Novartis Is Taking the Road Less Traveled

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There are two ways for pharmaceutical companies to deal with their impending patent cliffs: Replace the drugs with more drugs that will eventually go off-patent, or replace the lost revenue with a more diversified stream.

While companies such as Pfizer (NYSE: PFE) and Bristol-Myers Squibb (NYSE: BMY) have sold off non-pharmaceutical segments recently, Novartis (NYSE: NVS) has become more diversified. Its Sandoz unit competes directly with big generic-drug players -- Sandoz's more than $3.8 billion in first-half sales weren't that much smaller than Teva Pharmaceuticals' (Nasdaq: TEVA) $4.3 billion in sales, excluding its branded multiple sclerosis drug Copaxone. Novartis also acquired vaccines specialist Chiron and recently bought 25% of eye-care specialist Alcon (NYSE: ACL).

The plan seems to be working. Sales were up 12% in the most recent quarter. Vaccines and diagnostics grew the fastest at 16%, with pharmaceuticals not far behind. Bringing up the rear were generic drugs and consumer health -- a catch-all for everything from contact lenses to over-the-counter drugs -- both of which gained 7% year over year.

Most importantly, Novarits isn't letting the growth cause bloat. Following in the footsteps of Abbott Labs (NYSE: ABT) and Wyeth (NYSE: WYE), Novartis is eliminating 550 sales reps.

The Alcon purchase isn't paying off yet, though. Interest charges from the debt it took on to make the purchase dragged on the bottom line. Novartis' earnings were up just 8%, after adding back in charges from the Alcon purchase and an environmental cleanup charge from last year's third quarter.

Still, in the long run, I think the strategy should pay off for Novartis. A diversified company -- much like a diversified portfolio -- should be much more able to weather the loss of a few patents.