If pressed to come up with an NVS Achilles's heel I'd say that it could be competitive pressures on several fronts could damage the branded pharma franchise as NVS is trying to ramp new drugs to offset the patent expiry of Diovan and Gleevec. For instance Denosumab may take some share of the osteoporosis and cancer sales (although I beleive some analysts estimates are vastly overestimated). Other oral MS drugs are bound to hit the market in the next few years and will increase the competition cor Gilenya. Given the breadth and diversity of the the NVS product offings it is far more insulated from taking a hit from a single patent expiration. It would take multiple failures on several fronts including the pipeline.
NVS survived such a scenario a few years ago when Zelnorm was pulled from the market, Lotrel was the victim of an at risk launch by Teva, Prexige was the victim of the vioxx aftermath (no US approval) and Galvus was the victim of an FDA approvable letter that was sufficient for NVS to opt out of the US diabetes market. I think these events made NVS stronger internationally and less dependent on the US market. It also drove NVS to diversify away from branded pharma (bought additional OTC assets from BMS, vaccine company Chiron, bought Hexal and Eon, and most recently the vision care giant Alcon).
I believe NVS strategy has been vindicated by the number of competitors tying to emulate it (expansion into vision care, biogenerics etc.). NVS has long said that they wanted to be the dominant producer of difficult to manufacture generic drugs (FOB's, etc). This strategy now appears to be playing out with their partner MNTA. Generic drugs have become such a commodity that their is tremendous pressure to be first to launch to win a few months of exclusivity. NVS saw this and found a niche that is less exploited where competitive pressures will not be as great. As such, I think the vision provided by Vasella was second to none. Hopefully this will continue under Jimenez.
Back to the Achilles's heel again, I think NVS harbors the dream of merging with Roche at some point in the future to create a super pharma company. While the combination of NVS, Roche and Genentech would be dominant, it could be fraught with corporate culture integration issues.
I agree with you statement about the geographic and product offering diversification provided by NVS. That is the chief reason I'm in the stock. NVS has to be one of the safest plays on emerging markets. They have spent considerable capital to do it right (buying businesses and integrating into China and now Russia). By becoming a major employer in these countries they have provided some insulation against political backlash that comes when foreign companies win too much market share. NVS has not written off India despite that Country's poor stand on intellectual property. The purchase of NVS india shows they are willing to put business decisions ahead of sour grapes.
Despite these positives, the PE multiple on NVS has dropped from 18 when I bought my first shares to about 11 now. This has happenned due the share price stagnating while the earnings ave steadily grown. I guess I'm holding on believing at some point it will revert back to the mean. The demographic tailwind caused by the baby boomer generation reaching peak drug consumption years would seem justify an improved multiple for the sector.
I'm obviously long NVS and I have my biases, but I always try to look objectively at each of my holdings.
FL
