WSJ
For investors willing to wait until next year, Novartis may finally regain some potency.
The Swiss drug maker's U.S.-listed shares have endured a string of selloffs and false starts over the last two years. The stock has gained just 8% in that time, lagging both the broader stock market and the NYSE Arca Pharmaceutical Index.
Despite new drug launches and the acquisition of eye-care company Alcon last year, Novartis (ticker: NVS) hasn't been able to offset dwindling sales of Diovan, the blockbuster blood-pressure drug that lost U.S. patent protection earlier this year. Add price cuts in Europe and lingering manufacturing problems, and revenue and earnings should shrink this year.
But next year should be much better. That's when CEO Joseph Jimenez sees profit growing again thanks in part to rising sales of cutting-edge new drugs. By 2014, he wants Novartis to grow bigger than it was in 2011 before Diovan went generic.
Add a 4% dividend yield and Novartis deserves better than the 11.5 times forward earnings it now fetches.
"This is a company that has a great pipeline and a [large] dividend yield, yet we trade at a below-market multiple," says Jimenez in a recent interview. "The Diovan patent expiration has created a wait-and-see situation. But this is a company that can grow through innovation."
With revenue of less than $59 billion last year, Novartis is one of the world's largest pharmaceutical companies, selling medicines for cancer, multiple sclerosis and diabetes, as well as vaccines, over-the-counter medications and generic drugs.
Roughly 54% of those sales came from brand-name prescription medications, with sales of Diovan and the cancer drugs Zometa and Gleevec exceeding $11 billion.
Unfortunately, Diovan sales will fall to roughly $4 billion this year. And next year, Zometa loses its U.S. patent protection, with Gleevec following in 2016.
Vaccine sales have been weak and quality-control problems at four production plants have hurt sales of generic drugs and consumer products.
Revenue will fall to just below $57 billion for the 2012 calendar year and yield earnings per share of $5.21, a 6% drop compared to last year, according to Thomson Reuters.
At a Glance
Novartis (NVS)
ADR Price: $59.08
52-Week High: $64.07
52-Week Low: $51.20
Market Cap: $142.7 billion
Est. 2012 EPS: $5.21 per share
Fwd P/E: 11.5 times
Est. Long-Term EPS Growth:* 2%
Est. ('12/'11) EPS Growth: -6%
Revenue (trailing 12 months): $57.5 billion
Dividend Yield: 4.20%
CEO: Joseph Jimenez
Headquarters: Basel, Switzerland
* Based on analyst estimates looking ahead three to five years.
Sources: Thomson Reuters and Yahoo! Finance
In 2013, however, Wall Street sees Novartis earning $5.30 a share. Sanford C. Bernstein analyst Tim Anderson says profit growth should average 5% to 10% annually through 2020.
Cost cutting has been a big focus for Novartis, as we noted in January (see Barron's Take, "Say Yes to Novartis," Jan. 14). Also, the company has invested heavily in emerging markets, which generate roughly 25% of sales.
But Novartis's real hope lies in rising sales among drugs launched in the last half-decade, and a promising pipeline that could deliver 14 or more blockbusters by 2017, including cancer, respiratory and heart treatments.
Novartis is well regarded for investing in research and development. And it's paid off with 30% of sales coming from drugs launched since 2007, a list that includes the kidney cancer drug Afinitor, the multiple sclerosis drug Gilenya and the diabetes drug Galvus.
But next year, Novartis plans to file for regulatory approval of a heart failure drug dubbed RLX030, or serelaxin. By 2014, it plans to seek Food and Drug Administration approval of the respiratory drug QVA149.
On Friday, the meningitis B vaccine Bexsero won backing from an advisory panel in Europe, which clears the way for regulatory approval there in the next three months.
"If they can deliver on their pipeline, there is upside to consensus sales and earnings estimates and that is when you will see the stock outperforming its peers among the big global pharmaceutical companies," says Brown Advisory analyst Paul Li.
Of course, Novartis has its detractors.
It's not the cheapest name among big drug makers, trading at a premium to rivals such as Pfizer (PFE) and Sanofi (SNY). The company can't afford regulatory delays or setbacks.
Critics argue that it could be 2014 before Novartis's bottom line starts expanding again.
No doubt about it, investors have had to swallow several bitter pills regarding Novartis. Still, it's poised to give investors what they crave -- earnings growth.
Add a growing dividend, and the stock can deliver potent returns.
