Thursday 18 January 2018

Canny Novartis trims sails as Big Pharma faces storms

'Click to enlarge'
'Click to enlarge'

John Lynch

For many, the predictions that the world population will increase in the coming decades by a billion is a scary one. For many more, the forecast that the number of people over 60 will grow by 60pc is an even more challenging notion.

But in business, problems present opportunities and that is the way large healthcare corporations like the huge Swiss-based multinational Novartis is looking at the population surge.

But the story common to the entire Big Pharma sector is a complicated one. It must not be unduly dependant on its latest blockbuster drug and, importantly, it must keep well clear of scandals.

Novartis has had trouble recently under both these headings. In addition, the take-up of new products is not as easy as it once was.

Healthcare payers, as has been seen in this country, are no longer willing to stump up what the drug firms demand. None of this is going to change soon, but the exploding numbers of older people means that Big Pharma at least has the numbers on its side.

It is 20 years since Novartis was formed, following the merger between Swiss rivals Ciba-Geigy and Sandoz. Novartis is one of the largest healthcare companies in the world, and its drug range includes heart, cancer, dermatology, respiratory, infectious diseases and eye-care products.

It has sales of $51bn (€45.6bn), operates in 180 countries, employs 120,000 and has a market value of SF211bn. It also holds a one-third stake in its competitor, Roche, the result of an unsuccessful takeover bid.

The company has three separate divisions: pharmaceuticals, eye care and generics. Pharma is the largest division, with sales of over $30bn and $9.4bn in earnings.

Its eye-care business Alcon, while a global leader in contact lenses, is under-performing and is being restructured. If the turnaround falters, this business could be dumped.

Sandoz, the company's generics division, is one of the world's largest producers and had a solid year, contributing $9bn in sales.

The US is Novartis's largest market, with 36pc of sales. Europe follows with 30pc, Canada and Latin America have 8pc. Growth has moderated particularly in China, India and Brazil.

In spite of the economic slowdown in China, the pressure on prices and compliance, the group remains optimistic that growth in China will continue to outstrip that of Europe.

Novartis is reshaping its business and undergoing a period of transformation. It is narrowing its sprawling product range, restructuring and cutting costs. Last year, the company swapped its vaccine business with GSK, receiving its cancer business in return. Both have also merged their over-the-counter businesses, setting up a new entity, GSK Consumer Healthcare, of which Novartis owns 36pc.

In its drive to reduce costs, the company has quit production sites in Germany, France and Brazil, is downsizing its Irish operation in Cork and plans to restructure another 20 sites.

The company is facing a battle to restore investor confidence after a series of setbacks. Its sales at $51bn and net profits of $11.5bn are resilient in spite of the slow take-up of its new heart drug. The market is also uneasy about investigations into its practises in China, US and South Korea, as well as the one-year suspension from the Japanese market for manipulating clinical trial data. Novartis's shares trade at 80SF, down from a 10-year high of 101SF last year (it reports in US dollars).

The group is trimming its sails in an industry that is being buffeted elsewhere. The industry can no longer count on rapid take up of new products. Healthcare payers have become more aggressive in controlling their drug costs. In addition, there is also consolidation among insurers and healthcare providers, giving them greater bargaining powers.

However, with Novartis we get limited surprises, a good defensive share and a stable currency. Worthwhile considering.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned

Irish Independent

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