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Swiss pharmaceutical duo “best in global class”

The pharmaceutical industry is blooming Keystone

Switzerland’s big two pharmaceutical companies posted contrasting 2009 results but analysts view Novartis and Roche as the most solid firms in their global field.

Having trailed behind Roche over the last few years, Novartis appeared to have turned a corner with a record-breaking performance in 2009. Roche is tipped to amply recoup the acquisition costs that dented its 2009 profits.

Both Basel-based firms are standing on solid foundations and are poised to reap strong benefits in the next two years, according to industry watchers.

“They have strong pipelines and assets that they can develop and they have the potential to leverage margins with above average volume growth,” Julius Bär analyst Christophe Eggmann told “In terms of risk reward and valuation they represent the most attractive investments in a global context.”

Novartis has impressed observers with its ability to close the gap on its rival with a strong production line of new drug products.

In previous years, the company had been forced to compensate for its inability to produce enough new medications by diversifying its portfolio into other areas. But the proposed acquisition of eye care company Alcon should mark the end of this phase, according to observers.

Different figures

“Pharmaceutical companies typically go through product cycles. But Novartis is poised to launch a lot of drugs into the market and this should maintain a reasonable level of momentum,” explained Helvea analyst Karl Heinz Koch.

Record-breaking profits of $8.4 billion (SFr8.7 billion) last year – up four per cent from 2008 – showed Novartis in excellent financial health. The only questions are whether its new drugs can plug the hole of expiring patents and if the troubled Alcon takeover can successfully generate long-term profits.

Roche’s 22 per cent decline of profits, to $8.5 billion (SFr8.95 billion) last year, was explained as being the result of huge restructuring costs associated with the completed acquisition of biotech firm Genentech.

Roche said the full merger would bring synergy savings of SFr1 billion by 2011 and that repayments of the loans used to bring off the deal were well on track.

Analysts were not entirely convinced by all the explanations offered for a rather disappointing set of bottom line figures in 2009. There are some fears that Roche’s expensive flagship cancer treatments may be facing a squeeze in countries that are trying to save on healthcare costs.

On right tracks

“The trouble is that their main cancer drugs underperformed for the second straight quarter and that raises question marks about what the real problem is,” said Koch.

There are also signs that Roche’s formidable line-up of new blockbuster drugs is slowing down. But Koch is convinced the pharmaceutical giant has the capability to find solutions before the problem becomes too severe.

“Roche is still waiting for new product launches and the company is still living off drugs produced many years ago,” he said. “But one of the positives for Roche is that it is not facing any significant patent challenges in the next five years and it has time to develop up its emerging pipeline.”

“At the end of the day, the company is in a very stable situation.”

Comparing Roche and Novartis directly is not an easy task as they have pursued such different strategies in the last few years, according to Eggmann. But the market expectations for the two companies appears to have slightly shifted after they produced their annual results.

“The reaction to Novartis was positive and for Roche more negative,” he said. “Roche’s numbers were fulfilled but the expectations were for better results. But in terms of business performance, both companies are on the right track.”

Matthew Allen,

Novartis 2009 full-year financial results:

Net sales: $44.3 billion (SFr46.7 billion) – up 11% on 2008.

Operating income: $11.4 billion (SFr12 billion) – up 11%.

Net profit: $10.3 billion (SFr10.9 billion) – up 8%.

Proposed dividend payment increased by 5% to SFr2.10 per share.

2010 outlook: Novartis expects net sales to increase in the mid-single digit percentage range this year.

Roche 2009 full-year financial results:

Net sales: $49 billion (SFr51.6 billion) – up 8%.

Operating income: $15 billion (SFr15.8 billion) – up 8%.

Net profit: $8.5 billion (SFr8.95 billion) – down 22% (including one-off costs relating to restructuring and the Genentech acquisition).

Proposed dividend payment increased up 20% to SFr6 per share.

2010 outlook: Roche expects net sales to increase in the mid-single digit percentage range this year. Tamiflu sales are expected to decrease from SFr3.2 billion to SFr1.2 billion in 2010.

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