Yahoo Finance Novartis Is Tracking Well Above the Industry
Novartis AG (NYSE:NVS) is one of the largest pharmaceutical companies in the world, many of whose drugs are "gold standards" in the treatment of cancer, heart failure and autoimmune disorders.
The company's revenue for the first quarter of 2024 was about $12.12 billion, exceeding our expectations by about $570 million and, more importantly, it grew by 2.9% compared to the previous quarter, even after the Sandoz spin-off and the completion of the sale of "front of eye" ophthalmology assets on Sept. 29, 2023.
In addition to Leqvio, another contributor to improving the company's financial position was Entresto, which is a heart medicine consisting of two active substances, namely sacubitril and valsartan.
Sacubitril is a prodrug neprilysin inhibitor whose mechanism of action is based, among other things, on the cleavage of atrial natriuretic peptide, which is released in significant quantities in response to stress. Ultimately, this helps reduce water and sodium retention in the body and also leads to a decrease in blood volume in the heart, thereby significantly reducing the risks of cardiovascular death.
By binding to the angiotensin receptor 1, valsartan helps lower blood pressure and aldosterone levels, thereby preventing the development of various cardiovascular diseases.
Entresto was first approved on July 7, 2015 for the treatment of patients with heart failure, which affects an estimated 6.20 million Americans. Moreover, due to its unique mechanism of action and extremely high efficacy demonstrated in various pivotal clinical trials, the U.S. health regulator subsequently expanded the drug's label.
Source: Author's elaboration, based on based on Novartis press releases.
Total sales of Entresto were $1.88 billion in the first three months of 2024, up 34.30% year over year due to increased demand in the United States for the treatment of heart failure, expansion of its geographic use and competitive advantages over enalapril, lisinopril and ramipril.
Source: Author's elaboration, based on quarterly securities reports.
In addition, we believe Kisqali will contribute to Novartis' Ebit margin growth in the coming years. The company's blockbuster drug is a CDK4/6 inhibitor that has been approved by the Food and Drug Administration for the treatment of certain patients with breast cancer.
Source: Author's elaboration, based on based on Novartis press releases.
Also, according to the Global Cancer Observatory, the number of new cases of breast cancer in the world will be 3.14 million by 2045, an increase of 36.90% compared to 2022, thereby being one of the key factors that will help maintain the upward trend in Kisqali sales.
Source: Global Cancer Observatory
Kisqali sales totaled $627 million in the first quarter of 2024, up 51.10% from the prior year due to continued strong demand in the U.S. and the European Union.
Source: Author's elaboration, based on quarterly securities reports.
Moreover, on Dec. 8, 2023, the company published the results of the Phase III NATALEE trial, which confirmed both Kisqali's favorable safety profile and its efficacy in reducing the risk of disease recurrence in patients with stage II and III early breast cancer.
CEO Vasant Narasimhan said the following on the earnings call regarding Kisqali's launch to a broader range of patients, which we estimate gives us confidence that its sales will continue to grow until patent expiration in 2036.
"So these are, we believe, relatively minor changes. Nonetheless, changes we do need to review with the regulators. In terms of inspection, we don't believe there would be any inspection required for this. And so that's what I think overall gives us confidence in the guidance to launch the medicine in the second half."
The Swiss pharmaceutical company is expected to release second-quarter financial results on July 18. Analysts forecast Novartis' revenue to range from $11.89 billion to $12.68 billion, up 6.10% from analysts' expectations for the previous quarter.
Source: Author's elaboration, based on GuruFocus data.
Nevertheless, according to our model, this financial metric will be $12.40 billion, which is $200 million more than the median of the range described above, thanks in part to more optimistic expectations for sales of Entresto, Leqvio, Kesimpta as well as Cosentyx, an anti-IL-17A monoclonal antibody approved by regulatory authorities for the treatment of patients with various immunological diseases.
Source: created by Author.
Thanks to the label expansions for Xolair and Cosentyx, as well as the approval of Fabhalta at the end of 2023, Novartis' operating income margin increased significantly not only year over year but also quarterly, amounting to about 30.80% in the first three months of 2024.
Source: Author's elaboration, based on GuruFocus data.
Moreover, this financial metric is significantly higher than that of its key competitors such as GSK (NYSE:GSK), Pfizer (NYSE:PFE) and Roche Holding (RHHBY), which indicates the effectiveness of the company's management in the development and commercialization of its medicines, and also contributes to the growth of interest from investment investors.
We estimate the company's operating income margin will reach 28.50% in 2024 and grow to 31.10% in 2025, mainly due to lower costs of raw materials needed to produce its medicines, increased sales of Cosentyx and Leqvio, and regulatory approval of Pluvicto to treat certain patients with prostate cancer, one of the most common cancers in the world.
Source: Global Cancer Observatory.
Analysts forecast Novartis' second-quarter earnings per share to be between $1.78 and $1.84, remaining almost unchanged from the prior year, mainly due to asset sales in 2023. Meanwhile, according to our model, the company's earnings will be 4 cents above the median of this range and reach $1.85.
Source: Author's elaboration, based on GuruFocus data.
Despite the company's expected acceleration in operating income growth from the second half of 2024, its trailing 12-month non-GAAP price-earnings ratio stands at 14.25, indicating it is trading at a discount to the health care sector and its peers.
On a more global scale, the price-earnings ratio is expected to decline to 11.07 by 2027, which is extremely attractive for investors looking for undervalued pharmaceutical companies with high dividend yields, an extensive portfolio of product candidates and management that can achieve success in commercializing approved drugs.
Source: Author's elaboration, based on analyst projections.
We also want to note that according to GuruFocus' data, Wall Street's average target suggests an upside of about 16.10% from the company's current price of $98.70.
Source: GuruFocus
Conclusion
In our assessment, increased competition in the global cancer therapeutics market from Merck (NYSE:MRK) and AstraZeneca (NASDAQ:AZN), as well as continued elevated U.S. inflation, which in turn reduces the likelihood of Fed rate cuts in 2024, are two risks that investors need to consider.
On the other hand, after the spin-off of Sandoz, Novartis' operating income margin again began to grow at a high rate, including due to increased sales of Entresto, Pluvicto and Leqvio. An additional investment thesis that we highlight is its rich portfolio of experimental drugs, many of which demonstrate high efficacy in the treatment of oncology, cardiovascular and autoimmune diseases.
Source: Novartis.
Furthermore, the total debt/Ebitda ratio has continued to decline over the past five years to around 1.44, indicating there are no significant risks associated with the redemption of its bonds maturing between 2024 and 2050.
Source: Author's elaboration, based on GuruFocus data.
We initiate our coverage of Novartis with an outperform rating for the next 12 months.
This article first appeared on GuruFocus.
