Novartis AG: Significant Net Debt Reduction (NYSE:NVS)

Investment Thesis

By the end of FY2021, Novartis AG (NVS) had paid off a monumental $23.6B of debt through the sale of its 53.3M Roche shares at $20.7B and its robust Free Cash Flow of $13.3B. The debt repayment brought NVS’s net debt level to a new low of $0.9B since FY2010.

NVS is also the pharmaceutical company that developed the world’s most expensive therapeutic, Zolgensma, for the treatment of Spinal Muscular Atrophy, at a price tag of $2.1M. However, the therapeutic only delivered $1.3B of revenue in FY2021, compared to AbbVie’s (ABBV) Humira at a blockbuster $20.7B of revenue in the same year.

Nonetheless, NVS still reported a decent revenue of $51.6B in FY2021, representing a 6.1% YoY growth, mostly attributed to the increased volume from the Innovative Medicines. On the other hand, Sandoz’s sales have been flat in recent years, with NVS expected to either divest or spin off the segment by the end of FY2022. If successfully divested, NVS is expected to gain another $25B of capital for its future pipeline, partnership, and M&A activities.

With A Capable Management Team, NVS Achieved An Impressive $23.6B Of Debt Repayment Through Astute Business Sense

NVS Cash and Equivalents, Free Cash Flow and Long Term Debt

In the latest earning call, NVS reported that it has paid off most of its net debt by $23.6B, to a net debt of $0.9B by FQ4’21. The current level represents NVS’s lowest amount of net debt since FY2010. The phenomenal debt repayment is mostly attributed to the capital received from the sale of 53.3M Roche shares at $20.7B in November 2021 and its robust Free Cash Flow at $13.3B for FY2021. The strategic move of selling Roche sales at a peak price of $388.99 points to the NVS management’s highly astute business sense. It allowed the company to cash in their investment at an impeccable timing for maximum returns. In addition, the company has been generating robust Free Cash Flow growth since FY2008.

NVS Dividend Yield and Stock Price Close

The strong capital in FY2021 also allowed NVS to pay out $7.4B of dividends in FY2021. That year, the company increased the dividend payout by 3.61% YoY, from $3.08 to $3.19, representing a consistent growth in the past two years since 2019. NVS’s stock also had a discernible long-term uptrend over the last five years. However, the stock had a relatively downtrend dividend yield over time. Nevertheless, NVS’s current yield of 2.4% also places it well above the Pharmaceuticals industry mean of 1.9%.

In addition, NVS also engaged in share repurchase programs that reduced the shares outstanding by 4.4% in the past five years, from 2.359B in September 2017 to 2.254B in October 2021. In FY2021, NVS purchased a total of 30.7M shares at $2.8B, with an additional $15B shares buyback announced in December 2021 (with $0.2B already exercised). These programs helped increase the ownership stake of existing stockholders, while mitigating potential dilution from the share-based compensations.

In addition, there has been some speculation on NVS’s plan for its generic and biosimilars segment, Sandoz, which has been reporting stagnant sales in the past six years. For FY2021, Sandoz reported revenues of $9.6B, representing a decline of -2.8% YoY and -3.3% from FY2019 levels. In the latest earnings call, NVS also reported that FY2021 sales in the US and Europe declined -15% YoY and -2% YoY, respectively, which is balanced with increased global sales at +7%. Its decline is mainly attributed to intense competition surrounding generic and complex biosimilar products, resulting in a decline in prices.

The spin-off or divestment of Sandoz would be beneficial for NVS, as it would enhance its future margins and ensure growth in its Innovative Medicines segment. It would definitely aid NVS in achieving its goal of 4% CAGR through 2026, with the Innovative Medicines segment reporting 8% YoY growth in FY2021. NVS could also potentially receive $25B 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. It remains to be seen on NVS’s decision at the end of FY2022.

As a result, it is evident that the NVS management has been highly competent in managing its operational performance. Moreover, given that NVS has minimal debt servicing moving forward, we expect the company to put its future Free Cash Flow towards its pipeline, with more than 20 potential platforms for regulatory approval by 2026. Assuming positive news from its clinical trials and prompt regulatory approvals, we may assume an upward re-rating to its future revenues.

