Sandoz emerges from Novartis' shadow
Amid the persistent rhetoric of expensive drug prices in the US and Europe, generic and biosimilar medicines (that have a similar level of effectiveness as the original drugs) provide some respite for governments, since they contribute c.80% of global medicines at roughly 25% of the total medicinal spend. Sandoz, with the market leadership in Europe and a strong positioning in other geographies, is one of the key vehicles to gain exposure in this area.
Value unlocking in play
After being spun off from Novartis in October 2023, Sandoz began trading with a market capitalisation of c.CHF10bn, which was surprisingly much lower than the street’s expectation of CHF15-20bn. However, since then the stock is up by c.47%, perhaps because Sandoz began to show promises of delivering on material improvements (discussed below) in the medium-term under a now independent management that has the flexibility and the resources to pursue longer-term strategy. This value unlocking is in contrast with Haleon’s (Add; UK) more pedestrian share price performance (+12%) after separation from GSK since July 2022.
Operationally, 2023 witnessed the strongest CER sales growth (+7%) since 2015, driven by the sustained robust performance from Biosimilars (c.23% of sales; +15%) and a steady showing from Generics (c.77%; +5%).
More to do
The firm’s US operations have been struggling for the last few years, especially since 2018 when Novartis decided to sell Sandoz’s US oral solids and dermatology business to Aurobindo Pharma but had to eventually retain these assets as the transaction did not receive regulatory approval. During these years, a lack of investment, the termination of some key partnerships and limited flexibility w.r.t. strategic execution caused Sandoz’s US sales to decline at an average 10% CER during 2016-23 and their contribution to overall sales dwindled from c.38% in 2015 to c.17% in 2023. In turn, considering the FX headwinds, Sandoz’s top-line witnessed a mid-single decline during these years.
This is why turning around the US operations is critical for the firm to achieve its medium-term (i.e., till 2028) goals of a mid-single digit sales CAGR and a ‘core’ EBITDA margin of between 24% and 26% (vs. 18.1% in 2023).
Fortunately, Sandoz has started delivering on this front, as the contraction of its US sales in 2023 was just 1% and, in the Q1 24, the North American sales (o/w US accounts for a major part) grew by a healthy 6%.
Biosimilars – the protagonist of the Sandoz story
Despite contributing just c.23% of sales, Biosimilars account for c.45% of our estimate of Sandoz’s gross asset value, as the biosimilar market is expected to grow at a 20% (vs. 5% for generics) CAGR during 2022-31 and they generate better margins than generic drugs. The higher growth expectation for biosimilars is largely a result of them being in a relatively early-stage vis-à-vis generics and the significant number of patent expiries for biologic drugs in the medium-to-long-term – a $580bn market opportunity based on originator LoEs (loss of exclusivity) over 2023-32. Sandoz, having been the first firm to come up with a biosimilar in the US and Europe (in 2015 and 2006, respectively), is one of the frontrunners in this space. The firm has 24 biosimilar products in the pipeline (vs. 49 and 79 biosimilars approved to date in the US and Europe, respectively), which has tripled in size over the last five years.
Moreover, having a strong presence in biosimilars could be construed as a competitive advantage, since they are more difficult, expensive and time-consuming to develop than standard generics. For instance, the development of a biosimilar can take six to nine years vs. just two years for a simple generic, and their development costs range between $100-300m per candidate vs. just $1-2m for standard generics. This also justifies their much lower pricing discount (10-30%) to the originator drugs than standard generics (up to 80%). The firm aims to maintain its market leadership via a much better R&D focus (c.9% of sales during 2018-23) than its peers, including Hikma (c.6%), Teva (c.6%) and Viatris (c.5%). Moreover, nearly two-thirds of Sandoz’s R&D budget goes towards developing new products, which reinforces the firm’s focus on strengthening its portfolio as well as on being the first-to-market (a key success parameter in this industry) in the target areas. All in all, biosimilars should be able to contribute 50% of the firm’s targeted sales growth by 2028.
The performance of Sandoz’s offerings could be gauged from the fact that its first biosimilar Omnitrope (used to treat growth-hormone related disorders), after being 18 years on the market, had overtaken even the originator firm in terms of volumes by the end of 2023. Then, Hyrimoz has c.82% share amongst the biosimilars of multi-blockbuster immunology drug Humira (peak sales figure mentioned below).
Near-term biosimilar launches to watch out for
Catch them young!
Based on the 17% bottom-line CAGR that we expect from Sandoz during 2023-26, the shares are trading at c.16x 2024e PE; they thus do not appear expensive and offer a PEG ratio of 0.9x vs. 1x median for Smaller Pharmas. Even beyond 2026, there is a scope for further profitability enhancement. Also, with the ongoing margin expansion, the improving balance sheet (2x net debt-to-EBITDA at end-2023) should make way for inorganic opportunities as well as healthy dividends. The 20% upside on Sandoz is largely supported by the intrinsic valuation parameters.
