DAVOS: Novartis Presents a Clear Vision for Investors

Drug maker Novartis (NVS) doesn�t have a cure for the world�s economic problems, but its stock can pep up investors� portfolios.

The Swiss company this week reported earnings for 2012 that largely met expectations. However, it is Novartis� forecast of good times ahead that is the cause for excitement.

Novartis said its next growth phase is expected to begin this year, resulting in sales growth in 2014 and 2015 of �at least mid-single digits,� with core operating income growing ahead of sales.

Investors welcomed the news by driving up the stock 4%. It has dipped a little since, but traded Friday at 62.15 Swiss francs, up more than 8% since the start of 2013 and close to its 52-week high. It trades at just below 13 times forecast 2013 earnings of 4.84 Swiss francs per share, a potentially modest rise from 4.81 Swiss francs earned in 2012.

Sanofi (SNY), Pfizer (PFE) and Merck (MRK) appear cheaper at 12-month forward price-to-earnings ratios of just below 12 times, but looks can be deceiving.

On the sidelines of the World Economic Forum in Davos, Switzerland, Novartis Chief Executive Joe Jimenez attributes the upbeat outlook to the dramatic growth of new products like multiple sclerosis treatment Gilenya, which posted $1.2 billion in sales in 2012, fast-growing emerging markets like China, and a reduced impact from generic competition.

Sales in 2013 are likely to be flat as generics reduce sales of blockbuster heart drug Diovan by as much as $3.5 billion. But the benefits should come fast after that.

Another reason for optimism is that Novartis expects to have 14 blockbuster drugs in its cabinet by 2017 compared with eight last year. A blockbuster is a drug with more than $1 billion in annual sales. �When you look at many of those blockbusters that we are projecting, they are already on the market,� says Jimenez, pointing to advanced breast cancer drug Afinitor and chronic obstructive pulmonary disease treatment QVA149.

Profit margin in 2012 slipped 0.7% to 26.7% in large part due to the patent expiry on Diovan. �Once we get out from under Diovan and it is in our base, we expect to see margin expansion in 2014 and 2015,� Jimenez adds. Part of that increase will come from reduced costs such as synergies from purchasing.

Jimenez doesn�t think Novartis needs to be part of any industry consolidation because he believes it is well positioned for the next five years. However, he doesn�t rule out bolt-on acquisitions in the range of $2 billion to $4 billion.

While retaining the flexibility to make those deals, Jimenez says strong dividends are the company�s top priority. Novartis, which has a market value of more than $182 billion, is proud of its record of paying higher dividends for each of the past 16 years. Its share yield 3.7%.

He adds that although the company hasn�t announced a formal share buyback, that �doesn�t mean we won�t buy back shares.� However, he notes that Novartis still has more than $11 billion in debt from the $50 billion acquisition of Alcon, the global leader in eye care.

Still, several analyst reckon the stock can hit 70 Swiss francs or more, suggesting upside of at more than 12%.

Novartis clearly has good vision. Investors should consider sharing�in it.

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