So what does this debate between old Pharma and new biotech have to do with Pfizer and Novartis? Novartis, unlike Pfizer has been planning ahead for its future as its patents expire. And similar to selling a covered call, has hedged its investment on patent protected drug therapies by investing heavily in the manufacture of generic drugs.
Of the $38 billion of revenues that Novartis generated in 2007, $7 billion came from its generic division Sandoz. From the 10-k for fiscal year 2007 concerning Sandoz:
“Advancing broadly twice as fast as net sales, operating income expansion was driven by efficiency improvements throughout the division, economies of scale in marketing and productivity gains in R&D. As a result, the operating margin improved to 14.5% of net sales from 12.4% in 2006.”
If there is going to be a push towards Universal Health Care as so portrayed by the Democratic presidential candidates, then the demand for generic drugs will become even greater as they are likely the first things covered under any sort of basic healthcare plan.
While Pfizer’s Lipitor expires in 2010. Novartis doesn’t experience a patent expiration until 2012 when Zometa (a $1.3 billion cancer drug) and Diovan (a $5 billion hypertension drug) come off protection. These are no small events; still the two only represent $6.3 billion of lost revenue vs. $12.8 billion for Lipitor.
So why is Pfizer still valued so highly?
PFE has a
- Trailing P/E (ttm, intraday):17.57
- Forward P/E (fye 31-Dec-09) :7.62
- PEG Ratio (5 yr expected):3.30
Novartis has a
- Trailing P/E (ttm, intraday):9.93
- Forward P/E (fye 31-Dec-09) :12.88
- PEG Ratio (5 yr expected):1.34
Why should a disappointing company in a maturing industry deserve a PEG ratio of 3.3? The reason is that Pfizer has $51 billion (Mar 08) worth of current assets on its books while Novartis has $27 billion (Dec 07). The expectation is that Pfizer has the leverage to purchase small biotechs, become involved in marketing partnerships with already viable drugs or heavily invest in their R&D. The thing is, Pfizer has been very inactive. An analogy can be drawn to Microsoft in the Tech Sector. Both industries are growth industries and both companies have nearly maxed out their original business models. But while Pfizer has been trying to cut costs, buy back shares and raise its dividend to entice investors, Microsoft has been actively trying to adapt to an ever changing landscape. And to a certain extent, Microsoft has been successful.
Of the two companies Novartis looks like the more agile and acute. The purchase of Sandoz demonstrated that management is paying close attention to the future of the business rather than just the present. And to investors, nothing matters more. Furthermore, Novartis has three treatments that recently received FDA approval: Tekturna, Exforge, andTasigna. Tekturna is the first new hypertension drug on the market in 10 years but has face some stiff competition. However, as recently as 2 weeks ago a modified version called Tekturna HCT has received approval from the FDA as well and is shown to be blood “twice as effective at reducing high blood pressure than diuretic HCT alone.” The three treatments are already on the market and Exforge has established a strong presence.
“Clinical data have shown nine of ten patients treated with Exforge reached treatment goals, confirming strong efficacy coupled with improved convenience.”
Tasigina is a treatment for myeloid leukemia that was just approved in 4th quarter 2007. It has already received approval in 4o countries. Something to note is that Tasigna is a highly specified drug, and follows the model that Genzyme is using and Deloitte predicts for the pharmaceutical industry. It isn’t trying to be a blockbuster, it is simply trying to improve lives and do so effectively.
“In clinical trials, Tasigna was effective in 77% of patients in the early stage of CML who were resistant or intolerant to other therapies – meaning blood cell counts returned to normal. In addition, 40% of patients achieved a complete cytological response with no abnormal chromosomes – the root cause of CML – detected in the bone marrow cells. At 12 months, the overall survival rate was 95%.”
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