Investment Summary

Sandoz Group AG, the global generics and Biosimilars leader spun out of Novartis in late 2023, has rapidly established itself as one of the most strategically positioned players in cost-effective medicines. The combination of a renewed corporate identity, sharpened Capital discipline, a robust biosimilars pipeline and rising global Demand for affordable healthcare presents an attractive multi-year growth opportunity. As payors and governments seek lower-cost alternatives to high-priced originator Biologics, Sandoz's Manufacturing scale, regulatory expertise and global distribution footprint position it to capture significant value. With improving margins, deleveraging momentum and clear strategic direction under its own management team, we view the shares as well placed for re-rating. Sandoz Group AG is therefore rated a Buy.

Business Overview

Sandoz is headquartered in Basel, Switzerland, and is listed on the SIX Swiss Exchange. Its business is structured around two principal pillars: generics, which provide off-Patent small molecule drugs across virtually every major therapeutic area, and biosimilars, which offer highly similar versions of off-patent biologic medicines. Generic products include cardiovascular, central nervous system, respiratory, anti-infective, oncology and dermatology medicines distributed via wholesalers, pharmacies, hospitals and increasingly via direct-to-pharmacy and E-commerce channels.

Biosimilars are the higher-growth pillar, with Sandoz being among the global pioneers of the category. The biosimilar portfolio addresses some of the world's largest biologic franchises, including filgrastim, pegfilgrastim, rituximab, etanercept, adalimumab and omalizumab, with further launches expected across denosumab, natalizumab, ustekinumab and ocrelizumab. Geographic reach is global, with Leadership positions in Europe, strong presence in North America and a growing footprint across Asia, Latin America and emerging markets. The integrated manufacturing network, including biologics capacity in Slovenia, Austria and other locations, provides the scale necessary for cost-effective biosimilar production.

Sector Backdrop

Healthcare systems around the world are under pressure from rising demand and constrained budgets. Generic medicines already account for the majority of prescription volumes in most major markets but a much smaller share of spending, illustrating the enormous value they deliver to payors. Biosimilars are emerging as the most important new lever to control biologic drug expenditure, with the savings opportunity expected to exceed several hundred billion dollars cumulatively over the coming decade as biologic patents continue to expire. Aging populations, rising chronic disease prevalence and the increased focus on equitable access to high-quality medicines collectively support sustained demand for both generics and biosimilars. Sandoz operates at the intersection of these themes.

Investment Thesis

Sandoz offers a differentiated investment profile compared with originator pharma names. The company is one of only a small number of global players with the technical, regulatory and commercial capability to develop and commercialise biosimilars at scale across major geographies. It benefits from a long pipeline of high-value biologic patent expirations stretching well into the next decade, providing visibility on multiple billion-dollar opportunities. As a standalone company, Sandoz can pursue more focused capital allocation than was possible inside Novartis, including dedicated investment in biosimilar development, targeted geographic expansion in Asia and Latin America and continued upgrade of its manufacturing network. Strengthening pricing dynamics in selected generic categories, helped by industry consolidation and tighter regulatory oversight, support the generics base. The combination of a stable generics business, expanding biosimilar contribution and improving Leverage/">Operating Leverage underpins our positive view.

Growth Drivers

The biosimilar pipeline is the key growth driver. Hyrimoz, the company's adalimumab biosimilar, has been a major launch in the US market and continues to expand across geographies. Tyruko, the natalizumab biosimilar, broke new ground as the first biosimilar approved in multiple sclerosis. Pyzchiva, the ustekinumab biosimilar, addresses a multi-billion dollar inflammation market. Future launches across denosumab, ocrelizumab and other categories provide further multi-year visibility. Within generics, value-added formulations including extended release forms, complex injectables and inhaled products provide more defensible niches with higher margins than commoditised tablet generics. Geographically, Sandoz is expanding in markets such as China, India, Brazil and the Middle East, where biosimilar adoption is in the early stages and structural healthcare investment is rising.

Another important growth lever is the gradual evolution of payor frameworks that increasingly favour biosimilars. In the United States, formulary inclusion of biosimilars on commercial and Medicare plans has accelerated. Several large pharmacy benefit managers have moved biosimilars to preferred status on their formularies, in some cases replacing originator molecules altogether. Interchangeability designations granted by regulators are increasing physician confidence in switching patients between originator and biosimilar versions of the same biologic. In Europe, where biosimilar penetration is already deep, expanding tender frameworks, switching programmes and education initiatives continue to drive incremental adoption. Together, these trends provide a multi-year framework within which Sandoz's biosimilar portfolio can ramp.

Financial Performance

Since the spin-off, Sandoz has delivered solid Revenue growth driven by biosimilars launches and disciplined pricing in generics. Core operating margins are expanding as the company benefits from operating leverage, manufacturing efficiencies and the gradual ramp of new launches. Free Cash Flow generation is improving as initial spin-off costs roll off and Working Capital normalises. Management has set a clear medium-term ambition for mid to high single-digit revenue growth and a core EBITDA Margin in the high 20s percent range by the latter part of the decade. The company is steadily reducing net Debt from spin-off levels, with capacity to commence Shareholder distributions and selective bolt-on transactions. Hedging, currency and pricing dynamics continue to be carefully managed as part of overall financial discipline.

Profitability is being driven by a combination of factors. Mix improvement from increased biosimilars contribution lifts overall gross margins given the higher relative profitability of biosimilars versus Commodity generics. Manufacturing network consolidation, automation investment and continuous improvement programmes are driving production unit cost down. Procurement consolidation is yielding savings across direct and indirect categories. Selling, general and administrative spending is being optimised through digitalisation, organisational simplification and shared service deployment. Together, these levers support steady year-on-year margin progression even in an environment of moderate input cost Inflation. Returns on invested capital are also trending higher as growth-oriented investments mature and deliver incremental contribution.

