Is Sandoz spinoff finally here? Novartis gets the ball rolling with strategic review

Novartis
Amid U.S. generics pricing pressure, Novartis has been focusing Sandoz on biosimilars and complex generics while granting the unit autonomy within the group. (Novartis)

When Novartis unveiled a plan in 2018 to grant its Sandoz generics business more autonomy, industry watchers read spinoff. Now, a separation may be around the corner.

Novartis has launched a strategic review of the Sandoz division, the company said Tuesday. All options are on the table, including retaining the business and separation.

A decision won’t happen overnight; Novartis said it plans to offer an update on the review by the end of next year.

Sandoz has faced industrywide pressure on generics drug pricing, especially in the U.S., since around 2017. In the first nine months of 2021, Sandoz’s sales in the U.S. declined 17%, while the whole unit’s haul dropped 4% year over year at constant currencies to $7.11 billion.

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Novartis’ solution for the franchise focuses on biosimilars and complex generics. Last month, Sandoz in-licensed a copycat referencing Roche’s anti-VEGF drug Avastin from China’s Bio-Thera Solutions. The firm is also in late-stage development of a biosimilar to Regeneron’s top-selling VEGF inhibitor Eylea for eye diseases. But its launch of a biosim version of Amgen’s TNF inhibitor Enbrel has been significantly delayed after legal defeats.

Sandoz plans to launch six biosimilar products across the U.S. and EU in the next few years, and it has about 15 biosim programs internally or through partnerships, Sandoz CEO Richard Saynor told investors during a call Tuesday. 

The company has previously tried to offload the under-pressure U.S. oral solids business, together with a dermatology franchise, to India’s Aurobindo Pharma for about $1 billion. But the two had to abandon the sale last Spring after hitting an antitrust review setback with the U.S. Federal Trade Commission.

Novartis’ goal is to make Sandoz a leading player in the generics market with stable sales growth at mid-single digit and profit margins around mid- to high-20%. In the third quarter, Sandoz’s profit margin reached 23.8%, decreasing 3.4 percentage points.

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As part of making Sandoz an autonomous unit within the group, Novartis has done some housekeeping work in the past few years. Sandoz’s manufacturing operations have separated from the group’s, Novartis CEO Vas Narasimhan told investors in April.

“I think in most of the relevant areas, Sandoz is now enabled to compete at the relevant cost structure and flexibility to be successful as a leading generics player,” Narasimhan said at the time.

The Swiss pharma has also been busy closing some legal loose ends for Sandoz. Last March, Sandoz agreed to pay $195 million and reached a deferred prosecution agreement with the U.S. Department of Justice as part of a far-reaching antitrust investigation around generics price fixing. Earlier this month, the company has inked a separate settlement worth $185 million for the civil portion of the claims. However, more similar lawsuits await.

The question now is, what options does Novartis have for Sandoz?

First, Novartis could as well keep the generics business. Narasimhan has said that Sandoz is “an integral part of Novartis.” And the portfolio also helped out during the pandemic.

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Novartis could also consider spinning Sandoz off into a standalone public-listed company, just like what Merck & Co. did with Organon, which recently came to life with the New Jersey pharma’s women’s health products, established medicines and biosimilars. GlaxoSmithKline is plotting the same route for its Pfizer-shared consumer health business.

Novartis itself successfully spun off eyecare specialist Alcon into a separately listed firm back in 2019. But as Narasimhan noted during a Tuesday call with investors, Sandoz is more integrated with the group than Alcon was. “There are important considerations we’ll need to work through from IT and business services standpoints to really enable us to make the best decision,” he said.

During the review process, Narasimhan said, Novartis will consider potential cost savings between Sandoz and the innovative medicine franchise, capital allocation, and which business set-up would be best for Sandoz’s aspirations in the generics industry.

Private investment firms might also step up for a deal. Bain Capital and Cinven bought German generics player Stada and delisted the drugmaker in 2018. 

The one less likely route for Sandoz? An acquisition from another generics giant. The Aurobindo deal already spelled out the anticompetition trouble of combining two large generic portfolios, not to mention the new Democrat-led FTC has promised increased scrutiny around big biopharma transactions. With all the price-fixing lawsuits, the generics industry simply might not afford a big merger from an antitrust standpoint.

Editor's Note: The story has been updated with additional comments from Richard Saynor and Vas Narasimhan.