💊 Will Novartis Find The Right Pill For Sandoz?

💊 Novartis: The Sandoz Conundrum?

Swiss-American pharma major Novartis AG (NVS) has commenced a strategic review of its generic drugs unit Sandoz. Mounting price pressures in the off-patent drugs business is a big concern. But will this much-bandied plan finally get to the execution stage this time around? (Tweet This)

Neither Here Nor There

Novartis was a result of the merger of Ciba-Geigy and Sandoz back in March 1996. In 2003, Novartis consolidated its generic drugs business under the moribund Sandoz name. Novartis acquired Hexal for $8.3B in 2005 and brought that under Sandoz as well. In 2006, Sandoz became the first-ever company approved in Europe for a biosimilar drug (Somatropin).

Separately, in 2008, Novartis, which had held a 25% stake in Alcon, the world’s largest eye-care company, went the whole hog to buy the remaining stake for an additional $39.3B. Alcon, which cost Novartis more than $60B, all things considered, was spun off into an independent listed entity in 2019.

The generic drug industry in the US was always fraught with price erosion. No patent protection, new players entering the market, low-price products, pharmacies joining with wholesalers, and wielding a higher purchase power – all this meant extreme pricing pressures.

Having committed quite some cash and other resources as part of these acquisitions, Novartis was under financial pressure and had to find a way out given the realities of the generic drug industry. Therefore, it was no surprise that in 2018, Novartis unveiled plans to make Sandoz an independent unit.

Also, in September 2018, Novartis tried to sell its oral solids and dermatology business to India’s Aurobindo Pharma for $1B. That fell through when the US Federal Trade Commission blocked the sale. All these pressures contributed to the decision to spin off Alcon.

The plans for making Sandoz independent were slow to take off the ground and stalled altogether during the Covid lockdown. For the full year 2020, Sandoz recorded sales of $9.7B, ~20% of Novartis’ topline. For the first nine months of 2021, Sandoz’s US sales declined 17% year-on-year. Novartis promptly issued a warning that Sandoz’s operating income may fall faster than previously expected.

The Throbbing Headache?

Novartis’ Q3 results more or less met expectations on the revenue front while surpassing EPS estimates.

Key Stats From Q3:

• Revenue: $13.03B Vs $13.04B expected
• EPS: $1.71 Vs $1.64 expected

Novartis expects Sandoz’s operating income to decline by a “mid-to-high-teens” percentage rate as compared to the earlier forecast of “low-to-mid-teens.” Sandoz’s “strategic review” might end with the division being sold to a rival player, PE firm, or spun off into an independent listed entity.

Such a decision is likely only by the end of the next year. But there are more urgent issues to consider. Last month, Sandoz agreed to pay $195M to the US Department of Justice in order to defer the prosecution in an antitrust investigation into generic price-fixing.

The division agreed to pay $1.895B this month for the civil portion of the claims while kicking the actual investigation a few months down the road.

Novartis has its task cut out. The last thing it wants is to attract more regulatory scrutiny a la its failed transaction with Aurobindo. On the other hand, Sandoz cannot continue to trend consistently downward in terms of profitability in a market that’s highly price sensitive. And the fact that this very division is embroiled in an antitrust investigation makes matters much more challenging.

As of now, shareholders have welcomed the announcement of a strategic review. Yes, it’ll take a year to get more clarity. In the meantime, they’ll have to make do with popping a few Zomig pills to relieve the headache that’s surely coming their way!

Market Reaction
NVS ended at $84.84, up 1.78%. Shares are down 10% this year.

Company Snapshot 📈

NVS $84.84 +1.48 (1.78%)

Analyst Ratings (24 Analysts) BUY 54%  HOLD 33%  SELL 13%