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NVS AT A GLANCE

P/E ► 13.5 AVG EV/EBITDA ► 10.5 AVG ROA ► 9.6% AVG ROE ► 15% AVG Debt to Equity ► 0.669 AVG Current Ratio ► 1.77 AVG Interest Coverage Ratio ► 23.6 AVG

 

 

 

 

 

 

Novartis (NYSE: NVS) is one of the largest pharmaceutical companies in the world, with annual sales of $42.6 billion. While Novartis produces medications for many diseases, cancer and cardiovascular medications make up the bulk of sales. These medications include blockbuster drugs Gleevec and Diovan, which will benefit from the demographic realities of an aging US population that is more susceptible to cancer or cardiovascular problems. In addition to their current drugs, Novartis has one of the strongest pipelines in the pharmaceutical industry, with over 50 new products set to premier in the next several years.

Novartis is different from any other major pharmaceutical company in that it also has a strong presence in the generic market. Sandoz -- one of its divisions -- brought in 18% of the company's total sales in 2008. With $7.6 billion in annual sales, Sandoz is the largest generic manufacturer under a major pharmaceutical company.^[1] This investment in the generic market allows Novartis to be somewhat insulated from patent expiration. At the same time, however, the investment in generics may complicate Novartis's stance towards patent issues since it has large stakes on both sides of the issue.

Novartis faces many of the challenges of other pharmaceutical companies, including issues surrounding patent expiration and FDA approval. In addition, there is growing pressure in the US and abroad to lower the price of medication. Again, some of these challenges may be buffered by Novartis's position in the generics market.

Corporate Overview

Company History

Novartis was formed in 1996 with the merger of pharmaceutical giants Ciba-Geigy and Sandoz. Today, the company is heavily focused on research into new treatments for cancer, cardiovascular diseases, and diabetes. Novartis is one of the largest pharmaceutical companies in the world, smaller only than Pfizer, Bristol-Myers Squibb, GlaxoSmithKline, and Sanofi Aventis.

Products ^[2]

Novartis has a wide variety of products, including pharmaceuticals, vision products, baby foods, and animal medications. This diversity insulates Novartis from market fluctutations and makes for an overall more stable corporation. While pharmaceutical production can vary greatly from year to year, over the counter medications are fairly stable, and OTC sales increased 5% in FY06 for Novartis.

• Pharmaceutical Division (64% of sales)

Novartis's oncology and cardiovascular franchises each earned over $5 billion in sales in 2007 with growth in the double digits. Diovan, Lotrel, and Gleevec, three of Novartis's biggest selling drugs for cardiovascular problems and cancer, respectively, were the ranked first in sales in their therapeutic categories.

• Sandoz (18% of sales)

Two major areas of Sandoz include antibiotics, with Amoxicillin/Augmentin and anti-allergens such as Claritin. This division will likely expand with Novartis's recent acquisition of Eon Labs and Hexal.

• Consumer Health (14% of sales)

Consumer Health includes over-the-counter drugs such as Excedrin and products such as CIBA contact lens cleaner.

• Vaccines & Diagnostics (4% of sales)

Products include vaccines for influenza and meningitis as well as pediatric immunizations. This division will expand with Novartis's acquisition of Chiron.

Business Growth

Novartis's 2009 Q2 net income fell 10% to $2.04B from $2.27B. Similarly to Q1 2009, this decline was driven largely by a stronger dollar. Net sales were down 2% to $10.55B but were up 8% on a constant-currency basis. Pharmaceutical revenues were particularly strong on a constant-currency basis, posting gains of 11%. ^[3]

On November 4, 2007, Novartis announced plans to construct a $700 million manufacturing facility in Singapore. The new production site will mainly focus on the production of biopharma drugs, such as monoclonal antibodies used to treat arthritis and cancer.

On December 13, the company announced plans to cut another 2,500 jobs over the next two years, or 2.5 percent of its workforce, in order to save $1.6 billion annually.

