While the Swiss are known for their chocolate, watches and ski resorts, 30% of the country’s exports are pharmaceuticals products. Novartis was recently in the news surrounding its involvement in the COVID-19 vaccine, so we thought we would explore the company.
Key Takeaways
- Financial strength seen in a steady stock, offering high and recurrent dividend yields compared to peers and industry.
- Financial weakness in low P/B and PEG ratio; the company see growth in earnings but not very much and less than peers. Debt coverage is also not as good as it could be.
- Other companies include Roche a highly correlated stock, Alcon a newly public swiss competitor, and a high growth and boomin Lonza.
- Big pharma in Switzerland is like software in California, there's no better place to be. The industry sees large R&D investments, high quality standards, great access to human capital and lots of go to market power.
Why Novartis matters right now.
First, what is Novartis?
Novartis is the Swiss Samsung of pharmaceuticals and the world’s second largest pharmaceutical company after Johnson & Johnson by market capitalization. Based in Basel, the capital of pharmaceutical manufacturing, Novartis employs 110,000 employees to develop BioMedical solutions (drugs). Novartis’ research focuses on cancer, cardiovascular, immunology, neuroscience, and respiratory diseases. Its global health impacts are in malaria, sickle cell disease and leprosy research and is known throughout the world.
Recent involvement with COVID-19
Late last week, the company issued a statement announcing its involvement with CureVac, a German biopharmaceutical company, to manufacture its COVID-19 vaccine candidate ‘’CVnCoV’’. Novartis will support global supply of another COVID-19 vaccine, leveraging its manufacturing capacity. The firm plans to make the mRNA and drug product for up to 50 million doses by the end of 2021 with 200 million more doses in 2022.
Novartis financial position
Is Novartis a dividend company?
Yes. Novartis (Ticker: NOVN) is a behemoth corporation with a market cap of CHF 183 billion. Novartis is a great stock pick for dividends because it has a high dividend coverage meaning that it could pay dividends to its common shareholder using its net income multiple times over! This is looked at favorably by investors seeking dividends. In fact, NOVN’s dividend yield in 3 years’ time is forecasted to be well covered by earnings. As shown in the graph below, earnings growth this year could be around 8.6% down from 13% seen in the past year.
The past 10 years have seen a continuous rise in the dividend yields with the current yield at 3.8%. Own 10 shares, and have $32 no questions asked. Compared to its swiss counterparts, Novartis boasts of the highest dividend yield out there and continues to promise more as earnings continue to grow. Current net profit margins of 16.2% rose from last year’s 14.7%, EPS ranges between $3.4 and $4.0 and its PE ratio of 23.8x suggests investors are ready to pay a premium for the stock.
Figure 1: Novartis key financial insights
Novartis is not perfect
In 2020, NOVN showed a meager 1-year return of 1% compared an industry average of 3.1% and a general swiss market return of 19.5%. This is not very impressive or attractive for investors however, including a dividend reinvestment, the 1-year return quickly changes to 5%. While NOVN shows for a high PE ratio of 23.8x, its PEG ratio is poor at 2.8x and its P/B ratio of 3.4x is over-valued compared to swiss pharmaceuticals industry’s average of 3x.
Novartis’ earnings are forecast to grow, but not by much more than the market. Its debt level is considered high, meaning that liabilities are not well covered by assets and moreover, its debt to equity has risen from 29% to 63% over the past 5 years. Novartis is not a high growth company in terms of revenues and sales are expected to grow slower than the swiss market this year.
Figure 2: Novartis’ 1-year share price performance
Swiss big pharma industry leads the world
How dominant are the Swiss in pharmaceuticals?
For context, Novartis sits at the top of one of the highest performing pharmaceutical industries in the world making NOVN all the more impressive. Switzerland is not only a key exporter, but also a key player in research & development. The size of R&D investments in the country according to the Interpharma association was north of CHF 7 billion in 2019, and as shown below, there are almost 1’000 patent applications per million inhabitants in 2019! Mind you that the swiss population in 2019 was only 8.6 million.
The swiss stock exchange is Europe’s leading exchange for life sciences companies representing around 40% of the European life sciences market capitalization. Switzerland has incredibly rigorous quality standards, only reinforcing Novartis’ position as a long-term leader, and holds the title of early adopter market which means the go to market time for new medical products and devices is second to none.
In addition, the Swiss have a single central authority that manages licensing of biotech and gene tech which guarantees both quality and minimal bureaucracy. When researching a company for competitive advantage, one should look at the strength of the industry within that country because of governmental support benefits, human capital access, and pricing power. Think cars in Germany, software in California, and wine in France.
Figure 3: Swiss lead the patent per citizen race
Who does Novartis compete with?
Who does Novartis competing with? Well, mainly one other Swiss giant called Roche. However, there are others such as Lonza, and Alcon which also hold strong market shares. The graph below is over a 5-year horizon and shows Lonza in black with a clear outperformance compared to the peer group. Lonza has shown incredible growth and should be considered for further research.
Alcon in yellow, has been closely tied to its peers, but is much newer on the public markets. This could imply more growth going forward. Roche and Novartis, the most similar of the four, have shown high levels of correlation and more importantly, steadiness.
This strong anchoring in a prestigious industry, and steady returns despite high quality competition makes for a strong Novartis case. Large stock deviations are possible, but not very likely (at least in the long run). With more cash, growth will be leveraged via innovation, and M&A activity and could see Novartis’ dominance, and dividend payout swell.
In the end, Novartis is very symbolic of the Swiss culture: stable, and quality over quantity oriented.
Figure 4: Swiss pharmaceuticals peer group share price performance over 5-years.
