Swiss pharmaceutical giant
has seen its stock jump 11% this year and has a slew of drugs on the market and in the pipeline. Is now a good time to buy?
It could be, according to analysts. At a recent presentation on research and development, the company said it has seven drugs on the market that will each generate more than $1 billion in annual sales by 2008. In addition, Novartis has 10 drugs in late-stage clinical trials that it expects to generate $10 billion in U.S. sales once approved and marketed.
Analysts had low expectations going into the Nov. 19 briefing. The company had disappointed investors in the year-earlier session when it announced one-year delays for three drugs. But investors cheered this year's product announcements, driving the stock to a 52-week high near $42 a share.
"Novartis has many products still in the early phases of their lifecycle. We expect these drugs should drive long-term pharma sales growth of 11%, faster than the industry average of 8%," said Matthew Weston, a Lehman Brothers analyst.
Many analysts agree that the company is making valid claims in touting what it describes as its industry-leading product pipeline and fast product-development cycles. Analysts polled by Thomson First Call expect the company to report 2003 earnings of $2.02 a share on revenue of $24.4 billion, up from earnings of $1.88 a share on revenue of $20.9 billion in 2002. That would represent a gain of 7% and 16%, respectively. Of 52 analysts surveyed, 60% rated the stock a buy, compared with 33% who rated the stock a hold and 7% who recommended selling, according to Thomson First Call.
The stock has been a solid investment, rising 11% since the beginning of the year. At $42.60, it is trading at a new 52-week high. Nonetheless, Chief Executive Thomas Ebeling said he is frustrated that the company's stock valuation doesn't recognize the firm's product-development position and analyst ratings. Ebeling, who was recruited by Novartis in 1997 from Pepsi-Cola Germany, said, "Our stock is a solid investment. We have kept every promise we have ever made."
On a number of important measures, Novartis is recognized as the industry leader. In a report issued in early October that examines the product pipeline strength of the top 15 pharmaceutical companies, Lehman Brothers rated the company's pipeline as the best in the industry. The study considered an array of factors, including patent risk, risk of late-stage product failure and exposure to the Medicare reform bill.
On the Lehman scale, Novartis narrowly beat
, while crushing the bottom five:
Bristol Myers Squibb
Johnson & Johnson
, which came in dead last.
In another measure of pipeline productivity published in late September, Goldman Sachs rated Novartis as No. 1 in a survey of 28 major pharmaceutical companies. According to the Food & Drug Administration, the company has secured more approvals for new drugs over the past four years than any other company. Its 11 new-drug approvals are more than double any of its rivals during this period, with the exception of Pfizer/Pharmacia. The company also says that its median product development times are shorter than the industry average by about a year, thus increasing the amount of time its drugs can be marketed under patent.
With all of this statistical success, however, investors have not yet rewarded Novartis' stock with a valuation premium over its rivals because of various uncertainties about the company.
Analysts from CDC IXIS downgraded Novartis to reduce on Nov. 10, saying the company's new-product launches will contribute only 12% of the overall sales growth for the company over the next four years. Instead of generating substantial new revenue from new drugs, the company will rely more heavily on drugs already on the market, including cancer drug Femara, Zelnorm, Gleevec and current hypertension blockbuster Diovan, the analysts said.
Nonetheless, analysts at Credit Lyonnais Securities took the opposite view and upgraded the stock on Oct. 27, saying they expect the market to show renewed interest in the Novartis pipeline in 2004. The company is expected to launch several new products, including constipation drug Enablex along with Myfortic and Certican. These analysts also cited the expected 18% growth in sales of the company's three core drugs, Diovan, Gleevec and Zometa, which should generate about 30% of total sales. Credit Lyonnais also set a new price target of $46 per share.
This upbeat view ignores the fact the FDA has not yet given final approval to several of the drugs Novartis expects to launch next year, and that in the last year three of the drugs that were promised for 2005 have already been delayed by at least a year.
Ebeling also speculated that his stock is hurt by its perception as less than a "pure play pharma" given its nonpharmaceutical lines in Cibavision and nutrition products. These noncore assets generated 14% of the company's revenue and 10% of its operating profit during the first nine months of 2003, and are expected to be divested or spun off in 2004.
Meanwhile, Novartis owns 33% of the voting stock in
, and was forced to include a $269 million one-time loss from Roche in its 2002 results. While Credit Lyonnaise analyst Leherle expects Novartis to report a gain from its stake in Roche in 2003, Ebeling acknowledges there is uncertainty in the relationship.
Ebeling wants to acquire the remaining 67% of Roche as soon as a deal can be negotiated, and feels that the two product lines do not overlap. Roche placed fifth in Lehman's product pipeline survey. While he wants to get a deal done, he also said that Roche executives "do not return my calls." At this point, investors do not know when or if the transaction Ebeling seeks will take place or what effect it would have on earnings.
One of the uncertainties likely to be lifted from the pharmaceutical sector in the near term is U.S. government action on adding prescription drug coverage to Medicare. Ebeling said he is hopeful that the legislation will make it easier for patients to get access to products such as Visudyne, a low-vision drug, and laser-light treatment for macular degeneration, a condition that leads to blindness primarily in the elderly. The treatments currently cost about $1,500 per dose.