AT NOVARTIS, A CURE FOR CULTURE CLASH? (int'l edition)
In mid-June, Switzerland's Novartis gave analysts a peek at the progress on drugs in its pipeline. They liked what they saw--and Novartis stock surged 10% in five days, adding $10 billion to the company's market capitalizaton. Since March, 1996, when Basel's Ciby-Geigy and Sandoz announced plans to merge, the former rivals' combined value has increased by 114%. Novartis is No.11 in BUSINESS WEEK's ranking of the world's most valuable companies, second only to Merck & Co. in pharmaceuticals.
Investors are betting that Dr. Daniel Vasella, president, will meet his pledge to turn Novartis into a top performer. That will mean matching Merck and Glaxo Wellcome in turning out a steady stream of blockbusters, while boosting operating margins to the 40% range. Thanks to the merger, Novartis has pulled even with Glaxo Wellcome, the global leader: Novartis has 4.4% of the drug market and leads the pack in research and development spending, with a budget of $2 billion.
But Novartis still needs more work to match its competitors in development speed, marketing prowess, and profitability. The drug company earned $1.6 billion on $25.6 billion in sales in 1996. Operating margins run about 20% vs. 40% for Merck and 35% for Glaxo Wellcome. ''Merck and Glaxo do it best. Novartis isn't even close,'' says Samuel Isaly of Mehta & Isaly Asset Management in New York.
Vasella is working to close the gap. By 2000, he aims to save $1.4 billion, mainly by eliminating 6,000 jobs. Layoffs, plus the spin-off of Ciba Specialty Chemicals and other units, have shrunk Novartis' global workforce by 31%, to 89,000. Analysts expect margins to climb to 28% in three years as costs come down and new drugs appear. Two potential blockbusters include Exelon, for Alzheimer's disease, and Diovan, for high blood pressure. Sales of each could top $1 billion, analysts say.
WARM-UP. By setting tough goals, Vasella may have avoided the culture clash that often plagues mergers. ''You have to push people so hard they don't have time to get into battles,'' he says. A doctor and ex-hospital administrator who joined Sandoz' U.S. marketing team in 1988, Vasella is known as an innovator. He was among the first in Europe to invest heavily in U.S. biotech.
Now, Vasella sees the merger as a warm-up exercise for the competition ahead. ''If you succeed at coping with a merger, it builds a lot of strength in an organization,'' he says. So far, investors are rewarding Vasella. To keep them happy, he will need to add more muscle to the drug giant's frame.
By Gail Edmondson in Basel
Updated June 27, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.