Leveraging on the work of our Global Markets House view 2Q24 - Walking a tightrope to an improving cycle, we expect a rotation from growth to quality sectors with strong cash flow generation and superior earnings growth, one of which is European Health Care. Novartis is a stock that screens in the top picks of our house view and is currently trading at a 5% discount to its long-term PE and at 7% discount to the SXDP.
The company has its 1Q24 results on the 23 April where we expect there could be an upside surprise to market expectations as recent history suggests that Novartis manages these expectations shrewdly by consistently providing conservative annual guidance, which is later revised upwards, setting the stage for potential positive surprises. In addition, the CMD in mid-May may well serve as a showcase of the early-stage drug pipeline.
Novartis missed expectations in its 4Q23 results, as improvements in its multiple sclerosis drug, Kesimpta, were offset by lower-than-expected sales of prostate cancer drug, Pluvicto. In addition, operating profit was hit by the depreciation of the Argentinian Peso, which accounted for approximately 50% of the miss in the quarter.
The company’s recent announcement that its rare disease therapy, Zolgensma, had demonstrated efficacy on older and mainly pre-treated children should soon convince the market of its long-term sales growth guidance of approximately 5% CAGR from 2023 to 2028e, which is significantly ahead of consensus estimates of 2.7%. We anticipate that the Company could provide updates on key marketed products in the 1Q results and the CMD, such as the cholesterol-lowering drug Leqvio and the rare disease treatment Iptacopan and additional visibility on promising pipeline candidates like Remibrutinib in dermatology and Atrasentan in rare diseases, to bridge the large revenues expectation gap.
Although 3M ATM IV at 17 vol points is not particularly attractive at 2YPc68 and 5YPc55, the market is only pricing in a 2% earnings move at its 1Q24 results, which appears low should earnings beat expectations and the company revise up its FY24 outlook. We propose buying June 24 92 calls at a net cost of 0.57% of underlying (spot ref:84.6). Should the price rise by only 5% the strategy would return c.2.75x on the premium employed.