Novartis

Is a new growth phase ahead?

Pharmaceutical companies don't have it easy. For years, they put a lot of money into researching a new drug - once its effectiveness has been proven, they get marketing approval if they're lucky. In most cases, such drugs are quickly patented, but these patents expire at some point and the market gets flooded with generic copies. That's why I consider smaller pharma companies in particular to be pretty speculative.

Novartis, on the other hand, knows the game and has been proving for several decades that you can be highly profitable in this industry too. Most recently, the pharma giant spun off its eye care subsidiary Alcon onto the stock exchange, because it wants to focus fully on its core competencies again. I think that's the right step to finally break out of the sideways movement in the stock chart and kick off a new growth phase.

The history and business model of Novartis AG

Novartis was created in 1996 through the merger of several chemical and pharmaceutical companies. But let's take it one step at a time. In 1785, Johann Rudolf Geigy-Gemuseus took the plunge into self-employment in Basel. He traded in materials, chemicals, dyes and remedies of all kinds. When he died in 1793, the business was continued by his family. His great-grandson Johann Rudolf Geigy-Merian also trained in the family business. After spending 5 years as a merchant in France, England and India, he set up a dye extraction plant in 1857 together with his colleague Johann Jakob Müller-Pack. There, 2 years later, they began producing synthetic fuchsine, a reddish-blue dye.

As early as 1901, the company was converted into a stock corporation, but the name was only later changed to J.R. Geigy AG. Thanks to international distribution and large-scale production, Geigy led the company into the industrial age. Even after his death, the executives always invested the profits in further development and research into new products. In 1935, for example, they launched an insecticide and shortly afterward set up their own pharmaceutical department. Between 1940 and 1960, they developed several important drugs there, such as painkillers, psychiatric drugs, blood pressure medication and herbicides.

Alexander Clavel also began producing fuchsine in his silk dyeing works in Basel in 1859. His company, the Gesellschaft für Chemische Industrie Basel (Ciba for short), later also focused increasingly on pharmaceutical products. Ciba too brought an insecticide to market in 1954, later followed by treatments for blood diseases. In 1970, Ciba merged with J.R. Geigy AG - and Ciba-Geigy AG was created. Last but not least, Alfred Kern and Edouard Sandoz founded their chemical company in Basel in 1886. They too initially made dyes and then expanded their business into pharmaceuticals. Not only did they bring fever-reducing medicines to market, but in 1943 also the psychoactive drug LSD - it was only withdrawn again in the 1960s. In 1996, Sandoz merged with Ciba-Geigy AG and Novartis was born. Today, Novartis is one of the largest pharmaceutical companies in the world, selling numerous prescription as well as over-the-counter products. In addition, Novartis also has a large number of drugs in its pipeline that could come to market in the next few years.

What will happen at Novartis in the next few years?

As described in the introduction, Novartis recently parted ways with its subsidiary Alcon. Alcon is an eye care expert and equips ophthalmologists with lasers and ultrasound devices. It also makes its own contact lenses. Novartis wanted to diversify more broadly with the company, but the business didn't go as hoped. Since April 2019, Alcon has been listed on the stock exchange as an independent company, and Novartis can focus completely on its pharma business again.

Besides the roughly 200 drugs Novartis currently has in clinical development, its employees keep researching innovative and effective medicines. In 2018, for example, it started a partnership with the Canadian cannabis producer Tilray. The plan is to market Tilray's non-smokable medical marijuana, develop joint products and educate doctors and pharmacists about the benefits of cannabis.

Most recently, Novartis received approval for Zolgensma in the US. This is the most expensive drug in the world. The gene therapy costs more than 2 million dollars - but only once. With alternative products like Spinraza, treatment costs already reach around 4-5 million US dollars after about 13 years. The drug is used in young children suffering from a muscle disease that unfortunately is very often fatal. When approval will come in the EU, however, is still uncertain.

And what about the dividend?

Since the merger into Novartis in 1996, the pharma company has also paid a dividend to its shareholders. On top of that, the payout has been raised regularly for 22 years. Over the last 10 years, the dividend growth rate was only 4 percent, but the current dividend yield of 3.3 percent is nothing to sneeze at. And with a payout ratio of a little over 53%, there's still enough money left in the company for research and development.

Conclusion:
The success of a pharmaceutical company depends on a great many factors. Will the drug be approved? Can I sell it in a way that still leaves me with a profit in the end? What do I do when my patent expires? These are all questions Novartis has to ask itself too - but unlike other companies, the Swiss firm is broadly positioned and can more easily absorb weak phases of individual drugs. So if you'd like to add a bit of pharma to your portfolio, Novartis is certainly a good place for it.