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Novartis Shifts Strategy to Reinforce Growth

As patent expirations loom, pharma giant focuses on generics


Perhaps fear that Novartis (NYSE:NVS) is losing patent protection on some of its key drugs has steered investors away from investment shares in the company, but upon closer examination, there are good reasons Sanford Bernstein industry analyst Tim Anderson says the Swiss pharmaceutical giant is well positioned for the long haul.

As the patent cliff threatens Big Pharma, Novartis can fall back on its large nonbranded drug operations. The company recently purchased Alcon, the eye-care giant, and controls Sandoz, the world’s No. 2 generic-drug maker, behind Teva (Nasdaq: TEVA).

To grow its generic business, the company is following a strategy focused on difficult-to-make drugs that span three categories: Biosimilars, oncology injectables and respiratory drugs, Novartis CEO Joseph Jimenez said in a recent Fortune interview. Over the next five years, the biologics that are going generic represent more than $60 billion in sales.  Via differentiation, Novartis hopes to command premium prices for its generics that competitors can’t.

The focus on generics doesn’t mean Novartis is ignoring R&D. Quite the contrary.  Jimenez says he is committed to cutting costs elsewhere to allow the company to keep its $8 billion per year R&D spend, ensuring the pipeline remains full and flourishing. However, the company’s strategy is changing. Rather than go after blockbuster indications, Novartis is pursuing a particular disease pathway with a drug designed to treat a rare disease, thus improving its chances for regulatory approval. It would then expand on the treatment label by adding a more common disease that is affected by the same pathway.

Novartis sees excellent long-term growth from emerging markets, particularly China. The company is counting on government officials there to follow up on their commitment to reform the health care system and widen insurance coverage to include many more of the hundreds of millions of rural residents. Novartis plans to spend more than $1 billion through 2014 in a pair of R&D centers near Shanghai, confident the Chinese government will continue to do a better job of enforcing intellectual property laws.

Novartis does face some formidable challenges. The loss of patent protection on its best-selling drug, Diovan for hypertension, is imminent. What’s more, profits fell during the last two consecutive quarters as sales of the company’s influenza vaccine declined following the end of the flu pandemic and as the company purchased its remaining stake in Alcon.

But the reasons to like the stock seem to far outweigh any negatives. Novartis recently halted a trial of Afinitor in advanced breast cancer patients because the drug had already met its goal of extending the time period before tumors began to grow again. Later this year, it plans to ask regulators for approval to market Afinitor for breast cancer. If successful, sales for that use are expected to peak at around $1.8 billion.

There are other big pluses. The company has increased its dividend for 14 consecutive years, has a strong balance sheet and sports consistent revenue growth.  At just under 15, its trailing P/E is below the industry average. Based on projected earnings of $5.51, the stock should be in the 80s next year if its P/E holds.

There seem to be no good reasons Novartis is today trading at the same price it was nearly five years ago. Opportunity is knocking.

Article printed from InvestorPlace Media,

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