Valuation at Novartis

International University of Japan

Graduate School of International Management

Financial Statement Analysis

Case write-up

Valuation at Novartis

Group F:

- Bache, Mouhiyidine        (2B5007)

- Vidanakankanamge, Iresha Dilhani        (2B5061)

- Nie, Rui        (2B5041)

- Ntindekure, Medard        (2B5042)

-Kyosuke Nakamura        (2B6034)

February 22, 2017

EXECUTIVE SUMMARY

Novartis Pharmaceuticals Corporation researches, develops, manufactures, and markets medicines and treatments for helping patients and improving patient care. It offers prescription drugs to treat various diseases and conditions, including cancer, cardiovascular….

The company also provides patient assistance programs to manage diseases and conditions.

Novartis Pharmaceuticals Corporation was formerly known as Sandoz Pharmaceuticals Corporation and changed its name to Novartis Pharmaceuticals Corporation in March 1997. The company was incorporated in 1968 and is based in East Hanover, New Jersey with additional offices worldwide. Novartis Pharmaceuticals Corporation operates as a subsidiary of Novartis AG.

1. Summarize characteristics of the pharmaceutical industry. Describe recent (as of early 2007) trend in the industry which might work as an opportunity or a threat to a company like Novartis.

<Characteristics>

Unlike others industries, the pharmaceutical industry is an industry replete with contradictions. It is considered by the public in opinion surveys as one of the least trusted industries. It is characterized by the following major characteristics:

•  Riskiest business in which to invest money

It requires an upfront big investment in research and development as well as multiples approvals in from regulatory authorities order to get access to the market for a developed drug. Only few new drugs make it to the market and failure means total loss as there are zero assets available to offset the losses.

•  Patent system

The huge upfront investment is protected by the patents system which ensures innovating companies for a limited period of time, the exclusive rights to sell the drug. As the patents have a limited time, generic pharmaceutical companies enter the market as soon as the patent expires and lead to a dramatic reduction in price.

• Dominated by few big pharmaceutical companies (monopolistic competition)

The pharmaceutical industry is dominated by a few number of big multinational who enjoy the exclusivity of the markets when their drugs are still under patents. These companies are mainly AstraZeneca, GlaxoSmithKline (GSK), Eli Lilly, Merck, Novartis, Roche and Pfizer.

• Strong growth, return to shareholders sales and market capabilities

The industry has been successful in creating new innovative drugs to address new patient needs. And has a reported revenue and earnings growth of 11% per year and an average return on book equity of 17.5%. Pharmaceutical companies spend 30% of sales on sales and marketing costs using sales reps and organizing conferences, dinners, direct appeal to patients and other events to enable sales reps to spent time with doctors.

• Insurance coverage for medications

Another important industry characteristic is the availability of health insurance coverage for prescribed medications.

• Opportunities for Novartis

• Market increase

The increased awareness by politicians in USA of the need to change the healthcare system in order to solve the dual problem of large uninsured population and increased cost of health. This could result in increased access to health care for the population and pharmaceutical companies including Novartis could benefit from these changes.

• Mergers and acquisition and outsourcing

Due to the increase in time and cost of development of a successful product, the pharmaceutical companies need to take advantage of synergy between the partners to enable staff and cost reductions to be made. Outsourcing R&D can be used as it contributes to cost reduction.

• Invest in generics companies

As generic company’s share of market keeps increasing, investing in these companies will help

• Threats

• Small space for innovation

The industry is becoming less productive in discovering and commercializing new drugs to replace those going off the patent. Drug development costs have drastically increased and only 0.08% of developed drug reach animal testing.

• Increased regulatory oversight and R&D costs.

The regulatory oversight increased control mechanisms in order enhance safety which increase the time for a drug to reach the market hence reducing the patent time and potential benefits. The R&D costs in terms of dollar and percent of sales increase is a threat to Novartis.

• Competition from generic developers companies

The increase of generics companies selling drugs at 30% to 90% discounts relative to prices of brand-name drugs prior to patent expiration and lose more than 80% of its volume of sales to generics after the first of patent’s expiration.

• Intellectual property abuse and counterfeiting

In 2006, the National Association of Boards of Pharmacy (NABP) reported that the prevalence of counterfeit medicines can range to over 10 percent of the drug supply globally.

2. Evaluate Novartis’ strategy to provide customers with a full range of the health care products from branded drugs to generics and OTC medicines. What might be pros and cons?

• Pros

As the cost and time for developing new drugs has increased, investing in a fast growing related market can present numerous advantages:

• Continuity in the same line of business.

After the expiration of the patents as generics companies have also a six month exclusivity, Novartis can enjoy benefit on the genuine drug and generic drug using the “pay for delay strategy easily” as the generics company belong to the group.

• Market share and costs in the generics products

Compared to the brand name products, the costs in the generics market are low and even if the market enjoys low returns compared to the brand name market, the possibility of loss on investments is limited. According to PhRMA, the generics’ share of the U.S. prescription drug market was 57 percent in 2005.