Buy Report: Novartis AG ADR (NYSE: NVS) prepared 20060417
Key Stats:
Last Close: $55.81
Market Cap $Mil: 130,368
Sales $Mil: 35,526
About Novartis:
- Latin for “New Arts,� Novartis is a Switzerland-based manufacturer of pharmaceutical, health-care, and vision products. The firm was formed in 1996 by the merger of Ciba-Geigy and Sandoz. Areas of specialty in branded drugs include oncology and cardiovascular products. Consumer health-care brands include such familiar names as Ex-Lax, Maalox, Lamisil, and Gerber. Its Ceiba-Geigy division makes disposable contact lenses as well as health products for domesticated animals and livestock.
- Novartis is the world’s fourth-largest pharmaceutical company
The Novartis Mission Statement:
“We want to discover, develop and successfully market innovative products to cure diseases, to ease suffering and to enhance the quality of life.�
“We also want to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and work in our company.�
YoY Financials (in USD millions):
2005 2004
Net sales 32,212 28,247
Operating income 6,905 6,289
Return on sales (%) 21.4 22.3
Net income 6,141 5,601
Research and development 4,846 4,077
R&D as % of sales 15.0 14.4
Free cash flow 4,673 3,301 - yeah, that’s 42%!
Number of employees 90,924 81,392
Three fundamental trends driving demand for healthcare services and medicines:
1) The aging of the world’s population, as the incidence and the prevalence of disease rise with increasing age;
2) Ongoing technological discoveries and developments, which lay the foundation for innovative pharmaceutical products; and
3) Rapid economic growth in countries such as China, India, and Russia, leading to improvements in the provision of public healthcare.
The Divisions of Novartis:
1) Pharmaceuticals, which comprises the activities in prescription drugs
2) Sandoz, which comprises the activities in generic prescription drug space
3) Consumer Health, which comprises the activities in OTC, Animal Health, Medical Nutrition, Gerber, and CIBA Vision
4) (PENDING) Vaccines and Diagnostics, which will be created upon the acquisition of Chiron Corporation.
Reasons to like Novartis
- Novartis is the only company with leadership positions in both patented and generic pharmaceuticals. They are extremely well-diversified.
- Novartis employs a different strategy than most major pharmaceutical companies who are typically in search of the next blockbuster drug – Novartis covers nearly every base of the pharmaceutical market
- They have a considerable biotech interest with a 33% stake in Roche Holdings which in turn controls 54% of Genentech (so by proxy, they own 18% of Genentech).
- Novartis faces only one major patent expiration for the rest of this decade.
- The company is stacked with new opportunities. Not only has Novartis launched more drugs globally than any other firm in the past five years, it’s on pace to do the same for the next five years. The company currently has 75 projects in R&D, 31 of which are in final phase 3 trials.
- Novartis is the world’s leading maker of generic drugs. In February of last year, they acquired Hexal (Germany’s second-largest generic drug firm) and a 67.7% stake in Eon Laboratories (one of America’s biggest generics suppliers). The reason is simple. The generic market is estimated to be a $100 billion market by 2010. Instead of watching profits go to bottom feeders, Novartis has brought them in-house. While competitors watch profits g to someone else when their patent expires, Novartis simply will roll its expiring drugs into its own generic production line. Margins decrease but they capture more of the sales.
- With the buyout of Chiron pending, Novartis is poised to diversify yet again. Despite having a history of low profits and high risks in the vaccine industry, the competitive landscape is changing. The profit margins are almost as high as traditional drugs but there is less marketing. Gross margins for vaccines are now close to 90%, with just a few cents on the dollar allocated to marketing. By way of comparison, gross margins for traditional drugs are between 95 and 98%, but with marketing costs averaging 25 cents on the dollar. Sales in vaccines are expected to grow 20% for the next 5 to 7 years (well above the 5 to 8% anticipated for traditional drugs). With more than 500 vaccines in late-stage trials this year and strong demand by governments worldwide, Novartis’ acquisitions will likely deliver significant revenue growth that other majors will lack.
- China – Novartis currently ranks in the top-five drug sellers in China (with sales growing 14% YoY to top $180 million). Sales are expected to be high going forward as China anticipates growth of the market to be doubled in the next five years. Novartis has doubled its China sales staff to benefit from the move, and its launched 10 new drugs in China.
- Fundamentals: For Q4, net income rose 18% to $8.42 billion; Sales of its five most popular drugs all rose by double-digits; ROIC was near 18% while cost of capital was 9%; ROIC of 15.6% during last 5 years; and based on forward P/E, shares are trading at a discount of roughly 20% to the company’s 10-year median.
- Industry leading pipeline – more than 50 projects in phase 2 or beyond`
- Morningstar reports that Novartis will likely own more than a quarter of the global market for cancer-fighting drugs within the next several years. With global demographics pointing to an aging population, Novartis owns a huge chunk of the space.
- Swiss-franc denominated – one of the strongest, most stable currencies in the world - provides a valuable dollar hedge and some international diversification.
- Financial position - $11 billion in cash reserves and virtually no debt. AAA-rated debt.
- Dividend – 1.6% yield. Novartis also actively buys back its own shares – $2.4 billion worth of repurchase in 2005.
What the Bears say:
- Novartis has made sizable acquisitions recently in generic drugs and OTC consumer products. While boosting growth, these businesses produce lower ROIC than branded pharmaceuticals.
- Like all branded pharmaceutical companies, Novartis faces considerable threat of extended drug approval times, pricing pressure from managed-care industry, and political pressure to rein in drug costs.
- Integration risk of Hexal, Eon, and soon Chiron.
- Substantial exposure to the European pharmaceutical market, which has been experiencing sluggish growth and downward pricing pressure.
Synopsis:
With an industry-leading pipeline, diversified revenue streams and a fortress-like financial position that includes a AAA rating and $14.5 billion in cash and short-term investments, this is one pharmaceutical stock poised for solid and continued share appreciation. Great products, soaring revenues and large new markets.
Links: http://www.novartis.com/ - Novartis Homepage
http://finance.yahoo.com/q/pr?s=NVS - Company Profile on Yahoo Finance
$56.49 (05/25/06)
