Monday, January 27, 2014

Novartis sells blood transfusion test unit to Grifols for $1.7 billion- 11/14/2013


  1. Company overview:
    in FY 2012, Revenue $57 billion, by segments: Pharmaceuticals 57%, Eye care (Alcon) 18%, Generics (Sandoz) 15%, Consumer health 6.6%, Vaccines and diagnostics 3.3%
    3 year CAGR: Phar 2%, Eye care 32%, Consumer health -5%, Vaccines and diagnosis -14%
    Operating income:$11.5 billion, Pharmaceuticals 80%, Eye care 12%, Generics 9%, Consumer health .4%, Vaccines and diagnosis: -2%,
    Vaccines and diagnosis compositions in Assets 5.8%, COR 7.6%, R&D 4.9%, CapEx 6.4%
    Segments under review: Consumer healthcare 7%, Vaccines 3%, totaled 5.2 billion

    17 major approvals in 2012. Gilenya gained blockbuster status, revenue increased from 15 million to 1.2 billion in 3 years. 200 in clinical development, 138 in pharmaceuticals.

    Shift in future focus:
    Pharmaceutical industry trend: consolidation, M&A, focus on core operations: PFE, Zoetis spin-off, Merck: Human health and animal health potential spin-off.
    1. Hang on with world leading operations.
    2. Consecutive nets sales decline and operating losses for Vaccines and diagnostics segment.
    3. 2012 10K: Innovation growth and productivity: - develop new products and grow portfolios, diversify pipeline, leverage procurement to cut costs. streamline processes and grow new products.

    Is it a good deal?
    1. For Norvatis: purchase price= 1.68 billion, 3* segment sales (565 million), operating income -250 million, the valuation seems to be quite generous
    2. For Grifols: Diagnostics will account for 20% revenue after acquisition, consolidate and become the leaders in vaccine and diagnostics amid industry structural shits.
    Win-win for both parties.

  2. Novartis Generates 57m in 2012
    Provide healthcare solutions, 5 major business areas sales:
    • Pharmaceuticals 57%
    • Alcon18%
    • Sandoz 15%
    • Consumer health 7%
    • Vaccines and Diagnostics 3%

    Sales by region:
    • United 33%, Europe 35%, Asia 23%, Canada and Latin America 9%

    5 areas net-income:
    • Pharmaceuticals 66%
    • Alcon24%
    • Sandoz 9%
    • Consumer health1 %
    • Vaccines and Diagnostics 0%(Negative)-75 m loss

    Is it good for both?

    For Novartis:
    • No synergies to the remainder of the Novartis group. We know diagnostics and Vaccines 75 million loss
    • The price of three times sales fair? 2012 net sales 565 million. Price 1.68 billion

    For Grifols:
    Grifols SA is a Spain-based company engaged in the healthcare sector. The Company is involved in the research, development, manufacturing and marketing of medical solutions for hospitals, which include plasma-derived therapies, as well as diagnosis and pharmaceutical products.

    After this acquisition, Grifols will expand its portfolio by including Novartis€ diagnostic products for transfusion medicine and immunology, including its highly innovative, market-leading NAT technology (Nucleic Acid Amplification Techniques), instrumentation and equipment for blood screening, specific software and reagents.

    • Third largest blood products maker, making up 20percent of its revenue will expand Grifols's core business in the U.S. to plants in California, North Carolina and Barcelona
    • The Novartis deal will help Grifols diversify further from its home market, which makes up just around 6% of the company's current revenue.
    • The Spanish government's power to control prices has made business in the country difficult.
    • The government is going to reduce the value of Spanish money.

  3. Net Sales by segments (USD 56.7 billion) in 2012
    -Pharmaceuticals 57%, 2% increase
    -Alcon (eyecare) 18%, 5% increase
    -Sandoz (generic) 15%, 4% decrease, 11% increase in Q3
    -Consumer health (OTC and animal health) 7%, 16% decrease, 12% increase in Q3
    -Vaccines and diagnostics 3%, 4% decrease. (Used to be the highest sales segment in 2009 and 2010)

    Core operating income by segments (USD 11,511 billion) in 2012
    -Pharmaceuticals 66%
    -Alcon 24%
    -Sandoz 9%
    -Consumer health (OTC and animal health) 1%
    -Vaccines and diagnostics: negative Operating income

    Leading Products:
    -Gleevec/Glivec: 8.3%
    -Diovan Group: 7.8%
    -Lucentis: 4.2%

