Novartis AG: significant reduction in net debt (NYSE: NVS)

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Investment thesis

By the end of fiscal 2021, Novartis AG (NVS) had paid off a monumental debt of $23.6 billion through the sale of its 53.3 million Roche shares at $20.7 billion and its strong free cash flow of $13.3 billion. The debt repayment brought NVS’s net debt level to a new low of $0.9 billion since fiscal 2010.

NVS is also the pharmaceutical company that developed the world’s most expensive drug, Zolgensma, for the treatment of spinal muscular atrophy, priced at $2.1 million. However, the therapy only generated $1.3 billion in revenue in fiscal 2021, compared to AbbVie’s (ABBV) Humira with $20.7 billion in revenue the same year.

Nonetheless, NVS still recorded a decent revenue of $51.6 billion in fiscal year 2021, representing a 6.1% year-over-year growth, primarily attributed to increased innovative drug volume. On the other hand, sales of Sandoz have remained stable in recent years, with NVS expected to either divest or divest the segment by the end of fiscal 2022. Upon successful divestiture, NVS is expected to earn an additional $25 billion from capital for its future pipeline, partnership and M&A activities.

With a capable management team, NVS achieved an impressive $23.6 billion debt repayment through shrewd business acumen

Cash and NVS equivalents, free cash flow and long-term debt

Cash and NVS equivalents, free cash flow and long-term debt

S&P Capital IQ and company filings

In the latest earnings call, NVS reported that it had paid off most of its net debt of $23.6 billion, reaching net debt of $0.9 billion in the fourth quarter of 2021. The current level represents NVS’s lowest net debt amount since fiscal 2010. The phenomenal debt repayment is primarily attributed to capital received from the sale of 53.3 million Roche shares for $20.7 billion in November 2021 and its strong free cash flow at $13.3 billion in fiscal 2021. The strategic decision to sell Roche sales at a record price of $388.99 underscores the very astute business acumen of Roche’s management. NVS. This has allowed the company to cash in its investment at an impeccable time for maximum return. In addition, the company has generated solid free cash flow growth since fiscal 2008.

Dividend Yield and NVS Share Price Closing

NVS dividend yield and share price

S&P Capital IQ

Strong capital in fiscal 2021 also enabled NVS to pay out $7.4 billion in dividends in fiscal 2021. In that year, the company increased the dividend payout by 3.61% in YoY from $3.08 to $3.19, representing consistent growth over the past two years since 2019. NVS shares have also seen a noticeable long-term uptrend over the past five years. . However, the stock has had a relatively declining dividend yield over time. Nonetheless, NVS’s current yield of 2.4% also puts it well above the pharmaceutical industry average of 1.9%.

In addition, NVS has also engaged in share buyback programs which have reduced outstanding shares by 4.4% over the past five years, from 2.359 billion in September 2017 to 2.254 billion in October 2021. In fiscal 2021, NVS purchased a total of 30.7 million shares at $2.8. B, with an additional $15 billion share buyback announced in December 2021 (of which $0.2 billion has already been exercised). These programs have helped increase the participation of existing shareholders, while mitigating the potential dilution of stock-based compensation.

Additionally, there has been speculation about NVS’s plan for its generic and biosimilar segment, Sandoz, which has reported stagnant sales for the past six years. For fiscal year 2021, Sandoz reported revenue of $9.6 billion, representing a -2.8% year-over-year decline and -3.3% from fiscal year 2019 levels. In the latest earnings call, NVS also reported that FY2021 sales in the US and Europe were down -15% yoy and -2% yoy, respectively, which is offset by an increase in worldwide sales of +7%. Its decline is mainly attributed to intense competition around generic and complex biosimilar products, leading to lower prices.

The spin-off or divestiture of Sandoz would be beneficial for NVS, as it would improve its future margins and ensure the growth of its innovative drugs segment. This would certainly help NVS achieve its 4% CAGR target through 2026, with the innovative medicines segment seeing 8% year-over-year growth in fiscal year 2021. NVS could also potentially receive $25 billion in due to the Sandoz divestiture, which would then be strategically applied to its future M&A activities, such as the recent acquisition of Gyroscope Therapeutics. NVS’s decision at the end of fiscal 2022 remains to be seen.

