Novartis AG (NVS) Earnings

Management highlights

Overall Q2 2026 performance - Novartis returned to net sales growth in Q2 2026, faster than initially expected, after exiting the Entrusto patent expiry period. Growth from priority brands and ongoing productivity gains offset generic erosion from expired patents. - One-time phasing items positively impacted Q2 2026 net sales by 1 percentage point and core operating income by 5 percentage points; these impacts will reverse in H2 2026. Pipeline and Regulatory Highlights - Updated 6-year overall survival data for Kiskali in early breast cancer showed clinically meaningful overall survival benefit in the broadest at-risk EBC population, with consistent safety and sustained IDFS benefit, supporting use of Kiskali across all subgroups. Data will be presented at an upcoming medical congress. - Cosentix delivered 10% constant currency Q2 growth, with strong underlying mid-single digit U.S. growth; positive phase 3 data in polymyalgia rheumatica supports an expected FDA approval for the indication in H2 2026, keeping the brand on track for an $8 billion peak sales target. - Rapsido (remibrutinib) has solid U.S. launch uptake for chronic spontaneous urticaria, with over 4,000 prescribers and 10,000 treated patients, 60% in the first-line setting; positive REMIND phase 3 data in chronic inducible urticaria supports an expected FDA approval for the most common CIndU subtype, with global filings for all three subtypes planned by end of 2026. - Ianalumab (Yonalimab) showed consistent, statistically significant efficacy and a favorable long-term safety profile in Sjogren's disease, with sustained benefit over 108 weeks of follow-up; on track for a U.S. launch in Sjogren's in H2 2026, with additional phase 3 readouts for ITP (H2 2026), SLE and lupus nephritis (2027), and phase 2 readout for systemic sclerosis (2027). - The first FDA submission for Delzota (an antibody oligo-conjugate for DMD exon 44 skipping) was completed, based on positive phase 1/2 data and long-term follow-up; approval and launch is expected in H1 2027, with multiple additional exon-targeting follow-on programs in development. - Delbrax for FSHD met all primary and key secondary biomarker endpoints in its phase 1/2 study; management is analyzing biomarker correlations to prepare for upcoming discussions with global regulators to assess potential accelerated approval pathways. - A full pipeline of H2 2026 readouts is on track, including readouts for Pellacarsen, remibrutinib, Ianalumab, and additional phase 2 programs for QCZ484 and VHB937 in ALS. Capital Allocation - Novartis maintains a shareholder-friendly capital allocation strategy, balancing growth investments with capital return to shareholders. Completed the Picovation and Xcelogy bolt-on acquisitions in Q2. - In the first half of 2026, Novartis paid out $9.1 billion in dividends and repurchased $2.1 billion of shares under the current $10 billion share buyback program; $5.6 billion remains to be executed, with completion targeted by the end of 2027.

Guidance

Novartis reaffirms its full year 2026 guidance, with no changes to prior projections: - Full year 2026 net sales are expected to grow low single-digit percentage points, with core operating income expected to decline low single-digit percentage points. - Full year 2026 core net financial results are projected at around $1.7 billion, and the core tax rate is expected to be around 16.5%, both consistent with prior guidance. - H2 2026 net sales are expected to grow mid single-digit percentage points as the impact of U.S. generic erosion fades. H2 2026 core operating income is expected to grow mid to high single-digit percentage points. - If exchange rates remain at mid-July 2026 levels, they will add a positive 1 percentage point impact to full year net sales and full year core operating income.

