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Healthy Gains

04/15/2005 12:00 am EST


Neil George

Editor, Profitable Investing

Patent expirations for prescription drugs have hurt many big pharmaceutical stocks. Despite this challenging environment, Neil George sees opportunity among select drug firms. Here, he looks at two favorites positioned to buck the trend in the sector.

"The wave of patent expirations represents a significant hit to the bottom line of most major pharmaceutical companies. But not all big drug companies are exposed to the patent-expiration problem. Switzerland-based Novartis (NVS NYSE) already has several blockbuster drugs, including Lamisil for the treatment of fungal infections and Diovan for the treatment of hypertension. Few of its bestselling drugs are scheduled to lose patent protection in the next few years. Novartis also wins major points for its strong pipeline of promising new drugs under development. In all, it expects to submit about five new drugs for FDA approval in 2005. Even better, Novartis may actually benefit from the coming wave of patent expirations—it recently acquired US generics producer Eon Labs and two German generic drug manufacturers. These acquisitions make it the world’s largest generic drug company; all the drugs coming off patent in the next five years represent potential new markets. Buy below 51.

"Last year’s mega-merger between France’s Sanofi-Synthelabo and Switzerland’s Aventis created one of the most promising big drug companies in the world, Sanofi-Aventis (SNY NYSE). More than half of the company’s annual sales currently come from five key products, including Plavix (used to treat cardiovascular disease and stroke victims) and Aprovel (for high blood pressure and certain types of kidney disease). Like Novartis, few of Sanofi’s major drugs are going off patent in the next few years. But that’s just icing on this cake. More important are the cost savings from last year’s merger and one of the industry’s most promising drug pipelines. Management is currently targeting about 1 billion euros ($1.35 billion) in cost savings resulting from the merger. Look for streamlining at Aventis to produce the bulk of the cost savings. One of the most promising drugs in Sanofi’s pipeline is Acomplia, an antiobesity drug that’s currently in late-stage trials. In total, there are more than 50 compounds in the pipeline at varying stages of development. Buy below 45."

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