Pfizer Inc. (PFE): Could Novartis AG (ADR) (NVS) Decision Bring Pharma Sector Rotation?

Buy branded for yield, generics for growth

Brand-name drug companies like Novartis AG (ADR) (NYSE:NVS), by contrast, are bought for yield. The company’s current dividend yields investors a fat return of 3.53% – that’s on top of a 28% gain in the stock price over the last 12 months. The company can afford to be generous – earnings per share came in last year at $3.89, against that dividend of $2.30/share.

In addition to Glivec, Novartis AG (ADR) (NYSE:NVS)’s big sellers include Diovan, a hypertension drug that has gone off-patent, and Gilenya, a drug for multiple schlerosis. But despite the losses from the patent cliff, Novartis AG (ADR) (NYSE:NVS) has a stellar pipeline of new drugs, including 14 of what it calls “blockbusters” which could get approval over the next four years. These include drugs to treat heart attack and psoriasis.

What makes a blockbuster is its general usefulness. Statins, which first came out in the 1980s, were blockbusters because most westerners have elevated cholesterol levels, because of their diet and a genetic makeup built on cold winter famines. Anti-depressants were huge blockbusters because almost everyone suffers from depression at one time or another.

In the case of Glivec, the company’s main patent expires in 2015, and the company hoped that a new patent would be granted for a new formulation. India’s refusal to do so means there will be generic competition in the developing world, and it remains to be seen what will happen in the west.

The legal fight, in other words, goes on. Drugs will keep falling off the patent cliff, Novartis will keep fighting to extend their life, but its pipeline means the company’s future, and future dividend looks bright.

Horses for courses

The drug business is not an either-or business, but an and business, in terms of your portfolio. Generic drug makers like Actavis have great growth prospects, but relatively small margins. Branded drug companies like Norvartis have great margins, produce a superior yield, and their pipelines bear regular watching.

The article Could Novartis Decision Bring Pharma Sector Rotation? originally appeared on Fool.com and is written by Dana Blankenhorn.

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