#2: Novartis
Headcount 119,418
Year Established 1996
Pharma Revenues $44,420 16%
Total Revenues $50,324 14%
Net Income $9,969 18%
R&D Budget $8,080 11%
Top-Selling Drug in 2010
Drug |
Indication |
$ |
(+/- %) |
Diovan |
hypertension |
$6,053 |
1% |
Gleevec |
chronic myeloid leukemia |
$4,265 | 8% |
Lucentis |
age-related macular degeneration |
$1,533 | 24% |
Zometa |
bone metastasis |
$1,511 |
3% |
Femara |
breast cancer |
$1,376 |
9% |
Sandostatin Group |
acromegaly |
$1,291 |
12% |
Exelon |
Alzheimer’s disease |
$1,003 |
5% |
Exforge |
hypertension |
$904 |
35% |
Neoral |
immunosuppression |
$871 |
-5% |
Voltaren |
inflammation/pain |
$791 |
-1% |
Exjade |
iron chelation |
$762 |
17% |
Comtan |
Parkinson’s disease |
$600 |
8% |
Reclast |
osteoporosis |
$579 |
23% |
Account for 48% of total pharma sales, down from 52% in 2009.
PROFILE
Novartis climbed to #2 in this year’s ranks, aided by acquisitions, product growth and a favorable exchange rate bump. With its top seller teetering on the edge of the patent cliff, how long can the Swiss dynamo keep its place?
Employing a strategy it calls ‘focused diversification,’ Novartis has been building up its non-branded-pharma businesses in recent years even as it continues to advance its drug pipeline. Its Sandoz generics business would stand alone as the #18 company in our ranks, while the Vaccines/Diagnostics business would rank at #9 in our Top Biopharma list. It may seem arbitrary for us to incorporate all those units as pharma revenues, but I think it gives a more transparent picture of Novartis and the company’s place in the pharma industry.
Even without including Alcon’s $2.4 billion contribution, Novartis would have rung in with $42.0 billion in drug (well, non-consumer health) revenues, enough to keep it comfortably ahead of Merck at $39.9 billion. Next year, the company plans to change its reporting structure to accommodate Alcon, and that should make the numbers a little more transparent for our purposes.
(Novartis’ branded pharma business had $30.6 billion in 2010 sales, up 6% and leaving it in the #6 slot behind AstraZeneca. Happy?)
Novartis, as mentioned, is gazing into the patent abyss. Top seller Diovan is seeing generic competition in Europe this year and will get hit in the U.S. by September 2012. In the U.S., the company may also lose protection for Exforge, its combo-drug that posted $935 million in sales on 35% growth in 2010 (and 28% in 1Q11 to $261 million). Diovan revenues dropped 5% in 1Q11 to $1.4 billion.
Luckily for Novartis, when it gazes into the patent abyss, that abyss gazes back! Profitably! The company’s Sandoz generics unit posted 14% growth in 2010 to $8.5 billion in sales, pumped up by growth in U.S. and emerging markets, as well as its position in biosimilars. The big boost came from Sandoz’ successful U.S. launch of generic Lovenox in late July 2010, which brought in $462 million over the remainder of the year. In 2009, Sanofi’s branded Lovenox had U.S. sales of $2.7 billion. U.S. sales of branded Lovenox fell 51% in 1Q11.
The unit also launched generics of Prograf ($184 million), Cozaar ($145 million), Prevacid ($123 million) and Gemzar ($58 million) during 2010. Sandoz recently began a Phase II study of a biosimilar version of Rituxan/Mabthera. The unit already markets biosimilars of HGH, Neupogen, and Epogen/Procrit. In 1Q11, Sandoz sales rose 15% to $2.3 billion.
That said, while generics giveth, they seriously taketh away. Diovan isn’t the only Novartis blockbuster ready to get cut down in the next few years. The roster is almost identical with the company’s Top-Selling Drugs list on the previous page: Femara, Zometa, Reclast/Aclasta, Sandostatin LAR and Gleevec (in 2015, but that’s on the horizon) are all threatened to some extent.
Focused diversification helps reduce the parent company’s dependence on branded pharma, but those drugs still account for 60% of total revenues. Novartis has had some good drug approvals in the past year, as well as some disappointments.
In September 2010, the FDA approved Gilenya, a novel oral treatment for multiple sclerosis. Analysts predict serious blockbuster status for the drug, with some estimates as high as $3.6 billion before the end of the decade. It posted sales of $59 million in 1Q11, its first full quarter on the market, so that’s a good start. Tasigna, Novartis’ followup to Gleevec in treating chronic myeloid leukemia, doubled its 1Q11 revenues, posting $153 million in sales. The company has been touting data about Tasigna’s superiority to Gleevec, its own $4.2 billion-seller, so either it’s really All That or Gleevec has shakier patent protection than anyone thinks. (I kid!) Also, Galvus, Novartis’ entry in the DPP-4 diabetes treatment derby, posted 1Q11 revenues of $132 million, in concert with its metformin combo version, Eucreas. Afinitor, an oncology treatment repurposed from a transplantation treatment, more than doubled its revenues, hitting $90 million in 1Q11.
So it’s not like Novartis doesn’t have an arsenal of up-and-coming products to help manage the loss of Diovan et al. But the company has also had its share of pipeline failures. In October and November 2010, Novartis cancelled a trio of late-stage drugs, taking more than $700 million in R&D charges. These were offset — at least in terms of dollars — by Novartis’ sale of the rights to Enablex (overactive bladder) to Warner Chilcott for $400 million and Elidel (atopic dermatitis) to Meda for $420 million. The company also took a $422.5 million penalty for improper marketing of six drugs in September 2010.
This is one complicated and multifarious company. While its pipeline looks strong, its patent risk is too huge to reconcile. Its vaccine business is a steady producer, but has to accommodate surges like last year’s H1N1 stockpiling. The generics wing is going gangbusters, but it’s a lower margin operation fraught with legal risks and price-devouring competition (hence the interest in biosimilars, which may hold higher prices for a longer time than the 180-day exclusivity period for small molecule generics). Novartis has done a good job of balancing all these factors, growing these various segments to become the second biggest drug company in the world.
The new reporting structure may make Novartis’ results in 2011 a bit different than this year’s, but the company should retain its hold on our #2 spot for a little while more. —GYR
THE LOWE DOWN
Novartis made it through another year without a massive layoff, so by the standards of their peers, they’re doing great. And their pipeline isn’t too bad, either. It’s hard not to wonder if it just looks good on the absolute scale, or mainly by comparison to their peers, but even a contrast effect is worth noticing.
They’re not immune, though, these stable Swiss. Diovan is coming off patent, which isn’t good news, but compared to what some of the other companies are facing (see Eli Lilly, see Pfizer, see AZ, see a whole bunch of others), their ‘patent cliff’ worries aren’t quite as dramatic.
The unanswerable question, though, is how much of this good fortune is due to research culture and managerial style, all those things that people can take credit for, and how much is due to just, well, good fortune? Given the number of drug companies out there, shouldn’t some of them be in good shape just by chance? I don’t think that’s what’s operating here, actually, but I’m not sure that I can completely rule out the null hypothesis, either. —Derek Lowe
ACQUISITION NEWS
Target: Genoptix
Price: $470 million
Announced: January 2011
What they said: ‘The acquisition of the Genoptix medical laboratory will serve as a strong foundation for our individualized treatment programs . . . By integrating Genoptix within Novartis, we can greatly enhance the value we add to patients, clinicians, payors and society.’
—Joe Jimenez, chief executive officer, Novartis
After making a flurry of deals in recent years, Novartis throttled back over the past 12 months. The company completed its drawn-out Alcon acquisition, first buying another 52% of Nestle’s shares, bringing its ownership stake to 77% (August 2010), and then absorbing the rest of the company into Novartis proper (completed April 2011).
In March 2011, Novartis completed its purchase of 85% of Zhejiang Tianjuan Bio-Pharmaceutical, a Chinese vaccine company. That $125 million purchase was first announced in November 2009. Apparently, ‘subject to certain closing conditions’ means ‘long wait’ in Chinese.
Even though Novartis is still integrating Alcon, the company is keeping an eye out for smaller deals. In a Bloomberg interview in June 2011, Novartis chief executive officer Joe Jiminez declared that the company was interested in bolt-on acquisitions in the $1 to $3 billion range, within consumer health, diagnostics, generics or biologics.
FABLES OF THE RESTRUCTURING
Novartis is restructuring. The company doesn’t come out and say it, but that’s what it’s doing. In November 2010, Novartis ‘unveiled its long-term strategy to grow in a dynamically changing healthcare environment,’ in its own words. A presentation stressed the company’s willingness to spend big on R&D and invest in emerging markets, and mentioned that it will do so by ‘freeing up working capital.’
A company statement noted that Novartis will ‘optimize’ its marketing and sales spending and planned to ‘support further improvement of gross margins, [by] initiating a group wide program to review its manufacturing footprint.’ Manufacturing, too, will be optimized by the creation of ‘Manufacturing Centers of Excellence’. Oh, and key sites will get up to 80% capacity utilization.
How many layoffs would these optimizations incur? How much savings? Novartis has yet to say.
But it did let 1,400 U.S. salespeople go right after Thanksgiving. And in March 2011, the company revealed plans to reduce operations in manufacturing operations in Horsham, West Sussex, UK, dropping 500 employees, as well as a 100-employee manufacturing operation in Tlalpan, Mexico. It never put out a press release about this, however; it was confirmed by Novartis after being reported by news outlets.
More bewilderingly, in its 1Q11 earnings statement, Novartis mentioned Tlalpan and Horsham, ‘in addition to the four sites we announced in the fourth quarter of 2010.’ However, there was no published announcement in 4Q10 about facility closures. The company took 4Q10 restructuring charges of $85 million (pharma, which accounts for the 1,400 salespeople laid off), $52 million (vaccines and diagnostics), and $24 million (corporate charges), with no mention of what was being divested or shut down.
I contacted the company and was told that the four sites were:
- Liverpool, England - adjusted operations, site is still in operation (Vaccines)
- Marburg, Germany - adjusted operations, site is still in operation (Vaccines)
- Huningue, France - divestment (Pharmaceuticals)
- Morocco - divestment (Pharmaceuticals)
When I asked why there had been no announcement or press release about these closings and adjustments, the reply was, ‘They were all announced locally.’ So it seems that Focused Diversification can be accompanied by Stealthy Restructuring.
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