European pharmaceutical company
is shedding its generics division, making it the latest in a long line of big players in the sector to divest all but its core drug development business.
Novartis said it plans to spin off Sandoz, a division that makes generic drugs and biosimilars, in the second half of next year. The business behind it will consist of
Innovative Medicines, which the company created in April through the combination of its pharmaceutical and oncology business units.
“For Novartis, the separation would complete our journey and allow the creation of a new Novartis, a fully focused drug company,” CEO Vas Narasimhan said in a press call early Thursday.
Novartis’ (ticker: NVS ) U.S. depositary receipts fell 0.1% in premarket trading Thursday. Investors may also have reacted to news late Wednesday that Novartis had suspended a trial of its Huntington’s disease treatment, citing safety concerns.
Narasimhan has aggressively slimmed down Novartis’ operations since arriving in 2018. He sold his stake in a consumer health joint venture
) for $13 billion and spun off the company’s eye care business as
(ALC). Before Narasimhan arrived, the company sold its animal health business to him
Lilly (LLY) in 2014.
The pure play strategy has included a big pharmacy, like Barron’s reported at a function in June. After rounds of spinoffs and other deals, most of the big companies in the business, including
Bristol Myers Squibb
(BMY), and Lilly, now only make new drugs and sell them.
Investors had called for the change, which offers the promise of stronger growth and more focus. But the ancillary businesses that the big pharmaceutical firms owned, including generic drug divisions like Sandoz, provided relatively stable revenue streams to balance the ups and downs of drug development. Their withdrawal could make the sector more dangerous.
Narasimhan has said that the broad decline of big pharmaceutical firms comes as the companies try to compete in advanced biotech-style drugs. “To be on the cutting edge of science, if you want to win in biopharmaceuticals, you have to focus your capital and your energy and your management’s attention in that high-tech space,” he said. Barron’s the end of last year.
Investors, so far, have been unimpressed by the company’s efforts to refocus. Since the start of 2018, Novartis’ ADR has returned 31%, well behind the S&P 500, which has returned 71.7% over the same period. ADR trades at 13 times expected earnings over the next 12 months, according to FactSet.
Dumping Sandoz could ease the stock’s woes. The generic drug industry has generally presented challenges for drugmakers, and Sandoz’s sales have been stagnant as sales of Novartis’ new drug division have grown. Sandoz’s net sales for 2021 were $9.6 billion, compared with $42 billion for the company’s innovative medicines operation. While Sandoz’s sales were flat between 2020 and 2021, sales of the innovative medicines division rose 8%.
The company announced a strategic review of the Sandoz unit last year, saying it was considering a number of options. In Thursday’s press call, Narasimhan said Novartis’ board had approved the spinoff on Wednesday.
Despite a Financial Times report in February that multiple large private equity firms were considering making bids to buy Sandoz, Narasimhan said on Thursday that the company had not received any formal offers. He said Novartis believes a spinoff is the right approach.
“Of course I can’t rule out the fact that if someone came with a very attractive offer, we would have to fully consider it,” he said. “The most likely case, in all scenarios, is that we will see through a rotation.”
Earlier this year, in April, Novartis announced a restructuring that the company said will deliver more than $1 billion in annual savings. Industry website FiercePharma reported at the time that the restructuring would involve “thousands” of layoffs.
Thursday’s news makes for a busy 2023 for big pharma spinoffs. In addition to Novartis’ Sandoz spinoff,
Johnson & Johnson
(JNJ) is planning to spin off its consumer health division next year.
Companies face a troubling precedent. GSK’s consumer health spinoff debuts
(HLN) this summer has been disappointing so far. The market valuation of the business is significantly below expectations.
Write Josh Nathan-Kazis at [email protected]