Splitting the Pill at Novartis Will Be Easier Said
Than Novartis is considering whether it needs a new look.
The Swiss pharmaceutical company has one of the most diversified businesses in the industry, ranging from drugs and vaccines to generics, animal health and eye care. But under new Chairman and Chief Executive Joseph Jimenez, Novartis is weighing whether to sell or separate some of its disparate divisions.
Still, those hoping for a significant revamp at this week's investor day may be disappointed. True, Novartis's renewed emphasis on owning only market-leading businesses seems to imply putting its animal health, vaccines and over-the-counter drugs units on the block. And its holding in fellow Swiss pharmaceutical company Roche Holding, ROG.VX +0.35% a 33% voting stake, may no longer be considered strategic.
Novartis's soul searching comes as other pharmaceutical companies consider streamlining. When blockbuster drugs were set to lose patent protection, Big Pharma bulked up to help mitigate the hit to revenue. Now, as the wave of patent expirations approaches its end and new drug pipelines show more promise, peeling away layers of diversification may win a better valuation for a more rapidly expanding core.
But it isn't clear how much Novartis can achieve, at least in the short term. It announced last week the sale of its blood-diagnostics business to Spain's Grifols GRFS +2.19% for $1.7 billion. But this was a small, profitable part of Novartis's loss-making vaccines division.
Bigger sales may prove difficult. Admittedly, Novartis's animal-health business, valued at perhaps $4 billion, could be attractive to companies like Bayer BAYN.XE -0.17% and Eli Lilly. LLY -0.04% The vaccines business, though, is dependent on low-margin flu shots; other vaccine makers like GlaxoSmithKline GSK -0.10% or Sanofi SNY +1.72% could also face antitrust issues if they try to buy it. Meanwhile, striking a deal with Roche for a stake repurchase could be tricky should Novartis want to sell at a premium. Selling all three subscale divisions, and the Roche stake, could raise up to $32 billion, according to Deutsche Bank. Novartis could use the funds to repurchase stock, pleasing investors. But that assumes the company doesn't hang onto proceeds for deal making, an option to which it has alluded in the past.
Then there is the issue of what is left behind. Novartis has had success with its late-stage pipeline. But Glivec, its biggest and most profitable drug, is set to lose patent protection, and sales growth and margins could come under pressure. Some of Novartis's disposal candidates offer better sales growth than its pharmaceuticals division in the next two years, partly because the over-the-counter medicines unit is recovering from manufacturing problems.
Pfizer's PFE +0.63% streamlining, after it shed its infant-nutrition and animal-health businesses, has been hailed as a success. But Pfizer was trading at eight times forward earnings when it started the process, compared with Novartis, which is already on a multiple of close to 15 times. Valuing the constituent parts of Novartis's business yields a total only just above the current share price, argues Bank of America Merrill Lynch. Breaking up is a messy business. Finding any value in it remains tough.