Executive Summary / Key Takeaways

• Novartis has successfully transformed into a pure-play innovative medicines company, demonstrating robust financial performance with double-digit sales and core operating income growth, alongside expanding core margins. This strategic focus underpins its confidence in long-term growth.
• The company's portfolio of priority brands, including Kisqali, Kesimpta, Pluvicto, Leqvio, and Scemblix, are exhibiting strong momentum, with several poised to achieve or exceed multi-billion dollar peak sales, showcasing significant replacement power against upcoming patent expirations.
• A rapidly advancing pipeline, highlighted by positive Phase III results for ianalumab in Sjögren's disease and ITP, along with significant progress in radioligand therapies (RLTs) and gene therapies, is expected to fuel future growth and redefine standards of care in areas of high unmet medical need.
• Strategic capital allocation, including a new $10 billion share buyback program and targeted bolt-on acquisitions, reinforces management's confidence in sustained growth despite anticipated U.S. generic entries for Entresto, Tasigna, and Promacta by mid-2025.
• Novartis's technological differentiation in areas such as dual-mechanism antibodies, targeted RLTs, and gene therapies provides a strong competitive moat, enabling superior efficacy and market positioning in specialized therapeutic areas.

Setting the Scene: Novartis's Strategic Evolution and Market Position

Novartis AG, incorporated in 1996, has undergone a profound strategic evolution to emerge as a focused, pure-play innovative medicines company. This transformation, marked by the divestiture of Alcon and the spin-off of Sandoz by the end of 2023, has sharpened the company's focus on high-value therapeutic areas including cardiovascular, renal and metabolic, immunology, neuroscience, oncology, and hematology. This strategic pivot aims to reimagine medicine, emphasizing innovation and a balanced approach to capital allocation. The company's history includes the successful development of enduring medicines like Entresto, a cardiovascular cornerstone launched around 2014, and Cosentyx, introduced in 2015, both of which have demonstrated sustained market presence and growth.

The pharmaceutical industry currently operates within a dynamic landscape characterized by increasing pricing pressures, particularly from U.S. initiatives like the Inflation Reduction Act (IRA) and the 340B program, as well as declining prices in European markets. Generic competition also remains a constant threat, as evidenced by anticipated patent expirations for key Novartis products. Despite these headwinds, significant opportunities exist in areas of high unmet medical need, where differentiated, innovative therapies can command premium pricing and drive substantial market penetration. Novartis positions itself as a leading global player, leveraging its broad portfolio and robust research and development capabilities to compete effectively against industry giants such as Pfizer Inc. , Johnson & Johnson , Merck & Co. Inc. , and Roche Holding AG .

Technological Edge: Driving Differentiated Therapies

Novartis's competitive strategy is deeply rooted in its multi-platform approach to drug discovery and development, emphasizing targeted therapies, biologics, gene therapies, and radioligand therapies. This technological differentiation is crucial for establishing competitive moats and driving superior patient outcomes.

One such differentiator is ianalumab, a novel fully human monoclonal antibody with a dual mechanism of action: B-cell depletion and BAFF-R inhibition. This innovative approach has yielded "statistically significant reduction in disease activity" in both Phase III NEPTUNUS-1 and NEPTUNUS-2 trials for Sjögren's disease. This breakthrough positions ianalumab with the "potential to become the first and only targeted treatment approved for patients with Sjögren's disease," a chronic autoimmune disease with very limited treatment options. For investors, this represents a significant market opportunity, with management projecting ianalumab as a "multibillion-dollar potential medicine" in Sjögren's alone.

In the realm of Radioligand Therapy (RLT), Novartis is pioneering targeted radiation delivery for cancer treatment. Its flagship RLT, Pluvicto, demonstrated a "doubled the median PFS" (progression-free survival) in the PSMAfore study for pre-taxane metastatic castration-resistant prostate cancer. This technology offers a highly precise method of delivering therapeutic radiation directly to cancer cells while minimizing damage to healthy tissue. Novartis is strategically expanding its RLT portfolio, with plans for an actinium PSMA-617 Phase III study and the advancement of other RLT programs targeting FAP, HER2, B7-H3, and DLL3. This expansion aims to solidify Novartis's leadership in this emerging field, creating a sustained competitive advantage.

