New Focus for Novartis

12/11/2014 7:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Most of the major blockbuster drugs that drove companies' performance in the last 15 years have come off patent or are due to do so within a year or two, observes Gavin Graham, contributing editor to Internet Wealth Builder.

As such, the weak performance of these stocks has already reflected this and also made them appear good value. As such, it now appears as if this period of relative underperformance by pharmaceutical stocks is coming to an end.

Given this backdrop, I'd like to recommend the Swiss multinational Novartis (NVS), which is transforming itself from a traditional, somewhat sprawling, drugs and medicines group into a more focused entity.

Novartis' areas of pharmaceutical specialization are cancer, hypertension , multiple sclerosis, macular degeneration, myeloid leukemia, Type 2 diabetes, asthma, pulmonary disease, and myelofibrosis.

The major reason for recommending Novartis are the deals it announced in April of this year, which are due to close in the first half of 2015.

The first involves the purchase of Glaxo's oncology division for $14.5 billion, plus an additional $1.5 billion contingent upon development milestones being achieved.

The acquisition will bring in such drugs as Votrient, Tafinlar, and Promacta for renal and breast cancer and Hepatitis C.

In return, Glaxo is buying Novartis's vaccines business (excluding flu vaccines) for $5.25 billion upfront—plus up to $1.8 billion in milestones—and Novartis will continue to receive royalties on the vaccines.

Next, Glaxo and Novartis are merging their consumer products group into a joint venture with Novartis holding 36.5% of the combined group. This group will have a number of well-known brands such as Panadol, Excedrin, Zovirax, Aquafresh, and Sensodyne.

Novartis agreed to sell its animal health division to Eli Lilly for $5.4 billion and its flu vaccine business to CSL of Australia for $275 million. The animal health deal is expected to close in the first quarter of 2015 and the flu vaccine deal in the second half.

I recommend the Novartis ADR as a Buy, due to its strong position in a number of major pharmaceutical treatments that will experience growth over the next few years. I also like its wide geographical reach, its strong balance sheet (29% debt/equity), and the refocusing on its core areas.

Novartis is only selling for 16.5 times 2015 forecast earnings and yields 2.9%. Dividends have increased by an average of 10% annually for the last five years.

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