Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to global pharmaceutical juggernaut Novartis AG (ADR) (NYSE:NVS) and I'll show you why its pipeline and dividend growth both look promising moving forward.
The dreaded "PE" Most of us know P/E to mean price-to-earnings ratio, but it can stand for something far scarier in the pharmaceutical industry: patent expirations. The patent cliff is the No. 1 enemy of Big Pharma since the approved drugs in a company's pipeline only have 20 years of protection from biosimilar competition (and often half of that time is spent in clinical trials). Therefore, biopharmaceutical companies need to constantly be innovating otherwise their revenue stream will dry up.
Novartis is no stranger to the loss of blockbuster drugs to expirations. Last year the company lost its exclusivity in the U.S. on Diovan, a drug used to treat hypertension and heart failure. To provide context to this loss, Diovan accounted for $5.67 billion of Novartis' $32.5 billion in pharmaceutical product sales in fiscal 2011. In fiscal 2013, Novartis anticipates a negative generic competition impact (primarily due to Diovan and Zometa) of approximately $2.3 billion . Yet, beyond Diovan, Novartis is set for some clear sailing for about the next four years.
The same can't be said for some of Novartis' peers. Eli Lilly & Co. (NYSE:LLY), for instance, is facing generic competition between 2010 and 2017 that could put three-quarters of its revenue stream at risk. To make matters worse for Eli Lilly, it has had little luck with late-stage pipeline products recently with experimental Alzheimer's drug solanezumab missing its primary endpoint in late-stage trials last year (not all hope is lost as it's being tested in a longer-term study overseas) and in May announcing it was discontinuing its late-stage study of enzastaurin as a second-line treatment for diffuse large B-cell lymphoma.
The Novartis advantage Success in the pharmaceutical sector basically comes down to one factor: Can you innovate? For Novartis, the answer is looking like a decisive, "Yes!"
Since the Food and Drug Administration introduced its new breakthrough therapy designation, or BTD, no company has received more BTD's than Novartis. It received a BTD on LDK378 for the treatment of ALK-positive non-small cell lung cancer in the first-quarter, a BTD on RLX030 for the treatment of heart failure in the second-quarter, and had BYM338 receive a BTD in the third-quarter for sporadic inclusion body myositis. The advantage of the BTD is that it can expedite bringing a new drug to market by allowing a pharmaceutical company to submit an application using early and mid-stage data as the basis. This could mean fewer R&D costs and longer periods of patent exclusivity.
You can even extend Novartis' advantage out a bit further if you include the fact that Novartis' Femara is the combination therapy used with Pfizer Inc. (NYSE:PFE)'s breast cancer drug palbociclib, which has also received a BTD. Early estimates for Pfizer's palbociclib from Wall Street say it could reach $5 billion in peak sales, which would be just another way for Novartis to extend the sales life of its existing drugs.
Novartis' business diversity and the growth of existing products are two other points where it excels.