💊 Is Novartis' Exit From Roche A Sound Strategy?

New CEO At Twitter; Lululemon-Peloton's Feud.

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💊 Novartis: Divorce With Benefits?

Swiss-American pharma giant Novartis AG (NVS) ended a two-decade association with Roche last week. It agreed to sell its nearly one-third voting stake back to Roche for $20.7B. The transaction will fetch Novartis a profit of $14B. Will it manage to further simplify its structure going forward? (Tweet This)

An Overnight Arrival

In 2001, then Novartis CEO Daniel Vasella wanted to merge with Roche Diagnostics, thereby creating a behemoth akin to Pfizer. Vasella had just presided over the merger of Ciba Geigy and Sandoz to form Novartis, and Roche was supposed to be his next target.

However, he encountered the secretive Oeri-Hoffmann families who controlled majority voting rights in Roche although they were just minority shareholders. Separately, billionaire investor Martin Ebner, who was instrumental in creating the financial services giant UBS, held 20% of Roche’s voting equity.

Ebner, who was in favor of the Novartis deal, couldn’t convince the company to give up its dual equity structure, which led to the Oeri-Hoffman families fiasco. After multiple attempts, he decided to throw in the towel.

Ebner dialled Vasella and offered his stake for $2.8B. Vasella finally had his prize. In May 2001, in an almost-overnight transaction, Novartis replaced Ebner on Roche’s cap table. By 2003, Novartis increased its stake to 33.3% through market purchases for a cumulative $5B investment.

Still, Vasella was unable to go for the kill as the Oeri-Hoffman families stood firm. And so, Novartis was forced to remain a hands-off investor in Roche without board representation. They did have veto rights but were barely able to influence the policy or strategy of the company.

All Novartis could do was feed off from Roche’s dividend income, which was a tiny fraction of its overall revenue. Billions of dollars invested remained stuck, and monetizing that stake would lead to better allocation of capital. Current CEO Vas Narasimhan saw the writing on the wall and started unraveling Vasella’s dream.

Setting Up For Long-Term Success?

Novartis’ 53.3M bearer shares of Roche will be sold for $388.99 apiece, almost the same as Roche’s closing price on Friday. The total sale will be valued at $20.7B, handing the company ~$14B in profit on the investment. Dividend income in the last 20 years amounted to another $6B.

Narasimhan termed it “the right time” to monetize their investment. Roche will use debt to finance the repurchase of the shares and then extinguish them to gain complete strategic flexibility. Oeri-Hoffman families’ voting power in the company will increase to 67.5% and further strengthen their hold.

Novartis’ retreat was in many ways unavoidable. Roche’s top-selling drug, Ocrevus, used in treating multiple sclerosis, is getting in-class competition from Novartis’ Kesimpta, which the USFDA approved in August 2020. Both companies also compete against each other in sectors like oncology, ophthalmology, and neuroscience – cause for increasing unease in either boardroom.

When Narasimhan took over as CEO in early 2018, Novartis signed a deal with GSK to sell its 36.5% stake in their consumer health JV for $13B. They used these proceeds to acquire AveXis for $8.7B and Endocyte for $2.1B. Its eyecare business Alcon was spun off into an independent listed entity in 2019. Now they have the windfall from Roche that gives them a much larger canvas to play with.

Narasimhan has also launched a strategic review of its generic drugs unit Sandoz, the decision on which is expected next year. Even so, Novartis remains a fair distance away to give Pfizer a run for its money. As of Friday’s closing, it had a market value of $180B compared to Pfizer’s $303B.

Novartis plans to grow its dividend and continue its M&A activities. But, for the moment, global markets may be in a somber mood. But these are long-term strategic moves at the corporate level that ignore the transient response of the markets. It seems Novartis finally has the monkey off its back and money in its coffers to set itself up for future growth!

Market Reaction
NVS ended at $80.27, down 0.53%. Shares are down 15% this year.

Company Snapshot 📈

NVS $80.27 -0.43 (0.53%)

Analyst Ratings (24 Analysts) BUY 63%  HOLD 25%  SELL 12%

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Today’s Market Terminology: Leverage

Leverage is a technique involving the use of debt instead of fresh equity in the purchase of an asset. Expectation generally is that the after-tax profit will exceed the borrowing cost by several multiples

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