The company is also making strides in gene therapy with OAV-101 IT, an intrathecal version of Zolgensma for spinal muscular atrophy (SMA) in patients aged 2 to 18 years. The Phase I/II STEER study met its primary endpoint, showing a "statistically significant improvement" in the Hammersmith score, a gold-standard measure of motor function. The "treatment effect versus placebo of 2.45" highlights its robust efficacy, differentiating it from competitors that may require repeated administrations or have not been tested against the same rigorous endpoints. This one-time treatment offers a compelling alternative to chronic therapies, with management envisioning it as a "$3 billion-plus medicine over time".

Furthermore, Novartis is a key player in siRNA (small interfering RNA) therapies, exemplified by Leqvio (inclisiran) and Pelacarsen. Leqvio, a twice-yearly injectable, is "outpacing the lipid-lowering market" by effectively silencing genes involved in LDL-C production. Pelacarsen, currently in Phase III, targets Lp(a) reduction, aiming for a "70% to 90% of the Lp(a) levels" knockdown in high-risk patients. These siRNA technologies offer the potential for highly effective, long-acting treatments that can significantly improve patient adherence and outcomes, thereby capturing substantial market share in large cardiovascular indications.

These technological advancements are not merely scientific achievements; they are critical drivers of Novartis's competitive moat. They enable the company to command higher pricing power in specialty markets, foster strong customer loyalty due to superior efficacy and convenience, and contribute to robust, recurring revenue streams. By focusing on these differentiated platforms, Novartis aims to outmaneuver competitors by offering novel mechanisms and superior profiles in diseases where existing treatments are inadequate.

Financial Strength and Operational Excellence

Novartis's strategic transformation has translated into robust financial performance. In the second quarter of 2025, the company reported net sales growth of 11% in constant currency (cc) and a 21% increase in core operating income (cc). The core margin expanded to 42.2%, reflecting a 340 basis point improvement. For the full year 2024, sales grew 12% and core operating income increased 22%, with the core margin reaching 38.7%. This consistent performance underscores the company's operational effectiveness and disciplined cost management.

The growth is primarily fueled by a portfolio of priority brands:

• Kisqali: Sales surged 64% (cc) in Q2 2025, achieving TRx leadership in metastatic breast cancer and a remarkable 61% NBRx share in the early breast cancer (eBC) launch. Its "Category 1 preferred NCCN guidelines" and U.S. patent protection until Q1 2031 provide a strong foundation for its "$8 billion plus peak sales guidance".
• Kesimpta: Q2 2025 sales grew 33% (cc), as it continues to "outpace both the B cell and MS market". Its self-administered, at-home dosing convenience has driven "leading NBRx share in 8 out of 10 of our major markets" outside the U.S., with peak sales expected to "well exceed our $4 billion" guidance.
• Pluvicto: Q2 2025 sales increased 30% (cc), driven by the pre-taxane indication approval in the U.S., which saw a 40% quarter-on-quarter growth in new patient starts. With over 670 active treatment sites, 9 out of 10 patients are within 30 miles of a site. The positive Phase III PSMAddition study for metastatic hormone-sensitive prostate cancer (HSPC) positions it for a 2026 approval, contributing to a "$5 billion plus" peak sales ambition.
• Leqvio: Q2 2025 sales were up 61% (cc) and the drug is on track to exceed $1 billion in sales in 2025. It is "outpacing the lipid-lowering market", with robust growth in both the U.S. (47% in Q2 2025) and ex-U.S. markets (74% in Q2 2025).
• Scemblix: Q2 2025 sales grew 79% (cc), also on track to exceed $1 billion in 2025. It has become the "most widely used TKI in CML" across all lines of therapy, with a 15% NBRx share in the first-line setting.
• Fabhalta: This oral monotherapy for PNH and complement inhibitor for IgAN and C3G is showing "steady growth" in the U.S. and "positive early launch signals" for C3G. Management anticipates "each one of these indications can stack up to be $1 billion".

