Novartis AG (NVS) is a global healthcare company based in Switzerland with five key business segments: patented, prescription medicines, eye care, generic medicines, over-the-counter-medication, and vaccines and diagnostics. These business segments are supported by Novartis Institutes for BioMedical Research, its R&D operations.
Novartis announced earlier this year the sale of its animal health business to Eli Lilly (LLY) for $5.4 billion, the acquisition of GlaxoSmithKline’s (GSK) oncology products for $14.5 billion, while also selling its vaccine business to GSK in the same transaction for $7.1 billion. GSK and Novartis also agreed to combine their consumer business in a joint venture. To say the least, it was a very busy first quarter for many within the pharmaceutical industry.
In an industry struggling for growth, the portfolio shakeup will position Novartis’s platform to take advantage of its late-stage drug pipeline, propelling further growth. In addition, many of the new drugs in development are anticipated to be breakthrough therapies. Novartis’s strategy for the future is to focus on three main areas: patented pharmaceuticals, eye care and generic drugs. Novartis’ diversified business platform will allow it to reap windfall profits on the high-margin patented pharmaceuticals being developed, while also minimizing risks with its complementary businesses and leverage synergies to increase total company margins.
Aging Population Is a Plus for Novartis
The world’s population is getting older — and with age comes a greater percentage of the populations with increased risk of various ailments. From 2013 to 2025 the world’s population will increase by 1 billion; it will have 500 million more people 50 years or older; and of those that are afflicted by a disease, 70% will be chronic. These kinds of statistics bode well for anyone currently investing in the healthcare industry.
This market growth has yet to show in Novartis’ business. In the first quarter of this year, Novartis reported sales increased 1% to $14 billion and operating income of $3.5 billion, an increase of 22% from the same period last year. The second quarter was a little better, with sales up 2% to $14.6 billion and operating income up 6% to $3 billion. Novartis continues to produce operating income faster than sales, but that can only be accomplished for so long. Novartis’ portfolio transformation will not be complete until at least early next year, at which time investors should be on the lookout for more rapid revenue growth.
NVS Stock Is Fairly Valued
Novartis has a strong drug distribution business, enjoys significant economies of scale through a complementary but diverse platform and has a portfolio of high-margin products that are protected by patents allowing it to reap short-term economic profits and fund new therapy R&D. With a current trading price of around $94 and analyst median price target of $96, I would hold off buying new shares until the effect of the portfolio realignment become clearer next year.
But if you are a current holder of NVS stock, I don’t think this is the time to sell. With a 3+% dividend yield and several breakthrough therapies planned to be announced in the coming months, you’ll want to re-evaluate Novartis’ growth potential after those announcements are made.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
