Novartis: An Ex-U.S. Proxy for Global Healthcare

In mid-July, Novartis (NVS) reported better-than-expected financial results for Q208 due to sales growth of 14% (which included a 9% forex benefit thanks to a weak US Dollar), resulting in an EPS of $0.98 for the quarter. Pharmaceutical sales were driven by strong demand for the blood pressure drug Diovan, which faces generic competition in 2012, and cancer drugs such as Gleevac, Zometa, and Femara. Novartis is expected to file for regulatory approval of cancer drug Afinitor by the end of this year. As illustrated in the accompanying five-year chart, Novartis has outperformed both its larger US rival Johnson & Johnson (JNJ) and the iShares S&P Global Healthcare exchange-traded fund (IXJ).

• NVS: Market Cap - $133 billion [B] , Dividend Yield - 2.5%, Forward P/E - 14.6
• JNJ: Market Cap - $195B, Dividend Yield - 2.7%, Forward P/E - 14.6

Earlier this month, Novartis purchased a 25% stake in the Swiss eye care giant Alcon (ACL) from Nestle for $10.4B in cash with the option to buy Nestle's remaining 52% stake for $28B in the period between January 2010 to July 2011. Novartis also owns about one-third of the shares of Roche (RHHBY.PK), which recently announced plans to acquire the remaining stake in US biotech giant Genentech (DNA). The business segments for Novartis include (based on FY07 data):

• Prescription Drugs: 63% of sales and 76% operating profits
• Generic Drugs (Sandoz division): 19% of sales and 12% of profits
• Consumer & Animal Healthcare: 14% of sales and 18% of profits
• Vaccines & Diagnostics: 4% of sales and 1% of profits
• Sales by Region: 40% in Europe, 36% in US, 8% in ex-US Americas

Brand drugs with over $1B in sales for 2007 include: Diovan ($5B), Gleevac ($3.1B), Zometa ($1.3B), and Sandostatin ($1B). The Company invested about 16% of 2007 sales into R&D and has 15 late-stage, Phase 3 trails underway. Novartis differentiates itself from JNJ mainly through its Sandoz generic drug division and its recently-acquired stake in eye care giant Alcon. For investors who prefer to invest in individual stocks rather than ETFs, a combination of JNJ and Novartis would be a good long-term choice for diversified, global exposure to the healthcare sector.

Disclosure: none