Renewed whispers from Swiss drugmaker Novartis AG (Basel) that it could divest its struggling Alcon eyecare business reflect the latest step in dismantling former leader Dan Vasella’s vision of building a European healthcare colossus. The transformation, however, is not proving to be easy, according to Reuters.Swiss drugmaker @Novartis could divest its struggling Alcon eyecare business Click To Tweet
Chairman Joerg Reinhardt (pdf) said this past weekend that Alcon’s difficulties have intensified a thorough examination of the unit’s future.
“All options are open in the future,” Chairman Joerg Reinhardt said in an interview in Swiss weekly SonntagsZeitung.“In the long run, the question arises as to whether we are the best owner for Alcon,” Reinhardt added.
Vasella’s $52 billion takeover of Alcon from Swiss foodmaker Nestle was completed in 2010 as part of his drive to reach the European healthcare industry’s summit. Since he departed in 2013, Novartis has changed course, focusing on its prescription drugs business, including an emphasis on cancer medicines and its Sandoz generics unit.
“Novartis under Vasella was going to be the Johnson & Johnson (New Brunswick NJ) of Europe,” said Stefan Schneider, a Bank Vontobel analyst in Zurich. “Since Vasella has gone, they’ve started transforming the business.”
Alcon’s uncertain future contrasts with the upbeat mood when Novartis first upped its stake. At the time, Vasella predicted it would contribute core operating profit margins of about 35%–far better than for drugs.
Today, Alcon’s sales are shrinking and it posted an operating loss in the first nine months of 2016. A Novartis spokesman declined to comment further on Alcon’s future but said CEO Joe Jimenez (pdf) had told analysts last month that its position in the company “remains to be seen.”
A healthcare industry banker said Novartis is unlikely to recoup its original investment in Alcon, according to Reuters. Disposing of it even at a loss would at least free the company from an underperforming business with significant research and development requirements.
A sale could take time, however, as the division head, former Hospira CEO Mike Ball, (pdf) was only hired in January and has yet to restore sales growth that would make it more attractive to suitors and potentially boost its price.
Alcon had $9.8 billion in sales in 2015, or 20% of Novartis revenue, though that included ophthalmologic drugs that have since been moved into the pharma business.
The unwinding of Vasella’s legacy started with a 2014 deal in which Eli Lilly & Co. (Indianapolis INN) bought Novartis’s animal health business and GlaxoSmithKline PLC (London) took over its vaccines business. GSK also took control of a joint venture with over-the-counter drugs. Chairman Jimenez said in October he was interested in “bolt-on” deals between $2 billion to slightly more than $5 billion.
Separately, Bloomberg reported Monday that Novartis is in talks to buy privately owned US generics maker Amneal Pharmaceuticals LLC (Hauppauge NY.) Novartis declined to comment, calling the report “rumors and speculations,” but such an acquisition would fit with its new core business definition.
Jimenez has also said Novartis might unload its 13 billion Swiss franc ($13.18 billion) stake in rival Roche Holding AG (Basel) without a premium, a stake Vasella once amassed to pursue his unrealized dream of marrying the two companies. But a quick fix has proven elusive.
Christophe Eggmann, investment director for healthcare equities at GAM in Zurich, owns Roche but has avoided Novartis in his 200-million-franc fund, due to concerns that persistent problems will be tough to remedy. “There is not enough visibility,” said Eggmann. This is always the problem Novartis has faced in the past: One division does well, but the other doesn’t.
Reinhardt left Novartis in 2010 for Germany’s Bayer AG (Leverkusen) after Vasella picked Jimenez as chief executive, but he returned in 2013 to replace Vasella as chairman.
Among his challenges, Reinhardt must navigate a wave of patent expiries, including Novartis’s top-selling blood-cancer drug Gleevec that now faces increasing generic competition.
Novartis started to recreate itself last year with an asset swap that augmented its oncology business and sloughed off its vaccines unit to GlaxoSmithKline. Now, the Swiss drugmaker is reportedly contemplating another major move. Does management have the will to continue with the recent shift in direction, and if it does, is too little, too late?
Novartis is weighing a deal for the generics maker Amneal Pharmaceuticals to expand its already-hefty Sandoz unit, Bloomberg reports, at a time when two of its biggest rivals in the field are integrating big buyouts of their own. The Amneal buy could be worth up to $8 billion, the news service says.
And in a new interview published Sunday, Joerg Reinhardt, chairman of the Swiss drugmaker, made the broadest suggestion yet that Alcon’s days under Novartis’ umbrella are numbered.
