Investing.com -- Analysts at Morgan Stanley in a note dated Thursday have revised their rating on Novartis (NYSE:NVS) AG (SIX:NOVN) to "neutral" from "buy," indicating a change in the investment outlook for the Swiss pharmaceutical company.
This comes after a period of strong share price performance, closely aligned market consensus estimates, and limited near-term innovation catalysts that, in the view of Morgan Stanley analysts, suggest little room for further appreciation in the stock.
The primary factor driving this change in rating is the 11% rise in Novartis’ share price over recent months, outpacing the broader market.
Analysts credit the company's performance to several factors, including positive earnings momentum following upgrades to its FY24 guidance in both the first and second quarters of 2024.
Additionally, Novartis has expanded its share buyback program, doubling the number of shares repurchased from approximately 200,000 to 400,000 since mid-June 2024.
Although these developments have supported the stock, Morgan Stanley suggests that these factors are now fully reflected in the stock price, indicating limited potential for further gains.
Another reason for the downgrade is the alignment of market consensus with Morgan Stanley's forecasts for Novartis through 2028. For FY24-28, Morgan Stanley's estimates are only slightly above consensus—by about 1% for net sales, core operating income, and core EPS.
This close alignment indicates a reduced potential for positive earnings surprises, which typically drive stock price increases.
Analysts foresee limited potential for a re-rating of Novartis stock in the near term, with market expectations largely mirroring the company's current performance trajectory.
In addition to this earnings consensus, the downgrade also reflects a lack of compelling innovation catalysts in the near future.
Novartis has already achieved a major milestone with its Phase 3 readout for Scemblix in first-line chronic myeloid leukemia, “Innovation momentum remains quiet until mid-2025,” the analysts said.
While Novartis has a number of promising pipeline products—such as Cosentyx, pelacarsen, ianalumab, and Pluvicto—key data releases and potential approvals for these drugs are not expected to materialize until the second half of 2025.
This creates what Morgan Stanley refers to as a “newsflow vacuum,” limiting the potential for stock price growth driven by new product developments in the short term.
Valuation concerns have also played a role in Morgan Stanley's decision to downgrade the stock. Novartis is currently trading at approximately 14.2 times its projected 2025 earnings per share, representing an 8% premium to the European Biopharma sector, excluding Novo Nordisk (NYSE:NVO). This premium is slightly above the historical average of around 7%, and higher than the 5% premium observed when Morgan Stanley initially rated the stock a "buy."
With this valuation in mind, and given the expected pause in innovation-driven catalysts, the analysts believe the stock is unlikely to deliver substantial gains over the next 12 months.
Despite the downgrade, Morgan Stanley remains optimistic about Novartis’ ongoing earnings momentum. The company has upgraded its FY24 guidance twice this year, a testament to its strong financial performance.
While this earnings momentum will continue to support the stock, Morgan Stanley argues that without corresponding innovation catalysts, it is unlikely to generate the gains that would justify a "buy" rating.
Going forward, Morgan Stanley does foresee a resurgence in Novartis’ innovation pipeline in the second half of 2025. Key data readouts from pivotal trials for products like pelacarsen (aimed at preventing cardiovascular events), Cosentyx (for various inflammatory conditions), and Pluvicto (for prostate cancer) are expected during this period.
Positive outcomes from these trials could de-risk several potential blockbuster drugs, providing a strong foundation for renewed growth. However, with these developments still some distance away, the bank's analysts remain cautious about the stock’s near-term prospects.
Potential risks to this outlook include weaker-than-expected commercial execution for key products such as Kisqali and Pluvicto, or earlier-than-anticipated generic competition for Entresto, one of Novartis' top-selling drugs.
On the upside, business development activities—such as new acquisitions or partnerships—could provide a boost to the stock, particularly if Novartis accelerates its buyback program or identifies attractive opportunities in areas like cardiovascular or oncology.
In terms of valuation, Morgan Stanley has revised its 12-month price target for Novartis to CHF 103 ($121 per ADR), reflecting only a 2% upside from current levels.