The Great Swiss Consolidator

Novartis likes to buy, and the drugmaker might not be through with takeovers.
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Novartis

(NVS) - Get Report

is starting off the new year with a reputation for having an appetite for acquisitions.

The company continues to digest last year's $8.3 billion acquisition of two generic drug firms, and it

hopes to complete by midyear the $5.1 billion purchase of the 56% of

Chiron

(CHIR) - Get Report

that it doesn't own.

More deals could be on the way for Novartis, which is itself the product of a merger between the Swiss drugmakers

Ciba-Geigy

and

Sandoz

in 1996.

The most prominent possible takeover, analysts' speculate, is the Swiss biotech company

Serono

(SRA)

, which hired Goldman Sachs two months ago to explore strategic options.

Novartis has closed four acquisitions in the last two years, but it hasn't devoured every potential target. On Tuesday, it decided against making a hostile offer for the Swiss vaccine maker

Berna Biotech

. Last month, Novartis said it was mulling whether to outbid the Dutch drugmaker

Crucell

(CRXL)

for Berna.

Not that long ago, Novartis went through a similar process of publicly contemplating whether to bid for what was then

Aventis

before deciding against the move.

Sometimes, Novartis will settle for a big piece of a company. For instance, it owns 32.7% of its big neighbor

Roche

, and it holds a 57% stake in

Idenix Pharmaceuticals

(IDIX)

, a Cambridge, Mass., biotechnology company.

By Jan. 19, when Novartis releases its fourth-quarter and full-year financial data, investors may learn if Serono has been added to the menu. And they should get an idea how the generic drug company acquisitons -- Germany's

Hexal

and the U.S.'s

Eon Labs

-- helped Novartis close out 2005.

Learning to Scale

Among Big Pharma companies, Novartis has by far the greatest commitment to making and selling generic drugs. In fact, it's the world's largest generic drugmaker, at least until

Teva Pharmaceutical Industries

(TEVA) - Get Report

closes its purchase of

Ivax

(IVX)

later this month.

But Novartis' profit margins and stock price are driven by patented products, and five drugs should each produce more than $1 billion in sales this year. In October, Dr. Daniel Vasella, the chairman and CEO, said Novartis' nine-month results were "robust" and that his company was

on track for record sales and earnings for the full year.

For 2005, the consensus among analysts polled by Thomson First Call is that Novartis earned $2.75 a share on revenue of $32.3 billion. The consensus earnings predictions for 2006 and 2007 are $3.14 and $3.48, respectively.

Eight analysts have buy ratings and two have hold ratings, giving Novartis the strongest support among large drug companies, foreign or domestic, in the First Call universe. Shares of Novartis have outpaced the Amex Pharmaceutical Index of large drug companies at intervals of six months, 12 months, two years and five years.

"Novartis has solid growth prospects," analyst Gbola Amusa of Sanford C. Bernstein wrote in a research report last month. Despite its "relative underperformance" for much of 2005, Amusa believes Novartis' drug pipeline could be "a potential source of share price progession."

Amusa's long-term concern is that investors now expect a high level of research and develoment productivity that might not be sustainable. Acquiring the rest of Chiron, he says, would improve Novartis' opportunities not only in vaccines but in drugs and blood-testing markets. Amusa doesn't own shares of Novartis, but his firm has a non-investment-banking relationship with the company.

Pipeline Dreams

Analyst Albert Rauch of A.G. Edwards reaffirmed his buy recommendation in a report last month, citing Novartis' "strength in its current arsenal of products and the potential in its pipeline."

Rauch initiated a buy rating in early September just before the stock made a fourth-quarter surge. At the time, he focused on the sales growth of Diovan for hypertension, Gleevec for cancer and Zometa for bone pain caused by cancer. He said Novartis could enjoy as many as six product approvals in the U.S. by the end of 2007, adding that only one major product, the nail fungus treatment Lamisil, could lose patent protection before 2010.

Rauch doesn't own shares, and his firm doesn't have an investment-banking relationship, although his research report says the firm or an officer owns shares of Novartis.

Since raising his rating, Rauch has issued research reports noting more promising results for Gleevec in treating chronic myelogenous leukemia (CML), a slowly progressing disease, and favorable early-stage clinical trial results for a compound that treats patients with Gleevec-resistant CML.

Also encouraging are the preliminary results for a midstage clinical trial for valopicitabine, an experimental treatment for hepatitis C from Novartis' partner Idenix. Last week, the companies asked the FDA to approve their drug telbivudine for chronic hepatitis B.

In recent weeks, Novartis also has won FDA approval for expanding the use of the breast cancer drug Femara and for launching Exjade, a treatment for iron overload, a condition that can kill patients who require frequent blood transfusions to fight rare, chronic blood disorders.

Although potential takeovers and promising pipeline prospects capture a lot of headlines, investors also will be paying close attention next week to Novartis' biggest and fast-growing drugs. For the first nine months of 2005, Novartis had five drugs with sales above $778 million, including Diovan at $2.68 billion, Gleevec with $1.58 billion and Zometa at $910 million.

Among big sellers, the fastest-growing drugs include Gleevec, sales of which rose 35% in U.S. dollars vs. the first nine months of 2004. Femara sales jumped 44% to $390 million, and Zelnorm, a drug for irritable bowel syndrome, posted a 30% sales increase to $295 million.