Reduced Risk, Upcoming Pipeline Inspire Bull Case For Novartis

Novartis AG (ADR) NVS has been all over the news lately as its cancer drug moves closer to FDA approval, and Morgan Stanley analyst Vincent Meunier believes the recent news flow suggests a less risky outlook.

This improved Meunier’s risk-reward ratio and led him to double upgrading Novartis from Underweight to Overweight with a new $91.37 price target.

“Our longheld concerns are diminishing," he said. "Entresto in heart failure and the eye care unit Alcon are not yet out of the woods, but massive consensus downgrades are coming to an end. Sales expectations for Entresto have halved since early 2016, and the group's $500m target in 2017 is achievable.

"The turnaround of Alcon looks on its way,and importantly, consensus margin expectations now stand slightly below our and management's 'low to mid twenties' target.”

New Growth Drivers

Meunier pointed towards several factors ahead that should spark optimism among Novartis investors.

“Beyond the accretive margin impact of a potential separation of Alcon," he said, "a return to growth in 2018 thanks to new drivers (Cosentyx, Kisqali) should help with focusing on pipeline execution and further savings. Our expected margin recovery from this year's 26% trough to 31% in 2022 appears achievable compared to other diversified EU large pharmas.”

Overall, these factors push Meunier towards believing pursuing M&A is less of a necessity for Novartis, which lower the risk of a dilutive deal.

Short Term Catalysts You Should Keep An Eye On

Meunier pointed towards three significant short-term updates:

1. “ACZ885 detailed data in heart attack (ESC Congress 27 Aug.2017), to gauge the potential of this possible $1bn+ blockbuster after recent positive headlines.
2. RTH258 detailed data in Ophthalmology (AAO Congress Nov.2017), a potential boost to reasonable ~$500m consensus expectations.
3. In 2018, we'd flag phase II data for SEG101 in sickle cell disease, a potential >1bn+ opportunity not in our Base case and with low market expectations.”

Novartis shares were trading at $84.81 in Wednesday’s session.

To read the latest financial news, visit the Benzinga Pro news wire.