ZURICH/LONDON, Aug 25 (Reuters) – Novartis ( NOVN.S ) plans to spin off its Sandoz generics unit to sharpen its focus on its patented prescription drugs, the Swiss group said on Thursday, admitting that no had received any formal offer for the business so far.
The company launched a strategic review of Sandoz last October – examining a range of options, including keeping the business, demerging it or selling it – after a prolonged period of underperformance driven largely by rising price pressures in the sector of off-patent drugs.
Novartis has not received any formal binding offers for Sandoz so far – but if any “very attractive” offers were to emerge, Novartis would fully consider them, CEO Vas Narasimhan said at a media briefing on Thursday.
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However, “the most likely case – in all scenarios – is that we will see through a rotation,” he said.
Although Novartis is said to have received interest from private equity buyers, the spin-off announcement will not be surprising given that it was seen as a likely outcome due to poor market conditions and the broader market being difficult to generics, analysts said.
“Prior uses by the pharma company have created short-term excitement given the strong track record of pharma spins outperforming their parents. In this case, competitive pressures in the generic space are likely to translate into less near-term interest,” analysts wrote in Citi. in a note.
Novartis shares now appropriately reflect the valuation of the two businesses, JP Morgan analysts added in a note.
Shares in the Basel-based company rose in morning trading.
Sandoz – which generated nearly $10 billion in sales last year selling generics and biosimilars (cheaper versions of biologic drugs made from living organisms) – will emerge as Europe’s leading generics company, according to Novartis.
Narasimhan described the market for generics as “very attractive” going forward, citing $400 billion to $500 billion worth of branded products expected to come off patent over the next decade.
Independent Sandoz is expected to be headquartered in Switzerland and listed on the SIX Swiss Exchange, with an American Depositary Receipt program in the United States. Richard Saynor will remain CEO after the spin-off.
The transaction, which is expected to be generally tax-neutral for Novartis, is expected to close in the second half of next year, subject to market conditions, tax rulings and opinions, final board approval and shareholder approvals, Novartis said.
How much Novartis debt Sandoz will carry as a separate entity will be finalized closer to the split, Narasimhan said.
“We want Sandoz to have adequate flexibility to invest in the business from a capital infrastructure standpoint, as well as pursue any M&A necessary to drive growth.”
Meanwhile, even a weakened Novartis will continue to have an appetite for deals. Bolt-on transactions worth less than $4 billion are still on the cards, Narasimhan said.
PRICE PRESSURES
Sandoz’s sales have been hurt by pricing pressure that has affected the broader generics industry for years, particularly in the United States, although the country accounts for less than a quarter of the unit’s total sales.
In 2021, sales in Europe fell 2%, while sales in the US fell 15% on a constant currency basis, also hit by a drop in demand related to COVID.
However, there are encouraging signs. Last month, Novartis said Sandoz’s earnings were likely to remain flat this year, largely thanks to growth in Europe.
Narasimhan also predicted a return to US growth for the unit, with expected biosimilar approvals for blockbuster drugs like Humira and Tysabri next year.
Novartis has trimmed its business interests, divesting its Alcon eye care business in 2019 and last November agreeing to sell a third of its voting stake in Roche ( ROG.S ).
It tried to divest part of Sandoz in 2018, but a $900 million deal with India’s Aurobindo Pharma ( ARBN.NS ) fell foul of antitrust rules.
Now, Narasimhan is aiming to spin off the entire division, which accounted for roughly a fifth of Novartis’ $51.6 billion in sales last year.
Novartis is also implementing a restructuring program that includes cutting up to 8,000 jobs, or about 7.4% of its global workforce. Read more
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Reporting by Silke Koltrowitz and Natalie Grover Editing by Jason Neely and Mark Potter
Our Standards: The Thomson Reuters Trust Principles.
