Novartis is taking a more calculated and strategic approach to its growth.
There are $200 billion reasons healthcare companies want to produce GLP-1 weight loss drugs. At that size, the market potential is huge, and the opportunities for revenue growth are plentiful.
But it also means that competition will be fierce. And with some highly effective treatments already approved and available, the bar is set high for any new drug that wants to take a slice of that lucrative market.
Not every company is jumping onto the bandwagon and investing into weight loss drugs, however. One of the largest healthcare companies, Novartis (NVS 0.30%), has decided that it will sit on the sidelines rather than getting involved in a race to develop the best weight loss drug in the market.
For investors, that could be a great move.
Novartis wants to focus on opportunities where it can dominate
CEO Vas Narasimhan recently told CNBC that the Swiss pharma company isn’t going to get involved in the “frenzy” that exists in the weight loss market today, saying that there are better options for Novartis to pursue instead. Narasimhan wants to focus on opportunities with higher odds of success.
One example is in radioligand cancer therapies, where he sees an opportunity to build up a $20 billion business. These are treatments that use radioactive drugs to deliver radiation to specific cancer cells. Other opportunities include pursuing treatments for Parkinson’s, Huntington’s, and Alzheimer’s.
Targeting those areas could be a better move for the business than going after a highly competitive weight loss market. There may be less likelihood for the company to carve out significant market share and to justify the investments necessary to bring a successful weight loss drug to market.
Not chasing the GLP-1 hype has kept Novartis a reasonably priced stock
A surefire recipe for healthcare stocks to soar in recent years has been to pump up their efforts in the anti-obesity market. Even if they might not have approved GLP-1 products, simply reporting encouraging results in clinical trials has often been enough to significantly rally a stock and send it to new highs.
Novartis hasn’t been investing into that niche. And while its gains have been decent this year — the stock is up 15% — that’s underwhelming when compared to the S&P 500‘s gains of 22% since January.
But that also means Novartis’ valuation looks more modest; its shares trade at just 14 times the company’s expected future earnings (based on analyst expectations). By comparison, the average stock in the Health Care Select Sector SPDR Fund trades at a forward price-to-earnings multiple of just under 22.
The company’s more levelheaded approach to growth is what makes Novartis a potentially underrated growth stock. It projects annual sales growth of 5% through to 2027. And while that might not seem all that exciting, it also avoids setting expectations too high for the future.
Novartis can be an ideal for risk-averse investors who want growth
If you want a good growth stock to own but also a fairly low-risk investment, Novartis can be a suitable option for your portfolio. Management’s no-nonsense approach and calculated outlook for the future makes me optimistic that the company could meet and potentially exceed expectations.
And what sweetens the deal even more is that the stock pays a dividend that yields 3.3% — more than double the S&P 500 average of 1.3%. Novartis might not be the most exciting healthcare stock to own, but it could be one of the best options for investors to buy and hold for the long haul.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