Segment performance

Aggregate company-wide results for Q2 2026: total net sales grew 1% to $14.4 billion, while core operating income was flat at $5.9 billion, with a core operating margin of 41.2% (down 70 basis points year-over-year). Free cash flow for Q2 was $5.6 billion, in line with expectations. For the first half of 2026, net sales declined 2%, core operating income declined 7%, core operating margin fell to 39.4% (down 2.3 percentage points year-over-year), and first half free cash flow totaled $8.9 billion. Key priority growth driver brands (overall up 36% constant currency): - Kiskali (Cascali): +43% constant currency Q2 growth; U.S. sales reached $1 billion for the first time (up 39%), ex-U.S. up 49%; holds 58% new patient share in exclusive U.S. early breast cancer nodal populations, 79% EBC NBRX share in Germany; on track for a $10 billion peak sales target. - Kesimpta: +32% constant currency Q2 growth; growing new patient share ahead of competitors in target U.S. first-line and first-switch segments; two-thirds of ex-U.S. MS patients still use older non-B-cell therapies, leaving large room for expansion; phase 3 trial of a once-every-two-months maintenance dose on track for 2027 readout. - Pluvicto: +43% constant currency Q2 growth; 70% of new U.S. patients are in the pre-taxane MCRPC segment, with over 880 active U.S. sites and 650+ ex-U.S. sites; ex-U.S. new patient growth hit 83%; approval for HSPC expected Q3 2026, which will expand the eligible patient pool by 75%; pipeline follow-on RLT programs are in development for additional indications. - Leqcio (Lectio): +59% constant currency Q2 growth; U.S. up 55%, outpacing the advanced lipid lowering market; holds 23.3% share in the U.S. Medicare Part B segment (up 3.6% year-to-date); China NRDL inclusion doubled market share versus pre-listing levels; two outcome studies on track for 2027 readout. - Semblix: +89% constant currency Q2 growth; U.S. up 93%, on track to reach first-line new patient leadership share in H2 2026; ex-U.S. holds 75% new patient share in third-line+ across key markets, with early first-line adoption now accelerating; approved in 65 ex-U.S. countries, already holds first-line new patient leadership in Japan.

Risks & headwinds

- Forward-looking statements are inherently subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from projected outcomes, as detailed in Novartis' SEC filings. - Rising biotech asset valuations for early-stage programs with limited clinical data have increased the bar for external deals, requiring higher levels of scientific conviction to justify higher entry prices. - Generic competition for established brands (including recent generic entry for Lutathera) creates pricing and sales pressure, though Novartis notes it has competitive advantages in logistics and manufacturing for radioliogand therapies. - China market competition is pressuring sales of some legacy brands, including Cosentix, though this impact has been offset by growth from other brands to maintain overall global performance. - Late-stage clinical trial outcomes are uncertain: success in phase 1/2 biomarker studies does not guarantee regulatory approval or positive phase 3 clinical outcome data.

Analyst Q&A

• Q: What is the timeline and potential for accelerated approval of VOTA for Huntington's disease based on existing Phase 2 data?

  A: Management is currently engaging with the FDA to discuss the existing Phase 2 data. The base case remains that a full Phase 3 study will be required, with no change to prior expectations. Additional clarity on the regulatory path is expected in H2 2026, and the company is continuing to follow existing Phase 2 patients for longer-term data collection.

• Q: How has Novartis' M&A strategy changed to allow for larger deals, and what strategic fit would larger targets have?

  A: There is no change to Novartis' M&A strategy. The company remains disciplined, focusing primarily on smaller bolt-on deals with upfront payments below $2 billion, and will only selectively pursue larger deals like Avidity when the asset fits both the company's therapeutic area and platform strategies. Novartis has full confidence in its internal R&D pipeline and only does external deals to supplement internal innovation.

• Q: What is the status of the Delbrax FSHD regulatory path, and what discussions have been held with the FDA about an accelerated filing based on biomarker data?

  A: The company is following the regulatory pathway agreed with the FDA prior to the Avidity acquisition, which requires demonstration that the measured biomarkers correlate with Dux4 activity and clinical improvement in patient function. The existing biomarker data supports making a case for accelerated approval to the FDA, but there is no guarantee of success. Management will provide updated guidance after completing discussions with the FDA.

• Q: What is the current commercial impact of newly approved oral PCSK9 inhibitors on Leqvio, and how will food effects for oral PCSK9s affect the market?

  A: There are no unexpected features of the approved oral PCSK9 labels that change Novartis' view of Leqvio's commercial potential. A large 70 million patient segment of patients in the U.S. still do not hit their lipid targets, and Leqvio is positioned in the insulated Medicare Part B physician-administered segment that is not exposed to the upcoming price competition between oral and monoclonal PCSK9s, supporting the $4 billion to $5 billion+ peak sales target. It remains to be seen how impactful the required fasting for the newly approved oral PCSK9 will be on adoption, but strong demand for infrequently administered siRNAs persists, particularly outside of the U.S. in markets like Asia.