The Wall Street Journal
A fresh face for Novartis could be just what the doctor ordered. Investors took the Swiss drugs group's surprise decision Tuesday to replace incumbent Novartis CEO Daniel Vasella with pharmaceuticals head Joe Jimenez in their stride, as stronger than expected 2009 earnings helped push the share price 1.5% higher. Mr. Vasella will stay on as chairman in the new structure.
Mr. Jimenez inherits a solid set of full-year results, including a 54% rise in fourth quarter net profits, boosted by sales of swine flu vaccines that beat analyst forecasts by 20%. But concerns over future growth remain: the company faces imminent price cuts in U.S., Japanese and Turkish markets, as well as generic competition on key drug Diovan this year. There are also question marks over its pipeline, including worries over U.S. approval of the much-hyped multiple sclerosis treatment, and the huge cash drain of some 40 drugs in phase-III clinical trials.
There's also uncertainty over the ultimate cost of the $50 billion acquisition of U.S. eyecare group Alcon. Court action by minority shareholders could force Novartis to raise the almost $11 billion it offered in stock for their stake earlier this month. Given the minorities include many employees, a protracted dispute could undermine efforts to integrate the business. Novartis investors used to 13 consecutive dividend increases could balk if dividend growth is sacrificed to divert cash elsewhere.
Mr. Jimenez inherits a solid set of full-year results, including a 54% rise in fourth quarter net profits, boosted by sales of swine flu vaccines that beat analyst forecasts by 20%. But concerns over future growth remain: the company faces imminent price cuts in U.S., Japanese and Turkish markets, as well as generic competition on key drug Diovan this year. There are also question marks over its pipeline, including worries over U.S. approval of the much-hyped multiple sclerosis treatment, and the huge cash drain of some 40 drugs in phase-III clinical trials.
There's also uncertainty over the ultimate cost of the $50 billion acquisition of U.S. eyecare group Alcon. Court action by minority shareholders could force Novartis to raise the almost $11 billion it offered in stock for their stake earlier this month. Given the minorities include many employees, a protracted dispute could undermine efforts to integrate the business. Novartis investors used to 13 consecutive dividend increases could balk if dividend growth is sacrificed to divert cash elsewhere.
Given these concerns, Mr. Jimenez's priority should be to cut costs. Inefficiencies in areas such as IT
remain, offering scope for savings across the board. Tuesday's management changes, which include the elimination of three executive positions, offer some encouragement on this score. Mr. Jimenez has already
helped deliver a three-year cost overhaul ahead of schedule while still achieving significantly higher operating margins in pharmaceuticals. New chief financial officer Jon Symonds, who joins from Goldman Sachs in February, also has a reputation as a cost-cutter.
Even so, Novartis shares now trade at 11.6 times this year's earnings—an 8% premium to the average of major European pharmaceutical groups, according to Credit Suisse. Plus the market is already pricing in further cost-cutting. In addition to a swift resolution to the Alcon deal, Jimenez will need to show he is a skilful corporate surgeon to justify any further re-rating.
Even so, Novartis shares now trade at 11.6 times this year's earnings—an 8% premium to the average of major European pharmaceutical groups, according to Credit Suisse. Plus the market is already pricing in further cost-cutting. In addition to a swift resolution to the Alcon deal, Jimenez will need to show he is a skilful corporate surgeon to justify any further re-rating.
