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Novartis' 'Cliffy' Business

February 07, 2014 | About:
Victor Selva

Victor Selva

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Novartis AG (NVS) is a company committed to providing healthcare solutions to improve the health and well-being of patients and societies worldwide through the research, development, manufacturing and marketing of healthcare products and pharmaceuticals. The firm generally sells its prescription drugs, mainly to wholesale and retail drug distributors, hospitals, clinics, government agencies and managed healthcare providers. Its portfolio includes innovative medicines, preventive vaccines and diagnostic tools, generic pharmaceuticals and consumer health products. Last quarter was a rough one for this company. Its reported net income was $2.1 billion, and fell short from the $2.4 billion estimate. There's some worry that, as generic competition continues to increase, the company's growth does otherwise. Is there any chance it doesn't?

"A Patent Cliff World"

Novartis has been losing its star drugs Diovan -its blockbuster blood pressure drug which accounted for 10 percent of total sales en 2012- and Zometa sales, as their patents expired and generic competition increases. This year, the patent on its 1.6 billion drug Sandostin expires too. Novartis CEO, Joseph Jimenez, regarded last quarter's 2 billion losses in patents and said that the company's outlook for 2014 is based on a "worst-case scenario" that this copycat drugs would be on the market in the second quarters and that if it doesn't launch "the numbers will be actually better than that".

Nonetheless, other stellar drugs from Novartis won't face patent losses until many years from now and may still offer plenty of opportunity given their fast growth, potential for label expansion, and solid patent protection. These drugs are Gilenya, which has a patent protection in Europe until 2018 and in the United Stated until 2019, and Afinitor which has protection through 2018 and 2019 in Europe and 2020 in the US.

Novartis is currently also pursuing approval of its breakthrough heart failure drug Seralaxin, after recent rejection of it by the European Medicines Agency. The company is hoping for a conditional approval upon reexamination- that is permission to market the drug while continuing additional late-stage trials. This drug is a key part of Novartis' strategy to diversify its portfolio away from Diovan and regain close-enough blockbuster sales in that segment since, if approved, the company forecasts annual peak sales of 600 million to 1 billion for it. On the other side, the Commithee for Medicinal Products for Human Use, recommended the use of Novartis' asthma drug Xolar as a treatment for a chronic form of hives.

Although patent losses and potentially increasing competition could slow down sales of the company's stellar and non-stellar drugs, Novartis possesses an industry-leading late-stage pipeline that should propel long-term growth. In the next few years, the company should launch several new chemical entities in critical therapeutic areas such as respiratory and oncology. In addition to this, Jimenez has further stated that Novartis was seeing promising growth in emerging markets -despite currency headwinds. According to him, these markets currently account for 25 percent of total sales and saw a 10 percent growth in the last quarter having China and Russia as the most successful markets.

Prioritizing, Restructuring and Repositioning

Even though Novartis has a leading number of pipeline drugs designated as "breakthrough therapies", it knows that it isn't enough and that research and development in unmet medical needs is crucial to yield several new drugs with strong pricing power. Also, it knows that given the current situation, it is necessary to restructure and reposition its business. Novartis' been also on the eye as major acquisitions during the past couple of years still face integration risks as they are folded into the company. Thus, Novartis' spokesman Eric Althoff has recently stated that the company wants to reallocate its resources in order to focus on planned product launches and other growth areas.

The firm's business is divided, on a worldwide basis, into four different operating divisions: Pharmaceuticals, Vaccines and Diagnosticss, Sandoz - a global generic pharmaceuticals company - and Consumer Health. This means that Novartis operates across multiple segments, which provides greater stability in earnings compared to other firms that focus just on one business. However, Novartis might have realized that being too ambitious in this way might not be productive. Not long ago, it sold off its blood transfusion diagnostics business for 1.7 billion. Now, there are rumors of another possible reposition of assets, or asset sales, as it has transpired that it might transfer its animal healthcare division to Merck with a 4 billion worth possible price tag. Also, it might be selling its vaccines unit instead of folding it in into its pharmaceutical business, which could be worth another 1 billion dollars. All of this efforts, if realized, might increase Novartis' possibility to focus in its global pharmaceutical operation, as well as to have the cash flow to engage in other proved-to-be-successful strategies as a share repurchase program, new acquisitions, or more expenditure in R&D.

Potential

In spite of posting lower-than-expected core earnings per share last week, this company still has potential for growth, given its innovation capacity, its restructuring and repositioning strategy, and relatively solid financials. Its valuation, below the industry median, coupled with industry leading margins and returns, make it an attractive investment option for the long-run.

 

Novartis AG

Industry Median

GlaxoSmithKline PLC (GSK)

P/E

21.30

27.00

20.30

Market Capital

192.19 B

-

126.95 B

ROE

12.30

6.80

78.60

Guru's like Sarah Ketterer (Trades, Portfolio), Jim Simmons, Steve Cohen and RS Investment Management (Trades, Portfolio) have decided so and remain bullish on their position regarding this company.

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 3.4/5 (5 votes)

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