Novartis's financial health is further underscored by its robust cash flow generation, achieving a record high free cash flow of $16.3 billion in 2024. This strong liquidity supports a balanced capital allocation strategy, including a new $10 billion share buyback program to be completed by the end of 2027, and a commitment to consistently growing its dividend, with a proposed 28th consecutive increase to CHF 3.50 per share.

Operationally, the company is investing significantly, including a 5-year, $23 billion commitment to its U.S. manufacturing and R&D footprint, aiming to produce 100% of key U.S. products domestically.

Strategic Initiatives and Pipeline Momentum

Novartis's strategic narrative is deeply intertwined with its pipeline advancements and targeted acquisitions. The recent positive Phase III results for ianalumab in Sjögren's disease and ITP represent a significant leap forward. In Sjögren's, the drug's dual mechanism of action has demonstrated statistically significant disease activity reduction, positioning it as a potential first-in-class treatment in a market with substantial unmet need. Management views this as a "multibillion-dollar potential medicine" in Sjögren's alone, with six Phase III studies ongoing across various autoimmune diseases.

Remibrutinib, an oral BTK inhibitor, also shows promise, with positive Phase II data in food allergy. This positions it as a potential "first oral allergen-agnostic treatment with a rapid onset of action", addressing a "$10 billion global market". Global submissions for Chronic Spontaneous Urticaria (CSU) are complete, with an FDA decision expected in the second half of 2025.

The rapid CAR-T therapy, YTB, for immune reset in autoimmune diseases, has shown "very strong result that was persistent and consistent out to 1 year" in severe refractory SLE. With over seven ongoing programs, YTB is seen as a "multibillion-dollar opportunity" with potential for launches in the 2028 timeframe.

Novartis is also bolstering its renal portfolio with Fabhalta, Vanrafia (FDA approved April 2025, notable for its clean label with "no REMS" for hepatotoxicity or pregnancy), and Zigakibart (Phase III readout expected H1 2026). These assets aim to establish Novartis as a long-term leader in renal care.

Strategic acquisitions and collaborations further enhance the pipeline. The agreement to acquire Tourmaline Bio (TRML) for approximately $1.4 billion will complement the cardiovascular pipeline with pacibekitug, an anti-IL-6 monoclonal antibody for atherosclerotic cardiovascular disease (ASCVD). The acquisition of Regulus Therapeutics (RGLS) adds an asset targeting kidney failure, while collaborations with Matchpoint Therapeutics and Argo Biopharma bring novel oral inhibitors for inflammatory diseases and cardiovascular molecules, respectively. These targeted deals underscore Novartis's commitment to filling strategic gaps and expanding its technological capabilities.

Competitive Landscape and Positioning

Novartis operates in a highly competitive global pharmaceutical market, where its strategic transformation into a pure-play innovative medicines company is designed to enhance its focus and competitive edge.

Compared to Pfizer (PFE), Novartis leverages its targeted therapies and diversified revenue streams, including a historical generics business (Sandoz, now spun off but still influencing strategy), to offer a more balanced profile against Pfizer's reliance on a few high-profile products. Novartis's R&D strength, particularly in novel mechanisms like ianalumab, aims for higher pricing power and margins in specialty markets.

Against Johnson & Johnson (JNJ), Novartis's concentrated focus on specialized therapeutics in areas like neuroscience and ophthalmology can lead to superior clinical outcomes, contrasting with JNJ's broader, more diversified structure. While JNJ benefits from strong brand loyalty due to its consumer health presence, Novartis's pure-play model allows for greater R&D efficiency.

In direct competition with Merck (MRK) in oncology and immunology, Novartis utilizes its strategic partnerships and global network to counter Merck's scientific expertise and pipeline risks. Novartis's ability to bring forward differentiated products like Kisqali, which has achieved TRx leadership in metastatic breast cancer and holds a unique label in early breast cancer, demonstrates its capacity to gain market share.

Versus Roche (RHHBY), Novartis offers competitive performance in oncology and immunology. While Roche excels in integrated diagnostics, Novartis's emphasis on global accessibility and its robust R&D in areas like RLTs provides a distinct competitive advantage, particularly in developing regions.

