Less than a year into a strategic review, Novartis has decided on a plan for its Sandoz generics unit: a spinoff.
A separation between Sandoz and Novartis’ pharma business was largely expected when the group unveiled a strategic review back in October. Competition and U.S. pricing pressure have been weighing on Sandoz and the broader generics industry for years. And having a generics business doesn’t really fit CEO Vas Narasimhan's stated focus on innovative drugs.
The separation “would further support our strategy of building a focused innovative medicines company, with depth in five core therapeutic areas, and strength in technology platforms,” Narasimhan, M.D., said in a statement Thursday. The split would also allow both companies to pursue different capital allocation strategies, he added.
Over the past few months, Sandoz reportedly attracted buyout interest, including from an investor consortium of Blackstone and Carlyle for up to $25 billion. But Novartis hasn’t received any formal binding offers for Sandoz, Narasimhan told reporters Thursday, according to Reuters.
During that call, Narasimhan said he still sees generics as a “high attractive” industry, as quoted by Reuters. That's because $400 billion to $500 billion worth of branded drugs are expected to lose market exclusivity over the next decade, he added.
Novartis had previously tried to sell Sandoz in pieces, specifically the most problematic U.S. oral solids franchise, to India’s Aurobindo Pharma. But the two firms abandoned the deal after hitting antitrust resistance.
Although Narasimhan remains hopeful that external Sandoz bids might emerge, he acknowledged that a spinoff is the most likely scenario. Analysts generally agree that a spinoff is the best outcome.
“We think that this decision makes strategic sense, as the division is taking a toll on the group’s growth and margins,” ODDO BHF analysts wrote in a Thursday note.
In 2021, Sandoz ginned up $9.6 billion in full-year sales, down 2% year over year mainly thanks to a 15% decline in the U.S., where pricing pressure has taken a toll.
But Sandoz’s business has shown signs of improvement lately. In the first half of 2022, Sandoz sales grew 6% at constant currencies to $4.7 billion, contributing 18.6% of Novartis’ total revenue haul. As a result of the better-than-expected performance so far this year, Novartis in July said it expected low single-digit percentage revenue growth for the generics business, versus flat expectations before.
Looking longer term, Novartis believes the Sandoz stabilization “creates a solid base for growth 2023 and beyond,” Narasimhan told investors during a July call. “And a lot of that will be driven by the biosimilars portfolio.”
Sandoz has largely been counting on biosimilars for future growth. About a year ago, it in-licensed a biosimilar to Roche’s Avastin from China’s Bio-Thera Solutions. The company’s applications for a high-concentration formulation of a Humira copycat and a biosimilar referencing Biogen’s Tysabri are under FDA review.
Narasimhan cited biosims for Humira, Tysabri and Amgen’s bone drug Prolia as the three key upcoming biosimilar launches for Sandoz in the U.S. All told, with a portfolio of over 15 assets, Sandoz’s biosimilars are targeting $80 billion of originator sales, he said during the July call.
Splitting Sandoz would mark the end of an era at Novartis. The Swiss pharma giant was created in 1996 through the merger between Ciba-Geigy and Sandoz.
In recent years, spinoffs have become a popular strategy among Big Pharma companies, who have sought to exit businesses outside their focus areas and double down on higher-margin drugs.
Novartis had previously spun off eye-care unit Alcon in 2019. Merck & Co. last year separated its own biosimilar business alongside women’s health and established medicines into Organon. GSK just finished demerging its Pfizer-partnered consumer health joint venture into a separately listed firm called Haleon. And Johnson & Johnson is preparing to do the same with its consumer health unit.
Sandoz is expected to be incorporated in Switzerland and listed on the SIX Swiss Exchange, with an American depositary share arrangement in the U.S. Sandoz’s current CEO Richard Saynor will remain in his position. Novartis expects the spinoff to complete in the second half of 2023, pending final board and shareholder approvals, among other conditions.
Meanwhile, Novartis is in the process of a major restructuring that’s combining oncology with the rest of the pharma business into one structure. The retool will also cost up to 8,000 jobs, including many managerial roles.