NVS Reported Excellent FY2021 Revenues

NVS Revenue and Net Income

In the past five years, NVS reported tepid revenue growth at a CAGR of 1.25%. However, in FY2021, the company reported an excellent revenue of $51.62B, representing an increase of 6.1% YoY and 8.6% from FY2019. The growth is mostly attributed to robust sales from Innovative Medicines at $43.5B with 6.5% YoY growth.

In FQ4’21, NVS reported a decent revenue of $13.23B, representing an increase of 1.5% QoQ, 3.6% YoY, and 6.6% from FQ4’19 levels. In FQ4’21, its Innovative Medicines segment accounted for revenues of $10.7B, representing a decline of -3.7% QoQ, though in line with FQ4’20. Of these, in FQ4’21, Entresto and Zolgensma reported robust YoY growth at 33% with an increase of $233M and 35% with $88M, respectively, while Cosentyx reported decent YoY growth at 12% with an increase of $134M. Kesimpta also reported excellent sales in FY2021 at a total of $372M. On the other hand, the Sandoz segment reported revenues of $2.5B in FQ4’21, in line with the previous quarter and FY2019.

NVS Projected Revenue and Net Income

In the next five years, NVS is expected to continue reporting stagnant revenue growth at a CAGR of 0.98%. However, consensus estimates that NVS will report $53.53B of revenue in FY2022, representing an increase of 3.7% YoY. The boost could be attributed to NVS’s recent launch of Leqvio, a therapeutic targeting low-density lipoprotein cholesterol. With the global Dyslipidemia market expected to be worth $48B by 2027, Leqvio has the potential to be another higher earner for NVS. Consensus estimates Leqvio to bring in $2B of peak sales by 2026, given that the therapeutic is more convenient to administer than similar drugs by Amgen’s (NASDAQ:AMGN) Repatha and Sanofi (NASDAQ:SNY)/Regeneron’s (NASDAQ:REGN) Praluent.

Nonetheless, consensus estimates that NVS’s revenue growth will slow down from FY2024 onwards. It is possibly due to Promacta/Revolade’s patents having expired in 2021, with Entresto’s and Tasigna’s patents expiring in 2023. These three products represented 14.6% of NVS’s sales in FY2021, with Promacta/Revolade accounting for $2B of NVS’s annual sales, while Entresto and Tasigna brought in $3.54B and $2B each, respectively. In addition, NVS had disclosed in its FY2021 SEC filings that there are patent challenges for these three products either in the compound patents or other related patents, despite the lack of generic competition in the US and EU. As a result, NVS could be looking at a decline in its future revenues, assuming the loss of exclusivity through the ANDAs proceedings, the entry of biosimilars, and a delay in regulatory approval for its pipeline.

So, Is NVS Stock A Buy?

NVS EV/Fwd Revenue

NVS is currently trading at an EV/NTM Revenue of 4.17x, slightly lower than its 3Y mean of 4.42x. Consensus estimates also rate NVS stock as fair value now, given its capability and reasonable valuation. However, as visible from the EV/ Fwd Revenue trend, NVS is not expected to report significant revenue growth in the next five years. The company may also experience a decline in revenue due to a loss of exclusivity in 2023. However, its pipeline may boost it back up in 2024, assuming successful regulatory approval for its phase 3 clinical trials.

Nonetheless, NVS’s management has displayed its competence through multiple strategic moves, such as the sale of Roche shares and its subsequent debt repayment. Moreover, assuming its Sandoz segment’s divestiture, we may see an upward re-rating for NVS’s future revenues as the company would be cash-rich to invest in its future pipeline, partnerships, and acquisitions. As a result, speculative investors may take this chance to add to their portfolios. Otherwise, it is better to adopt a wait-and-see approach on this stock, given that it has been trading sideways in the past three years.

Therefore, we rate NVS stock as Neutral for now.