Investing in research pharmaceutical companies is notoriously difficult, the sector requires large amounts of investment to develop new drugs and the success of pipelines can be extremely difficult to predict. I decided to take a look at some of the largest drug companies and decide which one is the safest long term investment. After doing the research I came up with Novartis and here is why.
Technical comparison to competitors
|Market Cap (Billions)||134||167||179||117||103|
|Dividend Payout Ratio||64%||63%||64%||77%||48%|
Novartis (NVS) has one of the lowest Price to earnings ratio when compared to its peers while also having one of the highest dividends. This makes Novartis very attractive to income and value investors. Its payout ratio is middle of road but has little room to grow it they still want to aggressively fund research and development.
One of the most things that most attracted me to Novartis was their diversification of revenue. While companies like Pfizer (PFE) and Abbot (ABT) are spinning off or selling assets to focus solely on drug research and development Novartis is committed to their generic manufacturing, consumer health, and animal health to keep their revenue stream diversified. Their recent acquisition of Alcon instantly made Novartis the world leader in eye care as well.
|Revenue (Billions)||% of total Revenue|
Sandoz is Novartis' generic manufacturing arm of the company. In 2011 they added over 9.4 billion in revenue and 1.9 billion in profit to Novartis' balance sheet. Sandoz is the second largest generic manufacturer in the world, outselling generic giants Mylan and Watson. Sandoz manufactures generic versions of several best selling drugs such as Prilosec, Zocor, Prograf, and Lovenox. Sandoz is also in the top three in the manufacture of generic injectable drugs. One of the most exciting thing about Sandoz is that they are the leader in the manufacturing of biosimilars. Biosimilars are complex to manufacture and command higher margins compared to other generics. Currently Sandoz commands almost 50% of the biosimilar market, and is has more than 10 currently in development. While the market for biosimilars is currently limited, it is growing extremely fast as patent expirations in the next decade will give Sandoz a huge oppurtunity for increased revenue if they can maintain their market lead. Novartis estimates that by 2020 the market for generic biologics could be worth upwards of 100 billion, giving Sandoz almost unlimmted potential.
Novartis combines their OTC and animal health units into consumer health. Novartis' OTC product line is among the best in the industry competing with the likes of Pfizer and Johnson and Johnson. Their portfolio includes Theraflu, Triaminic, Maalox, Prevacid, Benefiber, Excedrin, and many more. These products all enjoy brand loyalty and brand name margins. Novartis' animal health unit is small but growing, it is a industry leader in aquaculture and is pursuing a purchase of Pfizer's animal health divsion.
When Novartis bought Alcon in 2010 for over 50 billion they immediately became the largest seller of eye pharmaceuticals in the world. While the acquisition was expensive it is proving to have been a wise investment. Alcon enjoys impressive 34% profit margins on its product. They also are enjoying impressive growth, sales in 2011 were up over 10% and operating income increased 24% when compared to 2010.
Like all large pharmaceutical companies Novartis' pipeline is key to the future success of the company. With the failure of Tekturna, and Diovan going off patent this year Novartis needs a blockbuster or two to offset their sales loss. The good news for Novartis shareholders is that Novartis has invested heavily in Research and Development over the years and has a very strong pipeline with over 130 projects in development. Some of the most promising and interesting include:
This drug is currently in phase 3 trials and could be on the market by 2013. It is used for hospitalized patients with acute heart failure and given intravenously. RLX030 is a novel drug that works by mimicking human relaxin-2.
Developed for a variety of conditions, Sotrastaurin is undergoing Phase II trials for the treatment of psoriasis, as well as liver and kidney transplants. Even if the studies are favorable Sotrastaurin wont be on the market for at least a few years. The drug is a protein kinase C inhibitor which affects early T cell activation.
Mavogluran works by blocking a receptor on the brain cell (metabotropic glutamate receptor 5). It has the potential to be used for a variety of mental diseases including Fragile X, autism, and levodopa-induced dyskinesia(Parkinson's disease). This drug could be approved by late 2013.
Developed to treat hypertension and heart failure, LCZ696 has potential to be a big seller for Novartis. As previously mentioned Diovan, which had over 6 billion in sales last year, will be losing its patent protection this year. LCZ696 has the potential to replace it as a key cog in the treatment of cardiovascular diseases. It is another novel drug that works buy inhibiting both angiotensin II and neprilysin. A study comparing LCZ696 to Valsartan showed it significantly improved blood pressure and was well tolerated.
Disclosure: I am long PFE.