    Overseas Markets:
    -US and Europe: largest
    -Asia/Africa/Australia get highest growth rate

    R&D expense/Sales:
    -Novartis: 21% of Pharmaceuticals sales, 17% in 2013, 16% in 2012,
    -Pfizer: 12% in 2012 and 2013
    -Merck: 17% in 2013 and 16% in 2012
    -GSK: 12% in 2013 and 13% in 2012

    Net sales of sold unit in 2012: around $565 million, 1% of total net sales.
    Benefits to Grifols: the world's third-largest blood products maker
    -A significant U.S. presence, which is small previously
    -Diagnostics will make up 20 percent of its revenue, up from 4 percent now

  4. Novartis (NYSE: NVS)

    Revenue Structure (2013 Q3)
    • Pharmaceuticals 55.27% 29.11% (core operating income margin)
    • Eye Care (Alcon) 17.49% 34.96% (core operating income margin)
    • Generic medicine (Sandoz) 16.09% 16.39% (core operating income margin)
    • Vaccines and Diagnostics 4.16% 15.15% (core operating income margin) -4.04%(2012)
    • Consumer Health 7.00% 11.00% (core operating income margin)

    • Total Net Sales for 2012 is $56.673 Billion, for 2013 Q3 is $14,294
    • Core operating profit margin for 2012 is 26.75%, and for 2013 Q3 is 25.33%
    • Operating profit margin (5 year average) is 18.5%, Merck 22.3%, Pfizer 18.9%

    • Number of Products in Phase I 5 (LTM) 4 (2012) 29 (Pfizer) 0 (Merck)
    • Number of Products in Phase II 32 (LTM) 29 (2012) 25 (Pfizer) 22 (Merck)
    • Number of Products in Phase III 30 (LTM) 29 (2012) 17 (Pfizer) 16 (Merck)
    • Number of Products in Pre-Registration 21 (LTM) 3 (2012) 7 (Pfizer) 4 (Merck)
    • Number of Products Launched 1 (LTM) 1 (2012) 3 (Merck)

    Vaccines and diagnostics division
    • Established in 2006 \Heavy R&D investment in vaccine but little return
    • Menveo contribute to the sales growth in this division
    • Reduce its dependence on prescription drugs\Biological medicines that are less exposed to generic competition
    • European Medicines Agency approves for a new drug (Bexsero) in curing Meningococcal disease/Estimated sales of $700 million in 2020
    • A standalone vaccines business could fetch $6.3 billion

  5. Novartis has five business segments: Pharmaceuticals, which makes up 56% of the total revenue; Alcon, eye product business, 18%; Sandoz, the generic business, 16%; Consumer Healthcare 7%, and Vaccines has the rest 4%. But in terms of operating income, Pharmaceutical dominates with roughly 80% of the total, while Alcon and Sandoz takes 10% each. Consumer health and vaccines segments have only minor or even negative contributions to the total operating income.
    It turns out that the blood transfusion testing unit is under Novartis’ Vaccines and Diagnostics business, which has negative operating income for 5 quarters since 2012. And of course, company is also considering selling the underperforming Consumer Health business, which includes over-the-counter products and animal health. The main drawback for these businesses is that they do not have economy of scale as other businesses do within Novartis, and they have a much higher share in expenses than that in revenue. So the only logical alternative for the company at this point is to increase scale. For the company strategy, Novartis will focus on its three core businesses: pharmaceuticals, eye care and generic medicines, all of which have annual revenue of at least $10 billion and a ranking of first or second in its field. A Wall Street Journal articles points out that after the sales, the company may consolidate its vaccines portfolio into its pharmaceutical division. This could help the company reduce costs.
    Like other top competitors, the company is looking into opportunities to buy small biotech companies to expand its pipelines, while the management thinks current prices are too high in the healthcare sector. So if there is any potential acquisition, it’s probably not in the short term. The company could use cash proceedings from sales of its business to fund its future acquisition, and it has a very healthy free cash flow figure.
    I share Haohan and Stone’s views that the company maintains one of the industry’s strongest pipelines: its Pharmaceutical R&D projects include 71 new compounds, which is among the highest in the industry. Sandoz, the generic business, had 12 first-to-files and further expanded its lead in differentiated products.
    The company’s business is increasingly affected by pressures on pricing for its products. Novartis’s Pharmaceutical business, it has relative stable pricing power, as the pricing contributed 1 percentage point for the first nine months in 2013, but had a negative impact of 1 percentage point in 2012.

