Share prices of Swiss pharmaceutical company Novartis (NVS -1.64%) have climbed more than 10% so far this year. The company focuses on cardiovascular, immunology, neuroscience, solid tumors, and hematology therapies, and in early October completed the spinoff of its generics division, Sandoz, into a separate company.
The spinoff isn't the only change the company has made, as it has trimmed its staff and tightened the focus on its therapies into more profitable areas.
Here are two green flags as to why the stock remains a good buy, as well as one red flag as to why it may not be a good buy right now:
Green flag No. 1: Novartis' strong portfolio of drugs will drive revenue
In the third quarter, Novartis reported sales of $11.8 billion, up 12% year over year, and earnings per share (EPS) was $0.73, up 20% over the same period last year.
That performance is why the pharmaceutical company raised its yearly guidance on Oct. 24 for the third time this year. It kept annual revenue guidance at high single digits but boosted its prediction for core operating income to grow in the mid-to-high teens (up from low-double-digit to mid-teens).
The key to the expected growth was continued strong sales from heart medication Entresto ($1.5 billion in the quarter, up 31%, year over year), as well as immunology drug Cosentyx ($1.3 billion, up 4% over the same period last year), plus increased sales of several relatively new drugs.
Cancer drug Pluvicto, which was approved by the Food and Drug Administration (FDA) last year, brought in $256 million in sales, up 220% year over year. Multiple sclerosis therapy Kesimpta saw sales of $657 million, up 127% over the same period last year and heart medication Leqvio, in its first full quarter since gaining a second indication, did $90 million in sales. Chronic myeloid leukemia drug Scemblix saw sales of $106 million, up 156% year over year.
Green flag No. 2: Novartis has a huge pipeline that should pay off
Novartis has 115 projects in clinical development, including 39 therapies in phase 3 trials. The company said it has more than a dozen key readouts over the next two years that could lead to submissions.
Company CEO Vas Narasimhan, in the company's third-quarter report, pointed out that the company's pipeline continues to make strides, including key milestones for Pluvicto, iptacopan, remibrutinib, and Lutathera.
The company scored a big milestone this month when it said Kisqali fared well in preventing the recurrence of breast cancer in key subgroups of patients.
Earlier this month, iptacopan did well in a phase 3 trial to treat patients with IgAN, a disease that leads to high protein levels in urine and potential kidney failure that affects roughly 25 million people worldwide.
The company also sees high potential in Ianalumab, a monoclonal antibody. The company has the drug in trials to treat autoimmune hepatitis, multiple sclerosis, pemphigus vulgaris (a rare blistering skin disease), rheumatoid arthritis, Sjögren's syndrome (an autoimmune disorder), and systemic lupus erythematosus. In September, the company released positive trial data for the drug as a lupus therapy.
Remibrutinib, which fared well recently in phase 3 trials to treat chronic hives, is also being looked at as a possible multiple sclerosis therapy.
The red flag: The company is facing patent cliffs
Novartis has said it sees $9 billion in annual sales going out the door by 2026, thanks to biosimilar competition for some of its top drugs, most notably Entresto, which has seen some patents expire this year, with more expected to expire next month and early next year.
Several other drugs could face biosimilar competition. Eye therapy Lucentis, which Novartis shares sales on with Roche, is also facing a patent cliff, as well as asthma drug Xolair and leukemia therapy Tasigna. Byooviz, the first biosimilar to Lucentis, was just approved on Oct. 24 by the FDA.
Cosentyx also faces potential biosimilar competition as early as 2025. If you put Cosentyx and Entresto's third-quarter sales together, they represent 23.8% of the company's revenue. That's a big hit, but it is important to remember that Novartis has faced big patent cliffs before and survived. Back in 2010, Diovan was the company's top-selling drug, and it did $6 billion in sales, around 20% of the company's yearly revenue. However, beginning in 2011, it began to face biosimilar competition and this year is on track to do only $621 million in sales.
What happened, though, is the company came up with new blockbusters, and today, the company's portfolio is larger than it was a dozen years ago. Through nine months, the company is on track for 15 drugs with sales of $1 billion or more.
