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By Tim Begany

It is a good thing for long-term investors when the market only looks at things a quarter or two at a time. This short-sightedness causes lots of day-to-day volatility, but it can also create some attractive bargains.

Lately, for example, the market has been punishing a well-known healthcare stock, pushing the price down by more than 7% year-to-date and by 12% during the past 12 months. The market is leery of the company right now because of some short-term hurdles it has to overcome, but I think the opportunity outweighs the risk at this point.

Novartis (NYSE: NVS) remains an excellent investment, offering both a nice dividend -- currently $2.48 a share (good for a yield of 4.7%) and very solid growth potential during the next few years. Sure, the stock may have to endure more punishment in the near-term as Novartis works through its issues (and as the tough global economy weighs down the market in general). But I think the stock could rise at least 30% to $68 a share, from about $52 now. With the dividend, total returns could be 10%-12% a year through 2014.

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A well-diversified giant

Look at this way... Whatever else is going on, Novartis is still a well-diversified drug giant. Of the firm's $59.3 billion of annual revenue, about two-thirds -- $39.8 billion -- is from pharmaceuticals. Most of this, about $26.3 billion, is spread across 20 medications developed to treat a range of diseases from cancer, high blood pressure and eye problems to Parkinson's disease, asthma and diabetes. Annual revenue for each of Novartis' top-20 drugs ranges from nearly $500 million to $5.7 billion. Plus, the generic-drug division, Sandoz, pulls in another $10.6 billion a year, while the vaccines/diagnostics and consumer health divisions combine for annual sales of $8.9 billion.

Novartis should be able to maintain steady sales growth because it's constantly developing new drugs with blockbuster potential to help replace current blockbusters as patents expire. One example is Gilenya, a drug approved by the Food and Drug Administration in September 2012 for the treatment of multiple sclerosis. Annual sales could reach $1.7 billion by 2015, compared with about $385 million in 2011, analysts say. Another potential blockbuster, QVA149, has been highly effective in treating a lung condition called chronic obstructive pulmonary disease. Novartis plans to file for approval of QVA149 in Europe this year and in the United States by 2014. Annual sales could be in the $2 billion to $5 billion range, peaking sometime in 2020, analysts project.

Novartis has also been looking to stimulate sales through acquisitions. The purchase of the remaining 23% interest in Alcon Inc. for $12.9 billion on Dec. 16, 2010, for example, completed a full buyout of the company from Nestle (OTCPK:NSRGY). The acquisition has given Novartis strong exposure to ophthalmology treatments (for eye-related disorders), the second-fastest growing segment of the health care industry after oncology, and boosted annual sales by about $7.2 billion.

Potential hurdles

Perhaps the biggest near-term hurdle for Novartis is a highly publicized battle to prevent Indian pharmaceutical firms from making a generic version of Gleevec, the company's patented $1.5-billion-a-year leukemia drug. Besides threatening a major revenue source if the Indian Supreme Court doesn't see things the company's way, the case has garnered negative attention internationally from activists and protestors who claim the company is helping to limit the supply of cheaper medications for serious diseases. The Indian Supreme Court is scheduled to make a final decision on July 10.

As I alluded to earlier, Novartis also has expiring patents for key products. Its $5.7 billion high blood pressure drug, Diovan, for example, is scheduled to go off-patent in September. Xometa, a $1.5 billion cancer drug, goes off-patent in March 2013.

As if this wasn't enough, there was also recently unfavorable safety-related news about two other Novartis drugs, Tekturna and Elinogrel. Tekturna, a hypertension medication that generates $557 million of annual revenue, has been linked with stroke and other complications in patients with diabetes. And on Jan. 17, Novartis announced it would terminate development of Elinogrel, a new blood thinner, because of disappointing results in clinical trials. (There's new data suggesting two of Novartis' meningitis vaccines, Bexsero and Menveo, don't work as well as originally thought.)

I'm not too worried about the problems I mentioned with Tekturna, Bexsero and Menveo because they're not top-20 blockbusters. As for the decision to stop developing Elinogrel -- it happens. Besides, the overall product pipeline clearly isn't an issue at this point, since Novartis has drugs with blockbuster potential in the works.

Risks to Consider: Although it's well-diversified, Novartis still gets the bulk of revenue through pharmaceutical sales, meaning it depends heavily on a strong new-drug pipeline to keep sales growing as key patents expire. Failure to regularly develop new blockbusters could hinder future growth.

Assuming Sandoz and the other divisions continue to perform well and new acquisitions pan out, I think Novartis can comfortably meet analyst projections for a 5% rate of growth in sales. This would bring sales to $68.6 billion in 2014.

The company can also meet expectations for earnings growth, which analysts predict will expand by 6% annually to $4.50 a share from $3.78 in 2011. Assuming investors keep paying 15 times earnings for the stock, as they have historically, the stock price could hit about $68 in 2014 (15 x $4.50 = $67.50). That's at least 30% upside, and at the low-end of how I think this stock could perform.

Because the market has once again unfairly punished a high-quality stock by focusing mainly on short-term issues, Novartis is an attractive value, trading 20% below the one-year high of about $65 a share. The forward price-to-earnings (P/E) ratio of 7.5 (based on projected earnings of $3.90 a share in 2012) is half the historic P/E of 15. This means the stock would need to double just to be valued at its historical levels. This isn't out of the question, though the likelihood is lower in the current economic environment. Still, I wouldn't be surprised to see shares advance as much as 50% during the next couple of years.

Disclosure: Tim Begany does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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Source: Novartis: The Market Is Wrong About This Pharma Stock