Novartis: In the Pipeline

Novartis AG, the giant, Swiss-based drugmaker, sells at about $57 a share -- just $5 more than it sold for in 1999. But the stock's tepid appreciation seems likely to accelerate over the next several years.

Novartis on Monday reported that first-quarter earnings rose 32% from the same period a year ago, to 83 cents per share. Part of the increase was attributed to lower marketing costs, but most was because of a 13% increase in sales, to $8.3 billion. The stock, however, barely budged because analysts -- while surprised by the robust earnings number -- had, on average, expected revenues of $8.5 billion.

But Novartis may well be the best positioned of the major pharmaceutical companies. It has four blockbuster drugs -- drugs with annual sales over $1 billion. They are leukemia drug Gleevec; Lotrel and Diovan for hypertension; and Zometa, another cancer drug. Sales of all four are still growing at double-digit annual rates.

The pipeline? "That's where it gets really exciting," says Trevor Polischuk, an analyst with Orbimed Advisors, which manages Eaton Vance Worldwide Health Sciences fund. Novartis is the largest holding in the fund at more than 7% of assets. Novartis just filed with the Food and Drug Administration for approval of two new drugs, one for hypertension and one for diabetes. "They'll be first-in-class drugs," says Polischuk. "They're not 'me-too' drugs." In addition, he says, Novartis boasts "a whole host" of other promising drugs in its pipeline.

What's more, Novartis faces few expiring patents in the near future, a problem that bedevils many other big pharmaceutical companies. Only one of its key drugs will lose patent protection by the end of the decade. Novartis must contend with some of the same pressures that other drug companies face, however -- most important, pressure by governments around the world to stem rapidly rising drug costs.

Chief executive Dan Vasella has done a fine job fostering the right atmosphere to keep research scientists developing new drugs. He worries some on Wall Street, though, because he's acquisitive. But Novartis's most recent purchase, biotech company Chiron, looks promising. "Novartis has deep pockets, tons of cash flow and a great balance sheet," Polischuk says. Indeed, debt is just 4% of capital, and the firm has $11 billion in cash and securities.

The stock (symbol NVS) sells at 17 times Polischuk's 2006 earnings estimate of $3.32 per share. That's about the same price-earnings ratio as most of Novartis's rivals. But Polischuk figures that Novartis's earnings will grow 17% per year through 2009 -- much more than its competitors. "On a price-earnings-to-growth basis, Novartis is the cheapest of all the big pharma companies" he says.

--Steven Goldberg