Lex: Novartis

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There is a reason why Novartis shares are at a three-year high. In the accident-prone pharmaceutical sector, the Basel-based group is delivering growth as reliably as a Swiss watch keeps time.

Underlying drug sales increased by 9 per cent in the third quarter and earnings by 15 per cent matching the strong first-half results and once again beating both industry growth rates and market estimates. This is due to a broad portfolio of relatively young, fast-growing drugs.

Like many of its peers, Novartis is making savings in marketing and administrative costs, boosting its pharmaceutical operating margin by three points to 33 per cent in the latest quarter. Unlike many rivals, it has little to fear from generic competition at present. Contrast that with AstraZeneca, which on Tuesday saw the patents on its best-selling anti-ulcer drug challenged by India's Ranbaxy.

Meanwhile, Hexal and Eon, the two generic manufacturers it bought for $8.3bn in February, are performing better than expected, which will reduce the impact of their one-off acquisition costs by about $100m. Novartis also appears to be closing in on its US partner Chiron, whose profit warning late on Monday will make it harder to resist the Swiss group's $4.5bn buy-out offer.

Novartis should deliver compound earnings growth of about 12 per cent over the next few years, slightly faster than the European pharmaceuticals sector, yet its shares, on 18 times estimated 2006 earnings, trade at a slight discount. They still look attractive.

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