Novartis hives off blood diagnostics for $1.7B in first slim-down sale

The Novartis sales have officially begun. The Swiss drugmaker ($NVS) has now agreed to sell its blood diagnostics business to Grifols, the Spanish healthcare company, for $1.7 billion. As analysts digest the news, they're already asking which unit will be next to go.

Novartis' vaccines and diagnostics business has been faltering of late. And crucially, it's not very big to start with. Or, in CEO Joe Jimenez's words, it doesn't have much scale--and without that scale, it's not the sort of business Novartis wants to hang onto these days.

Jimenez and Chairman Joerg Reinhardt have been reviewing the company's businesses for possible sale or spinoff. Pharma, generics and the eye care unit Alcon are all safe; Novartis sees them as core businesses, each with the critical mass to be formidable competitors in their respective markets.

Not so for vaccines, over-the-counter drugs, animal health and diagnostics. Some of these businesses were acquired as part of former CEO Daniel Vasella's diversification push, notably Chiron, which bulked up the company's vaccines and diagnostics unit--and never really performed up to expectations. The blood transfusion diagnostics business sold to Grifols? Once part of Chiron.

For Grifols, the purchase beefs up a growing diagnostics business. After the deal closes, diagnostics will make up 20% of Grifols' sales. For Novartis, it whittles the diagnostics business down to testing products closely linked to its efforts to develop targeted drugs. As Vontobel analyst Andrew Weiss noted, the blood testing business offered no synergies with the rest of Novartis's operations.

After announcing the deal Monday, Jimenez said Novartis is reviewing animal health, OTC drugs and vaccines to determine whether they can grow up to full-scale competitors. "These are good businesses, but we have to find a way to give them global scale," Jimenez told Reuters. If not, then they'll be on their way out.

"We need to have global scale in these businesses, and right now we're in that process of gaining scale or considering other options for these businesses," Jimenez told Reuters. The company will look at "any and all options that would allow us to have those businesses achieve their full potential," he told The Wall Street Journal.

Analysts have said Novartis could realize several billions from the sale of each of these units. As Reuters notes, Jefferies has said the vaccines and diagnostics business would be worth about $7.7 billion. After the Grifols sale, the remainder might be sold for up to $6 billion, Reuters notes.

Last week, Novartis executives suggested that animal health might be the first full unit to hit the market. Meanwhile, in other efforts to slim down the company, Novartis has been cutting jobs and restructuring R&D. Sales jobs in the U.K. were the most recent to go.

- read the Novartis release
- get more from Reuters
- check out the WSJ coverage (sub. req.)

Special Reports: Top 10 Pharma Companies by 2012 Revenues - Novartis | 20 Highest-Paid Biopharma CEOs of 2012 - Joe Jimenez

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