Novartis(NVS), the Swiss drug manufacturer, recently discussed its long-term strategy and gave an overview of the growth benefits from the Alcon merger.
In early April 2011, Novartis completed the merger with Alcon, following which the latter became the second-largest division within Novartis. Alcon division includes Novartis’ CIBA Vision contact lens and lens care business and select eye care medicines (excluding Lucentis) besides the legacy Alcon business.
Alcon is expected to position Novartis strongly in the eye care segment and provide a solid growth platform. Novartis expects to generate annual cost synergies of $350 million by 2013, higher than prior expectations of $300 million. The Alcon segment is expected to grow in the high-single to low-double-digit range and is expected to provide operating leverage and synergies, which will subsequently expand the margins.
Novartis is set to see a very large portion of its pharma revenues eroded via patent expiries from 2011 onward. The company’s biggest growth driver, hypertension medicine Diovan, is already facing patent expiration in Spain. Further, Diovan generics are expected to enter in other European countries soon. The US patent will expire in September 2012. Diovan’s main competitor, Merck’s (MRK) Cozaar, has already gone generic in the US and major European markets.
The recently launched products need to generate sufficient revenues to bridge the gap caused by generic erosion. These newly launched products like Lucentis, Tasigna, Gilenya and others demonstrated solid volume growth in the second quarter of 2011 and accounted for almost 25% of total sales, which were up 46% over the prior-year quarter. Management also aims to increase penetration in the emerging markets where the healthcare requirements are growing. Productivity improvements have already added more than $1.2 billion in savings in the first half of 2011. The savings are expected to exceed the 2010 levels of $1.9 billion.
Overall, management believes that the new products, the company’s wide revenue and geographic diversification, and continued productivity improvements will help mitigate the negative impact from generic erosion and maintain robust margins.
Our Recommendation
Currently, we have a Neutral recommendation on Novartis. The company carries a Zacks #2 Rank (“Buy” rating) in the short run. Though pleased with Novartis’ wide range of products and its efforts to diversify further, as is evident by the acquisition of the eye-care company Alcon, we prefer to remain on the sidelines due to the imminent patent cliff faced by the company.
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