Novartis to spin off Sandoz to create Europe's leading generics player

By Natalie Grover and Silke Koltrowitz

ZURICH/LONDON (Reuters) -Novartis plans to spin off its generics unit Sandoz to sharpen its focus on its patented prescription medicines, the Swiss group said on Thursday, acknowledging it had not received any formal offers for the business to date.

The company 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.

Novartis has not received any formal binding offers for Sandoz so far - but if any "highly attractive" bids did emerge Novartis would fully consider them, CEO Vas Narasimhan told a media briefing on Thursday.

However, "the most likely case - in all scenarios - is that we will see through a spin," he said.

The spin-off announcement will not come as a surprise, given it was seen as a likely outcome due to poor market conditions and the struggling broader market for generics, analysts said.

"Previous spin-outs from pharma company 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," Citi analysts wrote in a note.

Novartis shares already appropriately reflect the valuation of the two businesses, added J.P. Morgan analysts in a note.

The Basel-based company's stock inched up nearly 1% in morning trading.

Sandoz, which generated nearly $10 billion in sales last year, will emerge as Europe's leading generics company, according to Novartis.

The standalone Sandoz is expected to be headquartered in Switzerland and listed on the SIX Swiss Exchange, with an American Depositary Receipt programme in the United States. Richard Saynor would remain CEO following the spin-off.

The transaction, which is anticipated to be generally tax-neutral for Novartis, is expected to be completed in the second half of next year, subject to market conditions, tax rulings and opinions, final board endorsement and shareholder approvals, Novartis said.

How much Novartis debt Sandoz will carry as a separate entity will be finalised closer to the separation, Narasimhan said.

"We want Sandoz to have adequate flexibility to invest in the business from a capital infrastructure standpoint, as well as to pursue any needed M&A to drive growth."

Meanwhile, a slimmed down Novartis also continues to have an appetite for deals. Bolt-on transactions worth less than $4 billion are still on the cards, Narasimhan said.

PRICING PRESSURES

Sandoz sales have been hurt by pricing pressure that has affected the broader generics industry for years, particularly in the United States, although the country accounts for less than a quarter of the unit's total sales.

In 2021, sales in Europe declined by 2%, while U.S. sales tumbled 15% on a constant currency basis, hit also by 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.

Novartis has been pruning its business interests, spinning off its Alcon (NYSE:ALC) eye care business in 2019 and last November agreeing to sell a nearly one-third voting stake in Roche.

It tried to divest part of Sandoz back in 2018, but a $900 million deal with India’s Aurobindo Pharma fell foul of antitrust rules.

Now, Narasimhan is aiming to spin off the entire division, which accounted for close to a fifth of Novartis’ $51.6 billion in sales last year.

Novartis is also implementing a restructuring programme that involves cutting up to 8,000 jobs, or about 7.4% of its global workforce.