Novartis Offers Healthy Gains at a Bargain Stock Price

NEW YORK (TheStreet) -- There aren't many bargains left in Big Pharma stocks. With shares of Sanofi (SNY) , Merck (MRK) , and Pfizer (PFE) all trading at or near their 52-week highs, investors are having a hard time finding value. Novartis (NVS) , however, looks like a solid bet.

Like some of its peers, Novartis is mere percentage points away from a 52-week high. The stock trades around $93. The 52-week high sits at $94.66. Shares are up 16% on the year to date, topping the health care sector's 11% gain, according to Morningstar.

Even so, these shares are cheap. This is because, unlike Merck and Sanofi, Novartis is trading right around the industry average price-to-earnings ratio of 23, according to Yahoo! Finance. Merck and Sanofi carry multiples of 39 and 28, respectively. Plus, while Merck just posted a 1% year-over-year revenue decline, Novartis is growing at more than 3% and beating Merck in gross margin (66% vs. 63%).

On a forward-looking basis, Novartis is projected to earn $5.69 per share in 2015, according to Yahoo! Finance. So at around $93 per share, that drops Novatis' P/E to 16. That's two points lower than what investors are willing to pay for AstraZeneca (AZN) , which trades at a forward multiple of 18.

The way I see it, relative to its peers Novartis has an above-average risk/reward ratio that stands out within the sector despite the outperformance investors have already enjoyed in the stock this year.

With strategic maneuvering and reshuffling, management has Novartis well positioned for the next several years.

After picking off the oncology business from GlaxoSmithKline (GSK) , Novartis sold off its weak-performing animal health business to Eli Lilly (LLY) . That segment generated considerable losses and never had the breadth to become a moneymaker. That deal, which valued the business at five times revenue, infused Novartis with much-needed liquidity.

All told, these maneuverings, which also included merging the company's consumer health business with Glaxo, has turned Novartis into a more focused operation -- one that is now ready to compete more fiercely in cancer treatment.

For now, this should dispel fears about the company's pipeline. In that regard, investors should be encouraged by Novartis' heart failure drug LCZ696, which recently passed phase 3 trial. This should not be taken lightly. Heart failure afflicts more than five million Americans. According to the Centers for Disease Control & Prevention, it costs roughly $32 billion annually to treat.

To the extent Novartis can perfect LCZ696 and get it to market, the financial impact to the company can become substantial. Industry experts like Stephen Nissen believes the company is close. Nissen, who serves as chair of cardiology at the Cleveland Clinic, called LCZ696 "the first new heart failure drug in decades."

With costs of $32 billion annually to treat heart failure, Novartis wouldn't need to corner the entire market to grow the bottom line. It just needs a product good enough to make a dent.

So with very few bargains left in drug stocks, investors would do well by placing a bet here on Novartis, especially with a potential life-saving catalyst in its portfolio.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates NOVARTIS AG as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate NOVARTIS AG (NVS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, reasonable valuation levels, increase in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity." You can view the full analysis from the report here: NVS Ratings Report

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