Navigating Generic Erosion: Is Novartis Still a Buy Amid Shifting Pharma Dynamics?

In the pharmaceutical sector, the specter of generic competition looms large, threatening to erode decades of hard-won revenue. For Novartis AG (NVS), the stakes are particularly high in 2025. The company's flagship drug Entresto, a $2.36 billion blockbuster in Q2 2025, faces imminent generic entry in the U.S. market. Analysts project a 50% sales drop for Entresto once generics flood in, creating a significant revenue gap. Yet, amid these headwinds, Novartis has positioned itself as a case study in strategic resilience. By leveraging a streamlined business model, a robust pipeline of high-margin innovations, and disciplined capital allocation, the Swiss pharma giant is proving that long-term growth can still thrive even as near-term challenges mount.

The Looming Generic Erosion

Entresto's impending generic erosion is the most pressing issue for Novartis. The drug, which accounts for 11% of the company's 2024 revenue, has already seen its patent protections weakened by a 2024 court ruling. With generic entry expected in mid-2025, the financial impact will be swift and severe. A 50% decline in U.S. sales would translate to a $5 billion annual revenue loss, a blow that could ripple through Novartis' cardiovascular-renal-metabolic segment.

But Entresto is not the only vulnerability. Other key drugs like Cosentyx (down 6% in Q2 2025) and Tasigna (plummeting 27%) are already grappling with biosimilars and generic alternatives. The broader trend—patent expirations and regulatory pressures—is a headwind that cannot be ignored. However, Novartis' response to these challenges is where the company's strategic acumen shines.

Strategic Resilience Through the Sandoz Spin-off

The 2023 spin-off of Sandoz, Novartis' generics and biosimilars division, was a masterstroke. By divesting its lower-margin business, Novartis refocused on four core therapeutic areas: cardiovascular-renal-metabolic, immunology, neuroscience, and oncology. This pivot has already yielded results. In Q2 2025, Novartis reported 12% year-over-year revenue growth, with core operating income rising 20% to $5.925 billion. The spin-off eliminated operational complexity and freed up capital for R&D and shareholder returns.

The financial benefits are clear. Novartis' core operating margin now stands at 38.7%, up from 35% in 2023, while its debt-to-equity ratio remains a manageable 0.5. The company has also returned $10 billion to shareholders via a buyback program, signaling confidence in its long-term prospects. This disciplined approach to capital allocation is a critical advantage in an industry where innovation and agility are paramount.

High-Margin Innovation Pipeline: The Next Frontier

Novartis' ability to offset generic erosion hinges on its pipeline of high-margin innovations. In 2025, the company has already delivered on several key launches:
- Kisqali (breast cancer): Surged 64% in Q2 to $1.2 billion, driven by strong adoption in the U.S. and Asia.
- Kesimpta (multiple sclerosis): Generated $1.1 billion in Q2, with first-line therapy positioning it for sustained growth.
- Pluvicto (prostate cancer): Rose 30% to $454 million, capitalizing on unmet needs in radioligand therapy.
- Vanrafia (IgA nephropathy): Received FDA accelerated approval in 2025, targeting a $2 billion market.
- OAV101 IT (spinal muscular atrophy): Regulatory submissions completed in both the U.S. and EU, with a potential $1 billion peak sales estimate.

These launches are not just revenue fillers—they are high-margin, high-impact products that reinforce Novartis' leadership in precision medicine. The company's $23 billion U.S. manufacturing investment further strengthens this pipeline, ensuring supply chain resilience and reducing exposure to global tariffs.

Financial Fortitude and Capital Allocation

Even as generic threats loom, Novartis' financials remain robust. In Q2 2025, the company generated $6.3 billion in free cash flow, with net sales growing 11% on a constant currency basis. Its $10 billion share buyback program, set to conclude by 2027, is a testament to its confidence in long-term growth. Meanwhile, strategic acquisitions—such as the $800 million upfront Regulus Therapeutics deal for gene therapies—signal Novartis' commitment to future-proofing its portfolio.

The company's balance sheet is another asset. With a net cash position of $16.1 billion (as of 2024), Novartis has the flexibility to navigate near-term volatility while investing in innovation. This financial strength is critical in an industry where R&D cycles are long and regulatory hurdles are high.

Valuation and Investment Considerations

At a forward P/E ratio of 12.5, Novartis trades at a discount to its peers, including Roche (P/E ~15) and AstraZeneca (P/E ~16). This valuation reflects market concerns about generic erosion but overlooks the company's strong cash flow and growth potential. With core operating income growth projected in the low teens for 2025, Novartis offers a compelling risk/reward profile for patient investors.

The key question for investors is whether the market is overestimating the impact of generic competition. While Entresto's decline is inevitable, Novartis' pipeline and capital discipline provide a buffer. The company's focus on high-margin innovations and its ability to return capital to shareholders make it a defensive yet growth-oriented play in the pharma sector.

Conclusion: A Buy for the Long-Term

Navigating generic erosion is a challenge shared by many pharma giants, but Novartis has turned a potential crisis into an opportunity. The Sandoz spin-off has streamlined its operations, while its pipeline of high-margin drugs ensures that growth is not reliant on a single product. With a strong balance sheet, disciplined capital allocation, and a forward-looking valuation, Novartis is well-positioned to outperform in the long term. For investors with a 5–10 year horizon, the current discount offers a compelling entry point into a company that continues to innovate, adapt, and deliver.