Novartis bought the drug company Protez in a deal worth up to $400 million on June 4. Protez has been developing a new antibiotic called PZ-601 that may be effective against particularly virulent strains called MSRA. Novartis will pay $100 million, with another $300 million depending on the success of the drug.

Novartis increased it's stake in the drug company Speedel from 10 percent to 51 percent, for $880 million. Novartis had previously licensed the blood pressure drug Tekturna from Speedel.

In Q3 of 2009, Novartis reported sales of $11.1 billion, up 3% from the same quarter of the previous year. Growth in sales was led by Novartis' $25 billion Pharmaceuticals division, while the Consumer Health and Sandoz divisions also posted growth in sales. Vaccines and Diagnostics sales fell for the quarter based on lower than expected H5N1 seasonal flu vaccines. Novartis reported net income of $2.1 billion, a growth of 1% from 2008.^[4]

Product Pipeline

Novartis' pipeline is one of the industry's largest, both in terms of breadth, number of new products, and depth. There are almost 50 total new drugs in late-stage development (past preliminary clinical trials--Phase II and III); those which pass the final stages are slated for introduction in the next 5 years.

Some of these new products include Aclasta for osteoporosis, diabetes treatment Galvus, and hypertension drug Rasilez. These products, naturally, are also competing against comparable drugs in other companies' pipelines. For example, Galvus, the diabetes treatment, is competing directly with a product from Merck called Januvia.

Novartis is developing several meningitis vaccines for infants. Meningitis is a serious disease, affecting 10 in 100,000 children. More than 10 percent of meningitis cases are fatal, even with antibiotic treatment. A recent study on a candidate vaccine called Menveo has been positive -- 90 percent of children given the vaccine developed resistance against four strains of meningitis. The company is also working on a vaccine which would work against a strain called meningitis B, which currently does not exist. The markets for both meningitis vaccines are estimated to be $1 billion a year each.

Recently/Soon to be Approved:

• Tekturna, a new drug for hypertension (high blood pressure), was approved in early March by the FDA. It works by regulating the kidney's release of renin, a substance which raises blood pressure. Tekturna is the first drug to be approved with this function, and the first new hypertension drug released in the last 10 years. This product could help Novartis secure their share of the hypertension treatment market. Novartis had previously licensed Tekturna from Speedel, which it recently bought controlling stake in. Novartis plans to push the drug together with Diovan to boost revenue that had been anticipated from the delayed cancer drug "Afinator" (see below). ^[5]

• "Afinator", a cancer drug near approval status, may reach the US market in the first quarter of 2009. The drug is three months behind its initial expected release due to a request for additiona testing frong the Food and Drug Administration (FDA). ^[6]

• In addition to Tekturna, Novartis announced on March 26th that it will likely launch Exforge, another new hypertension treatment, earlier than expected. Pfizer lost a patent on Norvasc, one of the active ingredients in Exforge, and so Exforge will not have to wait until the original patent on Norvasc expires to release Exforge. Many analysts both from within and outside Novartis predict that Exforge could be another big seller, reaching perhaps $1 billion.

• About half of leukemia patients who use Gleevec eventually develop resistance to the drug, so a new drug is needed. On November 28, the European Commission approved Tasigna, a leukemia drug by Novartis for use in patients who no longer respond to Gleevec. The company estimates that combined sales of Gleevec and Tasigna will reach $3.5 billion annually.

• Coartem, a malaria pill, got a favorable review from the Food and Drug Administration (FDA) and will likely be approved in December 2008. The drug, in use around the world for the past 10 years, has very few side effects that the FDA determined were likely symptoms of the disease itself. While Novartis makes no profit on the drug and consequently will not significantly increase earnings from Coartem, approval of a drug to treat a tropical disease garners a voucher for a speedy review of another drug with higher commercial potential (which could save Novartis millions of dollars). ^[7]

Patent expirations

For a detailed discussion of brand name vs generic medication, see also Brand name vs Generic medications.

Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. The patent period begins when the company begins researching the drug and files a patent with the patent office. After clinical trials, the average patent is only in effect for an additional 11-12 years. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper than brand medication, and the lower cost is often a strong incentive for consumers to choose generic drugs over branded ones. In addition, the presence of a generic alternative may prompt a decrease in the brand name medication's price.

