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Why Have Novartis’s Valuation Multiples Fallen?

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Lower valuation multiples

Despite patent expiries worth $2.4 billion, Novartis (NVS) managed to report a flat revenue performance in 2016. Further, the company is expected to report a small rise in revenue in 2017, mainly driven by the stellar performance of its newly launched Interleukin 17 (or IL-17) drug, Cosentyx, and the increased uptake of its heart failure drug, Entresto.

To know more about the company’s 2017 revenue projections, read Why Novartis Could Witness Modest Revenue Growth in 2017.

The company also reported robust performance in its Alcon vision care business in 2016. To know more about this business segment, read Will Novartis’s Alcon Business See Growth in 2017?

However, the patent expiries of Glivec, Ophtha, Afinitor, and Gilenya in the United States may continue to negatively affect the company’s sales until 2020. Patent expiries also affected Novartis’s valuation multiples in 2016.

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The above diagram shows that Novartis is trading at a lower trailing price-to-earnings (or PE) multiple compared to its peers such as Merck & Co. (MRK) and Pfizer (PFE). Novartis is, however, trading above Bristol-Myers Squibb (BMY), mainly on account of the latter’s failure to establish itself as a first-line lung cancer player.

Patent expiry impact

Novartis expects to witness a negative revenue impact of ~$2.5 billion in 2017 due to impending patent expiries and a subsequent generic revenue erosion similar to what it experienced in 2016. A major portion of this revenue hit can be attributed to the patent expiry of Novartis’s blockbuster oncology drug, Glivec, which is called Gleevec in the United States.

If Novartis manages to offset these negative drivers in 2017, its share price could see a boost along with the price of the Vanguard FTSE Developed Markets ETF (VEA). Novartis makes up ~0.93% of VEA’s total portfolio holdings.

In the next article, we’ll discuss future growth opportunities for Novartis in greater detail.

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