Novartis announces widely expected Alcon spinoff, plus $5B share buyback, to strengthen focus on biopharma

Narasimhan
Novartis CEO Vas Narasimhan has made several decisions centered around focusing the company on biopharma innovation and digital technology. (Novartis)

When Novartis CEO Vas Narasimhan was asked during the company’s first-quarter earnings conference call in April what he planned to do with the long-struggling eye unit Alcon, he said he wanted to make the decision next year “from a position of strength.” But clearly Alcon’s performance during the quarter—sales grew 7% to $1.8 billion—gave Narasimhan the confidence he needed to move that decision up a bit.

Novartis said today it will spin off Alcon in the first half of 2019, pending shareholder approval. Alcon will be separately traded and based in Switzerland, with its current home base of Fort Worth, Texas, serving as a “critical location,” Narasimhan said during a press call after the announcement. Novartis, which acquired Alcon in 2011 for more than $50 billion, will retain the ophthalmology drugs that it separated out from the unit in 2016, leaving the new Alcon to focus entirely on eye devices and surgical products.

During the call, Narasimhan was pressed to predict the valuation of the Alcon spinoff, but he declined, even after one caller referred to Novartis’ past estimate that it may be worth between $25 billion and $35 billion. “What I can say is that we believe this business has really performed well and has turned to a real position of strength,” Narasimhan said. “When you look at the margin expansion, it continues to move up towards the 20%-plus range.” He added that a combination of demographic trends and technological advances in eye care were driving Alcon’s growth and would make the company attractive to investors as a standalone entity.

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The casting off of Alcon is the latest move by Narasimhan to focus Novartis on high-margin biopharma development. In March, Novartis sold off its share of a consumer-health joint venture with GlaxoSmithKline for $13 billion. A few weeks later, it bought gene therapy developer AveXis for $8.7 billion—a whopping 88% premium over AveXis’ share price prior to the offer.

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Novartis has more cash to pour into investments, a fact that was made clear by its announcement of a $5 billion share buyback it intends to complete by the end of 2019. When asked during the call whether the buyback signaled a loss of appetite for mergers and acquisitions, Narasimhan said Novartis is still interested in doing deals, provided the price is right.

“We continue to look at bolt-on M&A and the share buyback does not change our focus,” Narasimhan said. “Of course, valuations remain challenging overall in the space, so we continue to look for value-creating transactions that also give us important … platform capabilities that we can build on as a focused medicines company.”

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Investors are welcoming the Alcon spinoff, pushing shares of Novartis up nearly 3% in premarket trading to $75.89. “This is a strategic decision which makes sense and enables the group to refocus on its core business: pharma and differentiated generics + biosimilars (Sandoz),” wrote Pierre Corby, an analyst for France-based Oddo BHF, in a note to investors.

Indeed, the Alcon separation will allow Narasimhan to turn his attention to Sandoz, which has struggles of its own. During the first quarter, the generic unit’s volume grew 2 percentage points, but sales in the U.S. plummeted 18% due largely to price erosion. And Novartis failed to fulfill its promise to get a generic version of GSK’s respiratory blockbuster Advair approved because the FDA demanded more data. Now that product likely won’t be on the market until 2019.

Are Alcon’s struggles so serious that Novartis might consider getting out of generics and biosimilars, too? No, Narasimhan said. “We remain committed to ensuring Sandoz regains its strength and continues to compete in a very dynamic environment,” he said.

Narasimhan added that the Alcon spinoff will also help Novartis pour resources into fulfilling one of his top goals when he took over the CEO spot from Joe Jimenez in February: to use digital technologies to improve every aspect of drug development. “I’d like to build a strength in data and digital technologies, which I think will be an important element in the future of healthcare, but also an important element in the future of innovating breakthrough therapeutics,” he said.