Companies that provide consumer goods are always at the mercy of the tastes and spending power of the end user. Companies that provide goods that consumers see as vital are less likely to suffer from the whims of consumers and their ability to pay. Drug companies fall into the category of providing essentials for everyday living for most consumers and are not as vulnerable to economic factors. Novartis (NVS) is one such company. Its performance has been solid in the last year and I am looking at what the future may hold.
Novartis encompasses a group of multinational companies with its primary concentration in pharmaceutical products. Its various operating divisions offer pharmaceutical medications, vaccines, surgical equipment, generic pharmaceuticals, over the counter medicines and veterinary products and medicines for farm and companion animals.
In the second quarter 2012, Novartis recorded net profits of $2.73 billion, an increase of .1% over the same period last year on revenues that decreased 4.2% to $14.3 billion. The decrease in revenue is a result of its highest revenue product in 2011, Diovan a blood pressure medication losing its patent protection. The second quarter had pharmaceuticals showing good underlying growth regardless of patent expiration in Europe with net sales of $8.3 billion from 9% growth in volume. Excluding the patent expiry on Diovan, net sales grew by 8%.
The company believes that its new breast cancer treatment Afinitor may become the next billion dollar drug. Recently launched human medical drugs and products provided $4.1 billion in the second quarter or 29% of revenues compared with 25% in the same period last year. Sales from medical equipment, devices and consumer products in its Alcon division propped up earnings in the quarter. Emerging markets grew by 6% and accounted for 24% of the company's revenue in the quarter. Quality control issues at its Lincoln Nebraska plant in January caused the suspension of production for a number of over the counter brands and a recall of some products. These issues were partially responsible for a 24% drop in sales in the second quarter.
Novartis has a 6% world market share in vaccines, a business where pricing power is important as there are fewer players. Its generic segment offers exposure to billions of dollars for drugs going off patent. In particular, its dermatological generic operation in the Sandoz division offers exposure to a market that had more than $2 billion in U.S. sales in 2011 and double digit growth in the last five years.
Because Novartis operates across many segments in the human and animal drug and consumer markets, it has the ability to provide greater stability in earnings than companies that have limited concentration in pharmaceutical and consumer segments. While the loss of patent protection creates a gap in earnings, much of that is buffered by the pipeline of new drugs getting approval and coming to market. The company has made strategic acquisitions to help it grow and it has made every effort to integrate the acquisitions without having a negative impact on income from acquisition costs. Novartis strategy of sustainable growth through diversification across many areas of the health care industry has seen it deliver consistent results and increased value to shareholders since its public offering in 1996.
Novartis trades at around $60. It has a 52 week range of $60.65 and $51.20. The price earnings ratio is 16.66 and earnings per share are $3.54. It pays a 4.1% dividend. The company has total cash of $6.11 billion and total debt of $22.63 billion. The book value is $26.52. Less than 1% of the float is short.
Its peer companies show similar statistics.
Pfizer (PFE) trades at around $24, near its 52 week high of $24.49. It pays a dividend of 3.7% and has a book value of $10.64. Its total cash position is $24 .34 billion with $35.59 billion in total debt. The float is less than 1% short.
Bayer AG (BAYZF.PK) trades around $83.49 and pays no dividend. It is trading over its previous 52 week high of $78.43. It has total cash of $2.51 billion and debt of $12.51 billion. Its book value is $28.25.
Eli Lilly (LLY) trades around $46.70 putting it over its previous 52 week high of $45.45. It pays a dividend of 4.20%. It has total cash of $5.26 billion total debt of $5.51 billion and a book value of $12.79.
Johnson & Johnson (JNJ) trades around $67.90. It pays a dividend of 3.6% and has a year high of $69.75. It has total cash of $16.92 billion total debt of $17.56 billion and a book value of $21.97. The float is 7.6% short.
Merck (MRK) trades around $44.40, near its year high of $45.17. It pays a dividend of 3.8%. It has total cash of $17.45 billion total debt of $18.98 billion and a book value of $18.16. The float is 1% short.
Sanofi (SNY) trades around $42.40 and has a year high of $42.45. It pays a dividend of 4%. The company has total cash of $5.85 billion, debt of $20.39 billion and a book value of $26.88 per share. 1% of the float is short.
GlaxoSmithKline (GSK) trades around $45.86, near its 52 week high of $47.48. It pays a dividend of 4%. The company has total cash of $12.10 billion and debt of $27.56 billion and a book value of $4.58. The float is less than 1% short
In times of economic strife, investors turn to gold, oil and drugs. Drug companies have performed well in the past year. All the aforementioned companies are trading at or exceeding previous year highs and all have relatively small short positions. All except Bayer pay a dividend and the percentage dividend rate is similar with all of the companies regardless of share price. All of them trade within a range of two to four times book value.
Merck, Johnson & Johnson, Eli Lilly and Pfizer all have better cash to debt positions than Novartis. Right now, debt is cheap and as long as it remains cheap, Novartis has very few worries.
All of the companies have adequate debt coverage for their current liabilities. Drug companies with less debt may be what differentiate those drug companies that will outperform the market from those that will perform in line with the market.
I believe that the shares of the companies mentioned here will continue to perform well in the coming months. Novartis has a lot of resistance at $60 and this is expected to continue until certain macro and market specific factors subside - eurozone, slowdown in emerging markets and generic interference. Novartis has covered off a lot of these risks, and like all of the other companies mentioned here, has performed well, despite economic conditions and the shutdown of its Nebraska plant. I like Novartis and would hold it if I owned it. I like all of the companies I have mentioned. I would rather invest in a lower priced, lower debt company like Pfizer or Merck if I was adding a drug company to a portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.