Key differentiators for Novartis include:

• Ianalumab's potential as a first-in-class treatment for Sjögren's disease, addressing a significant unmet medical need.
• Kisqali's leadership in metastatic breast cancer and its broad label in early breast cancer, supported by "Category 1 preferred NCCN guidelines".
• Kesimpta's convenient self-administered, at-home dosing for MS, which differentiates it from competitor products requiring healthcare professional administration or complex devices.
• Pluvicto's expanding RLT leadership, backed by a broad and growing site footprint across the U.S..
• OAV-101 IT's one-time gene therapy approach, offering a compelling alternative to repeated injections required by some competitors.
• Remibrutinib's potential as an oral, rapid-onset treatment for food allergy, which could be "very compelling relative to Xolair".

Despite these strengths, Novartis faces vulnerabilities. The anticipated U.S. generic entries for Entresto, Tasigna, and Promacta by mid-2025 represent a significant headwind. Regulatory and pricing pressures, including the IRA (with approximately 30% of Cosentyx sales exposed to Medicare pricing) and the potential for a Most Favored Nation (MFN) policy, could impact profitability. The company also experienced a market-wide slowdown in China in the first half of 2025. Novartis is strategically responding to these challenges through active IP defense for Entresto, investing in U.S. manufacturing to mitigate tariff risks, and exploring direct-to-patient models to address pricing complexities, such as the planned Cosentyx platform offering a 55% discount off list price.

Outlook and Risks

Novartis has upgraded its full-year 2025 bottom line guidance, with core operating income now expected to grow in the "low teens" (13-14%), up from "low double-digit". Sales growth is projected to remain in the "high single-digit" range. This outlook anticipates a stronger first half of 2025, followed by a moderation in the second half due to the full-quarter impact of potential U.S. generics for Entresto and a large prior-year gross-to-net adjustment. The company remains confident in its mid- to long-term growth outlook, targeting 5% plus sales growth through 2029 and a core margin exceeding 40% by 2027.

Key assumptions underpinning this guidance include the mid-2025 U.S. generic entries for Tasigna, Promacta, and Entresto, although ongoing IP and regulatory litigation for Entresto could potentially extend its exclusivity.

However, several risks warrant investor attention. The most immediate is the impact of generic erosion from the anticipated LOEs, which could significantly affect revenue and profitability. Regulatory and pricing pressures, particularly from the IRA, could lead to increased cost-sharing and potential price reductions for certain products. The possibility of a broad MFN policy in the U.S., if extended to the private market, could be "devastating" for the industry. Pipeline execution also carries inherent risks, as evidenced by the termination of the XXB program due to safety and efficacy concerns. The Sjögren's disease trials for ianalumab, while promising, are in a "tough indication" with no prior statistically significant benefits demonstrated by other drugs. Similarly, the clinical benefit of votoplam in Huntington's disease and the success of remibrutinib in MS remain high-risk opportunities. Competitive intensity, particularly from new entrants in markets like HS, could impact market share for established brands like Cosentyx. Furthermore, the complex supply chain for radioligand therapies and the lack of clear regulatory standards for potential generic RLTs present unique challenges.

Conclusion

Novartis stands at a pivotal juncture, having successfully transformed into a focused innovative medicines company. The robust financial performance, driven by accelerating growth from its priority brands and a strategically diversified pipeline, underscores a compelling investment thesis. The company's commitment to technological leadership, particularly in dual-mechanism antibodies, targeted radioligand therapies, and gene therapies, provides a formidable competitive advantage in addressing areas of high unmet medical need. This innovation engine, exemplified by the breakthrough potential of ianalumab in Sjögren's disease and the expansion of its RLT portfolio, positions Novartis to redefine standards of care and capture significant market share.

Despite the looming headwinds of generic competition for key products and persistent pricing pressures, Novartis's proactive strategic responses, including aggressive IP defense, substantial investments in U.S. manufacturing, and the exploration of direct-to-patient models, demonstrate its resilience. The upgraded 2025 guidance and confident mid-to-long-term outlook reflect management's belief in the company's ability to sustain growth and expand margins. For discerning investors, Novartis represents a compelling opportunity, where a focused strategy, technological prowess, and a robust pipeline are poised to deliver long-term value, even as the company navigates the complexities of the global pharmaceutical landscape.