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Tuesday August 24, 2010
Novartis (NVS): Healthy gains from solid pipeline
by Elliott Gue, contributing editor Personal Finance  For years the healthcare sector had a well-deserved reputation for consistent returns and profitability regardless of broader economic conditions. But the past two years have challenged this reputation, and these stocks are out of favor. Some favorites, such as Novartis (NVS) are trading at their most attractive valuation in years. Although the sector faces undeniable challenges, markets often overreact to new regulation, providing attractive entry points for savvy investors and a low bar of expectations. On a forward price-to-earnings basis, health care stocks are almost as cheap today as they were at the market’s 2009 nadir--despite improved economic prospects and credit conditions. And on a relative basis, health care stocks traditionally have commanded a premium to the S&P 500 thanks to their defensive growth characteristics. In terms of price to sales, the group trades at a 10 percent discount to the broader market, near historic lows. 
To play the group, focus on pharmaceutical firms with a solid pipeline of new products and companies in niche sectors with long-term growth potential and little exposure to coming reforms. Growth Portfolio holding Novartis’ largest division is branded pharmaceuticals, which accounts for roughly three-quarters of operating income. The company’s blockbusters are Gleevec, a cancer drug that generates $1 billion in quarterly sales, and Diovan, a hypertension treatment that accounts for $1.4 billion in revenue each quarter. Diovan poses a bit of a near-term risk to revenue; the drug’s European patents expire in 2011, while its US protections will sunset in 2012. But Gleevec’s patents will hold until 2015, and Novartis boasts a robust pipeline that includes more than a dozen major drugs in later-stage Phase III trials. Several recent product launches also will offset revenue lost to generic competition. Promising compounds in the later stages of development include FTY720, a treatment for multiple sclerosis, and a new vaccine for meningitis B. New product launches accounted for 21 percent of net sales in the second quarter, up from just 16 percent a year ago. Sales of the company’s new products jumped 43 percent from the prior year, led by potential blockbusters Lucentis, an eye-disease treatment, and Afinitor, a cancer drug. Novartis also wins points for its diversified business lines. The company’s generic unit, Sandoz complements its prescription drug business and should enable the firm to benefit from a wave of patent expirations over the next three years. Novartis also beefed up its vaccine business with the acquisition of Chiron; with only a handful of competitors in vaccine production, higher margins are around the corner. Novartis rates a buy under 55. Learn more about this financial newsletter at Personal Finance. |
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