Rising Regulatory Hurdles And US Tariffs Will Undermine Biosimilar Margins

Key Takeaways

• Sustained pricing and regulatory pressures, along with rising legal risks, are likely to constrain revenue growth and earnings quality for Sandoz.
  
• Increased investment and competition may erode margins and threaten the long-term viability of its traditional generics and biosimilars business model.
  
• Accelerated biosimilars growth, innovative launches, expanded manufacturing, and global market reach position Sandoz for resilient revenue, improved margins, and competitive strength amid rising healthcare demand.

Catalysts

Develops, manufactures, and markets generic pharmaceuticals and biosimilars worldwide.

• Ongoing and rising global pressure on drug pricing, compounded by newly confirmed US tariffs on EU generics and biosimilars, is likely to further constrain Sandoz's ability to drive top-line revenue growth and will place significant downward pressure on net margins going forward.
  
• The increasing regulatory complexity-marked by the need for intricate approvals and the potential for prolonged timelines across developed markets-is expected to slow new generic and biosimilar launches and could reduce Sandoz's pipeline velocity, threatening both future revenue growth and the realization of its much-touted pipeline value.
  
• Sandoz's heavy investment in expanding manufacturing capacity and recent acquisitions (such as Just-Evotec Biologics) may increase the company's fixed cost base at a time when competition from low-cost Asian manufacturers is intensifying, leading to greater risk of margin erosion and net earnings volatility if price competition accelerates.
  
• The accelerating shift in healthcare towards personalized and precision medicine represents a structural threat to traditional large-volume generics and biosimilars, potentially capping addressable market growth for Sandoz and threatening the long-term sustainability of its revenue base.
  
• Heightened litigation and intellectual property risk in the biosimilars segment, together with the risk of failed launches or key setbacks in a limited set of blockbuster assets, could drive unpredictable, one-off legal and restructuring costs, affecting earnings quality and further widening the gap between adjusted and reported free cash flow.

Sandoz Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sandoz Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sandoz Group's revenue will grow by 4.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.1% today to 10.9% in 3 years time.
• The bearish analysts expect earnings to reach $1.3 billion (and earnings per share of $3.07) by about August 2028, up from $227.0 million today. The analysts are largely in agreement about this estimate.
• 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 17.0x on those 2028 earnings, down from 119.5x today. This future PE is lower than the current PE for the CH Pharmaceuticals industry at 31.1x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 3.82%, as per the Simply Wall St company report.

Sandoz Group Future Earnings Per Share Growth

Risks

• The accelerating sales growth in biosimilars, successful product launches like Pyzchiva, Wyost, and Jubbonti in major markets, and a robust pipeline of 27 biosimilars targeting $200 billion in originator sales all point to strong future revenue growth and market share expansion for Sandoz Group.
  
• Regulatory streamlining and increased acceptance of biosimilars are expected to accelerate approval times, lower development costs, and enable Sandoz to bring more products to market faster, thereby supporting margin improvement and long-term earnings growth.
  
• Ongoing and significant investments in manufacturing modernization, capacity expansion in Slovenia, and the acquisition of Just-Evotec Biologics provide Sandoz with competitive advantages through cost control, increased operational efficiency, and vertical integration, which should result in improved net margins and cash flow generation.
  
• The global shift towards generics and biosimilars, fueled by demand from an aging population, rising chronic diseases, and heightened pressure on healthcare costs, is poised to drive sustained volume growth for Sandoz, supporting steady increases in revenue and market resilience.
  
• Geographic diversification and a leading presence in both Europe and international markets reduce dependency on the U.S. while opening access to high-growth patient populations, positioning Sandoz for stable revenue streams and less vulnerability to regional or regulatory shocks.

Valuation

• The assumed bearish price target for Sandoz Group is CHF37.09, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sandoz Group'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 CHF60.65, and the most bearish reporting a price target of just CHF37.09.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $12.1 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 3.8%.
  
• Given the current share price of CHF50.54, the bearish analyst price target of CHF37.09 is 36.3% lower. Despite analysts expecting the underlying buisness 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.