Novartis: A Deeply Undervalued Buy At $54

| About: Novartis AG (NVS)
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Novartis (NYSE:NVS) has recently completed its acquisition of Fougera Pharmaceuticals through its own generic division Sandoz. The move has strengthened its position in diversification over other competing companies. This provides a competitive advantage to Novartis in global competition, also. The stock is currently trading around $54 per share, which I think is highly undervalued. I sense a signal of strength for Novartis in this acquisition news, but also in its drug development news and I predict strong growth of company coming soon.

Healthcare has been a busy bee with mergers and acquisitions globally. In April, the industry made about 200 deals totaling more than $33 billion. No other sector could even come near to it in terms of buyouts and sell-offs. Furthermore, that number does not include Pfizer's (NYSE:PFE) $11.8 billion sale of its infant nutrition business to Nestlé. The acquisition ticker has been busy. Just last week, Watson Pharmaceuticals (WPI) acquired Actavis in a $5.6 billion deal, positioning the combined company as the third largest generics maker company with respect to sales. Meanwhile, AstraZeneca (NYSE:AZN) acquired US Biotechnology Company Ardea Biosciences in a $1.3 billion deal and Amgen (NASDAQ:AMGN), the US biotechnology group, paid $700 million for control of pharmaceutical company Mustafa Nevzat - a Turkish generic drugs company. Needless to say, the industry has been keeping busy.

The acquisition comes at a telling time for Novartis. The company reported a first quarter profit slide 8% on slumping sales of its over the counter medicines and top selling drug Diovan. Sales of the blood pressure medication fell down by 15% to $1.2 billion, in line with other analysts' expectations. The drug's U.S. patent protection expires this September 2012.

But that's really the only sour news for Novartis right now. There is plenty more good news on the development horizon for Novartis. Recent reports reveal that its drug to treat smokers' cough proved successful in recent trials. The drug has a wealth of possibilities once it reaches the market as the need for a smoking rehabilitation drug is wide. Competitors Pfizer and Boehringer Ingelheim both have similar treatments, but Novartis could, with the right marketing, take over their market share.

Estimates are wide-ranging for what kind of sales the new treatment (called QVA149 for now) will bring in. Even with the range, these estimates are all for hundreds of millions of dollars, with some predicting the treatment to bring in over $700 million in 2017. This estimate includes solid sales figures from Europe and Asia, which are definitely within the realm of possibility assuming the treatment has a good run first in the US.

But Novartis is not stopping there. The smokers cough treatment is not the only trick it has in its bag for new development, and now it's not the only drug to find early success. Novartis' drug SigniforR was recently approved in the EU, and will become the first available medication for the treatment of Cushing's disease.

The approvals come on the heels of a strange turn in drug developments for major competitors. Pfizer, Eli Lilly (NYSE:LLY) and AstraZeneca all recently contributed former compounds that previously yielded failure over to US scientists to see if they can produce mental illness treatments. The process is part of a cause begun by the Obama Administration in order to lessen the risks taken on by drug makers. If the treatments are successful, the profits will be split with these contributing companies and the US government. We will have to wait and see the results, but it's a no-risk situation for the drug giants.

Of course, this is not the only thing these companies are up to. Pfizer, only weeks after its huge sale to Nestlé, announced its first quarter earnings. The earnings report was very much in line with analysts expectations, though Pfizer did manage to squeak out over its target price. Still profits are down 15% because of newly introduced generic competition to the hot-selling Lipitor.

More importantly, perhaps, the company spoke to the future of its dealings, specifically its relationship to its shareholders. Pfizer was dismayed at how little its stock rose after the Nestlé deal, and is probably afraid the lack of excitement may discourage more investors. The company, at the earnings announcement, pledged to listen more to its investors, who encouraged it to make the mega-sale in the first place.

Eli Lilly may have to deal with much the same process following the decrease of its popular Zyprexa medication. For drug giants, replacing a top-selling drug is never easy, and the popularity and wide-reach of generics debuting only hurts more. Eli Lilly will have to go back to its drawing board and come up with a replacement. The first ticket drawn up on that board right now is Solanezumab, a treatment for Alzheimer's that, if successful, could generate as much as $9 billion sales. That move would be Eli Lilly's big ticket out of the slump, but all hope can't ride on one medication. The FDA review of the drug will be a huge moment in the year for Eli Lilly and for the drug industry at large.

With all the hullabaloo happening around them, Novartis is showing how a drug company makes its profits, and it's doing it in style. It's not only joining in on the jump of acquisitions, but it's also developing its own treatments. Or rather, I should say, had been developing its own treatments and now, with new approvals, will begin to reap the rewards for its work.

If the company finds success with SigniforR, and later with its smoker's cough treatment, look for an increase in price. If this all goes to plan, and you add the acquisition of Fougera, Novartis shareholders could be in for a major payday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.