Novartis is heading into its third-quarter earnings report on October 27 with a familiar challenge: the steep decline of its former blockbuster heart-failure drug, Entresto. According to analysts at RBC Capital Markets, Entresto prescriptions likely fell by about 96% in the third quarter compared with the same period last year, as the drug lost patent protection and faced generic competition.
The drop is a major headwind for the Swiss pharmaceutical giant, which has relied on Entresto for a significant share of its revenue in recent years. The drug, used to treat heart failure, was one of Novartis's top sellers, generating billions in annual sales. With its exclusivity gone, patients and insurers are rapidly switching to cheaper generic versions, a pattern common when a major drug loses its patent.
New drugs step up, but not enough
RBC notes that Novartis's newer medicines, particularly the multiple sclerosis treatment Kesimpta and the leukemia drug Scemblix, are seeing prescription gains. However, those increases are only partly offsetting the Entresto shortfall. The analyst firm expects that the combined growth from these newer products will not fully compensate for the loss of Entresto sales in the quarter.
This dynamic is a classic issue for large pharmaceutical companies: the so-called "patent cliff." When a top-selling drug loses exclusivity, revenue can plummet quickly, and it often takes years for new products to fill the gap. Novartis has been working to diversify its portfolio, but the transition is rarely seamless.
Investors will be watching the October 27 report closely to see how deep the Entresto decline cuts into overall revenue and profit. The company's ability to manage costs and accelerate growth from its pipeline will be key to mitigating the impact.
What it means for investors
For everyday investors, the Entresto situation highlights the risks of owning pharmaceutical stocks, where patent expirations can create sudden and significant revenue drops. It also underscores the importance of looking beyond a company's current best-sellers to its pipeline and the competitive landscape for its key drugs.
RBC's estimate of a 96% prescription decline is a stark reminder of how quickly generic competition can erode a drug's market share. While Kesimpta and Scemblix are growing, they are not yet large enough to replace Entresto's peak sales. This could lead to lower year-over-year earnings for Novartis in the third quarter, and possibly for several more quarters until the new drugs scale up.
Investors should also consider the broader context. The pharmaceutical sector is facing similar patent cliffs across many companies, and the ability to innovate and bring new drugs to market is a critical differentiator. Novartis's pipeline includes treatments for cancer, immunology, and other areas, but the near-term focus will be on how management addresses the Entresto gap.
RBC's note is just one analyst's view, and actual results could differ. However, the trend is clear: Entresto's decline is a major story for Novartis, and the October 27 earnings release will be a key moment for the stock.
For those following the broader markets, the situation echoes other companies facing similar challenges. For instance, Mercedes-Benz faces its own headwinds in China ahead of its Q3 report, and Chipotle's growth plan faces a messy Q3 test, according to UBS. These examples show that earnings season often brings a mix of company-specific challenges and opportunities.
In the pharmaceutical space, the focus on patent expirations is not new. BP's recent write-down highlights how even large companies can face unexpected setbacks. For Novartis, the key will be execution: how quickly can Kesimpta and Scemblix ramp up, and what other pipeline drugs might fill the void in the coming years?
Investors should also keep an eye on the broader market environment. With Citi now expecting a Fed rate hike in December after hot inflation, the cost of capital and valuation multiples for growth stocks, including pharma, could be affected. But for now, the immediate question is how Novartis navigates its Entresto hangover.
As the October 27 date approaches, expect more analyst commentary and possibly pre-announcements. The stock's reaction will depend on whether the actual numbers are better or worse than the already-low expectations. For long-term investors, the key is to assess whether Novartis's broader strategy can deliver sustainable growth beyond the Entresto cliff.
In summary, Novartis is facing a significant revenue gap in Q3 due to Entresto's patent loss, with newer drugs only partially bridging the divide. The upcoming earnings report will provide clarity on the extent of the damage and the company's path forward.