Novartis will have major setbacks in patent expiration in the next five years, including Diovan and Lotrel. However, in comparison to competitors such as Pfizer, Novartis has fewer patents that expire in the near future.

Novartis's generic presence, Sandoz

Novartis also has several generic producers within its corporate umbrella. Novartis has long owned Sandoz, which manufactures generic products. Novartis also recently acquired Hexal and Eon Labs, both generic manufacturers, which it then incorporated into Sandoz, creating a giant generic division. While Novartis pharmaceuticals compete strongly on the branded side of the market, a strong generics division allows them to compete in this market against competitors' branded medication. Novartis is in a unique position to dominate both markets, since it can capture more of the market share than its competitors can through its two-pronged approach. With its position in the generic market, Novartis can also take advantage of competitors' drugs as their patents expire.

Product Diversity

Novartis's focus on cancer and heart disease

For a more detailed discussion on how an aging US population affects pharmaceuticals, see also aging US population.

For a more detailed discussion on how American trends in obesity affects pharmaceuticals, see also Obesity.

Cancer and heart disease treatments each accounted for $5 billion of Novartis's sales in 2007. The cancer and cardiovascular medication markets are both projected to continue growing because of this aging population and a genererally poorer American dietary and fitness habits.

Recent expansion in vaccines

To read more about the effects of an influenza outbreak, see also Influenza outbreak.

Novartis recently acquired Chiron, a vaccine manufacturer, and so it has been able to expand its production and research in this area. In July 2009, Novartis received an order from the United States government for $690 million worth of H1N1 vaccines. Novartis is currently building a new facility to manufacture the vaccines that should be ready by Q4 2009.^[8] On September 15, 2009, the FDA approved Novartis' H1N1 vaccine along with other vaccines from GSK, CSL, MedImmune, and Sanofi-Aventis. Novartis leads the group in terms of orders from the U.S. government, with 45.7% of the total orders.^[9]

New Focus on Biologics

Novartis is moving more and more towards biologics, compounds that mimic substances in the body. Biologics are a sound investment for drug companies because they are generally seen as more resistant to generic competition due to the fact that they are difficult to make/copy. Enbrel, a biologic designed to treat arthritis, had sales of $5.3 billion in 2007. The company currently has 139 such compounds in trials, including 14 in human trials. ^[10]

Comparison to Competitors

Major competitors to Novartis include Merck, Pfizer, and Bristol-Myers Squibb, all large pharmaceutical companies with compatible drugs. For example, Merck has begun production of Januvia, which is in direct competition with Novartis' Galvus. Bristol-Myers Squibb is a leader in cancer medications, and so also poses a challenge to Novartis in this field.

Novartis has fewer drugs up for patent expiration in the next 5 years than the other companies, and its ownership of Sandoz, the largest generic company owned by a major pharmaceutical, allows it to compete on the generic front as well.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[11]

References

1. ↑ Novartis 2008 Annual Report - Sandoz
2. ↑ Novartis 2008 Annual Report - Healthcare Portfolio
3. ↑ MarketWatch. "Novartis drops 10% as dollar strengthens." 16 July 2009.
4. ↑ Novartis delivers strong new product momentum and operational performance in first nine months of 2009
5. ↑ Bloomberg. "Novartis to Combine Heart Pills as Afinitor Cancer Drug Delayed." 19 November 2008.
6. ↑ Bloomberg. "Novartis to Combine Heart Pills as Afinitor Cancer Drug Delayed." 19 November 2008.
7. ↑ Bloomberg.com. "Novartis Malaria Drug Gets Favorable U.S. FDA Review." 1 Dec 2008.
8. ↑ Novartis recieves $690 million order for H1N1 and Novartis' Future
9. ↑ FDA approves four companies' H1N1 vaccines
10. ↑ Bloomberg. "Novartis to Combine Heart Pills as Afinitor Cancer Drug Delayed." 19 November 2008.
11. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction