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Healthy Growth Prospects for This Pharma Pick

Christine Benz

Christine Benz: Hi. I'm Christine Benz from Morningstar. You have until April 15 to fund an IRA for the 2009 tax year, so all this week I will be talking to some of Morningstar's top experts to get their best ideas for funding an IRA.

I'm here today with Damien Conover. Damien is an equity strategist, and he is also editor of the Morningstar Healthcare Observer. Damien, thanks so much for being here.

Damien Conover: Thanks for having me.

Benz: So, we've recently seen, over just even the past couple weeks, very few 4- and 5-star stocks at this point. Yet, your pick today is a 5-star company currently. Tell us what it is and why you like it.

Conover: The company is Novartis, ticker symbol NVS, and the reason why we like it is a couple things. One, the valuation of the company is very attractive. Two, it's growth prospects are very attractive as well. And when I say growth prospects, the main thing I'm talking about are its currently launched products as well as its pipeline products, both of which are very well poised for growth over the next two to three years.

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Benz: So I know that your group thinks that pharmaceutical companies as a whole will be net beneficiaries of health-care reform, but you were also telling me, Damien, that this particular company is going to be a beneficiary of growth in emerging markets and increased discretionary spending in emerging markets. Can you tell us why you think that is such an attractive theme for Novartis?

Conover: It is very important for pharmaceutical firms to branch out from their customary target markets of the United States, Western Europe, and Japan. And the growth in emerging markets offers a huge growth potential for these companies that historically hasn't been there. Novartis is the third-best positioned company in emerging markets and should benefit very well from the growth of incomes in emerging markets.

Benz: So in terms of risks that people might want to stay abreast of if they are looking at this company, what should they be thinking of?

Conover: The key risk with Novartis is a patent loss on Diovan. Diovan is one of their best-selling products currently, and that product loses its patent 2012. So the 2012 time period, that year, will be a year of relatively flat growth. But besides that year, we think the company is very well positioned for growth over the long term.

Benz: So Damien, you also think that the company currently is trading at a pretty good discount to your estimate of its fair value, right?

Conover: Yes, exactly. We think Novartis has lots of upside. And as well, it is rated as a low uncertainty stock, so we don't think it is going to be quite as volatile as some of the other stocks in the pharmaceutical industry.

Benz: Sounds good. Damien, thanks for an interesting pick. We appreciate you sharing it with us.

Conover: Thanks, Christine.

Benz: Thanks so much for watching. I'm Christine Benz for Morningstar.com.