Pipeline and Manufacturing Outlook

Sandoz's pipeline of biosimilars in development comprises a broad mix of oncology, immunology, bone health, ophthalmology and rare disease biologics. The company has invested in a global biologics manufacturing network that includes Upstream and Downstream biologics capacity, Fill-finish and packaging, supporting both internal pipeline production and selective contract manufacturing for partners. Within generics, the company emphasises complex generics, including respiratory inhalation, transdermal patches, hormones and complex injectables, which face fewer competitors and command better Economics than commoditised oral tablets. Continued investment in manufacturing modernisation, automation and quality systems supports both productivity and regulatory excellence.

Commercialisation Outlook

Sandoz's commercial model is tailored to the needs of biosimilar adoption. In Europe, where biosimilar penetration is highest, the company partners with hospital systems, payors and clinicians to support switching, education and Supply reliability. In the United States, biosimilars are still in earlier stages of penetration relative to potential, particularly in retail-distributed therapeutic areas; Sandoz is investing in payer engagement, prescriber education and patient access programmes to accelerate uptake. In emerging markets, partnerships with local distributors, tendering organisations and ministries of health support Volume growth. Generics are commercialised through traditional pharmacy and hospital channels, increasingly supplemented by online and direct-to-pharmacy platforms, providing operating efficiency and broader reach.

Capital Allocation and Returns

Capital allocation priorities are balanced between investment in pipeline and manufacturing, debt reduction and progressive shareholder returns. Management has signalled the intention to commence regular dividends and, over time, additional capital returns once leverage targets are met. Bolt-on acquisitions to strengthen the biosimilars pipeline or to expand geographic reach remain a possibility, though discipline is being prioritised. The combination of reinvestment, deleveraging and the gradual build of distributions provides a balanced framework that aligns with the company's stage in its post-spin journey.

Valuation Perspective

Sandoz trades at a meaningful discount to specialty pharmaceutical peers on price-to-Earnings and EV/EBITDA metrics, reflecting the still-young listed history, perceived commoditisation risk in generics and the absence of long-tail Dividend track record. We believe this discount overstates the structural risks given the strong biosimilars growth runway, expanding margins and improving cash returns. As the company demonstrates a multi-year track record of mid single-digit growth, expanding margins and increasing capital returns, the valuation gap to broader healthcare peers should narrow.

Key Risks

Risks include pricing pressure in core generics, particularly in the United States, where channel concentration and tender dynamics can erode margins. Biosimilar competition is intensifying with multiple global players entering the same molecules, requiring strong differentiation and execution. Manufacturing complexity in biologics introduces operational and quality risks. Regulatory delays for new biosimilar approvals could push out the revenue benefit from pipeline Assets. Currency Volatility, particularly across European and emerging market currencies, can affect reported results. Litigation over biologic patent challenges or interchangeability designations may produce timing volatility. Finally, integration of digital platforms and data systems following separation from Novartis carries execution risk.

Management and Strategic Direction

Under CEO Richard Saynor, Sandoz has crafted a clear strategic narrative built around three pillars: building the leading biosimilars business globally, sustaining a competitive generics portfolio with a focus on differentiated products and value-added formulations, and operating with industry-leading capital discipline and ESG standards. The leadership team has been complemented by a board with deep experience across pharmaceuticals, Capital Markets and operations. As an independent company, Sandoz now has dedicated investment authority to pursue Capital Expenditure projects that strengthen biosimilar capacity, modernise generics manufacturing and expand into selected high-growth geographies. The Corporate Culture emphasises quality, reliability and Partnership with customers, including hospital systems, payors and patients, supporting the long-term durability of the business model.

Sustainability and ESG Considerations

Sustainability is central to Sandoz's mission of pioneering access to medicines. Beyond environmental commitments such as reducing greenhouse gas emissions, water use and waste, Sandoz emphasises the social impact of its work: every dollar of generics or biosimilars revenue typically represents multiple dollars of healthcare savings that can be redirected to other patient needs. The company has signed up to global initiatives on access to antibiotics, antimicrobial resistance and responsible manufacturing. Strong governance frameworks, regulatory compliance and ethical business conduct are emphasised by management and board. For investors integrating ESG considerations, Sandoz's strategic alignment with healthcare affordability is a clear positive.

Industry Position and Competitive Moat

Sandoz competes in an industry where scale, regulatory expertise and manufacturing reliability are decisive. Biosimilars in particular require deep capabilities in cell-line development, large-scale fermentation, analytical characterisation, regulatory engagement and global commercialisation. Few companies have the integrated capability set required to compete effectively at scale, and Sandoz is one of the small group of leaders globally. The company's heritage in generics provides established relationships with payors, distributors and pharmacy systems, supporting biosimilar adoption. Continued investment in technology upgrades, quality systems and digital capabilities is reinforcing the competitive moat. As regulatory pathways evolve to encourage biosimilar substitution and switching, Sandoz's leadership position becomes increasingly valuable.

Conclusion: Why We Rate Sandoz a Buy

Sandoz combines the scale of a global generics leader with the growth profile of a maturing biosimilars specialist. Operating in a sector underpinned by powerful long-term demand for affordable medicines, the company has the manufacturing footprint, regulatory expertise and pipeline depth to deliver attractive multi-year revenue and margin progression. With clear strategic direction post spin-off, improving margins, falling leverage and a strong biosimilar opportunity set, we view the risk-reward as favourable. Sandoz Group AG is therefore rated a Buy, providing a differentiated way to invest in the healthcare affordability megatrend that should reward long-term shareholders as the company executes against its multi-year roadmap.