  6. The Group’s wholly owned businesses are organized into six global operating divisions, and report the results in the following five segments:
    • Pharmaceuticals:- Net profit: 9.6 billion and 80.3% of the total (Group total operating profit)
    • Alcon: (Eye care) - Net profit: 1.5 billion and 12.3% of the total
    • Sandoz:(Generic Pharm.) - Net profit: 1.1 billion 9.1% of the total
    • Vaccines and Diagnostics - Net Loss: 250 million of the total
    • Consumer Health:(OTC &Animal Health) - Net profit: 48 million 0.4% of the total

    - Net sales of $56.7 billion in 2012, while net income amounted to $9.6 billion
    - Research & Development expenditure in 2012 amounted to $9.3 billion.
    - Net sales, $13.9 billion, or 24%, came from Emerging Growth Markets, and $42.8 billion, or 76%, came from Established Markets

    Top product: (Sales 2012)
    - Glivec: 4,675 million, Oncology, Pharmaceuticals
    - Diovan: 4,417 million, Primary Care, Pharmaceuticals
    - Lucenic: 2,398 million, Ophthalmic, Alcon (Eye-care)

    Core Business:
    Pharmaceuticals Division
    - Pharmaceutical is organized in the following business franchises: Oncology; Primary Care, and Specialty Care.
    - In 2012, accounted for $32.2 billion, or 56.7%, net sales, and for $9.6 billion, or 80.3%, of operating income.
    - Net sales reached USD 7.9 billion in the Q3,2013
    - Growth products, including Gilenya, Tasigna, Xolair, the Q Family2 and Jakavi, together generated USD 3.1 billion

    Financial Date:
    Net Margin 16.71%(Decreasing pricing power); Current Ratio 1.2 ;Long Term Debt of Capitalization 15.5% (low liabilities and low default risk)
    Return on Assets 8.0% & Return on Equity 14.3% (decreasing in last five year)

    Summary of Blood Transfusion Unit Deal
    Facts: Blood transfusion test unit sold for 1.68 billion, which is three times of their annual sales $565 million in 2012.
    1. Focus more sharply on strategic businesses and gain global scale of leading segment
    2. Gain cash flow to invest in their core business

  7. Company Overview:
    - 5 Business segments: Pharmaceuticals,eye care (Alcon), generic (Sandoz),Vaccines and Diagnostics and Consumer Health

    - Core Businesses:
    Pharmaceutical: 33b sales, 57% of net sales and 66% of operating income in 2012
    Eye care (Alcon): 10b sales, 18% of net sales and 24% of operating income in 2012
    Generic (Sandoz): 9b sales, 15% of net sales and 9% of operating income in 2012

    - Sub- scale businesses:
    Consumer Health, which includes OTC and Animal Health: 4 b sales, 7% of revenue and 1% of operating income in 2012
    Vaccines and Diagnostics: 2b sales, 3% of revenue and made negative operating income in 2012

    - Net sales 56.7b, -3%;Operating income +5%
    - R&D: 16% net sales

    Financial Overview:
    -Sales Growth in Q3:Overall, an increase 4% compared to last year. Pharmaceuticals +1% to $7.9B, ; Alcon +3% to $2.5B; Sandoz +11% to $2.3B, Vaccines +2% to $594M; consumer health +11% to $1B.
    -Free Cash Flow: at $3.5 billion by Q3. Strong position and give enough cash flow for pipeline development on its core business
    -Operating Margin(ttm): 21%, Merck 20%, Pfizer 32%
    -ROE: 18.15%; ROA 10.28%: ROE around 1% lower than its main competitor, ROA around 1% higher. Both are strong and leading in the industry

    Comments on Transfusion Tests Sale
    -Blood Transfusion Tests Unit is not closely related to its core businesses, with no synergies to the remainder of the Novartis group. Keeping other diagnostics that are closely linked to its pharmaceuticals pipeline
    -Vaccines segment is not growing and revenues from the unit had not changed significantly from the previous year. Not contributing a lot to its business
    -The sale of the Novartis blood transfusion diagnostics unit enables Novartis to focus more sharply on our strategic businesses
    -Use additional cash flow to develop its solid pipeline in its core businesses, especially Pharmaceutical segment
    -A start of restructuring. Potential sell of its business in OTC and animal health segment to be more specialized in its core businesses