Analysis: Novartis CEO may struggle to win investors over Sandoz split

The logo of Swiss drugmaker Novartis is seen at the company’s factory in the northern Swiss town of Stein October 23, 2017. REUTERS/Arnd Wiegmann/File Photo

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LONDON, Aug 26 (Reuters) – Novartis CEO Vas Narasimhan may struggle to win over investors for the listing of generic drugs firm Sandoz as falling drug prices and nervousness financial markets represent one of his biggest challenges in the overhaul of the Swiss drugmaker that has been going on for years. .

Novartis said on Thursday it plans to sell Sandoz on the Swiss and US stock exchanges next year, capping a protracted rationalization of the Basel-based drugmaker that began in 2014, preceding Narasimhan’s appointment as CEO in 2018. . read more

Since Narasimhan took the helm, he’s spun off Alcon’s eye care business, pulled out of GSK’s former consumer healthcare business, agreed to sell a stake of nearly a third in Roche (ROG.S) for nearly $21 billion and cut up to 8,000 jobs, or about 7.4% of its global workforce.

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Novartis began a strategic review of Sandoz last October – examining a range of options, including retaining the business, splitting it off or selling it – after a prolonged period of underperformance due in large part to growing pressures on prices in the off-patent medicine sector, particularly in the United States.

Aware of tough market conditions, Novartis attempted to offload Sandoz’s US tablet business in 2018, but the $900 million deal with India’s Aurobindo Pharma breached antitrust rules.

The environment for more commoditized generics – particularly in the United States – remains extremely challenging, with many players reporting double-digit price deflation this year, Barclays analyst Emily Field told Reuters.

“I don’t think investors are holding their breath that the environment will improve as much in 2023,” she said.

“Previous spin-outs from pharma companies have created short-term excitement given the strong track record of pharma spins outperforming parents. In this case, competitive pressures in the generic space will likely result in less interest in the short-term “Citi added. analysts in a note Thursday.

Sandoz accounted for nearly a fifth of Novartis’ $51.6 billion in sales last year.

In 2021, European sales of the unit fell 2%, while US sales fell 15% at constant currency, hurt by pricing pressures as well as lower demand related to COVID .

However, there are encouraging signs. Last month, Novartis said Sandoz’s earnings are likely to remain flat this year, driven mainly by growth in Europe.

The unit’s push towards generics and more complex biosimilars (cheap versions of biologic drugs made from living organisms) should also start to bear fruit.

Narasimhan on Thursday predicted a return to U.S. growth for the company, with biosimilar approvals expected for blockbuster drugs such as autoimmune disorder drug Humira and multiple sclerosis treatment Tysabri next year. .

Sandoz remains somewhat underrated – in the sense that a premium to other generic companies may be warranted given the lack of significant legal overhangs, a leadership position in biosimilars and as well as complex generics, and geographic scope, Jefferies analysts wrote in a note last month.

“And yet, we see no debate that Sandoz should trade at a discount to a new Novartis. Moreover, we only sense a lukewarm appetite from many Novartis investors to hold a stand-alone Sandoz.”

SWISS TOP STOCK

The creation of lackluster non-pharmaceutical companies is part of a broader industry trend to focus more on the lucrative patent prescription drug market.

Last month, British drugmaker GSK sold its Haleon consumer healthcare business in Europe’s biggest stock market for more than a decade. Last year, US drugmaker Johnson & Johnson (JNJ.N) said it had pledged to carve out its consumer arm.

Analyst estimates for the valuation of Sandoz shares are very wide, ranging from $14 billion to over $26 billion.

Even at the lower end, Sandoz would be catapulted into the top 20 companies listed on the Swiss Stock Exchange (.SSMI) and would be the second largest new listing on the index in over a decade.

But investors may prefer to be cautious. Market reception of the GSK unit has been mixed.

Haleon has lost 22% since floating a month ago, taking its market capitalization from around £30.5 billion to around £24.37 billion.

IPO volumes in Europe have fallen this year after a record 2021 as more investors turned away from jitters about the geopolitical outlook following the invasion of Ukraine by Russia and the increasingly fragile global economy.

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Reporting by Natalie Grover in London; additional reporting by Lucy Raitano in London; edited by Josephine Mason and Elaine Hardcastle

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Robert D. Coleman