The pharmaceutical industry is the cornerstone of modern medicine in the modern capitalist world, and it is a key component to a well-diversified stock portfolio. These companies specialize in developing, producing and marketing drugs and medical treatments used the world over. Novartis AG (NVS), based in Basel, Switzerland, is the world's leading pharmaceutical company ranked by sales. Here is a closer look at Novartis, what it does, and how its financials stack up.
Novartis AG, A Brief History
The Novartis of today was created through a series of mergers and acquisitions, the most recent being AveXis (AVXS) for $8.7 billion in April 2018. The company can trace its history back to the mid-18th and 19th centuries to two Swiss companies: CIBA, founded in 1859, and J.R. Geigy Ltd., founded in 1758. Both firms began by producing materials and chemicals (CIBA is an acronym for Company for Chemical Industry Basel) and diversified throughout the 1900s. In 1970, the two companies merged to form CIBA-Geigy, well known for its CIBA Vision brand contact lenses.
In 1996, CIBA-Geigy merged with another century-old Swiss company, Sandoz, notably its labs were where the drug LSD was first discovered. Prior to this merger, Sandoz had also grown by acquiring companies such as Wander AG, Gerber Products, and Clariant. After the merger, Sandoz became the company's generic drug brand.
Novartis emerged from the CIBA-Geigy-Sandoz deal and throughout the 2000's continued to grow through acquisition, including the takeover of biotechnology company Chiron.
In June 2018, Novartis announced plans to buy $5 billion in stock after spinning off its Alcon eye-care business to shareholders.
Products and Brands
Novartis carries a wide variety of pharmaceutical products covering many facets of healthcare and for a variety of diseases. For 2017, its best-selling drugs were the multiple sclerosis treatment Gilenya ($3.18 billion in sales), plaque psoriasis treatment Cosentyx ($2.07 billion), cancer drug Gleevec ($1.94 billion), macular degeneration treatment Lucentis ($1.88 billion), and cancer treatment Tasigna ($1.84 billion). It is also known for producing Ritalin, an oral polio vaccine, and the seasonal flu vaccine among others. It's subsidiary Sandoz produces generic drugs, accounting for nearly 16% of Novartis' global sales.
Novartis' over the counter (OTC) brands include Theraflu, Excedrin, Benefiber, Prevacid, Lamisil, and Alcon eye care and contact lens products. Novartis also produces veterinary products for pets and large animals and carries a line of insect and rodent control products used by exterminators.
In 2017, the company generated $49.1 billion in sales from its various product lines, making it the world leader in its industry. Its major competitors include Roche Holdings (RHHBY:OTC), Abbott Labs (ABT), Pfizer (PFE), Merck & Co. (MRK), Astrazeneca (AZN) and Bristol-Myers Squibb (BMY).
Financials and Fundamentals
Novartis shares trade on the New York Stock Exchange as an ADR, under the ticker symbol NVS. The company currently commands a market capitalization of $186.2 billion and P/E ratio of 22.38, notably lower than the pharmaceutical industry's trailing P/E of 366.69.
Being a Swiss-based corporation, investors should be aware of the currency risk associated with owning its ADRs. The price volatility of the Swiss Franc can present both risk and opportunities. For example, a strong Franc can be used to acquire takeover targets at a relative bargain.
Patent Problems & Legal Issues
Novartis has been involved in a number of patent battles, most notably a fight in India over Gleevec. In a landmark decision, the supreme court of India upheld the Indian patent office's decision to reject Novartis' patent application. This meant that populous India would not be the profit center the company had imagined for its flagship cancer drug. In response to the ruling, Novartis in a surprise move donated more than $1.7 billion of the drug to Indian cancer patients.
Like other big pharmaceutical companies, Novartis has come under scrutiny over some of its marketing and sales techniques. In 2010, Novartis paid a fine of $422.5 million to settle criminal and civil complaints stemming from misleading sales practices and marketing drugs for off-label uses. In 2013, two more lawsuits were filed against the company for similar reasons. Earlier this year, Novartis faced investigation due to allegations that the Swiss group bribed hospital officials to fix drug prices in order to boost sales.
The Bottom Line
Having exposure to the pharmaceutical industry is important for constructing a well-diversified equity portfolio. Novartis AG is the largest drug company by sales and one of the largest by market capitalization in the world. It also provides U.S. investors with some exposure to foreign shares. The company has a diverse and profitable line of pharmaceutical and over-the-counter products as well as a number of new projects in its pipeline.
The company is not without its fair share of controversy, however, and potential investors should pay attention to legal issues stemming from patents, sales and marketing issues and allegations of manipulation of clinical trials. Overall, the company looks like it still has growth opportunities ahead of it and could potentially use the strengthened Swiss Franc to purchase takeover targets and continue its long legacy of growth through more acquisition.