Novartis (NVS) is a large global pharmaceutical company headquartered in Switzerland. The company was formed in 1996 through the merger of Ciba-Geigy and Sandoz. Novartis generated approximately $59 blillion in revenue and $12 billion in operating profit over the past 12 months.
Novartis operates in five segments: Patented Pharmaceuticals ($30B in 2010 revenue), Vaccines and Diagnostics ($3B in 2010 revenue), Sandoz (generic pharmaceuticals, $8.5B in 2010 revenue), Consumer Health ($6.2B in 2010 revenue) and Alcon (77% stake, $2.4B in 2010 revenue). Alcon is an eye-care products company that Novartis recently purchased from Nestle and merged in to the Novartis group in April of this year.
Novartis appears on GuruFocus’ Undervalued screener and is broadly owned by a variety of gurus.
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Like many pharmaceutical companies, Novartis is suffering from the twin problems of reduced pricing power throughout Europe due to austerity programs and expiring patents on best-selling drugs.
Exposure to Eurozone
As part of their austerity program, either forced or entered in to voluntarily, many countries are making cutbacks on healthcare expenditures. Last year Novartis faced 3% to 27% cuts in price in Greece, 6% to 16% cuts in Germany, 11% to 23% discounts in Turkey, and 7.5% discounts on brand name pharmaceuticals and 25% discounts on generics in Spain. Management (and indeed the whole world) expects forced price cuts to be in effect and perhaps deepen for the foreseeable future.
(Source: Novartis 10-K)
If the eurozone currency union were to break up Novartis is well situated from a debt perspective. It only has EUR 1.5B of its debt denominated in euros. The rest of the debt is primarily denominated in Swiss francs and U.S. dollars. While a break up would certainly wreak short-term havoc across Europe, Novartis’ solvency wouldn’t be in question.
Products and Pipeline
Like all pharmaceutical companies, Novartis is dealing with the loss of patents on some of its best-selling drugs. The largest loss is Diovan which expired in the EU and expires in the U.S. next year and in Japan in 2013. As one of the largest healthcare companies in the world, Novartis is able to absorb the blow better than most as Diovan only made up approximately 11% of NVS’ sales. Additionally, NVS’s R&D efforts look to be paying off as recently launched products continue to offset losses to generics as shown below.