Innovation and Growth at this Global Pharmaceutical

By Andrés Cardenal - June 26, 2012 | Tickers: JNJ, NVS, SNY | 0 Comments

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Pharmaceutical companies have been plagued with concerns over growth opportunities in the following years. Patent expirations and a lack of new blockbuster products to replace them have created some serious difficulties in the sector. Also, the regulatory environment is permanently debated and subject to change in many countries, so investors have good reasons to be careful when choosing companies in this industry.

At the same time, there are some very powerful tailwinds which should benefit the best companies in the sector over the middle and long term. First of all, technological possibilities for innovation and new product launches have never been better, the world needs more and better drugs of every kind, and technology is there to make it possible.

Demographic trends also look very promising for the sector as the world population is growing older, and life expectancy is getting longer too, which means increasing demand for all kinds of medical treatments over the following years. The induction of countries like China and India to the global capitalist system will also mean growing demand from big masses of the world population which didn´t have access to these kinds of products before their incorporation into the global trade system.

One company which seems to be doing a nice job on planting the seeds of future growth is Novartis (NYSE: NVS) This global pharmaceutical operates in four different lines of business: branded pharmaceuticals, generics, vision care and consumer products. In May of this year Novartis has announced the acquisition of Foguera, a main dermatology company which is expected to add substantially to revenues and earnings at Novartis.

Novartis has done some interesting acquisitions in the past to fuel growth, the acquisition of Chiron in 2006 launched Novartis into the vaccine business which is growing nicely. Novartis first bought a 25% initial stake in Alcon –eye care – during 2008 from Nestle, another 52% was acquired in 2010 and Alcon was finally fully acquired by Novartis in April 2011. This move was a smart one, by doing it in different phases Novartis had enough time to evaluate the convenience and gradually assess the growth opportunities coming from Alcon. Vision care products are now the second largest segment at Novartis, generating 17% of sales and 21% of operating profits.

The ability to identify good acquisition targets and integrate them efficiently into the company´s business is one of the most important challenges faced by the sector right now. Most big pharmaceuticals have deep pockets and a wide geographical reach, and that´s why acquisitions make a lot of sense as a growth strategy, but scale considerations are very important when evaluating acquisitions prospects.

Sanofi (NYSE: SNY) and Johnson and Johnson (NYSE: JNJ) had to sell Dermik and Ortho respectively in the skin care business since they seemed to lack the economic scale to achieve favorable returns. The acquisition of Foguera by Novartis could be an interesting test to see if the company is being smart enough when choosing acquisitions for further growth.

But make no mistake here; although acquisitions are certainly one interesting avenue for expansion, Novartis has many other resources to keep growing in the future. The company´s generic business, Sandoz, provides the opportunity to grab a portion of the billions of dollars in competitive branded products losing patent protection over the next 10 years. There are some considerable advantages in operating both in the branded and generic businesses in this industry; the company is less exposed to legal or regulatory changes which could affect the competitive situation between branded and generics, for example.

Also, Novartis has an industry leading late stage pipeline of new products which could materially effect growth over the next years. The company is losing patent protection for its biggest drug Diovan this year, which impacts almost 10% of Novartis´s total sales, but few companies have such a deep pipeline of products with blockbuster potential to replace expiring patents. Gilenya for multiple sclerosis, Galvus for diabetes, Arcapta for respiratory diseases and Afinitor and Tasigna for cancer are some of the products which have been identified as having enough potential to become blockbusters in the future.

Novartis is working heavily on new Cancer treatments which incorporate genetic information about each patient in order to provide drugs and treatments which are especially targeted towards each individual and based on their particular genetic information. From the company´s website: We believe that treatments should become targeted and based on an understanding of a patient’s unique genetic make up and individual response to a medicine. This kind or research is one of the most promising in Cancer treatment, and Novartis has already developed many successful drugs used by cancer patients all over the world.

Diversified operations, a strong focus on innovation and development, and a solid track record at acquiring companies and integrating them successfully make Novartis one of the most innovative and dynamic pharmaceuticals in the world. With a P/E ratio near 15 and a dividend yield at 4.5%, shares of Novartis seem very reasonably priced and hence positioned to outperform the markets in the long term.

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