Barclays sees upside potential in Sandoz shares are tariffs risk is priced in

Investing.com -- Barclays (LON:BARC) analysts see potential upside in Sandoz AG (SIX:SDZ) shares, arguing that tariff risks are now largely priced into the stock. 

Despite the company’s underperformance relative to the broader European pharmaceutical sector since mid-February, Barclays remains constructive on Sandoz’s long-term growth prospects, particularly driven by its biosimilar pipeline.

Sandoz shares have lagged the SXDP European pharma index by about 14% and the Swiss Market Index (SMI) by about 18% since hitting mid-February highs. 

Much of this underperformance, Barclays suggests, is due to concerns over potential pharmaceutical tariffs. 

However, with Sandoz generating the majority of its sales in Europe and having a relatively limited U.S. footprint—less than 20% of revenue—the impact of these tariffs may be overestimated. 

The brokerage now believes these risks are reflected in the stock’s current valuation.

Ahead of Sandoz’s first-quarter 2025 sales results, Barclays has adjusted its financial forecasts, trimming 2025 estimates to align with company guidance. 

The brokerage now projects a price target of CHF 46.50 per share, down from CHF 50 previously, while maintaining an “overweight” rating. 

The revised price target is based on a valuation of 16 times projected 2025 earnings, incorporating a mix of price-to-earnings, enterprise value-to-EBITDA metrics, and a discounted cash flow model.

For the first quarter of 2025, Barclays expects Sandoz’s sales to come in about 4.6% below consensus estimates. 

The brokerage attributes this to several factors, including the impact of last year’s divestiture of the company’s China business to Aspen, as well as the temporary pause in sales of Cimerli, a biosimilar ophthalmology product, ahead of its U.S. relaunch. 

Additionally, price erosion across the generics market is weighing on revenue, though Sandoz management remains confident in its commercial execution and expects sales to be weighted toward the second half of the year, benefiting from new biosimilar launches.

Regarding tariffs, Barclays estimates the financial impact of existing and potential duties on Sandoz at $25-$35 million in 2025, with an annualized impact of $35-$50 million.

If the European Union imposes additional tariffs, the potential downside could rise by $25-$60 million in 2025, with a worst-case scenario nearing $100 million.

However, Barclays notes that these numbers are highly uncertain and that Sandoz is already working on mitigation measures.

Sandoz’s manufacturing footprint, with 15 plants—11 of them in Europe—means a substantial portion of its products are produced externally. This structure may help cushion some of the tariff impact. 

Analysts also point out that while tariffs could raise drug prices, they could also lead to supply shortages if companies withdraw from affected markets.

On the product front, Barclays highlights key upcoming launches as potential growth drivers. The biosimilars Tyruko, Pyzchiva, Wyost, and Jubbonti are expected to hit the U.S. market in 2025, while Enzeevu is slated for a European launch in the fourth quarter of the year. 

Sandoz is confident it can secure a top-two market position in ophthalmology following the Cimerli acquisition, which provided the necessary commercial infrastructure.

The brokerage also points to Sandoz’s strategic investments in biosimilar manufacturing. 

While the company has lowered its 2028 free cash flow guidance to $1.6-$2 billion from a previous $2 billion, this is largely due to increased capital expenditures aimed at strengthening production capabilities. 

Most of these investments, including expansion at the company’s Slovenian site, are expected to enhance margins post-2028.

Barclays acknowledges that price erosion in the generics space remains a challenge, with mid-single-digit declines projected for 2025 following a period of post-pandemic fluctuations. 

However, volume growth of 10% last year suggests underlying demand remains strong. 

The company’s performance with Omnitrope, a growth hormone treatment, has been particularly solid, benefiting from supply disruptions among competitors.