Valuation at Novartis

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- Risk diversification and reputation

Investing in Generics Company may allow Novartis to grow its business, diversify its risks and capitalize on its established reputation. The rate of acceptance of newly developed drugs is too low and the time used make it difficult to enjoy longer patents periods. It is better to have its own generics company in order to have longer product life cycle

- Cons

- Cannibalization and resources affectation

On the downside, there's the potential for the generics products to cannibalize sales of brand name drugs, and the tendency to affect more resources to the generics products and ignore the original drugs.

- Very competitive environment

The generics environment is very competitive and has low returns compared to the genuine drugs markets and is plugged with low quality products which may stain the company’s image.

3. Assess each of Novartis’ four segments against its main segment competitors. Refer to Exhibit 5-8 and use one or two key ratios there as guidance.

For analysis we will use three criteria.

Compounded annual revenue growth rate: It is used to measure how fast a business is expanding.

- Relative market share: Firm’s market share against that of its leading competitor. It’s useful compare firm’s relative position and evaluate degree of competition in market.

- EBIT over net operating assets: Relationship shows the income generated from operations, as a percentage of the net operating assets used to create that profit.

Novartis focuses its business on four segments, Pharmaceuticals, Sandoz (its generic business), Consumer Health and Vaccines and Diagnostics.

- Pharmaceutical division

Pharmaceutical division is the largest division of Novartis with sales of 23 million and it is 62.5% of total revenue in 2006. Pharmaceutical division focuses on innovative patented medicines to enhance health outcomes for patients and health care providers.

Compounded annual revenue growth rate 2000-2006

-Novartis: 12.74% -Johnson & Johnson: 11.74%

-Pfizer: 11.0% -Glaxosmithkline Plc: 9.29%

-AstraZeneca Plc: 5.50% -Merck & Co. Inc: -2.22%

When comparing revenue CAGR f among its competitors, Novartis records highest CAGR amounted as 12.74% for the period of 2000-2006. It gives an indication of future business expansion capability of the company. Novartis relative market share has increased 10% - 13% in 2001-2006. In 2006 Pfizer was the industry leader with 25% of relative market share and Novartis was fourth.

EBIT over net operating assets 2000 - 2006

Company name

2000

2001

2002

2003

2004

2005

2006

AstraZeneca plc.

NA

NA

20%

18%

19%

26%

27%

GlaxoSmithKline plc.

22%

24%

27%

31%

29%

37%

42%

Johnson &Johnson

45%

47%

52%

38%

46%

33%

37%

Novartis

32%

30%

36%

32%

35%

41%

33%

Pfizer

56%

65%

70%

8%

26%

26%

29%

Comparison to the core earnings (EBIT) and core assets (NOA) of the company, Johnson and Johnson and Pfizer were headed in the industry in 2000-2002. But after 2003 Novartis could become the second position recording more than 32% of core earnings against its NOA used and indicating its income generating.

- Sandoz division

Sandoz is the third largest division on sales in 2006 by contributing 16.28% to Novartis total revenue. Sandoz has a portfolio of more than 1,000 products covering all major therapeutic areas.

Compounded annual revenue growth rate 2000-2006.

-Novartis: 20.22% -Teva Pharmaceuticals: 31%

-Watson Pharmaceuticals: 23.72%

Novartis has 20.22% of revenue CAGR, but comparing to its main two competitors Novartis is in the third position. Its relative market share has decreased 50% - 39% from 2000-2006.

EBIT over net operating assets 2000 - 2006

In generic business division Novartis recorded less than 10% in core earnings to its core assets for 2000-2006. Teva Pharmaceutical Inds. Ltd has performed well than Novartis recording highest 22%, 2001 and 2003 with utilization of