Novartis Raises Profit Outlook as Avidity Bet Costs $1.9 Billion

Growth brands lifted core operating income 10% and the core margin to 41.6%, but a write-down on Avidity’s lead drug and rising debt show what September’s trial failures still cost.

Key Takeaways

• Third-quarter sales rose 4% to $14.52 billion and core EPS gained 9% to $2.46, beating the $2.25 consensus as 14 points of volume growth overwhelmed 9 points of generic erosion.
• Novartis now expects 2026 core operating income to be flat to up low single digits, from a forecast decline, which implies a strong fourth quarter after nine months down 2% at constant currency.
• A $1.9 billion impairment on del-desiran cut reported operating income 59%, while net debt reached $37.4 billion and free cash flow fell 18%, keeping the $12 billion Avidity deal under review.

Two Sets of Books

Novartis reported a third quarter on October 27 that reads very differently depending on where the reader starts. From the top line, it is the story of a franchise regaining its stride. Net sales rose 4% in both dollars and constant currencies to $14.52 billion. Core operating income climbed 11% to $6.04 billion, and the core margin reached 41.6%, two points above a year earlier. Core earnings per share of $2.46 rose 9% and cleared the $2.25 consensus compiled by Zacks, even as revenue fell a fraction short of the $14.56 billion expected. Management lifted its 2026 forecast for core operating income to flat to low single-digit growth, from a low single-digit decline, and held its sales outlook.

From the bottom line, the quarter belongs to September. Operating income fell 59% to $1.84 billion, and net income dropped 70% to $1.20 billion, or 63 cents a share. Most of that gap comes from a single entry: a $1.9 billion partial impairment of del-desiran, the muscle-disease drug at the center of the $12 billion Avidity Biosciences acquisition, with higher interest costs accounting for much of the rest. The charge sits outside core results and consumes no cash. It is nonetheless the formal accounting for a research setback that erased more than a tenth of the company’s market value in one session. Its arrival beside a guidance upgrade captures the tension in the investment case: an operating business running ahead of plan, attached to a pipeline whose next stage has become harder to underwrite.

Volume Carries the Quarter

The commercial result rested on volume, which added 14 percentage points to sales against 9 points lost to generics and 1 point to pricing. Kisqali was again the largest contributor, rising 37% to $1.82 billion and drawing within $40 million of Cosentyx as the group’s top seller. Kesimpta grew 22% to $1.48 billion in multiple sclerosis, Scemblix advanced 67% to $593 million in leukemia, and Leqvio, the twice-yearly cholesterol injection, rose 63% to $506 million. Cosentyx added 9% to $1.86 billion, though the company acknowledged that US growth was helped by adjustments to prior-year revenue deductions, a qualifier that tempers the headline.

Against these gains stands the steady erosion of older franchises. Entresto, which met US generic competition in mid-2025, fell 38% to $1.17 billion, while Promacta and Tasigna dropped 61% and 37%. In July, management warned that roughly $800 million of US Entresto sales sat in the prior-year third-quarter base, making this the year’s most demanding comparison. That the top 20 brands still grew 7% gives weight to Vas Narasimhan’s claim that the quarter showed “the replacement power of the business.” The nine-month figures supply the necessary restraint. Sales were flat at constant currencies and core operating income was down 2%, so replacement remains a trajectory rather than an accomplished fact.

What September Took

The impairment traces back to one week. On September 4, Novartis disclosed that pelacarsen, its antisense drug for lipoprotein(a), had failed to reduce cardiovascular events in the 8,323-patient Lp(a)HORIZON trial, despite lowering the target protein. Four days later, the Phase III HARBOR study of del-desiran in myotonic dystrophy type 1 missed its primary endpoint of video hand opening time against placebo. Avidity had been part of Novartis only since February 27. Bloomberg reported that the company had also paused trials of an experimental cell therapy in autoimmune disease after three patient deaths. The shares closed 10.9% lower on September 8.

The write-down is deliberately partial, and the choice is telling. Novartis says del-desiran showed clinical activity in secondary endpoints and exploratory analyses, and it will consult regulators before setting a path forward. The rest of the Avidity portfolio remains intact: del-zota, for Duchenne patients amenable to exon 44 skipping, has received FDA priority review, and work in facioscapulohumeral muscular dystrophy continues. Narasimhan has defended the acquisition strategy. Deutsche Bank was less forgiving, cutting the stock to hold and its target to CHF 120 from CHF 140, citing heightened deal risk and a wider portfolio gap early next decade. The lasting cost is less the $1.9 billion than the discount investors may now apply to the next acquisition.

Leverage, Cash and the Market’s Reading

Cash flow did not keep pace with core profit. Free cash flow fell 18% to $5.1 billion in the quarter and 12% to $14.0 billion over nine months. Net debt rose to $37.4 billion at the end of September from $21.9 billion at the start of the year, as $16.7 billion of acquisition and licensing outflows, a $9.1 billion dividend and $4.8 billion of buybacks exceeded internally generated cash. Avidity was initially funded with an $11 billion bridge loan, refinanced through bonds in March, and the interest now weighs on core as well as reported earnings. Ratings of Aa3 and AA- leave ample room, and $4.9 billion of the $10 billion buyback remains to be executed, but flexibility is narrower than it was a year ago.

Investors read the release as confirmation rather than revelation. The shares rose 2.3% in early trading, according to Reuters, extending a recovery from the September low of CHF 111.80. The stock had closed at CHF 127.48 on October 26, up 16% for the year, which suggests the pipeline damage was largely priced before the upgrade arrived. What the quarter added was evidence of operating leverage: core profit growth of 10% on sales growth of 4%. The restraint of the move is a verdict in its own right. Margin expansion has been rewarded; the next leg of the valuation depends on cash conversion and on the pipeline.

The Burden of Proof Moves to R&D

The quarter’s research record was more mixed than September implied. Remibrutinib, already marketed as Rhapsido for chronic spontaneous urticaria, succeeded in two Phase III trials in relapsing multiple sclerosis, reducing relapses against teriflunomide, although a study in myasthenia gravis was halted for futility. Pluvicto won US and Chinese approval in hormone-sensitive metastatic prostate cancer and now covers every stage of PSMA-positive metastatic disease. Six-year NATALEE data showed Kisqali reduced the risk of death in high-risk early breast cancer by nearly 20%. Fabhalta gained traditional FDA approval in IgA nephropathy, and pelabresib was filed in Europe for myelofibrosis.

The new guidance sets a demanding finish. With nine-month core operating income down 2% at constant currencies, delivering flat to low single-digit growth for the year requires a fourth quarter well ahead of last year, consistent with the mid-to-high single-digit second-half growth management outlined in July. The next tests come at the Meet Novartis Management event in London on November 18 and 19 and with full-year results on February 3, 2027. The nomination of former Microsoft executive Rajesh Jha to the board adds technology depth to governance. This quarter showed that Novartis can outrun its current patent losses. Whether research and acquisitions can replace Cosentyx, Kisqali and Kesimpta when their own exclusivity fades in the early 2030s is the question September reopened, and one a single strong quarter cannot settle.