growth.
  
• Positive pipeline momentum and potential new product approvals, such as Pluvicto in new indications and Ianalumab in immunology, could enhance future revenue streams and overall earnings.
  
• Ongoing productivity improvements and cost discipline are likely to contribute to margin expansion, enhancing net earnings and free cash flow over the coming years.

Novartis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Novartis's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 28.4% in 3 years time.
• Analysts expect earnings to reach $15.4 billion (and earnings per share of $7.72) by about February 2028, up from $11.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, down from 17.6x today. This future PE is lower than the current PE for the US Pharmaceuticals industry at 22.7x.
• Analysts expect the number of shares outstanding to decline by 3.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.61%, as per the Simply Wall St company report.

Novartis Future Earnings Per Share Growth

Risks

• There is a reliance on key products such as Entresto, with looming loss of exclusivity in mid-2025 in the U.S. This poses risks to revenue growth, especially considering U.S. sales are 50% of global sales.
  
• The entry of generics for other high-revenue drugs like Tasigna and Promacta mid-2025 could create significant revenue and earnings pressure post-expiration, impacting net margins.
  
• Medicare Part D reform impacts could lead to modest headwinds, particularly in terms of net earnings, as increased costs could offset potential volume growth.
  
• There's an inherent risk in the pipeline with ongoing clinical trials and potential for delays or setbacks, especially significant in drugs like Leqvio and pelacarsen affecting future revenue streams.
  
• Increased competition in key markets, such as Cosentyx facing new competitors in psoriasis, could impact revenue growth and market share retention, putting pressure on profit margins.

Valuation

• The analysts have a consensus price target of CHF104.35 for Novartis based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF124.66, and the most bearish reporting a price target of just CHF84.45.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $54.0 billion, earnings will come to $15.4 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 3.6%.
  
• Given the current share price of CHF96.83, the analyst price target of CHF104.35 is 7.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.