Drug Failures and Firings will Hurt Novartis, But Can a Dividend Heal All Ills?

Novartis

is looking to decrease its American workforce in a move that will find almost 2,000 looking for work. Citing the loss of its patent for blood pressure drug Diovan, the firm said it will lower its American work force by 1,630 positions immediately, with another 330 jobs to be lost in the near future when it restructures its U.S. headquarter operations in Q2 2011. Diovan already lost its European patent and its American patent is expected to end in September. Its Japanese patent will be lost in 2013. Currently, the drug earns the firm $6 billion a year in revenue. In a separate financial move, the company is also looking to take a one-time charge of $900 million thanks to disappointing results for its new blood pressure drug Rasilez, also known as Tekturna in the United States, a renin inhibitor that has had disappointing trial results. Novartis had to halt the

in December 2011 when the drug showed disturbing side effects, such as increased non-fatal strokes, renal complications, hyperkalemia, and hypotension in high-risk groups. Rasilez-based products were much anticipated for the firm, which had already sold $449 million of the drug by September 2011, although it hadn't yet turned a profit. The company had previously hoped the new drug would provide 2% of the firm's sales in 2011. The firm revised its sales estimates for the new drug. Kepler Capital Markets analyst Martin Voegtli told Reuters that he expects the market "to correct substantially" for the failure of the new drug, noting that the market has yet to revise its valuation of Novartis in light of the failure. The firm's movements will have a number of short and long-term effects on the company's stock price, which was down 0.77 points, or 1.36%, in pre-market trading. Restructuring will cost the company $160 million in Q1 2012, which will bring expected one-time charges to over $1 billion for the firm in its first quarter of the new year. With a P/E ratio of 13.32 and an already decreasing profit margin (which fell from 19.33% to around 16.5% by the end of 2011), the company's stock price may take a heavy beating both in anticipation of those results and after they become a reality. On the flip side, Novartis maintains a healthy annual dividend, which hit 2.36 at the beginning of 2011, producing a yield at the time of over 4%. The company usually announces its dividends in February, which may counteract a bearish trend in the stock caused by one-off charges that investors might find to be more tolerable than the current market is showing.