Is Novartis' Strategy a Winning One?

Novartis has changed to a new strategy. Is it likely to be a successful one?

Mar 20, 2014 at 9:30AM

Shares in Novartis (NYSE:NVS) have underperformed the S&P 500 over the last five years, with the company's bottom-line also disappointing investors. Indeed, over the period, net profit has increased from $8.2 billion in 2008 to $9.3 billion in 2013, which equates to an annualized growth rate of under 3%.

During that time the company, under the leadership of Daniel Vasella, diversified its operations to include vaccines and generic drugs. The thinking was that the company would be better insulated from the peaks and troughs of the pharmaceutical industry, where patent expiry can cause sales to plummet.

With Daniel Vasella having recently been replaced as chairman by Joerg Reinhardt, Novartis is seeking a new direction. Is the new strategy set to be a winning one?

Patent expiry
As with many of its pharmaceutical peers, Novartis' list of blockbuster drugs is undergoing a number of patent losses. For instance, breast cancer drug Femara, has faced generic competition since 2011 when its active ingredient, letrozole, saw its patent expire in the US and in major European countries. Its sales fell by 12% to $384 million in 2013. In addition, patents protecting the Sandostatin LAR formulation, the long-acting version of Sandostatin (which represents the majority of Sandostatin sales), expire in 2014 and beyond in the U.S., but expired in July 2010 in key markets outside the U.S. Sandostatin was Novartis' fifth biggest selling drug in 2013, with nearly $1.6 billion of sales.

Seeking growth
Therefore, the previous strategy to diversify the business away from pharmaceuticals to include generics and vaccines seemed like a logical one. However, in an attempt to stimulate growth, new management is apparently seeking to divest (or pursue joint ventures) with Novartis' over the counter drugs, animal health and vaccines businesses. Indeed, the first action to reduce the size of Novartis' offering took place in November 2013, when it sold its blood-transfusion diagnostics business to Spanish company Grifols for around $1.7 billion.

The main reason for the potential divestments is that Novartis' new management is focused on building businesses where it can achieve scale and, more importantly, generate growth to counter the effects of patent expiration. This strategy seems to be somewhat similar to that currently being pursued by Johnson & Johnson (NYSE:JNJ), with is focusing on building its divisions that are set to experience above-average growth, while those that are deemed slower growth are divested. The most recent example of this was the sale of Johnson & Johnson's blood testing unit to Carlyle Group, a private equity firm, for just over $4 billion in January 2014.

Of course, Novartis remains very much focused on pharmaceuticals, with the division accounting for 56% of total sales in 2013. Therefore, even if it were to scale back its other divisions, it would likely remain more highly diversified than sector peer Bristol-Myers Squibb (NYSE:BMY). Although Bristol-Myers is also moving away from being a producer of mass-market drugs toward being a more nimble, specialist, niche player, it will continue to remain focused on pharmaceuticals. A major step that Bristol-Myers Squibb took recently toward reaching this goal was the sale of its share of the diabetes joint alliance with AstraZeneca for $2.7 billion, which will allow the capital to be reinvested in the company's research and development spend to stimulate its drug pipeline.

A logical strategy
While the potential changes at Novartis may appear to be significant, they may be less important than at first sight. For instance, the consumer health division (which includes animal health and over the counter medicines) accounted for only around 7% of sales in 2013. Indeed, despite previous management's desire to diversify, Novartis remains highly dependent upon its pharmaceutical pipeline to stimulate future growth.

Therefore, while a strategy shift may mean less stability in future (as the company relies to a greater extent on the ups and downs of pharmaceuticals for sales), it may not end up being the sea change that it appears to be. As a result, it seems as though new management's new strategy is logical and could turn out to be a winning one. Focusing resources on countering the patent expirations that have the potential to be the biggest drag on growth could mean that shares deliver an improved performance in future.

2014's must-have stock
As Novartis shows, there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Peter Stephens has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers