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Novartis – Growth by Acquisitions

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During the past few months, I have been focused on large pharmaceutical companies and the pipelines they are living and perishing with.  Merck, Lilly, GSKSanofi, and JnJ are a few that I have highlighted.  This week at PSW, Yves of Naked Capitalism wrote an interesting take on Big Pharma that I encourage all to read entitled, "Big Pharma: Even Worse Than Used Cars as a Market for Lemons?"  Big Pharma is having issues right now in their pipelines, as I outlined in this article, "The Calm Before the Storm – Big Pharma Is Gonna Have Big Problems and Pfizer is the BIGGEST!"  Companies are rebranding, using line extensions, and pushing pure enantiomers that are made to active metabolites by your body as new drugs (see Nexium and Prilosec).  There's no doubt that Big Pharma is hurting, and the industry is relying on mid-tier pharma and biotech to take the risks and to make emerging treatments for diseases.  A very good friend in the industry and I discussed 12 years ago that, in our lifetime, there would be 5-6 major pharma players.  These companies would be the development hubs, and biotechs would be the R&D engines that keep science moving forward.   Keep that in mind when investing in Pharma, as consolidation is ripe with so much cash in the coffers!  Now on to the current review.

Novartis (NVS) was created in March 1996 from the merger of Ciba-Geigy and Sandoz Laboratories, both Swiss companies. Ciba-Geigy was formed in 1970 by the merger of J. R. Geigy Ltd (founded in Basel in 1758) and CIBA (founded in Basel in 1859). Combining the histories of the merger partners, the company's effective history spans 250 years.   In 1997, Novartis spun out Ciba Specialty Chemicals, and in 1999 announced the merger of Novartis Crop Protection and Seeds with AstraZeneca’s Zeneca Agrochemicals business to form Syngenta.   Since the initial merger in 1996, Novartis has become one of the most dynamic, innovative and fastest growing companies in the pharmaceutical industry (currently ranked #4 by 2009 sales of $45.1B).

Table 1.  Novartis Sales and future revenue.

 

Sandoz Generics Division:  With generic prescriptions becoming an important revenue generator, NVS decided to push into an economy of scale business by purchasing Lek, in 2002.  Lek was a leading generic drug manufacturer in Slovenia and provided NVS with an entry-point into the emerging Central and Eastern European markets.  To further their generics business under the Sandoz brand name, Novartis acquired:
  • In 2004, the Canadian generic manufacturer Sabex (who have access to injectable technology and providing penetration of the Canadian market)
  • In 2005, Hexal (Germany) and Eon Laboratories (US) in 2005, 
  • In 2009, EBEWE Pharmaceuticals, 
  • In 2010, Oriel Therapeutics (who specialize in respiratory drugs and inhalers).

Sandoz is currently the industry’s second largest generics player behind Teva, and a front-running player in biosimilars (think insulin).  In 2009, Sandoz  generated global sales of $7.5 billion.

Vaccines & Diagnostics:

With the purchase of Chiron, NVS is now 5th in size ($2.4B in 2009) for vaccine behind market leaders Pfizer, Sanofi, Merck and GSK.   In big pharma, vaccines and antibiotics have long been regarded as a commercially unattractive market.  In recent years with the launch and rapid uptake of novel, high-price products (first vaccine 'blockbusters'), such as Prevnar (Pfizer) and Gardasil (Merck), pharmaceutical and biotech companies have begun to focus on the areas as it is insulated from typical generic competition associated with small molecules.  The influenza vaccines is the second largest after Sanofi, but most of the vaccine division growth is expected from two meningococcal vaccine products: the quadrivalent conjugate Men ACWY vaccine (Menveo – approved in the US and EU in Q1 2010) and a Men B vaccine which is currently in Phase III.

