Three Foreign Pharma Stocks for Your Portfolio

As recession moves from the United States to Europe, all stock markets are getting whacked. As the editor of Morningstar InternationalInvestor newsletter and manager of its real-money Passport Portfolio, I have been looking for safe havens to invest in. One area that I expect to hold up particularly well is the pharmaceutical industry. Regardless of the economy, people will continue to worry about their health and demand treatments to improve their condition.

Pharmaceutical firms are continually developing new treatments for illnesses. As new treatments become available, patients demand the newest and best treatment. New medicines come with patents that protect the developers from competition. This patent protection provides pricing power even during weak economies, which is why many pharmaceutical firms receive a wide moat rating from Morningstar.

Firms with wide moats are generally able to withstand competition and weak economic conditions better than companies with narrow or no moats. Here are three wide-moat pharmaceutical firms that I own in the Passport Portfolio. They all have solid balance sheets, which is very important in the current credit environment.

 Novo Nordisk (NVO)
Fair Value Uncertainty Rating: Medium | Economic Moat: Wide | 5 Stars
Novo is the leading company worldwide in treating diabetes. It provides more than half the insulin used in the world and has very strong patents, which have significant time remaining. The firm is also adding new generations of products with additional patents that should help it maintain its leadership position for years to come. Although it is unfortunate that diabetes is becoming ever more common, it is important to have treatments for those with the disease. As people in Western countries continue to eat less-nutritious meals and live more sedentary lives, diabetes will continue to increase. In less-developed countries, health care is improving and diabetes is being properly diagnosed more frequently, which is also driving increased demand for Novo's products. These needs will continue regardless of the state of the economy. This is a stock that traditionally trades at very high multiples, which doesn't provide enough of a margin of safety despite its exceptionally well-positioned business. Novo also has a very solid balance sheet with a net cash position, which will enable it to continue to invest in research and development regardless of what is happening in the credit markets. I'm excited the market sell-off has provided the opportunity to buy such a high-quality company.

 Novartis (NVS)
Uncertainty Rating: Low | Economic Moat: Wide | 5 Stars
Novartis is a large Swiss pharmaceutical firm. It has already weathered the worst of its short-term patent expirations and has a strong pipeline. This should allow it to grow significantly going forward compared with most large pharmaceutical firms, whose pipelines will just offset the losses from patent expirations. Novartis also owns Sandoz, the second-largest generic drug manufacturer in the world, which allows the firm to benefit from all the drugs going off patent. It also has a strong vaccine business as well as diagnostics and consumer products that bring stability and growth. Novartis is the only one of these three companies to have reported third-quarter results so far, and they were in line with our expectations. As we expected, the economy hasn't slowed them down. There are also positive signs from new drugs, including Tekturna for hypertension, Zometa for bone metastases, and Exjade for iron regulation. All three grew rapidly in the quarter, and we think all three will become blockbusters.

 Sanofi Aventis (SNY)
Uncertainty Rating: Medium | Economic Moat: Wide | 5 Stars
Sanofi is much more of a value play than the other two. It has more patent expirations that will offset the majority of growth from its pipeline. However, it is also trading at significantly lower multiples. It also pays a much larger dividend--it now yields 6%. Sanofi's three largest drugs--anticlotting agent Plavix, antithrombotic treatment Lovenox, and diabetes drug Lantus--generated more than $7 billion in combined sales in 2007 and grew 11% from the previous year, but none accounted for more than 9% of total sales. This means the firm has a very broad product portfolio and is not dependent on any single drug.

In the current stock market malaise, it is important to own stocks that one can be confident will survive and thrive when the global economy recovers. In order to learn more about Morningstar InternationalInvestor and other sectors and stocks I'm investing in during these trying times, see the information below.