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Strong pipeline and innovation make Novartis a sure bet, despite setbacks

The uncertainties surrounding drug development and intense competition are the primary challenges facing pharmaceutical companies, which also prompt investors to approach the stocks with caution. Like its peers, Novartis International AG (NYSE: NVS) also faces the risks typically associated with the pharma business, though it is one of the fastest-growing sectors.

In an incident that underscores the vulnerability of the industry, the Switzerland-based drugmaker recently suspended the distribution of its generic heartburn drug Zantac after an FDA investigation indicated the presence of carcinogenic chemicals in it. Novartis was the first among the many Zantac producers to recall the batches that already hit the market, an act that was lauded by the stakeholders.

Patent Suit

A more recent development added to investors’ caution – Bausch Health warned of legal action against Novartis’ generic arm Sanofi for allegedly infringing upon multiple patents of Xifaxan, the former’s popular formulation for the treatment of irritable bowel syndrome. Consequently, Novartis’ stock suffered a minor blow.

Also read: Novartis scores another point in multiple sclerosis

Interestingly, the stock continues to stay above its long term average, reflecting the bullish mood around it, both among investors and analysts. There has been a slew of encouraging reports coming from the company in recent weeks, the latest being positive results from an advanced-stage study on Cosentyx for additional indication for the treatment of a chronic form of arthritis.

Positive Outcome

Earlier, the company said the phase-III study on its combination asthma drug QMF149 met the primary endpoint. The positive results take the investigational formulation closer to FDA approval and commercial launch, the most significant phases of product development for every drug manufacturer.

Study on Novartis' asthma drug QMF149 meets primary endpoint
Picture Courtesy: Novartis website

While the strong pipeline adds to the prospects of enhancing revenue generation going forward, the management made a crucial move that would revolutionize the way the company conducts its key operations. It forged a tie-up with Microsoft (MSFT) this week for setting up the Novartis AI innovation. Under the tie-up, the software giant will provide consultancy for the initiative that aims to incorporate artificial intelligence into drug research and development.

Buy Novartis?

Over the past three months, most of the market watchers following Novartis have recommended a buy, with a target price that represents a 12% upside from the current levels.

Related: Novartis Q1 2019 Earnings Conference Call Transcript

Novartis’ shares have been on the recovery path since last year, bringing cheer to investors who were concerned about the long lull that preceded the bounce-back. The stock had a good start to 2019 and the change in trend became more pronounced in recent weeks. It has moved up 10% since the beginning of the year.

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