Patented Pharmaceuticals

: Five core therapy areas make up NVS's pharma unit (oncology, infectious diseases, central nervous system, cardiovascular and respiratory) and it makes up approximately 60% of total prescription sales.  The latter two, cardio and respiratory, are moving opposite to one another, where cardiovascular, once a core strength with the Diovan/Co-Diovan franchise ($2.9B in 2009), is becoming the lagger, and respiratory is becoming a leader.  Respiratory has in it several late stage pipeline products (and all are versions of QAB149 – a long acting beta agonist):

 

  • QMF149 (asthma, COPD) – investigational QAB149 (indacaterol) with Merck's (SGP) inhaled corticosteroid mometasone
  • QVA149 (COPD) – once-daily, dry powder bronchodilator for inhalation combining a fixed dose of the once-daily beta2-agonist QAB149 (indacaterol) and the long-acting muscarinic antagonist NVA237 (glycopyrronium bromide) for COPD treatment, and
  • Onbrez (COPD)- Onbrez Breezhaler (QAB149 or indacaterol) in both 150 mcg and 300 mcg doses as a new once-daily maintenance bronchodilator treatment of airflow obstruction in adult patients with COPD.

 Figure 1. Novartis Pipeline as of July 2010.

 

Oncology will remain the largest therapy area in terms of revenues by 2015, however, beyond at point there will a significant threat to Novartis’s market position attached to impending patent expiry for the lead Glivec/Gleevec .

To prepare for the Gleevec franchise expiratory, NVS agreed to pay the Swiss conglomerate Nestlé, $10.4B for a 25% stake in Alcon (2008).  Earlier this year, Novartis acquired the remaining 52% stake for $181 per share.  All told, NVS acquired a controlling 77% stake in Alcon at a total cost of $38.4 billion. The final 23% of Alcon being acquired from minority shareholders.

A few other notables products in the pipeline:

  • Certican (everolimus) is an immunosuppressant to prevent rejection of organ transplants. mTOR (mammalian target of rapamycin) is a serine/threonine protein kinase that regulates cell growth, cell proliferation, cell motility, cell survival, protein synthesis, and transcription.  mTOR belongs to the phosphatidylinositol 3-kinase-related kinase protein family and much research has also been conducted on everolimus and other mTOR inhibitors for use in a number of cancers.
  • Panobinostat (LBH589) is a novel histone deacetylase inhibitor (HDACi) (see Figure 2 below).  To carry out gene expression, a cell must control the coiling and uncoiling of DNA around histones. This is accomplished with the assistance of histone acetylases (HAT), which acetylate the lysine residues in core histones leading to a less compact and more transcriptionally active chromatin, and, on the converse, the actions of histone deacetylases (HDAC), which remove the acetyl groups from the lysine residues leading to the formation of a condensed and transcriptionally silenced chromatin. Reversible modification of the terminal tails of core histones constitutes the major epigenetic mechanism for remodeling higher-order chromatin structure and controlling gene expression.  HDAC inhibitors (HDI) block this action and can result in hyperacetylation of histones, thereby affecting gene expression. 

Figure 2. HDAC Inhibition

 

  • And lastly, AFQ056- this compound is close to my studies because it is a project that I devoted a lot of time to at a former employer (not NVS).  In either case, IF it works, it will be one of the first treatments for a mental condition known as Fragile X syndrome.    In 1991, scientists discovered the gene (called FMR1 for "Fragile X Mental Retardation – 1") that causes fragile X.  In people with Fragile X, a defect in FMR1 (a "full mutation") shuts the gene down.  Like a defective factory, FMR1 cannot manufacture the protein that it normally makes.   An mGluR5 antagonist, which means it reduces mGluR5 activity in the brain is thought to help 'alter' the brain chemistry in these subjects (much like an antidepressant would for depression or anxiety).

Novartis has a strong pipeline and a diverse prescription pharmaceutical brand. The company has seven blockbusters which account for approximately 40% of sales, with an additional 25% of prescription sales attributable to the Sandoz generics and vaccines divisions.  Although the company faces a number of notable patent expiries over the next few years (the largest being Diovan/Co-Diovan), it has continues to bring new blockbuster products to the market.  Furthermore, growth via the Sandoz and vaccine businesses will remain unexposed to any material generic threat in the years ahead.  Visit

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and join us in member chat for our entry points into this exciting Pharma Company, and many other discussion points about the market in general.


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  1. David, Are you still holding LEN for your target of around 14 ?