J&J or Novartis?


Diversified health-care companies Johnson & Johnson (NYS: JNJ) and Novartis (NYS: NVS) reported results Tuesday. Both companies may have beat Wall Street expectations, but one looks far better positioned for the future than the other.

Generic drugs
Both J&J and Novartis have been dealing with ongoing patent expirations of some of their products and the ensuing generic competition and sales erosion. But unlike J&J, Novartis has a not-so-secret weapon -- its own generic division, Sandoz, which experienced double-digit growth in the quarter. While Big Pharma is in the midst of a patent cliff, Novartis' Sandoz is poised to take advantage of it, already marketing generic versions of some blockbusters.

To minimize the effects of patent expirations, both companies also have non-pure pharma businesses. However, Novartis did a much better job at it than J&J with its recently acquired Alcon eye-care business, as well as its consumer-health division, both of which exhibited strong growth.

At J&J, the medical-devices segment grew only 1.3% operationally, and the company had to take two large charges related to the decision to exit the drug-coated-stent business and to the massive DePuy hip-replacement recall. And J&J's consumer division is only now beginning to recover from more than a year of recalls of its over-the-counter medicines, mainly Children's Tylenol and Motrin.

In pharmaceuticals, J&J seemed to have performed well. Sales grew 12%, 7% of that operationally. Several products enjoyed sharp growth, as did some recently launched drugs. The FDA also approved several J&J drugs during the quarter.

Growth of Novartis' pharmaceutical sales was similar. It also saw significant contributions from recently launched products and had several drugs approved during the quarter. But Novartis also has its vaccines and diagnostics segment. While vaccines declined considerably in the quarter, the division offers generally promising growth and additional diversification.

If it's between the two ...
J&J was once the absolute golden standard in management and product quality. These days, however, it is plagued with severe quality issues and a lack of managerial oversight and clear direction. Liabilities from lawsuits related to several of its products are yet unknown. If its pharmaceutical business is to drive growth, the R&D spending of $4.5 billion may not be enough. Instead, the company is planning a $21 billion acquisition of Synthes to boost its medical-device division. J&J could be on the road to recovery, but there is an alternative.

Novartis is diversified enough across segments and geographical areas that it should weather patent expirations better. Meanwhile, even as it enjoys growing generic revenue, it spends much more on R&D than J&J. Actually, only Pfizer (NYS: PFE) and Merck (NYS: MRK) currently spend more, and by 2016, Novartis will surpass them, too, according to Evaluate Pharma. EP also believes Novartis will then contest for the top pharma spot.

So if it's between the two, I'd wait till management proves itself again at J&J and instead go with Novartis. Its clear strategic direction seems to offer the better choice.

At the time thisarticle was published Fool contributorMelly Alazrakiowns no shares in any of the companies mentioned. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter serviceshave recommended buying shares of Novartis, Johnson & Johnson, and Pfizer and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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