Is Novartis' Strategy a Winning One?http://www.fool.com/investing/general/2014/03/20/is-novartis-strategy-a-winning-one.aspx Peter Stephens
March 20, 2014
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?
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-