3 Reasons Novartis Creates Long-Term Opportunity

| About: Novartis AG (NVS)

Novartis (NYSE:NVS) is an appealing investment due to its high dividend, adequate financial metrics, and strong portfolio of recently launched products. Novartis' second quarter earnings release detailed how the major worldwide pharma should be able to gain momentum for increasing revenues in the near term. Current shareholders should hold long term; interested investors should initiate a position in October or in the fourth quarter. Aside from being on track for its 2012 guidance, Novartis has had recent success in clinical trials for key products, including treatments for COPD and acute heart failure. The CART-19 collaboration with the University of Pennsylvania is also targeted to begin clinical trials before 2013.

Pfizer (NYSE:PFE), Merck (NYSE:MRK), GlaxoSmithKline (NYSE:GSK) and AstraZeneca (NYSE:AZN) are the major pharmas most comparable to Novartis due to the competing products amongst these diverse portfolios. Novartis' price is around 17 times earnings and 2.8 times sales; its price-to-earnings and price-to-sales ratio are both lower than Pfizer and Merck's corresponding ratios. Novartis' EPS is around $3.54; its 11.2% EPS decline in 2012 is the lowest among these major pharmas. AstraZeneca's $6.24 EPS and Merck's 634% EPS growth in 2012 are the highest among these firms. Novartis' current ratio is around 1.05 and its debt to equity ratio is around 0.34. GlaxoSmithKline's 2.44 debt-to-equity ratio is the highest among these firms. Novartis' sales have increased 11% in the past five years, only Merck's 16.2% sales growth was higher.

Novartis' ROE is around 13.1%, its operating margin is around 18.8% and its profit margin is around 14.9%. Novartis had the lowest operating margin among these firms. Its ROE and profit margin were higher than both Pfizer and Merck & Co. Novartis' 3.01 short ratio is the highest among the firms while it has the lowest beta score and its 0.33 relative volume is also the lowest among these firms. Novartis' average volume is around 2.2 million; this is higher than both GlaxoSmithKline and AstraZeneca. Novartis' annualized dividend is around $2.46, this is the highest among these major pharmas. Novartis' stock is up 12.6% YTD and up 2.5% in the past month; its stock has increased 7.5% since its last earnings release.

On the latest Novartis earnings report, second quarter net sales totaled $14.3 billion, increasing 1% under constant currencies (cc), YOY. Second quarter operating income totaled $3.18 billion, also increasing 1% cc, YOY. Novartis net income totaled $2.73 billion, increasing 5% cc, YOY. Novartis ended the second quarter with $2.31 billion in free cash flow, decreasing 30%, YOY. Revenue from the recently launched products offset the loss from the Diovan patent expiration. The products launched in 2007 have continued to perform strongly thus far in 2012.

Revenue from these products increased 8% to $4.1 billion, recently launched products account for 29% of net sales, increasing 400 bps, YOY. Net sales for pharmaceuticals totaled $8.3 billion, increasing 4% cc, YOY. Net sales increased 8% when Diovan is excluded from the equation; recently launched products accounted for $2.8 billion, increasing 28% cc, YOY. Sales volumes increasing 9% offset the 4% negative impact of generic competition and the 1% impact of lower pricing. The recently launched products now account for 34% of pharmaceutical sales, up from 28%, YOY.

Alcon sales totaled $2.6 billion, increasing 5% cc, YOY. Surgical sales increased 8% cc, YOY, this was mainly due to increased cataract product sales in emerging markets and the US; lens sales also increased 6% cc, YOY. Alcon realized three regulatory approvals in the second quarter while pharmaceuticals achieved five regulatory milestones regarding treatments for breast cancer, COPD and myelofibrosis. Alcon and the recently launched products are the main proponents of Novartis' success looking forward. Novartis still has leading positions in generics, vaccines and diagnostics, OTC medicines, animal health, eye care, and pharmaceuticals. Vaccines and Diagnostics sales increased 21% cc, YOY.

A few weeks ago the EC approved Seebri Breezhaler, Novartis' once-per-day inhaler for patients with COPD. The inhaled maintenance bronchodilator treatment was recently approved in Japan prior to the latest announcement. The phase iii clinical trials showed that Seebri Breezhaler was effective in improving lung function after the morning dose; it also improved shortness of breath and decreased the use of rescue medication. Patients realized a 21% improvement in endurance exercises compared to the placebo group. Onbrez Breezhaler, Novartis' other maintenance bronchodilator treatment for COPD patients with airflow obstructions, is also approved by the EU.

Novartis is currently developing QVA149, a combination of the two treatments; it plans to file with Japan and the EU before 2013, which could increase stock value, again making Q4 the time to buy. Novartis is the first firm to have two once-per-day monotherapy bronchodilators that operate differently and can both be used with Breezhaler devices. The EMA's Committee for Medicinal Products for Human Use recently provided a positive opinion on Votubia/Afinitor treatment for patients suffering from renal angiomyolipoma who don't need immediate surgery. This would be the first alternative treatment to surgery for patients with kidney tumors associated with tuberous sclerosis complex.

Novartis also recently announced success in phase iii clinical trials for RLX030; it reduced the mortality rate for patients with acute heart failure. RLX030 met both primary objectives in the trial and was well tolerated by the patients spanning across 11 countries. The data will be presented at the American Heart Association Congress in November 2012. This builds upon Novartis' success with positive phase iii trials in August 2012 for LCZ696, a treatment for chronic heart failure.

Recent phase iii studies showed Novartis' Gilenya, a once-per-day treatment for multiple sclerosis, is effective early-on in treating relapses. This treatment is highly rated among patients and investigators and as the potential to be the leading treatment in this sector. Clinical trials for CART-19, a treatment for chronic lymphocytic leukemia, are projected to begin in the fourth quarter. The partnership with the University of Pennsylvania, developing immunotherapies for the treatment of cancers, also bodes well for Novartis' long-term earnings outlook.

The robust portfolio of diverse products and high dividend make Novartis an ideal candidate for establishing a long-term defensive position. Payoffs from 2012 trials and FDA and EU approvals will begin in 2013, which should increase stock prices. Long-term investors will want to buy in late October or by end of Q4 before prices increase.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.