In international comparison, the Swiss stock market is not doing particularly well at the moment. With a total return of just under 5% in 2023, the SMI lags well behind other benchmarks such as the DAX, EURO STOXX 50 and S&P 500. It is therefore all the more gratifying that the Zurich trading venue has recently attracted attention with a debut. On October 4, Sandoz shares were traded for the first time. With an initial valuation of CHF 11 billion, the 2023 generics company is one of the largest IPOs in Europe to date. Previously, pharmaceutical company Novartis had spun off 100% of the division. At first, investors weren't exactly clamoring for the spin-off. After opening at CHF 24.00, the newcomer slid to CHF 22.70. But then Sandoz turned upwards. In the meantime, the newcomer to the stock market is heading for the CHF 30 mark and is thus trading more than a fifth above its initial price.
The strong performance in a relatively weak market environment suggests that many Novartis shareholders have held on to their Sandoz shares. For every five shares they held in the pharmaceutical giant, they were allotted one share in the spin-off. Fundamentally, the newcomer, which is already included in the SMIM, can score with various quality features. In terms of gross sales, Sandoz is the world's largest supplier of drugs with expired patent protection. The Basel-based company generates more than three-quarters of its sales in the USD 185 billion global generics market. The second mainstay of the company, which has a history stretching back almost 140 years, is the production of imitation biopharmaceuticals, known as biosimilars. In total, the Group sells around 1,500 products that are taken by 500 million patients in more than 100 countries. The most important sales region is Europe. In 2022, Sandoz generated more than half of its sales totaling USD 9.2 billion on the old continent (see chart).
The broad positioning cannot hide the fact that the industry giant is considered to have rather low margins. In 2022, 20.6% of sales remained in core operating income. The Novartis Group achieved a margin of 33%. The Sandoz management around CEO Richard Saynor has firmly resolved to do better here. In addition to growing sales volumes, prices and a shift in the product mix toward higher-value preparations should help. The topic of margins also plays an important role in the first analyses of Sandoz shares. Berenberg cites possible improvements in profitability as an argument for the stock market newcomer. In general, the stock market underestimates the leading market position, the stable balance sheet and a promising biosimilar pipeline, according to the private bank. In addition to the North Germans, who rate the stock market newcomer as a "Buy", J.P. Morgan and Morgan Stanley, for example, join the camp of the bulls. Both US brokers have given Sandoz an "overweight" rating.
Regardless, Sandoz cuts a good figure as an underlying for structured products. Leonteq has launched a Softcallable Barrier Reverse Convertible (BRC) on the SIX debutant. Investors can expect a fixed quarterly coupon payment of 7% p.a. here. The redemption is partially protected: As long as Sandoz does not fall to or below the barrier of 69% of the initial level, investors will get back the CHF 1,000 nominal in full. If this calculation does not work out, the outlined return opportunity still remains. However, in this case the underlying would have to turn upwards and end the term at or above the strike to avoid markdowns. Please also note the soft callable feature. It allows the issuer to call and redeem this issue early. Incidentally, on October 24, Sandoz will release its interim report for the first nine months of 2023. Holders of the BRC can be relatively relaxed about the standalone company's debut as a participant in the reporting season.
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