Growth strategies Novartis

Growth strategies Novartis

Company overview

Incorporated in 1996, Novartis is engaged in the research, development, manufacturing and marketing of an array of healthcare products. The company is present in over 140 countries and is headquartered in Basel, Switzerland. Novartis' product portfolio includes prescription medicines, preventive vaccines and diagnostic tools, generic pharmaceuticals and consumer health products. Novartis primarily operates through four global operative divisions:

• Pharmaceuticals;
• Vaccines and diagnostics;
• Sandoz;
• Consumer health.

The company's pharmaceutical division operates in the following therapeutic areas: cardiovascular and metabolism; oncology; neuroscience and ophthalmic; respiratory; immunology and infectious diseases; and other. The key products in Novartis' vaccine portfolio include influenza, meningococcal, pediatric and travel vaccines. The Sandoz division portfolio includes generic pharmaceutical and biotechnological active substances, which are not protected by valid and enforceable third-party patents. The consumer health division includes OTC medicines, veterinary products for farm and animals, and contact lenses and lens care products

Table 13: Novartis snapshot
Headquartered	Basel, Switzerland
Established	1996
Consolidated revenue (FY2009)	$44.3bn
OTC revenue (FY2009)	$3bn
Employees (2009)	1,00,000

Source: Company reports

Leading consumer healthcare products

R&D: consumer healthcare

The consumer R&D activities of Novartis are primarily concentrated on analgesics, gastrointestinal, respiratory, cough and cold, and cardiovascular risk reduction (through smoking cessation products). Each business unit of the consumer health division has its own R&D capabilities. In 2009, Novartis invested $346m in R&D activities for the entire consumer health division, equal to 6% of the net sales of the division. OTC teams work in close proximity with pharmaceutical R&D team to evaluate the potential products for Rx-to-OTC switching. The teams also place an increased focus on developing line extensions of existing products in an attempt to capitalize on the brand equities of established brands.

As a strategic decision, Novartis is strengthening its R&D activities in emerging countries including India, China, Brazil, Russia and Turkey. This strategy has enabled Novartis to cut down on its investment costs and gain a better understanding of these markets, which will be important given that most of the OTC growth is expected to come from these emerging countries. In 2009, Novartis announced plans to increase its R&D activities in China by investing $1m over the next five years. While the investment is primarily for its pharmaceutical division, Novartis is expected to capitalize on this platform for OTC products in China in the near future. In 2006, Novartis opened its OTC R&D center in India to support its OTC pipeline in various markets including the US and Europe.

Financial performance

The company reported consolidated revenues of $44.3bn for the financial year ended December 2009, an increase of 7% over FY2008. The sales and growth represented in Novartis' annual report are converted from local currencies, and as such vary from the actual performance. In 2009, the company's vaccines and diagnostics division recorded the highest growth of 38% to reach $2.4bn due to the outbreak of the H1N1 pandemic. The pharmaceutical division witnessed growth of 8% to reach $28.5bn in the same year. In contrast, Sandoz witnessed a year-on-year decline of 1% to reach $7,493m, although the division reported an increase of 5% in local currencies. The consumer health segment generated revenues of $5.8bn, representing a year-on-year growth of over 5% in local currencies. The growth is primarily attributable to the expansion of existing brands to multiple geographies. Novartis' OTC product line is reported to have seen exceptional growth in the emerging markets. The operating income declined slightly to 19.2%, due to the major investments in OTC product Prevacid24HR in the US.

Novartis' pharmaceutical division remains by far the largest contributor to company revenues. In 2009, the pharmaceutical division accounted for 65% of total revenues, while Sandoz, consumer health, and vaccine and diagnostics accounted for 17%, 13% and 5%, respectively. In consumer healthcare, OTC led the division with a contribution of around 50% to sales. This is primarily due to the company's strategy of switching its existing products to the OTC category; a recent example is the US launch of Prevacid24HR in November 2009, a proton pump inhibitor for the treatment of frequent heartburn.

Table 14: Novartis consolidated financial performance, FY2009
	FY2009($m)	Y-o-Y growthFY2008–09 (%)
Total revenues	44,267	7
Operating income	9,982	11
Note: the actual sales and sales growth vary due to currency conversions. However, the company's annual report presents the converted figures in US dollars.

Source: Company reports

Growth strategies

Geographical expansion in high-growth markets

Novartis is growing in the developed markets of the US, Europe and Japan. However, the company is investing to capitalize on the growth opportunities in the emerging markets of Brazil, China, Russia, India, South Korea and Turkey. Novartis has taken significant actions to strengthen its presence in these markets and is also adapting local commercial models in an attempt to meet the needs of other emerging markets. The company plans to increase its presence in these markets through new product launches (Novartis plans to launch 20 new products in China by 2011, for example) and targeted acquisitions, as well as the introduction into these markets of those OTC products which have gained significant popularity in Western markets. Novartis is increasing its sales force and also expanding its distribution channels to augment its reach in these geographies.

Focus on core industry

Novartis has systematically transformed itself into a company focused on the healthcare market, having previously spun off or sold its businesses in chemicals, nutrition and agribusiness, beverages and medical nutrition. In 2007, Novartis finally divested all of its non-healthcare business by selling two business units, Medical Nutrition (effective July) and Gerber foods (effective September), which were a part of its consumer health portfolio. The businesses were sold to Nestlé in separate transactions. The divestment will enable Novartis to utilize all of its resource for the development of a healthcare portfolio including pharmaceuticals, vaccines, consumer health and generics (through Sandoz). Although pharmaceuticals remain the prime focus for Novartis, it is increasing its efforts to strengthen its consumer health portfolio owing to the strong growth forecast in the emerging markets.

Targeting potential growth categories in each geography

Novartis is aligning its strategy to focus on the growth categories of individual countries. In 2009, Novartis announced its plans to move into the Ayurvedic category in India. This is a fast growing category in India and the products registered as Ayurvedic can be sold without prescription and through any retail channel including supermarkets and grocery retailers. Novartis also launched an OTC version for its nasal decongestant brand in a spray format.

The company plans to form joint ventures and acquisition deals with local players to facilitate quick expansion in these countries. In 2005, for example, Novartis formed a joint venture with Chongqing Taiji to manufacture OTC medicines in China. In China, Novartis is looking to acquire only those local OTC companies which have annual sales of over $73m.