The Food and Drug Administration’s new “breakthrough” status is making big waves in the biotech world.

Under the federal agency’s “breakthrough” product designation, passed in July of 2012, the most promising drugs have an opportunity to move directly from Phase I testing to commercialization. That’s a big time and money saver. Now drug companies have a chance to accelerate or bypass Phases II and III of the clinical testing process that can last years.

But so far, the FDA has been very selective about handing out breakthrough designations. In fact, the agency has only given out the designation to Vartex Pharma (Nasdaq: VRTX) for a pair of cystic fibrosis drugs in development. Sure enough, that has lifted Vartex to a market-beating 24% gain in the past three months. Take a look below…

That’s why it was such a big deal when Switzerland-based Novartis AG (NYSE: NVS) became just the second company to receive breakthrough status on a promising drug.#-ad_banner-#

The leading international drug maker said the FDA granted its LDK378 drug for metastatic nonsmall cell lung cancer (NSCLC) patients that test positive for the genetic mutation anaplastic lymphoma kinase (ALK) and can’t be treated with Xalkori (crizotinib), a new drug developed by Pfizer Inc. (NYSE: PFE).

Even though this is no guarantee of commercialization, this breakthrough designation is a big deal for two reasons. First, because it increases the probability of eventual commercialization with a priority line of communication into the FDA. Second, because it significantly reduces the amount of time required to bring a new drug to market. Both factors would sharply increase the profitability of the project and drug.

Novartis has initiated two Phase II clinical trials for LDK378 in ALK-positive NSCLC patients, and plans to accelerates studies late this year with an eye toward marketing applications in 2014.

But it’s not all about the breakthrough status that makes Novartis a compelling buy right now. As a leading international drug maker, there are three other relevant reasons Novertis is in position to capitalize on the fast-growing health care and drug markets.

Here they are…

1. The company has plans to shed underperforming brands to increase profitability and generate billions in cash.
With the recent departure of long-time Chairman Daniel Lucius Vasella, there is a greater probability that Novartis will sell its 53 million share stake in Roche, another pharmaceutical giant. The Novartis stake is currently valued at $12 billion but could fetch up to a 30% premium.

There is also speculation that Novartis will spin off its highly successful animal health division as the animal-care market continues to consolidate, possibly generating another $5 billion in cash. Selling these less profitable ventures and focusing on core strengths should enable Novartis to build its pipeline and most successful brands, support margin strength and drive higher multiples.

2. Novartis also looks well equipped to navigate the patent cliff.
Although generic competition is expected to negatively affect sales by $3.5 billion in 2013, generics are expected to decline to just 2%-3% of sales by 2014 and 2015. In the meantime, Novartis continues to build a prodigious pipeline of blockbuster drugs, growing to 14 from just eight in 2012. Each of the blockbuster drugs is expected to generate more than $1 billion in annual sales.

3. Its strong financial profile could boost dividends and fuel share buybacks.
The company currently has more than $8 billion in cash and equivalents, but the potential sale of its stake in Roche and animal-health division could raise another $20 billion. This would enable Novartis to grow its dividend, which management raised for the 16th consecutive year in 2012. At $2.53 per share, Novartis boasts an impressive dividend yield of roughly 3.6%. Management has also stated that it is open to using its cash position to buying shares back.

Risks to Consider: Breakthrough status on new drug does not guarantee ultimate approval or commercial success. Even though the designation is a big step forward, the FDA still needs to approve the drug for commercialization.

Action to Take –> Novartis just received the coveted breakthrough status for its new lung cancer drug that creates a potential fast track to commercialization. The company is also in position to increase profitability and streamline operations with the sale of its Roche stake and animal-products division. Given all these strong reasons and throwing in Novartis’s 3.6% dividend yield, then this is a buying opportunity no investor should miss.