Novartis shares slide on BofA downgrade

Investing.com -- Shares of Novartis (LON:0QLR) (SIX:NOVN) were down on Wednesday following a downgrade by BofA Securities, which downgraded the Swiss pharmaceutical giant to "neutral" from "buy." 

At 4:01 am (0801 GMT), Novartis was trading 2.4% lower at CHF 96.48.

The move reflects a more cautious outlook, driven by concerns over a slower catalyst path, looming legal risks, and long-term growth uncertainties. 

BofA also lowered its price target for Novartis to CHF110 from CHF120, reflecting growing apprehensions about the company's near-term potential for outperformance.

The downgrade marks a shift in sentiment after Novartis' strong run, which saw its stock outperform the European pharmaceutical sector by around 12% since early 2023. 

The rise was supported by positive outcomes from several Phase III trials, including Kisqali, Pluvicto, Iptacopan, and Scemblix, as well as successive earnings beats that consistently exceeded expectations. However, BofA now sees fewer catalysts on the horizon that could sustain this momentum. With key Phase III data already released and unlikely to drive significant earnings surprises until the second half of 2025, the firm no longer expects Novartis to deliver further short-term outperformance.

One of the central risks BofA highlights is ongoing patent litigation related to Kisqali, a key growth driver for Novartis in breast cancer treatment. The dispute with MSN Labs over Kisqali's U.S. patent could significantly impact Novartis' future earnings. 

Although the chance of an unfavorable ruling is considered low, at 20-25%, the potential downside is substantial. Should Novartis lose patent protection as early as 2026, BofA estimates the company could face an 18% reduction in its 2030 earnings per share (EPS) and a corresponding decline in its discounted cash flow (DCF) valuation. 

Such a scenario could also trigger downgrades to consensus estimates across the market, further dampening investor sentiment.

Adding to Novartis’ challenges is the looming generic competition for its blockbuster heart failure drug, Entresto. 

BofA anticipates that generic versions of Entresto could hit the U.S. market by mid-2025, which would sharply reduce Novartis’ revenue from this key asset. 

In fact, BofA’s sales forecasts for Entresto are already 8% below consensus for 2025 and 13% lower for 2026. The erosion of Entresto’s market share due to generics represents a major headwind for Novartis in the coming years.

Valuation concerns also played a role in BofA’s decision to downgrade the stock. The brokerage revised its price-to-earnings (P/E) ratio estimate for Novartis from 16x to 15.5x for 2025, reflecting the increased proximity to patent cliffs for major drugs such as Cosentyx (2029), Kesimpta (2030), and Kisqali (2031). 

These approaching expirations limit the potential for a higher stock re-rating, as investors weigh the company's ability to sustain growth beyond these key patent dates.

However, BofA remains somewhat positive about Novartis' longer-term prospects. While the brokerage tempering its expectations for 2024 and 2025, its earnings projections for 2028 remain 16% above consensus, driven by new product launches expected to fuel growth in the latter half of the decade. 

However, until those launches take off, the company faces a quieter period in terms of catalysts and growth drivers.