Novartis (NVS, Financial), the Switzerland-based multinational pharmaceutical company was created in 1996 through the merger of Ciba-Giegy and Sandoz. If someone wants to analyze companies that grew successfully after big mergers then Novartis is an excellent candidate.
1758- J.R. Giegy Ltd founded in Basel
1859- CIBA founded in Basel
1970- CIBA and Giegy merge to form Ciba-Giegy
1996- CIBA-Geigy merge with Sandoz laboratories to form Novartis
The Team
Novartis is led by Joseph Jimenez for the past two years after he took over the reins of the company from Daniel Vesella, who is the now the chairman of Novartis Board. Novartis operates in more than 100 countries and employs approximately 120,000 people all over the world.
The employee breakup clearly shows where the company is investing in human resources.
The Business
Novartis has come a long way since its formation in 1996. It shed its nutrition division and baby food maker Gerber to Nestle (NSRGY) while adding eye care division Alcon. Novartis also strengthened its position in the generics market through Sandoz. Novartis is a well-diversified company now. The pharmaceuticals business unit still remains the biggest business for Novartis and expect things to remain the same for a long time.
Novartis is one of the very few pharma companies that earn more than 20% of its revenue from emerging markets. The developed market exposure is approximately 70% and Sandoz will be the key to increase emerging market earnings further. Novartis achieved double digit growth in China, India and Brazil in 2011 and if it continues the same pace then it will become one of the fastest growing companies in the region. But things are getting a bit tricky for big pharma in emerging markets as country after country in the region are pushing generics at the expense of branded drugs.
Pharma Unit
The main business unit of Novartis is just getting over the patent cliff. The pharma unit has been growing at a healthy rate of 7% for the last three years and if they achieve anything closer to that in the next three years then it will be a great achievement. The expiry of its blockbuster drug Diovan and the impending patent loss of Gleevec and Zometa will definitely put some downward pressure on earnings for the next few years.So any bounceback for the pharma unit will directly depend on the kind of drugs launched by Novartis in the next few years. The pipeline is more critical than ever.
Financial Health
Novartis performed really well in the last 10 years. In 2012 Novartis reached $59 billion in revenues, more than twice its revenue in 2002. The size and the composition of the company will make it difficult to repeat the same amount of growth in the next 10 years, but it should be able to hold its top five position in the pharma industry.
Latest Quarter
The third quarter 2012 report shows that Novartis achieved eight regulatory milestones in pharmaceuticals with Lucentis, Gilenya, Afinitor and Tasigna performing well. Commenting on the results, Joseph Jimenez, CEO of Novartis, said: “While Novartis net sales were impacted by the patent expiration of Diovan and a down quarter in Sandoz and Consumer Health, our launch brands performed well and now represent 29% of Group sales. Pharmaceuticals had another solid quarter. Our excellent record on innovation continues with new approvals for innovative products like Afinitor in advanced breast cancer, the recent EU filing of QVA149 in COPD and encouraging news in heart failure. I am confident that this improves the long term growth prospects of the business.”
Valuation
Novartis is currently selling at 17 times its 2012 earnings and 11 times its forward P/E. I have used a discounted earnings model to arrive at the required growth rate for a target share value using 2011 EPS $3.83. The discounted earnings model shows that NVS (shares at the current price of $60) is either fairly valued or undervalued.
Disclosure: I am not long NVS and I have no intention to buy or sell NVS for the next few days.
1758- J.R. Giegy Ltd founded in Basel
1859- CIBA founded in Basel
1970- CIBA and Giegy merge to form Ciba-Giegy
1996- CIBA-Geigy merge with Sandoz laboratories to form Novartis
The Team
Novartis is led by Joseph Jimenez for the past two years after he took over the reins of the company from Daniel Vesella, who is the now the chairman of Novartis Board. Novartis operates in more than 100 countries and employs approximately 120,000 people all over the world.
The employee breakup clearly shows where the company is investing in human resources.
The Business
Novartis has come a long way since its formation in 1996. It shed its nutrition division and baby food maker Gerber to Nestle (NSRGY) while adding eye care division Alcon. Novartis also strengthened its position in the generics market through Sandoz. Novartis is a well-diversified company now. The pharmaceuticals business unit still remains the biggest business for Novartis and expect things to remain the same for a long time.
Novartis is one of the very few pharma companies that earn more than 20% of its revenue from emerging markets. The developed market exposure is approximately 70% and Sandoz will be the key to increase emerging market earnings further. Novartis achieved double digit growth in China, India and Brazil in 2011 and if it continues the same pace then it will become one of the fastest growing companies in the region. But things are getting a bit tricky for big pharma in emerging markets as country after country in the region are pushing generics at the expense of branded drugs.
Pharma Unit
The main business unit of Novartis is just getting over the patent cliff. The pharma unit has been growing at a healthy rate of 7% for the last three years and if they achieve anything closer to that in the next three years then it will be a great achievement. The expiry of its blockbuster drug Diovan and the impending patent loss of Gleevec and Zometa will definitely put some downward pressure on earnings for the next few years.So any bounceback for the pharma unit will directly depend on the kind of drugs launched by Novartis in the next few years. The pipeline is more critical than ever.
Financial Health
Novartis performed really well in the last 10 years. In 2012 Novartis reached $59 billion in revenues, more than twice its revenue in 2002. The size and the composition of the company will make it difficult to repeat the same amount of growth in the next 10 years, but it should be able to hold its top five position in the pharma industry.
Latest Quarter
The third quarter 2012 report shows that Novartis achieved eight regulatory milestones in pharmaceuticals with Lucentis, Gilenya, Afinitor and Tasigna performing well. Commenting on the results, Joseph Jimenez, CEO of Novartis, said: “While Novartis net sales were impacted by the patent expiration of Diovan and a down quarter in Sandoz and Consumer Health, our launch brands performed well and now represent 29% of Group sales. Pharmaceuticals had another solid quarter. Our excellent record on innovation continues with new approvals for innovative products like Afinitor in advanced breast cancer, the recent EU filing of QVA149 in COPD and encouraging news in heart failure. I am confident that this improves the long term growth prospects of the business.”
Valuation
Novartis is currently selling at 17 times its 2012 earnings and 11 times its forward P/E. I have used a discounted earnings model to arrive at the required growth rate for a target share value using 2011 EPS $3.83. The discounted earnings model shows that NVS (shares at the current price of $60) is either fairly valued or undervalued.
| JNJ | PFE | NVS | MRK | SNY | GSK | |
| P/E | 22.73 | 19.59 | 17.16 | 20.09 | 15.4 | 13.57 |
| Share Value ($) | 73.59 | 78.13 | 65.11 | 62.49 |
| Earnings Growth Rate (Next 7 Yrs) | 1% | 2% | 2% | 4% |
| Terminal Growth (Earnings) | 2% | 2% | 2% | 2% |
| Discount Rate | 7% | 7% | 8% | 9% |
Disclosure: I am not long NVS and I have no intention to buy or sell NVS for the next few days.
