Novartisis one of the largest pharmaceutical firms in the world, and over an extended period in the recent past, the average effective patent life for branded drugs was 11.5 years, it consistently earned higher ROES than the pharmaceutical industry as a whole. The Pharmaceutical industry had an impressive track record of generating strong growth and returns for shareholders over an extended period. For example, from 2016 to 2019, the industry reported revenue and earnings growth of 11 percent per year, and had an average return on book equity of 17.5 percent. Two forces had combined to help create this sustained high performance. First, the industry had been remarkably successful in creating new innovative drugs to address patient needs. This was a costly process. Only one in 5,000 to 10,000 compounds tested in the laboratory reached the market, and of these only 30 percent were a commercial success. A second factor behind the industry's performance was its strong slaes and marketing capability. On average, pharmaceutical companies spent 30 percent of sales on sales and marketing costs. Required: As a pharmaceutical analyst, what factors would you consider to be important in making projections of future ROES for Novartis? In particular, what factors would lead you to expect Novartis to continue to be a superior performer in its industry, and what factors would lead you to expect Novartis future performance to revert to that of the industry as whole?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Novartisis one of the largest pharmaceutical firms in the world, and over an extended
period in the recent past, the average effective patent life for branded drugs was 11.5
years, it consistently earned higher ROES than the pharmaceutical industry as a whole.
The Pharmaceutical industry had an impressive track record of generating strong growth
and returns for shareholders over an extended period. For example, from 2016 to 2019,
the industry reported revenue and earnings growth of 11 percent per year, and had an
average return on book equity of 17.5 percent. Two forces had combined to help create
this sustained high performance. First, the industry had been remarkably successful in
creating new innovative drugs to address patient needs. This was a costly process. Only
one in 5,000 to 10,000 compounds tested in the laboratory reached the market, and of
these only 30 percent were a commercial success. A second factor behind the industry's
performance was its strong slaes and marketing capability. On average, pharmaceutical
companies spent 30 percent of sales on sales and marketing costs.
Required:
As a pharmaceutical analyst, what factors would you consider to be important in making
projections of future ROES for Novartis? In particular, what factors would lead you to
expect Novartis to continue to be a superior performer in its industry, and what factors
would lead you to expect Novartis future performance to revert to that of the industry as a
whole?
Transcribed Image Text:Novartisis one of the largest pharmaceutical firms in the world, and over an extended period in the recent past, the average effective patent life for branded drugs was 11.5 years, it consistently earned higher ROES than the pharmaceutical industry as a whole. The Pharmaceutical industry had an impressive track record of generating strong growth and returns for shareholders over an extended period. For example, from 2016 to 2019, the industry reported revenue and earnings growth of 11 percent per year, and had an average return on book equity of 17.5 percent. Two forces had combined to help create this sustained high performance. First, the industry had been remarkably successful in creating new innovative drugs to address patient needs. This was a costly process. Only one in 5,000 to 10,000 compounds tested in the laboratory reached the market, and of these only 30 percent were a commercial success. A second factor behind the industry's performance was its strong slaes and marketing capability. On average, pharmaceutical companies spent 30 percent of sales on sales and marketing costs. Required: As a pharmaceutical analyst, what factors would you consider to be important in making projections of future ROES for Novartis? In particular, what factors would lead you to expect Novartis to continue to be a superior performer in its industry, and what factors would lead you to expect Novartis future performance to revert to that of the industry as a whole?
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