Novartis Navigates Patent Challenges with Strong Q2 and Pipeline Momentum

Novartis AG (NVS) delivered a robust Q2 2025 performance, defying headwinds from generic competition and demonstrating resilience through margin expansion, top-line growth, and a pipeline brimming with approvals and late-stage milestones. Despite Entresto's looming U.S. generic threat—a key risk—management's focus on operational efficiency, shareholder returns, and next-wave therapies positions the pharma giant for sustained value creation. Here's why investors should look past near-term patent cliffs and focus on Novartis's long-term growth trajectory.

Sales Surge and Margin Strength: A Foundation for Growth

Novartis reported Q2 net sales of $14.1 billion, a 12% USD increase year-over-year, driven by double-digit growth across oncology, cardiology, and rare disease therapies. Key performers included:
- Kisqali: Sales jumped 64% (cc) to $1.18 billion, fueled by its newly approved indication for early-stage breast cancer in the U.S.
- Entresto: Maintained momentum with 22% cc growth to $2.36 billion, despite looming generic competition.
- Pluvicto: Expanded access globally, delivering 30% cc growth to $454 million, with regulatory submissions for hormone-sensitive prostate cancer expected by year-end.

The real standout was margin expansion, with the core operating income margin hitting 42.2%—a 340-basis-point improvement (cc) year-over-year. This reflects operational discipline, cost controls, and pricing power, even as generic competition chipped away at 2% of sales growth.

Pipeline Momentum: The Engine of Future Growth

Novartis's Q2 results weren't just about current assets—they signaled a strong pipeline primed to fill gaps from patent expirations:
1. Vanrafia (atrasentan): The FDA's accelerated approval for IgA nephropathy (IgAN) marks a first-in-class treatment for a rare kidney disease, with peak sales potential exceeding $1 billion.
2. Pluvicto: Phase III data in hormone-sensitive prostate cancer showed a 36% reduction in radiographic progression, positioning it for a broad label expansion.
3. Votoplam: Huntington's disease drug demonstrated a 99% reduction in toxic HTT protein in Phase II trials, with Phase III data expected in 2026.
4. OAV101 IT: SMA gene therapy submissions in the U.S. and EU could secure approval by mid-2026, complementing Zolgensma's position in the space.

The $10 billion share buyback announced in Q2—set to complete by 2027—further underscores management's confidence in cash flow generation. With free cash flow surging 37% to $6.3 billion, Novartis can weather Entresto's generic loss while funding R&D and shareholder returns.

Navigating Entresto's Generic Threat

Entresto's U.S. patent cliff—anticipated in mid-2025—remains a critical risk, with sales likely to drop $1 billion annually post-generic entry. However, three factors mitigate this:
1. Legal Appeals: Novartis is challenging the generic approval timing, potentially delaying competition into 2026.
2. Margin Resilience: The 42.2% operating margin shows pricing and cost efficiencies can offset volume declines.
3. Pipeline Offset: New therapies like Pluvicto and Vanrafia are already contributing to top-line growth, with $1.9 billion in combined sales across key assets this year.

Valuation and Investment Thesis

At current prices, Novartis trades at 17x 2025 core EPS, a discount to its five-year average of 18.5x. This undervaluation stems from near-term Entresto concerns, but the stock offers a compelling risk-reward:
- Upside Catalysts:
- Regulatory wins for Pluvicto (mid-2026), Votoplam (2026), and OAV101 IT (2026).
- Buyback completion boosting EPS by ~5% annually.
- Downside Protection:
- Strong balance sheet ($23.8 billion net debt, but manageable given $27 billion annual sales).
- Diversified revenue streams (oncology, cardiology, ophthalmology) reduce reliance on any single drug.

Investor Takeaway

Novartis's Q2 results and pipeline progress confirm its ability to navigate patent cliffs through innovation and capital returns. While Entresto's generic threat remains a near-term overhang, the company's margin resilience, robust free cash flow, and late-stage pipeline justify a buy rating for investors with a 3–5-year horizon. The $10 billion buyback and high-single-digit sales growth guidance further support the case for long-term value accumulation.

In short, Novartis isn't just surviving patent expirations—it's building a new growth engine.