Wall Street professionals are in many respects paid worriers, and that's certainly true in the world of Big Pharma. Investors fret about the quality of the pipeline at companies like Pfizer (NYSE:PFE), Lilly (NYSE:LLY) and Merck (NYSE:MRK) and their ability to grow after patent cliffs. But when a company like Novartis (NYSE:NVS) comes down the road with a healthy pipeline, the Street seems to respond with worries about how well that pipeline will actually sell, the gaps in the company's product line-up, and the extent of internal cost saving initiatives.

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All of that said, the skeptics on Novartis have at least some valid points. While Novartis is a well-balanced company and a good option for income-oriented investors, it is not the cheapest or most interesting Big Pharma stock today. (Learn how to find a healthy pharmaceutical investment in a market full of weak drugs. For more, see Evaluating Pharmaceutical Companies.)

A Long-Term Strategy Paying Dividends
Novartis management spent a lot of the last few years putting together the recipe it wanted for the company - making significant acquisitions in areas like generics and consumer health. The company is still a major force in branded drugs (about two-thirds of its sales), but it is also now a company to be reckoned with in generics and consumer health and the acquisition of Alcon has further strengthened some specialty lines of business.

The trouble with acquisitions, though, is that it often leads to cost leakage across the corporation. What's more, although Novartis has joined in the mass-firing game, there are concerns that the company has not cut far enough. Maybe that's valid - Merck and Pfizer are more profitable, for instance - but it may also be short-sighted. Cost-cutting doesn't always have to be about flashy press releases and a mass exodus to the gallows.

A Strong Pipeline ... or Is It?
Where Novartis seems to jump out is in the quality of its late-stage pipeline. Gilenya, a new drug for multiple sclerosis, is out on the market, and new drugs for gout (Ilaris), breast cancer (Afinitor), leukemia (Tasinga) and respiratory disease (QVA-149) hold quite a bit of revenue potential.

Potential is a funny thing, though, and many an investment has gone wrong on the ill-fated hopes of potential. Gilenya, for instance, may not be getting such great initial uptake and rival drugs from Biogen Idec (Nasdaq:BIIB), Sanofi (NYSE:SNY) and Teva (Nasdaq:TEVA) could take big bites. At the same time, it looks like the FDA has some worries in the respiratory area and both Novartis and GlaxoSmithKline (NYSE:GSK) are looking at delays in getting drugs to market.

That's not all, of course. Although Novartis is a remarkably diversified company, some analysts want more. Specifically, they highlight the company's weakness in biologics (compared to companies like Novo Nordisk (NYSE:NVO), I suppose) and relatively modest vaccine business.

Too Much Optimism, or Well-Earned Praise?
Among the European pharmaceutical companies, Novartis is actually the most popular in terms of 'buy' ratings - with Sanofi a relatively close second and Astra Zeneca (NYSE:AZN) in dead last. There are valid reasons to be optimistic here - a good pipeline, a well-balanced business and a good record of integrating acquisitions and managing patent cliffs. Still, with so many analysts already liking this stock (and pitching it to institutional buyers), is there still room to surprise?

The Bottom Line
When it's all said and done, Novartis looks good but not great. It's a fine company and likely a fairly safe bet for investors - and that nearly 4% dividend yield is nothing to dismiss. Still, others names like Pfizer look even cheaper on a risk-adjusted basis. (For more on dividends, see The Power Of Dividend Growth.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: PFE, LLY, MRK, NVS, SNY, TEVA, BIIB, GSK, NVO, AZN

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