Carving off Alcon while expanding Sandoz would be a déjà vu sort of approach for Novartis, which acquired Alcon in a multi-stage, $51 billion buyout concluded in 2010. Novartis itself was formed in the merger of Sandoz and Ciba-Geigy in 1996, points out FiercePharma.
It would also give Sandoz, which has focused lately on growing its biosimilars business, a boost for its portfolio of traditional generics. That business has lagged a bit lately, as pricing pressure has hampered sales growth. Sandoz has also posted “significantly fewer” new generic approvals than its rivals since 2012, Bernstein analyst Ronny Gal noted earlier this year.
All of this wincing news comes at a time when Sandoz’s top rivals, Teva Pharmaceutical Industries and Mylan, have wrapped up big acquisitions of their own. Teva just recently closed on its $40 billion buyout of Allergan’s generics business, and Mylan ponied up last year with a $5.7 billion deal for Abbott Laboratories’ non-US generics.
A deal for Amneal could value the company at up to $8 billion, Bloomberg reports, depending on the structure. Negotiations are underway, the news service’s sources say, but Amneal is working with an adviser as it explores its options–which could mean talks with other potential buyers.
Amneal’s portfolio spans more than 100 products, including pills, topical treatments, patches, injectables and inhaled meds. It has grown partly via acquisition, buying products from Merck, Pfizer, Actavis and Warner Chilcott. The company says it is now the seventh-largest generics maker in the US and the fastest-growing worldwide.
Amneal would probably fit with Sandoz, a diversified generics maker with operations all over the world. The same can’t be said for Alcon at Novartis. In a restructuring announced earlier this year, Novartis transferred the eye business’s drugs to its pharma division to shrink its focus to consumer products and surgical devices.
To its credit, Novartis does appear to be giving the Alcon turnaround a serious go of it, however. It hired former Hospira CEO F. Michael Ball to run the unit and increased its spending on advertising and marketing on the consumer products side. That marketing has delivered some growth in Europe, but not so much in the US, and though the surgical business boasts a couple of new product approvals, it’s still struggling. Sales were down 3% for the third quarter.
Still, despite all the maneuvers either made recently or suggested might be made, beneath the PR Newswires, conference calls and quotes in the media, the stiff-upper-lip tone taken by senior management, I sense a hint of quiet desperation, even perhaps resignation. Vasella’s dream of a European colossus is being systematically dismantled. Here’s why.
In the last year, shares of Novartis are down 14%. The company has been hit by a wave of patent expirations, and it’s become more difficult than expected to replace that revenue. Fiscal 3Q prescription pharmaceuticals accounted for about 62% of sales. Alcon vision care accounts for about 20% of revenue and Sandoz represents about 18%.
In July, Novartis reported second-quarter fiscal 2016 earnings of 75 cents per share, down 1%. Sales of $12.6 billion were down 2%, points out our brethren at TheStreet.com. Net income was $1.8 billion. Adding the first and second quarters together, first-half sales were down 2.4% to $24.1 billion. Earnings before interest and taxes fell 4% to $6.6 billion and caused operating margins to fall 200 basis points to 27%.
To some of us, it’s Novartis’s generic drugs that are demolishing the company’s growth.
Gleevec, which is used to treat a type of blood cancer called myeloid leukemia, lost its patent protection. Sun Pharma rolled out an approved generic in February 2016. In 2015, Gleevec had total worldwide sales of $4.65 billion. This year sales could be down as much as 35% to $3.0 billion. Diovan was Novartis’ No. 1 product until generics hit the market. Sales went from $3.5 billion in 2013 to $1.3 billion in 2015. Sales of Diovan could be down 20% this year.
And that’s the fundamental problem with an investment in Novartis. The sales erosion is dramatic. It is difficult for the company to replace billions of dollars lost to generics. But perhaps the acquisition of Amneal is a good start.
The sale of Alcon would give Novartis even more growth capital to work with, not that its M&A vault is lacking the necessary girth to fund just about any size acquisition.Steve's Take: The sale of Alcon would give @Novartis even more growth capital to work with Click To Tweet
Sales are expected to decline 2% this year to $48.5 billion, but earnings per share will be down almost 7%. The lack of operating leverage is throwing a bucket of ice water onto the company’s results. Novartis needs to cut expenses in order to grow earnings because sales are slowing so quickly.
Timing is everything in global pharma. Will Novartis move to divest Alcon while bringing on Amneal? It would be the right start for the “turnabout” in many of our opinions. But does management have the resolve to act now? I believe it does because timing is everything. And Reinhart and Jimenez know it.