There is a lot to like about Novartis (NVS). The company is trading near its 52-week high of $60.65 and annual sales grew by over 15%. The company pays a 4.1% dividend and has several new drugs in the development pipeline for eventual FDA approval and commercialization. However, its share price is currently overvalued when compared to analogous pharmaceuticals, and new competitive threats are emerging that could cut deeply into the company's market share. Furthermore, revenues decreased 4.2% in the second quarter of 2012, in addition to declining EPS over the past two fiscal years. The company's earnings are expected to increase a nominal 2.5% in 2013, over 4% less than the industry average.
While these negative financial indicators are concerning, perhaps the greatest risk to Novartis is the emergence of new competitors to some of the company's most successful products. For example, the University of Mississippi presented efficacy data at the prestigious American Heart Association High Blood Pressure Research Conference showing that Chromadex Corporation's (CDXC.OB) patented pTeroPure® (pterostilbene) compound reduces blood pressure in adults. Some investors may dismiss this as clinical trial data. However, it should be noted that the pTeroPure ingredient is already commercialized in ChromaDex's line of dietary supplements called BluScience, which is available nationwide in more than 17,000 drugstores and wholesalers.
This new product could be a direct threat to Diovan, Novartis's flagship product which accounts for $5.7 billion in annual sales. In addition, Diovan is also losing its patent protection, leaving sales vulnerable to generic products. While Diovan is a drug with many potential negative side effects, pterostilbene is a natural ingredient found in blueberries. Clinical trials have found the ingredient to be safe and highly tolerable for patients. Studies conducted on pterostilbene have led researchers to believe that it also yields benefits to heart health, cognitive function, anti-aging, weight loss, and other metabolic disorders. While there is certainly an argument to be made that doctors will continue to prescribe Diovan, it must be recognized that a multi-function product such as pTeroPure could significantly cut into Diovan sales, as doctors seek to promote overall health as well target reduce blood pressure reduction.
There are competitive threats to other Novartis products as well. This month, Pfizer (PFE) received FDA approval for Bosulif, a drug utilized to treat chronic myeloid leukemia. Analysts expect Bosulif to cut into Novartis's market share, in which its treatment options, including Tasigna and Glivec, generate annual revenues in excess of $700 million.
Also this month, the FDA granted approval to Sanofi's (SNY) Multiple Sclerosis (MS) treatment Aubagio, joining the Novartis drug Gilenya as just the second oral treatment for MS. In its first quarter on the market, Gilenya generated $182 million in sales; however, the pending commercialization of Aubagio will cut into future sales and limit the product's ceiling.
With increasing competition and substantial new risks for its flagship product Diovan, Novartis could see gross sales dip further in the second half of 2012 and beyond. Furthermore, there are many other reputable pharmaceuticals with similar financial indicators, which are trading for much cheaper. These companies are Pfizer, Sanofi, Merck (MRK), and GlaxoSmithKline (GSK) and they pay out a comparable dividend - one of the traits that make Novartis so attractive to investors - but have better cash to debt positions. In this writer's opinion, investors should exercise caution with any plans to buy or hold Novartis stock.
Additional disclosure: The writer is not a licensed broker or investment adviser and therefore cannot recommend that you buy, sell, or hold any security. While every attempt was made to verify the information in this report, much has been derived from public sources and cannot be guaranteed for accuracy.