As a result, it is evident that NVS management has demonstrated great skill in managing its operational performance. Additionally, given that NVS has minimal debt service going forward, we expect the company to put its future free cash flow into its pipeline, with more than 20 potential platforms for regulatory approval by 2026. Assuming positive news from its clinical trials and rapid regulatory approvals, we can assume an upward reassessment of its future earnings.

NVS recorded excellent revenues for fiscal year 2021

NVS turnover and net income

NVS turnover and net income

S&P Capital IQ

Over the past five years, NVS has experienced low revenue growth at a CAGR of 1.25%. However, in fiscal year 2021, the company recorded excellent revenue of $51.62 billion, which represents an increase of 6.1% year-on-year and 8.6% compared to fiscal year 2019. The growth is primarily attributed to robust Innovative Medicines sales at $43.5 billion with 6.5% year-over-year growth.

During the fourth quarter of 2021, NVS recorded a decent revenue of $13.23 billion, representing an increase of 1.5% QoQ, 3.6% YoY and 6. 6% from Q4 2019 levels. In Q4’21, its Innovative Medicines segment generated revenue of $10.7 billion, down -3.7% QoQ, but in line with FQ4’20 . Among these, in the fourth quarter of 2021, Entresto and Zolgensma recorded robust annual growth of 33% with an increase of $233 million and 35% with $88 million, respectively, while Cosentyx recorded growth. decent annual growth of 12% with an increase of $134 million. Kesimpta also recorded excellent sales in fiscal 2021 for a total of $372 million. On the other hand, the Sandoz segment recorded revenues of $2.5 billion in the fourth quarter of 2021, in line with the previous quarter and fiscal year 2019.

NVS forecast revenue and net income

NVS forecast revenue and net income

S&P Capital IQ

Over the next five years, NVS is expected to continue to experience stagnant revenue growth at a CAGR of 0.98%. However, the consensus estimates that NVS will bring in $53.53 billion in revenue in fiscal year 2022, representing a 3.7% year-over-year increase. The boost could be attributed to NVS’s recent launch of Leqvio, a treatment targeting low-density lipoprotein cholesterol. With the global dyslipidemia market expected to reach $48 billion by 2027, Leqvio has the potential to be another higher earner for NVS. Consensus estimates that Leqvio will bring in $2 billion in peak sales by 2026, as the treatment is more convenient to administer than similar drugs from Amgen (NASDAQ:AMGN) Repatha and Sanofi (NASDAQ: SNY)/Regeneron’s (NASDAQ:REGN) Praying.

Nevertheless, the consensus is that NVS revenue growth will slow from FY2024 onwards. 2023. These three products accounted for 14.6% of NVS sales in fiscal 2021, with Promacta/Revolade accounting for $2 billion of NVS annual sales, while Entresto and Tasigna reported $3.54 billion, respectively. dollars and $2 billion each. Additionally, NVS had disclosed in its FY2021 SEC filings that there are patent challenges to these three products, either in the compound patents or in other related patents, despite the absence generic competition in the United States and the EU. As a result, NVS could see lower future revenues, assuming loss of exclusivity through ANDA procedures, entry of biosimilars and delay in regulatory approval of its pipeline.

So, is NVS Stock a buy?

NVS EV/Fwd Revenue

NVS EV/Fwd Revenue

S&P Capital IQ

NVS is currently trading at an EV/NTM turnover of 4.17x, slightly below its 3-year average of 4.42x. Consensus estimates also value NVS stock at fair value now, given its capacity and reasonable valuation. However, as the EV/Fwd revenue trend shows, NVS is not expected to experience significant revenue growth over the next five years. The company could also experience a decline in revenue due to a loss of exclusivity in 2023. However, its pipeline could relaunch in 2024, assuming successful regulatory approval for its Phase 3 clinical trials.

Nevertheless, NVS management showed its skill through multiple strategic moves, such as the sale of Roche shares and the subsequent repayment of its debt. Additionally, assuming the divestiture of its Sandoz segment, we could see an upward repricing of future NVS revenue as the company would be cash-rich to invest in its future pipeline, partnerships and acquisitions. As a result, speculative investors can seize this opportunity to enrich their portfolios. Otherwise, it is better to take a wait-and-see approach on this stock, given that it has traded sideways over the past three years.

Therefore, we rate NVS stock as neutral for now.

Ann J. Cox