Financial Report Preview | 16 times PE lives on the line. Novartis (NVS.US) data on three major new drugs in the second half of the year became a “litmus test” for valuation

The Zhitong Finance App notes that in addition to focusing on the quarterly results announced on Tuesday, investors in Novartis (NVS.US) are also looking at the results of three major drug trials to be announced in the second half of this year. These results are seen as the key to proving that the Swiss pharmaceutical company enjoys a reasonable premium valuation.

Wall Street expects Novartis revenue for the second quarter of 2026 to be $14.12 billion, down 4.86% year over year; adjusted earnings per share are expected to be $2.14, compared to $2.42 for the same period last year.

Analysts said these experimental drugs — pelacarsen for cardiovascular disease, remibrutinib for multiple sclerosis, and del-desirable for genetic diseases — could determine the company's growth prospects up to the next decade, as the specter's R&D pipeline is being scrutinized more and more.

Kaitan Patel, fund manager of London's Novartis investor Whitefriars, said, “The market may be ruthless in terms of R&D... even minor deficiencies in clinical trials can be severely punished, and the impressive results are just a sigh of relief.”

Earlier this month, shares of AstraZeneca in the UK fell after a failed trial of a neurological disease drug to treat heart disease.

CEO Wan Sihan, who has led Novartis for eight years, expects the company to grow during what he called the largest patent expiration period in its history.

Barclays Bank analyst James Gordon said, “Management's body language on these (trial) results will be a huge focus of attention.”

Analysts estimate that the three drugs together represent an annual peak sales potential of more than $10 billion, which is expected to offset losses from Cosentyx (Cosentyx), the best-selling drug used to treat psoriasis and arthritis, and the breast cancer treatment Kisqali (Kisqali) in the US and Europe due to loss of patents around the turn of a decade.

The heart disease drug Entresto (Entresto) is already facing competition from generic drugs, and sales are expected to drop by $4 billion this year.

Test results are the key to valuation

Some analysts have warned that most of the potential upside brought about by the test results is already reflected in Novartis's industry-leading valuations, which have a forward price-earnings ratio of about 16 times. The company's stock price has risen 11% since this year, up about a quarter over the past 12 months.

Jefferies analyst Michael Lechten said, “At a price-earnings ratio of 16 times, you really need these growth levers to be realized.” “This is more about the trend in the second half of the year. At that time, you might as well consider reading out the pipeline data that is currently slightly riskier.”

Senior analyst James Quigley said Novartis needed at least two of these three tests to achieve good results. “If two of these fail, the 16x price-earnings ratio looks like it's going to be very, very fragile,” he said.

Management Confidence

Investors will pay close attention to management's confidence, the likely timing of publication of results, and statements surrounding “clinical significance” benefits. This indicator usually determines whether the efficacy of the drug is large enough for doctors, patients, and payers to accept.

UBS analysts expect pelacarsen to be statistically significant with a relative risk reduction of around 12%, but clinicians may want to see 15% or more before they consider the results to be clear and meaningful. Pelacarsen was first revealed in three trials, and its HORIZON study is testing whether reducing lipoprotein (a) (Lp (a)) can reduce the risk of myocardial infarction or stroke.

Sven Borho, managing partner at investment company OrbiMed, said “Lp (a) is particularly interesting because there are currently no similar drugs on the market,” and the company is responsible for managing the portfolio of recent investments in Novartis's Worldwide Healthcare Trust.

Borho said that if Novartis drugs were to market first, it could become a major sales driver. “It's going to be a huge market because once you use it, you have to use it for the rest of your life.”