We believe forward PE (price-to-earnings) and EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples are the two best valuation multiples to use when valuing Novartis (NVS) and other large pharmaceutical companies, given the relatively stable and visible nature of their earnings. PE multiples are widely available and represent what one share can buy for an equity investor. EV/EBITDA multiples, on the other hand, are capital structure neutral.
As of March 24, 2016, the company was trading at a forward PE multiple of ~14.6x. Based on the last five-year multiple range of ~9x to ~20x, Novartis’s current valuation is neither high nor low.
Novartis’s valuation multiple has also followed the industry’s overall trend over the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, Novartis will be affected. The industry currently trades at a forward PE multiple of ~15.6x. Sanofi (SNY), AstraZeneca (AZN), and GlaxoSmithKline (GSK) have forward PE multiples of 12.5x, 13.8x, and 16.2x, respectively.
On a capital-structure-neutral basis, Novartis currently trades at ~14.5x, which is much higher than the industry’s average of ~11.3x. Sanofi (SNY), AstraZeneca (AZN), and GlaxoSmithKline (GSK) have forward EV/EBITDA multiples of 9.0x, 8.6x, and 10.4x, respectively.
The above multiples represent an improvement in estimates and valuations for Novartis, which is a positive sign for investors. Investors can consider ETFs like the iShares Global Health Care ETF (IXJ), which holds 5.2% of its assets in Novartis, or the VanEck Vectors Pharmaceutical ETF (PPH), which holds 7.3% of its total assets in Novartis, in order to divest the company-specific risk.