The Smart Pill That Was Worth $104 Billion

Big pharmaceutical companies often invest millions of dollars in up and coming biotechs. But it’s quite unusual for a small investment to create billions of dollars of value.

But that’s exactly what happened just a few years ago. That’s when Novartis (NYSE: NVS) made a small investment in a California firm that was working on a top-secret project. Within just two years, that single investment helped create more than $100 billion in shareholder value.

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Back in 2009, Novartishad just reported a record year, with sales topping $44 billion. With earnings growing, the company was sitting on more than $17 billion in cash.

Few people noticed the news release on January 12, 2010. That was the day that a small California startup called Proteus Biomedical announced a partnership with Novartis. The company has since been renamed Proteus Digital Health.

Proteus had been working to develop a sensory enabled “smart pill.” Put simply, the smart pill can be swallowed and gathers sensory information used to diagnose a patient. This was – and still is – the most cutting edge of medicine.

Novartis saw the potential, and invested $24 million in Proteus. Far more important than the investment was the partnership. Novartis obtained an exclusive license to the “smart pill” in the areas of organ transplantation. Plus, Novartis obtained the option to expand its exclusive license to include cardiovascular, oncology, and pharmaceuticals.

With Novartis’ partnership and financial backing, Proteus continued to work to develop its products for another two years. Then in July 2012, the company got the news it was waiting for.

The U.S. Food and Drug Administration (FDA) approved the Proteus ingestible sensor as a medical device. It had taken four years for the FDA to approve the brand new category of medical device.

In the two years prior to the announcement, Novartis shares had made very small gains. Between July 2010 and July 2012, the stock trailed the S&P 500 and gained 19%.

Since the FDA approval, Novartis shares have soared 76%. That return compares with a respectable 48% gain for the S&P 500 during the same period of time.

That may not sound like a huge gain. But a 76% rise in Novartis stock is a huge increase in market value. In the two and one-half years since the smart pill was approved, Novartis’ market capitalization has increased from $134 to $246 billion.

That means the creation of $104.4 billion in market value. That’s a huge increase for a company of this size.

You’re probably wondering what was behind that big move. Obviously a company like Novartis has lots of moving parts and factors that can contribute to a big rise in value.

I started by digging into the financial results. Usually the financials will tell the story, and explain a big move for an established blue chip like Novartis.

But what I discovered was surprising. The company’s financial performance between 2012 and 2014 wasn’t impressive. It wasn’t terrible…but it wasn’t the type of performance I expect from a stock that’s crushing the market.

Between 2012 and 2014, Novartis sales rose 2.3% and net income grew 7.3%. Those results weren’t impressive enough to justify a 76% rise in the stock. In fact, I don’t think the financials had any impact on the stock price.

Instead, it was new developments that were fueling the rise of Novartis stock. In the world of biotechs and pharmaceuticals, it’s often the story of the next big thing that matters most. That was certainly the case with Novartis.

The company’s $24 million investment and partnership with Proteus helped create more than $100 billion in shareholder value in less than three years. Of course it’s impossible to determine exactly how much value was derived from this specific partnership.

Right now, another company is developing the next generation smart pill. I have every reason to believe that this new medical device could revolutionize the entire way in which we diagnose diseases and treat patients.

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