Board that train now.
Value unlocking in play
After being spun off from Novartis in October 2023, Sandoz began trading with a market capitalisation of c.CHF10bn, which was surprisingly much lower than the street’s expectation of CHF15-20bn. However, since then the stock is up by c.47%, perhaps because Sandoz began to show promises of delivering on material improvements (discussed below) in the medium-term under a now independent management that has the flexibility and the resources to pursue longer-term strategy. This value unlocking is in contrast with Haleon’s (Add; UK) more pedestrian share price performance (+12%) after separation from GSK since July 2022.
Operationally, 2023 witnessed the strongest CER sales growth (+7%) since 2015, driven by the sustained robust performance from Biosimilars (c.23% of sales; +15%) and a steady showing from Generics (c.77%; +5%).
More to do
The firm’s US operations have been struggling for the last few years, especially since 2018 when Novartis decided to sell Sandoz’s US oral solids and dermatology business to Aurobindo Pharma but had to eventually retain these assets as the transaction did not receive regulatory approval. During these years, a lack of investment, the termination of some key partnerships and limited flexibility w.r.t. strategic execution caused Sandoz’s US sales to decline at an average 10% CER during 2016-23 and their contribution to overall sales dwindled from c.38% in 2015 to c.17% in 2023. In turn, considering the FX headwinds, Sandoz’s top-line witnessed a mid-single decline during these years.
This is why turning around the US operations is critical for the firm to achieve its medium-term (i.e., till 2028) goals of a mid-single digit sales CAGR and a ‘core’ EBITDA margin of between 24% and 26% (vs. 18.1% in 2023).
Fortunately, Sandoz has started delivering on this front, as the contraction of its US sales in 2023 was just 1% and, in the Q1 24, the North American sales (o/w US accounts for a major part) grew by a healthy 6%.
Biosimilars – the protagonist of the Sandoz story
Despite contributing just c.23% of sales, Biosimilars account for c.45% of our estimate of Sandoz’s gross asset value, as the biosimilar market is expected to grow at a 20% (vs. 5% for generics) CAGR during 2022-31 and they generate better margins than generic drugs. The higher growth expectation for biosimilars is largely a result of them being in a relatively early-stage vis-à-vis generics and the significant number of patent expiries for biologic drugs in the medium-to-long-term – a $580bn market opportunity based on originator LoEs (loss of exclusivity) over 2023-32. Sandoz, having been the first firm to come up with a biosimilar in the US and Europe (in 2015 and 2006, respectively), is one of the frontrunners in this space. The firm has 24 biosimilar products in the pipeline (vs. 49 and 79 biosimilars approved to date in the US and Europe, respectively), which has tripled in size over the last five years.
Moreover, having a strong presence in biosimilars could be construed as a competitive advantage, since they are more difficult, expensive and time-consuming to develop than standard generics. For instance, the development of a biosimilar can take six to nine years vs. just two years for a simple generic, and their development costs range between $100-300m per candidate vs. just $1-2m for standard generics. This also justifies their much lower pricing discount (10-30%) to the originator drugs than standard generics (up to 80%). The firm aims to maintain its market leadership via a much better R&D focus (c.9% of sales during 2018-23) than its peers, including Hikma (c.6%), Teva (c.6%) and Viatris (c.5%). Moreover, nearly two-thirds of Sandoz’s R&D budget goes towards developing new products, which reinforces the firm’s focus on strengthening its portfolio as well as on being the first-to-market (a key success parameter in this industry) in the target areas. All in all, biosimilars should be able to contribute 50% of the firm’s targeted sales growth by 2028.
The performance of Sandoz’s offerings could be gauged from the fact that its first biosimilar Omnitrope (used to treat growth-hormone related disorders), after being 18 years on the market, had overtaken even the originator firm in terms of volumes by the end of 2023. Then, Hyrimoz has c.82% share amongst the biosimilars of multi-blockbuster immunology drug Humira (peak sales figure mentioned below).
Near-term biosimilar launches to watch out for
Catch them young!
Based on the 17% bottom-line CAGR that we expect from Sandoz during 2023-26, the shares are trading at c.16x 2024e PE; they thus do not appear expensive and offer a PEG ratio of 0.9x vs. 1x median for Smaller Pharmas. Even beyond 2026, there is a scope for further profitability enhancement. Also, with the ongoing margin expansion, the improving balance sheet (2x net debt-to-EBITDA at end-2023) should make way for inorganic opportunities as well as healthy dividends. The 20% upside on Sandoz is largely supported by the intrinsic valuation parameters.
Board that train now.
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