Novartis exits 20-year Roche stake, creating a $20.7B question about CEO Vas Narasimhan's next M&A move

After 20 years, Novartis is finally shedding its stake in Swiss rival Roche, gaining a handsome return on investment but leaving behind a big question of where CEO Vas Narasimhan plans to spend all the money.

Novartis has agreed to sell back 53.3 million Roche bearer shares, or roughly 33% of Roche's voting stake, for about $20.7 billion, allowing for what Roche called the “disentanglement of the two competitors.”

The share buyback comes as Roche’s stock price on the SIX Swiss Exchange has been trading at all-time highs thanks in part to its strong performance from COVID-19 products. The move also comes as the two companies have grown increasingly competitive against one another.

“After more than 20 years as a shareholder of Roche, we concluded that now is the right time to monetize our investment,” Novartis CEO Vas Narasimhan said in a statement.

'Strategic investment' versus 'strategic flexibility'

Novartis started building a stake in Roche back in May 2001 as a long-term financial investment. The company reached its current stake by 2003 after investing a total of about $5 billion. In addition to the obvious share price gain, the holding also yielded over $6 billion of dividends over the years. All told, Novartis calculated an annualized return of 10.2% in U.S. dollars or 6.6% in Swiss francs.

The sale price, at $388.99 (CHF 356.93) per share, reflects the volume-weighted average price of Roche’s non-voting equity certificates over the last 20 trading days ending on Nov. 2, the two companies said.

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[T]oday we don’t see Roche as a strategic investment, nor part of our core business,” a Novartis spokesperson said in a statement to Fierce Pharma. “We don’t need to own a competitor and we have seen a strong run on the valuation of Roche, so when they indicated openness to a transaction to allow us to exit, we decided to proceed in the best interest of shareholders.”

For Roche, by removing the ownership of a third of its voting power by a competitor, the company has “gained even more strategic flexibility,” a Roche spokesperson told Fierce Pharma in a separate statement. Novartis approached Roche with the share repurchase proposal, and the latter company decided the transaction is “in the best interest of Roche and its shareholders from a strategic and economic perspective,” the Roche spokesperson added.

Roche and Novartis indeed have increasingly found themselves in rivalry positions lately. Roche’s top-selling drug, multiple sclerosis treatment Ocrevus, is getting in-class competition from Novartis’ Kesimpta, which earned an FDA go-ahead last August.

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In addition, Novartis recently in-licensed BeiGene’s PD-1 inhibitor tislelizumab, which would compete with Roche’s PD-L1 inhibitor Tecentriq. In wet age-related macular degeneration, Novartis’ Beovu is a competitor to the Roche-shared Lucentis. While Novartis has spinal muscular atrophy one-time gene therapy Zolgensma, Roche recently won approvals for oral drug Evrysdi.

As both drugmakers wade deeper into oncology, ophthalmology and neuroscience, the two companies are set to collide on even more fronts.

The next chapter

Now that the 20-year marriage between the two Basel-based drugmakers is about to end, the $20.7 billion question is: Where will Novartis use the money?

In a Thursday statement, Novartis said it will use the proceeds “in line with capital allocation priorities.” As Novartis Chief Financial Officer Harry Kirsch reminded investors during a conference call last week, the priorities include investment in the internal business, growing its dividend, bolt-on M&A and in-licensing, as well as share buybacks.

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“We have continuously screened the market, and we continue to look opportunistically for bolt-on M&A opportunities that fit our franchises and existing infrastructures,” Kirsch said.

Likely bolt-on targets might come in the fields of oncology, cardiovascular disease and novel gene therapies, Jefferies analyst Peter Welford said in a Thursday note to clients.

Novartis has followed a sell-and-buy pattern in recent years under Narasimhan’s leadership.

Merely two months into Narasimhan’s tenure as CEO in early 2018, Novartis reached an agreement with GlaxoSmithKline to exit its 36.5% stake in their consumer health joint venture for about $13 billion. On the heels of that announcement, Novartis shelled out $8.7 billion for AveXis, which gave it Zolgensma. That same year, Novartis bought Endocyte for $2.1 billion to bolster its offerings in the radiopharmaceuticals business.

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As part of Narasimhan’s push to focus Novartis as a “medicines company,” the Swiss pharma in 2019 spun off eyecare specialist Alcon into a standalone business. The same year, Novartis put down $9.7 billion for The Medicines Company to get its hands on PCSK9 cholesterol-lowering drug Leqvio, or inclisiran.

Last week, Novartis said it has launched a strategic review of its generics business Sandoz after preparing the unit by granting it autonomy within the group. A decision on Sandoz’s future is expected by the end of next year.

As for Roche, it will finance the share buyback with debt. Getting the voting rights back gives the company more flexibility in dealmaking, the Roche spokesperson said. The deal will boost the voting power of the Roche founding families to about 67.5%, Roche said. The family’s current voting stake is about 45%, according to the company’s 2020 annual report.

The transaction still needs approval from Roche shareholders at its upcoming general meeting on Nov. 26.