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.
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.
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.
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.