The Food and Drug Administration's new "breakthrough" status
is making bigwaves in the biotech world.
Under the federal agency's "breakthrough" product designation,
passed in July of 2012, the most promising drugs have an
opportunity to move directly from Phase I testing to
commercialization. That's a big time andmoney saver. Now drug
companies have a chance to accelerate or bypass Phases II and III
of the clinical testing process that can last years.
But so far, the FDA has been very selective about handing out
breakthrough designations. In fact, the agency has only given out
the designation to
Vartex Pharma (Nasdaq: VRTX)
for a pair of cystic fibrosis drugs in development. Sure enough,
that has lifted Vartex to a market-beating 24%gain in the past
three months. Take a look below...
That's why it was such a big deal when Switzerland-based
Novartis AG (
became just the second company to receive breakthrough status on
a promising drug.
The leading international drug maker said the FDA granted its
LDK378 drug for metastatic nonsmall cell lung cancer (NSCLC)
patients that test positive for the genetic mutation anaplastic
lymphoma kinase (
) and can't be treated with Xalkori (crizotinib), a new drug
Pfizer Inc. (
Even though this is noguarantee of commercialization, this
breakthrough designation is a big deal for two reasons. First,
because it increases the probability of eventual
commercialization with a priority line of communication into the
FDA. Second, because it significantly reduces the amount of time
required to bring a new drug tomarket . Bothfactors would sharply
increase the profitability of the project and drug.
Novartis has initiated two Phase II clinical trials for LDK378 in
ALK-positive NSCLC patients, and plans to accelerates studies
late this year with an eye toward marketing applications in 2014.
But it's not all about the breakthrough status that makes
Novartis a compelling buy right now. As a leading international
drug maker, there are three other relevant reasons Novertis is in
position tocapitalize on the fast-growing health care and drug
Here they are...
1. The company has plans to shed underperforming brands to
increase profitability and generate billions incash .
With the recent departure of long-time Chairman Daniel Lucius
Vasella, there is a greater probability that Novartiswill sell
its 53 million share stake in Roche, another pharmaceutical
giant. The Novartis stake is currently valued at $12 billion but
could fetch up to a 30% premium.
There is alsospeculation that Novartis will spin off its highly
successful animal health division as the animal-care market
continues toconsolidate , possibly generating another $5 billion
in cash. Selling these less profitable ventures and focusing on
core strengths should enable Novartis to build its pipeline and
most successful brands, supportmargin strength and drive
2. Novartis also looks well equipped to navigate
Although generic competition is expected to negatively affect
sales by $3.5 billion in 2013, generics are expected to decline
to just 2%-3% of sales by 2014 and 2015. In the meantime,
Novartis continues to build a prodigious pipeline of blockbuster
drugs, growing to 14 from just eight in 2012. Each of the
blockbuster drugs is expected to generate more than $1 billion in
3. Its strong financial profile could boost dividends and fuel
The company currently has more than $8 billion in cash and
equivalents, but the potential sale of its stake in Roche and
animal-health division could raise another $20 billion. This
would enable Novartis to grow itsdividend , which management
raised for the 16th consecutive year in 2012. At $2.53 per share,
Novartis boasts an impressivedividend yield of roughly 3.6%.
Management has also stated that it is open to using its cash
position to buyingshares back.
Risks to Consider:
Breakthrough status on new drug does not guarantee ultimate
approval or commercial success. Even though the designation is a
big step forward, the FDA still needs to approve the drug for
Action to Take -->
Novartis just received the coveted breakthrough status for its
new lung cancer drug that creates a potential fast track to
commercialization. The company is also in position to increase
profitability and streamline operations with the sale of its
Roche stake and animal-products division. Given all these strong
reasons and throwing in Novartis's 3.6% dividend yield, then this
is a buying opportunity no investor should miss.
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