NVSEF - Novartis: Lowering Our Target Price

Summary

• Novartis will IPO its generic division.
• We estimate a lower Sandoz valuation (still at a premium compared to its peers) and higher losses of exclusivity.
• We derive a target price of CHF 80 with a 13x P/E on 2023 numbers.

Here at the Lab, we used to be more positive about Novartis ( NVS , NVSEF ), and after a deep analysis and the latest company update, we decide to lower the Swiss pharmaceutical giant's target price and maintain a neutral rating from a previous buy at CHF 95 per share. To sum up, there are two main reasons: 1) lower Sandoz valuation (after having analyzed Viatris (VTRS), Teva (TEVA) and Haleon (HLN) performance and market reaction) and 2) Novartis (ex-Sandoz) limited growth catalyst over the next 5 years period with various losses of exclusivity compared to its closest peers.

Sandoz catalyst

In October 2021, Novartis has announced its intention to split the Sandoz operation and to review all the strategic options for the generic drug company. As a memo, Sandoz is the largest generic company in Europe and a world leader in the biosimilar sector. Last year, the company delivered top-line sales of approximately $9.6 billion and has 20,000 employees across the globe. Going back to Sandoz's story, there were two possible outcomes: on one hand, the sale to a Private Equity fund; however, at this time, it seems more complicated due to the high cost of leverage. On the other hand, there was the IPO exit strategy. This was a viable way as already done by other pharmaceutical giants. According to rumors , Sandoz's value was around $25 billion. The move by the Swiss company would follow the strategies implemented by other large international pharmaceutical groups, which in recent years have decided to spin off the generic division in order to focus investments and research on more profitable areas. After Merck (MRK), Sanofi (SNY), Pfizer (PFE), Johnson & Johnson (JNJ) and the latest one of GSK, which recently completed the spin-off of the consumer health division called Haleon, Novartis will follow.

With the latest strategy focus, Novartis unveils that " the examination showed that the spin-off of Sandoz is in the interest of the shareholders ". The agenda now marks the second half of 2023 as possible IPO time (if market conditions will allow it). Sandoz will be listed in the Zurich stock exchange and also foresees an ADR for Wall Street.

Here at the Lab, cross-checking Sandoz numbers versus its closest comparable (Teva, Haleon, and Viatris), we decide to reduce Sandoz's valuation from $26 billion to $19.5 billion. However, this still implies a premium against its peers due to a higher growth rate (thanks to EM exposure), lower biosimilar erosion and lower pending litigation. We arrive at Sandoz's valuation using a multiple of approximately 9x on EV/EBITDA expected in 2023.

Novartis ex-Sandoz and conclusion

We recently looked at the Roche (RHHBY) pipeline with a supportive conclusion , despite Sanofi's recent stock price performance , we always indicated the French company as a leading player matching growth and value. In addition, AstraZeneca (AZN) is our preferred company in terms of growth potential in our EU pharma coverage. Going to Novartis, after our analysis, we are lowering the company's growth estimates. First of all, we are reducing Leqvio's assumption and turnover performance. Secondly, after having analyzed the Novartis LoEs, we are estimating lower revenue for biosimilar competition for a total consideration of almost $10 billion in the next five-year period. With the latest plan , the company is still confident that it will be able to achieve a " 4% sales CAGR through 2027 and a Core Op Inc margin ~40%+ in the mid".

However, a lower Sandoz valuation and no near-term pipeline catalyst s weigh on Novartis's valuation. If we add the fact that Novartis's performance has been driven by price increases and the latest US IRA was signed to limit price increase (in 2023) and price negotiation (in 2026), we see a limited upside in Novartis's investment case. The Swiss pharmaceutical giant is still less expensive than its closest peers. We now believe for a good reason, hence we arrive at a CHF 80 stock price based on a 13x P/E 2023 estimates.

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