What happened

Shares of the Swiss pharmaceutical giant Novartis (NYSE:NVS) are sliding after the company spun off its eye care segment. For every five shares of Novartis held, investors received one share of the new company, Alcon (NYSE: ALC). In response, the pharmaceutical stock has fallen 11.6% as of 12:38 p.m. EDT on Tuesday.

So what 

The Alcon segment contributed $7.1 billion to Novartis' top line in 2018, a 6% increase over the previous year. That's nothing to sneeze at, but Novartis is so large that Alcon sales made up just 14% of top-line revenue. Today's loss would be larger, but profit margins in the eye care business aren't as wide as with pharmaceuticals. 

Guy in a suit drawing a downward sloping chart in midair.

Image source: Getty Images.

A legal challenge from Amgen (NASDAQ:AMGN) that Novartis walked into could become a very expensive unforced error. Novartis invested heavily in the development and commercialization of Aimovig, a migraine headache preventing drug. Aimovig was first to market, and its leading share of the space could drive annual sales to $2.5 billion by 2022.

Now what

Novartis could lose its share of Aimovig sales because Amgen noticed the company's Sandoz contract manufacturing subsidiary was in breach of contract. The biotech recently filed a suit that could terminate the agreement to co-commercialize Aimovig and share in the profits.

If Amgen succeeds, the losses would sting Novartis, but not too much. Novartis recorded $51.9 billion in sales last year and generated $11.7 billion in free cash flow.

At recent prices, the shares trade at 18 times trailing free cash flow, which is quite reasonable for a well-managed pharmaceutical giant with a diverse product line and late-stage pipeline. Novartis even has one of the most watched gene therapy programs in the business.

With plenty of potential blockbusters near the finish line, Novartis looks like a buy at today's knocked down price.