Biotech Values

[DewDiligence]

Profit margin of generic Lovenox in hospital setting:

I was asked on the MNTA board how NVS’ operating-profit margin in the hospital setting might compare to the margin in the retail setting. Clearly, the margin in the hospital setting will be smaller than the margin in the retail setting and the blended margin for the mix of retail and hospital sales, which was known to be 68.5% during 4Q10 (#msg-59748179). Based on the discussion below, I estimate that NVS’ operating-profit margin in the hospital setting will be 52%. Here’s the arithmetic:

Let R = NVS’ average selling price per unit in the retail setting.
Let H = NVS’ average selling price per unit in the hospital setting.
Let C = NVS’ average unit cost as defined by the terms of the NVS-MNTA joint venture, which is assumed to be the same for the retail and hospital settings.

Let’s assume that 90% of NVS’ 4Q10 Lovenox sales were in the retail setting. (This number has not been disclosed, but the 90% figure ought to be accurate enough for our purposes.) Thus, we know that:

(.9(R-C) + .1(H-C)) / (.9R + .1H) = .685

To a first-order approximation, we know from #msg-59555188 that:

H = .64 R .

Hence, we may substitute H/(.64) for R in the first equation above, which yields:

.9(H/.64-C) + .1(H-C) / (.9H/.64 + .1H) = .685 ;

(1.41H - .9C + .1H - .1C) / (1.41H + .1H) = .685 ;

(1.51H - C) / 1.51H = .685 ;

1.51H – C = 1.03H ;

C = .48 H .

I.e., NVS’ profit margin on Lovenox sales in the hospital setting is 1-.48 = 52%.