Merryn's Blog

A Swiss drug giant to pop into your portfolio

Ten years ago, investors were high on the major drug stocks. But these days, 'big pharma' has fallen right out of favour. That gives us a chance to cash in on a cheap sector.

Ten years ago, investors were high on the major drug stocks. But these days it's all changed 'big pharma' has fallen right out of favour.

The good news is, that gives us a chance to cash in on a cheap sector. And an upbeat trading statement today has added extra spice to one European drug maker - Novartis (VX: NOVN).

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Last week in Money Morning we highlighted that within the last decade, US pharmaceutical stocks have moved from trading on a 40% p/e multiple premium to the rest of the market, to a 40% discount, according to data from Bloomberg.

It's a similar story in Europe. The rating of Swiss healthcare giant Novartis has almost halved since 2000. At CHF53, the stock's now on a forecast p/e of under 12 for next year, and a current yield of 4% which is expected to rise to 4.3% in 2010.

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Even if growth was poor, you could hardly call that expensive. But in fact, today's trading update says that growth will be better than expected. Overall, 2009 sales will rise at a "high single digit" rate, compared with a previous forecast of a "mid single digit" increase. And revenue at the firm's pharmaceutical unit is now expected to grow at a "double digit" rate, compared with an earlier estimate for "high single digits" growth. And this excludes anticipated revenues of as much as $700m from fourth-quarter swine flu vaccine sales.

Recently introduced drugs are doing well too. Products such as Lucentis for eye disease, the Exforge high blood pressure drug, and the Reclast treatment for brittle bones generated net quarterly turnover of $1.3bn, i.e. 18% of pharma revenue compared with 11% a year ago. That's good news, as one of investors' main worries has been post-2012 patent expiries in the US of the firm's best sellers, the hypertension drug Diovan and the cancer medicine Gleevec.

"Everything is going really well for Novartis at the moment and a lot of things are falling into place", says Karl-Heinz Koch at Helvea. "There is a really good story building for the next couple of years".

Sounds like it's worth buying now to get the benefit.


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