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Novartis to Buy Back Shares

Zacks Equity Research

Novartis (NVS) outlined a few strategic plans at its analyst day held recently, in order  to position itself more strongly in the pharmaceutical business as well as increase return for shareholders.

With an aim to deliver value to shareholders, Novartis will repurchase shares worth $5 billion over a period of two years. The company also plans to allocate capital for increasing dividends.

Novartis aims to realign its capital structure, and targets a credit rating of AA.

We remind investors that Novartis acquired its eye care unit, Alcon, in 2011 which is now fully integrated. Novartis has realized synergies of $370 million from the Alcon acquisition, which enabled the company to reduce debt.

Novartis recently announced the divestiture of its blood transfusion diagnostics unit to Spain-based Grifols for $1.675 billion in order to focus on its strategic business. The divestment is expected to be completed by the first half of 2014.

Further, Novartis identified three business segments – Pharmaceuticals, Alcon and Generics as growth engines for the company. All three account for 85% of total business of the company.

The largest division – Pharmaceuticals -- is expected to generate sales of $1 billion in 2013 driven by strong growth of drugs like Lucentis, Gilenya, Afinitor and Tasigna, and Galvus.

We remind investors that generics have adversely impacted revenues by $1.8 billion in 2012 and are expected to impact by $2.3 billion in 2013 as blockbuster drugs like Femara, Diovan and Zometa are losing exclusivity.

To counter the impact of generics, Novartis plans to increase investments in its pipeline. The company has prioritized dermatology (secukinumab), heart failure, respiratory (Onbrez, Seebri, and Ultibro Breezhaler) and cell therapy (LEE011) as its focal areas.

Novartis also plans to undertake certain restructuring activities. These include leveraging scale in procurement, consolidating research sites around the world and optimizing the manufacturing footprint.

We are encouraged by Novartis’ efforts to strengthen its business in other key areas apart from oncology. The company’s efforts to realign its capital structure, increase sales productivity and return value to shareholders is also commendable.

Novartis currently carries a Zacks Rank #3 (Hold).  Right now, Bayer (BAYRY), Auxilium Pharma (AUXL) and Johnson & Johnson (JNJ) look attractive. All three carry a Zacks Rank #2 (Buy).

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