Radioligand Therapy Risks And Pricing Pressures Will Threaten Long Term Earnings Stability

Catalysts

About Novartis

Novartis is a global pharmaceutical company focused on developing, manufacturing, and commercializing innovative medicines across oncology, immunology, neuroscience, cardiovascular, and renal diseases.

What are the underlying business or industry changes driving this perspective?

• Reliance on high-growth oncology and immunology brands such as Kisqali, Pluvicto, Kesimpta, and Scemblix leaves Novartis exposed to any slowdown in adoption or competitive encroachment in these rapidly evolving treatment classes, which could compress the currently robust top line growth and stall revenue acceleration.
• The expanding radioligand therapy and advanced biologics portfolio requires substantial, ongoing manufacturing and infrastructure investment, so any execution missteps in scaling or quality could inflate cost of goods and erode the elevated core operating margin profile.
• Upcoming and ongoing generic erosion in major legacy products, notably Entresto, Tasigna, and Promacta, risks outpacing the ramp of newer launches if growth curves flatten, which would pressure overall revenue growth and limit further net margin expansion.
• Heavy dependence on U.S. pricing and reimbursement for key growth brands in the context of Medicare Part D redesign, inflation penalties, and policy negotiations increases the likelihood of less favorable net pricing dynamics, directly weighing on both net sales and earnings growth.
• The strategy of lifting long term revenue expectations through bolt on deals such as Avidity and Tourmaline adds meaningful near term R and D and development spending, so if pivotal data or launches underperform, the planned step up in future sales may not fully offset the 1 to 2 percentage point core margin dilution and could cap earnings progress.

Assumptions

This narrative explores a more pessimistic perspective on Novartis compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Novartis's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 25.5% today to 24.9% in 3 years time.
• The bearish analysts expect earnings to reach $14.2 billion (and earnings per share of $7.55) by about December 2028, down from $14.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $17.5 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 17.6x today. This future PE is lower than the current PE for the US Pharmaceuticals industry at 33.9x.
• The bearish analysts expect the number of shares outstanding to decline by 2.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained double digit volume growth in priority brands such as Kisqali, Kesimpta, Pluvicto, Scemblix, Leqvio, Fabhalta and the expanding renal portfolio could more than offset loss of exclusivity headwinds for Entresto, Tasigna, and Promacta, supporting resilient mid to high single digit revenue growth and stabilizing or expanding earnings.
• Continued broad based regulatory and clinical success, including new indications and launches for Pluvicto, Cosentyx, Rhapsido, Ianalumab and the IgAN portfolio, may enlarge Novartis' addressable patient pools across oncology, immunology, neuroscience and renal diseases, which would underpin a durable long term revenue expansion and protect net margins.
• Strong free cash flow generation and disciplined capital allocation, reflected in multibillion dollar bolt on acquisitions like Avidity and Anthos, significant share buybacks and rising dividends, could enhance earnings per share even if reported profit growth is modest, thereby supporting the share price through higher per share earnings and shareholder returns.
• Operational execution in radioligand therapy, biologics and complex manufacturing, evidenced by rapidly expanding Pluvicto treatment sites and efficient global rollouts, may preserve high gross margins and enable Novartis to maintain core operating margins around 40% despite temporary dilution from new R and D investments.
• Favorable long term secular trends, such as aging populations, increasing prevalence of chronic immunologic and cardiovascular diseases and growing global access to advanced therapies in markets like China, Japan and the Middle East, could structurally lift demand for Novartis' innovations, supporting sustained revenue growth and long term earnings resilience.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Novartis is CHF85.02, which represents up to two standard deviations below the consensus price target of CHF107.6. This valuation is based on what can be assumed as the expectations of Novartis's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF127.25, and the most bearish reporting a price target of just CHF85.02.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $56.9 billion, earnings will come to $14.2 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 3.9%.
  
• Given the current share price of CHF106.64, the analyst price target of CHF85.02 is 25.4% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.