| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
Healing Novartis (int'l edition) As agribiz sours, it shifts to health care It's a mild mid-October day in Basel, and Daniel Vasella, the 46-year-old CEO of Swiss pharmaceuticals giant Novartis, is just back from a whirlwind tour of Asia. One of the highlights, he confides over lunch, was discussing the pros and cons of genetically modified food with the King of Thailand. It's a topic he knows well. In 1996, when Swiss drugmakers Ciba-Geigy Ltd. and Sandoz Ltd. got together in a $63 billion merger to form Novartis, the former physician proudly proclaimed it the world's first life-sciences company. Vasella said that thanks to its world-class agribusiness portfolio, Novartis was in a unique position to apply technologies learned from plant genetics to both pharmaceuticals and agricultural businesses. He staked the company's future on genetic engineering. Vasella bet on the wrong horse. The backlash over genetically modified crops is undermining the life-sciences concept upon which Novartis is based. Although Vasella still believes gene technology is the wave of the future, he admits that at least for now, the synergies between plant science and pharmaceuticals have proved marginal. At the same time, soft commodity prices and increased competition have cut into agribusiness sales. ''The plan now is to focus on health care,'' Vasella says. The shift in focus is likely to set off a new round of restructuring at Novartis. Vasella says he may spin off the agribusiness units to shareholders. He could use the proceeds to buy another pharmaceutical company, which would strengthen the more lucrative drug franchise. In the first half of this year, agribusiness sales fell 10%, to $3.2 billion, while drug sales grew 6%, to $6.1 billion. At the very least, a spin-off would buy Novartis some time until revenues from new pharmaceutical products kick in, in 2001. The company has 11 new compounds in late stages of human testing or awaiting approval, more than most of its competitors. Vasella aims to increase sales of newly developed drugs from 18% of the total to 25% within two years. That's a tall order. Novartis' drug portfolio is mature, and it faces increasing competition from generics. Three-quarters of its pharmaceutical products are at least five-years-old, and 50% of sales come from products that are off patent. More worrisome is the company's declining market share in the U.S., currently the world's fastest-growing drug market. ''In the next two to three years, Novartis is going to take a bath in profitability,'' predicts Barrie G. James, a former Ciba executive and president of Pharma Strategy Consulting in Basel. He reasons that the cumulative effect of shrinking market share, lack of blockbuster drugs, and a suffering agribusiness will bring growth to a standstill. STRONG BALANCE SHEET. It's a dramatic change in sentiment from 1996, when analysts assumed the company could deliver on cost-cutting and sales growth. Cost-savings from the merger have improved the company's results. Pretax profits in 1998 were $5.5 billion on sales of $22 billion, up from $3.9 billion on sales of $21.1 billion at the time of the merger. But sales remain sluggish. Investors are sitting on the sidelines until they get answers on the fate of the agribusiness units and the commercial viability of the new drugs coming to market. Novartis' current price-earnings ratio of 22 times next year's earnings is among the lowest of any major drug companies. ''The market is in a waiting position, and I don't blame it,'' says Novartis Chief Financial Officer Raymund Breu. Vasella, a scientist who began his career in the drug business 11 years ago, is twisting under the pressure. In addition to mulling over the prospect of spinning off agribusiness, he is bringing in new management and shedding peripheral units in consumer health. He also plans to seek a secondary listing on the New York Stock Exchange, which would help raise Novartis' profile in U.S. markets and give it access to a greater pool of capital. But both Breu and Vasella say the pessimism is exaggerated, and that they are making progress in restructuring the group. Promised job cuts and new cost savings of around $1.4 billion are likely to be completed by yearend. Most of the money saved will go to improving the company's already strong balance sheet, which includes $12.8 billion in cash and marketable securities. The remainder of the freed-up cash will go to strengthening sales and marketing efforts, particularly in the U.S., which currently accounts for 36% of Novartis' sales. The main problem is the weak performance of agribusiness, which includes fungicides, herbicides, seeds, and animal-care products. Despite a massive reorganization, the business continues to lose market share in herbicides and fungicides to competitors such as Monsanto Co. and AstraZeneca. To offset agribusiness losses, Vasella is working hard to rejuvenate the company's drug portfolio. Novartis aims to increase the percentage of drugs under patent to 70% from 50% by 2003, says Joerg Reinhardt, the head of development for Novartis Pharmaceuticals. It hopes to put three new compounds from each of the company's seven therapeutic areas into the product development pipeline each year. If it succeeds, Reinhardt believes Novartis can increase the number of compounds that make it to market each year from 1 in 10 to 1 in 7 by 2002. A BLOCKBUSTER? Several of the drugs under development will hit the market by the end of next year. The first is expected to be Visudyne, which is currently under priority review with the U.S. Food & Drug Administration. Visudyne is a treatment for macular degeneration, the leading cause of blindness in adults over 50. With potential sales of $1 billion within the next three to five years, it could rapidly become the largest-selling opthalmic treatment in the world, says Richard R. Stover, a senior analyst at Arnhold & S. Bleichroeder Inc. This will be followed by Zelmac, a treatment for irritable bowel syndrome, Starlix for adult-onset diabetes, and E-25 for treating asthma. Novartis will have an additional seven new compounds, including treatments for Parkinson's and Alzheimer's diseases, epilepsy, and asthma, on sale in the U.S. by the end of next year. In 10 years' time, Vasella estimates that Novartis will have spent a total of $1 billion to develop xenotransplantation therapies, which use genetically modified animal organs for transplantation in humans. Vasella has initiated a number of promising changes. But he still needs a blockbuster, along the lines of a Viagra or a Prozac, to prove the worth of his merger. And he'd better hurry. Investors are losing patience. By Kerry Capell in Basel, with Heidi Dawley in London _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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