Analysis-Novartis CEO may struggle to rally investors to Sandoz spin-off

© Reuters. FILE PHOTO: Swiss drugmaker Novartis' logo is seen at the company's plant in the northern Swiss town of Stein, Switzerland October 23, 2017. REUTERS/Arnd Wiegmann/File Photo

By Natalie Grover

LONDON (Reuters) - Novartis CEO Vas Narasimhan could struggle to woo investors to the listing of generics drugs business Sandoz, as weaker drug prices and jittery financial markets present one of his biggest challenges in the years-long overhaul of the Swiss drugmaker.

Novartis said on Thursday it plans to spin off Sandoz on Swiss and U.S. stock exchanges next year, capping off a prolonged streamlining of the Basel-based drugmaker that began in 2014, preceding Narasimhan's appointment to CEO in 2018.

Since Narasimhan took the helm, he has carved out the Alcon (NYSE:ALC) eye care business, bowed out of GSK's former consumer health business, agreed to sell a nearly one-third voting stake in Roche for close to $21 billion and is cutting up to 8,000 jobs, or about 7.4% of its global workforce.

Novartis started a strategic review of Sandoz last October - examining a range of options, including retaining the business, spinning it off or selling it - following a protracted period of underperformance driven largely by mounting pricing pressures in the off-patent drug sector, particularly in the United States.

Cognisant of the difficult market conditions, Novartis attempted to offload Sandoz's U.S. tablets business in 2018, but the $900 million deal with India's Aurobindo Pharma fell foul of antitrust rules.

The more commoditised generics environment - especially in the United States - remains extremely challenging, with many players reporting double-digit price deflation this year, Barclays (LON:BARC) analyst Emily Field told Reuters.

"I don't think investors are holding their breath that the environment will improve all that much in 2023," she said.

"Previous spin-outs from pharma companies have created near-term excitement given the strong track record of pharma spins outperforming parents. In this case, the competitive pressures in the generic space are likely to translate into lesser near-term interest," added Citi analysts in a note on Thursday.

Sandoz accounted for close to a fifth of Novartis’ $51.6 billion in sales last year.

In 2021, European sales in the unit slipped by 2%, while U.S. sales tumbled 15% on a constant currency basis, hurt by pricing pressures as well as a COVID-related drop in demand.

However, there are encouraging signs. Last month, Novartis said Sandoz's earnings would likely hold steady this year, primarily thanks to growth in Europe.

The unit's push into more complex generics and biosimilars (cheap versions of biologic drugs made from living organisms) is also expected to start to pay off.

Narasimhan on Thursday predicted a return to U.S. growth for the business, with expected biosimilar approvals for blockbuster medicines such as the autoimmune disorder drug Humira and multiple sclerosis treatment Tysabri next year.

Sandoz remains somewhat under-appreciated - in that a premium to other generic companies can be justified given no significant legal overhangs, a leading position in biosimilars and well as complex generics, and geographic breadth, Jefferies analysts wrote in a note last month.

"And yet, we envisage no debate that Sandoz should trade at a discount to a New Novartis. Further, we sense only lukewarm appetite of many Novartis investors to hold a standalone Sandoz."

TOP SWISS STOCK

Carving out lacklustre non-pharma businesses fits a broader trend in the industry increasingly keen on sharpening focus on the lucrative market for patented prescription medicines.

Last month, British drugmaker GSK spun off its consumer health business Haleon in the biggest listing in Europe for more than a decade. Last year, U.S. drugmaker Johnson & Johnson (NYSE:JNJ) said it was committed to detaching its consumer arm.

Analysts' estimates for Sandoz's equity valuation are very wide, ranging from $14 billion to more than $26 billion.

Even at the lower range, Sandoz would be catapulted into the top 20 companies listed on the Swiss stock exchange and would be the second-largest new listing on the index in over a decade.

But investors may prefer to be cautious. Market reception to GSK's unit has been tepid.

Haleon has lost 22% since the float a month ago, taking its market cap of around 30.5 billion pounds to around 24.37 billion pounds.

European IPO volumes have plummeted this year after a record-breaking 2021, as more investors have shied away amid nervousness about the geopolitical outlook following Russia's invasion of Ukraine and the increasingly fragile global economy.