Novartis AG (NYSE:NVS) is selling more of its newer medicines, but shareholders have yet to see the full financial benefit. In the second quarter, higher volumes contributed 18 percentage points to revenue growth. Generic competition wiped out 14 points, while lower prices erased another three. The result was a 1% net sales growth at constant currencies, despite remarkable performances from several important drugs.
The stock closed at $143.75 on October 9, with Yahoo Finance’s latest available statistics showing a forward P/E of approximately 14.71. That valuation invites a closer look at how quickly Novartis can replace revenue disappearing from older medicines, particularly when its latest quarterly core operating income was essentially flat.
But before we get into the investment case, take a look at our ranking of the best healthcare stocks to buy according to hedge funds. Check out the complete list here for more insight into the sector.
Bull Case
The encouraging news is that Novartis AG (NYSE:NVS) already has several medicines capable of generating substantial sales, rather than relying entirely on promising clinical trials. Kisqali, its breast cancer treatment, brought in $1.70 billion during the quarter, growing 43% at constant currencies. Kesimpta followed with $1.42 billion, up 32%. Scemblix, meanwhile, recorded 89% growth to $562 million, while Pluvicto climbed 43% to $651 million.
Together, these four treatments generated approximately $4.33 billion, or around 30% of quarterly revenue. That is a meaningful foundation for replacing lost sales, especially since the growth spans oncology and neuroscience rather than depending on one medicine. Read more about the company’s pipeline in our comparative article on how Failure of Novartis’ Pelacarsen Could Reshape the Lp(a) Race for CRISPR and Ionis.
The company also continues to generate substantial cash. Free cash flow for the quarter reached $5.6 billion, despite declining 12% year over year. Its core operating margin remained above 40%, providing evidence of considerable profitability even as generic competition weighed on growth.
The challenge, however, is that strong sales from individual medicines have not yet translated into comparable companywide growth, and that makes the composition of Novartis’s revenue particularly important. Investors need to distinguish between medicines adding genuinely incremental sales and those whose growth is largely compensating for revenue already being lost elsewhere in the portfolio. We meticulously crafted a list of the 12 Cheap Biotech Stocks to Buy Now. Access the complete list here.
Bear Case
Keep up with the healthcare sector through our insightful articles covering bull and bear cases. Along with NVS, read our recently published article on Danaher Has Barely Moved in a Year. Is its 25x Earnings Valuation Justified?
Coming back to Novartis, Entresto shows just how difficult the revenue replacement challenge has become. The heart-failure medicine generated $1.18 billion in second-quarter sales, down 50% from a year earlier. That decline alone represents roughly $1.18 billion in lost quarterly revenue, which is almost enough to offset substantial gains across several newer medicines.
There is also a difference between a growing product portfolio and a growing earnings base. Novartis reported flat core operating income of $5.94 billion, while core EPS remained essentially unchanged at $2.41 in dollar terms. Reported net income fell 19%, reflecting higher income taxes and interest expenses alongside operating pressures.
Management’s outlook offers little indication that the earnings pressure will disappear immediately. Novartis reaffirmed its expectation for low-single-digit net sales growth and a low-single-digit decline in core operating income for 2026, both at constant currencies.
Conclusion
Novartis AG (NYSE:NVS) has convincing evidence of commercial success. What it lacks, at least in its latest results, is equally convincing evidence that newer medicines are lifting companywide profits.
That is the tension behind its valuation. A business generating billions in free cash flow and growing several major franchises has clear financial strengths. But with generic competition consuming much of that growth, Novartis’s forward earnings valuation must be weighed against management’s expectation of a decline in core operating income for 2026.
The next meaningful development will not simply be another strong Kisqali or Scemblix sales figure. It will be whether those gains finally begin to outweigh the losses elsewhere and restore broader earnings growth.
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This article is originally published at Insider Monkey.
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