Novartis (XSWX:NOVN, Financial), the Switzerland-based pharmaceutical major, is the second-largest pharma company in the world in terms of market capitalization, but the company is currently going through a rough patch of transition.
Revenues from pharmaceutical segment are being hit by patent expiries, and its decision to push into the vision care industry through Alcon is proving to be more difficult than expected.
The Alcon story
Novartis revenue streams can be divided into three parts: pharmaceuticals, Alcon for eye care products and Sandoz, its own generic medicines company. Novartis was created in 1996 through the merger of Ciba-Geigy and Sandoz. In one of the biggest consolidations of that time, Sandoz, the 14th-largest drug maker in terms of sales, merged with Ciba, the ninth largest, creating a company that was in control of 4.4% of global sales. It pushed Novartis to the top of the health care industry, and the company has managed to stay in the top three since then.
In a push to diversify its revenue streams Novartis kept increasing its stake in Alcon, first buying Nestlé’s (XSWX:NESN, Financial) 25% stake in 2008 while retaining the option to buy another 52% that was held by Nestlé. In 2011, Novartis took 100% ownership in the company after buying all the remaining shares. At the time of acquisition the deal was expected to provide significant support to Novartis’ revenue growth as the eye care market was expected to grow faster than the pharmaceutical segment.
But unfortunately for Novartis Alcon's growth remains a dream. Alcon’s revenues have steadily edged lower over the years, and Novartis has been restructuring the unit hoping that a turnaround will happen sooner rather than later. With nearly 20% of its revenue coming from this division, Alcon has been adding huge pressure on Novartis’ top line sales and bottom line results.
Alcon’s revenue comes from three segments: Surgical, Ophthalmic Pharmaceuticals and Vision Care. As for the sales decline, generics and intense competition in the market were two of the major reasons for Alcon’s underperformance over the years.
“Alcon is already feeling the sting from generics to some of its top sellers, and last month's patent expiration for its glaucoma drug, Travatan Z, didn't do anything to help matters. That generic competition, along with disappointing numbers for its intraocular lens implants and contact lens solution business, have left the unit in a bind.” – Fiercepharma
On the positive side Novartis does expect Alcon to return to growth during the second half of the current fiscal while organic growth for the division is expected to be in low single digits. The mention of organic growth makes it clear that the company is expecting to sign some new deals to get the division moving.
Double trouble at the patent cliff
But the Swiss company is now facing problems at two ends. Its pharmaceutical revenues have taken a hit due to patent expiries for top drugs such as Glivec, and the company is now banking on Entresto – a drug for treating heart failure – to improve its sales. At the other end Alcon is also going through a similar phase as their popular glaucoma drug Travatan Z went over the patent cliff.
Alcon’s management has been reshuffled, and the company is busy cutting deals and announcing partnerships to improve its sales numbers. With the world’s population aging there is indeed a market for vision care, and it is growing. But the problem is that Novartis did not anticipate the intense competition in the market. Novartis CEO Joe Jimenez seems not to be averse to selling off parts of Alcon or even the entire unit if it comes to it.
“Jimenez has left that option open, saying he is amenable to 'peeling off underperforming parts of Alcon.' For now, he is committed to Alcon, though his patience is not infinite. 'You have an on-trend business with an aging population,' Jimenez told analysts in October. 'If it doesn't improve, then we've got a different conversation.'” – Reuters
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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