Novartis Plans to Give Ailing Alcon More Time for Turnaround

(Bloomberg) -- Novartis AG plans to give its ailing Alcon eye-care division an additional year and a half to rebound before deciding whether to spin it off.

The business is starting to show signs of a turnaround and “has the potential to grow sales at or above market while delivering profitability at least in line with the industry,” the Basel, Switzerland-based drugmaker said in a statement Tuesday as it reported its first quarterly profit increase in almost three years.

Chief Executive Officer Joe Jimenez, who is set to hand the reins to Vas Narasimhan after eight years at the helm, has said he expects the company to return to growth next year. Alcon, which has been a drag, needs to show sales and margin improvements before its owner can reach a decision about its future. A spinoff giving Alcon shares to Novartis investors would add value and lead to two “very focused” companies, Jimenez said in an interview.

“We’d want to come to the market from a position of strength,” Jimenez told reporters on a conference call. “Let’s get this thing humming with good momentum, and then a final decision will be made.”

Novartis shares fell 2.2 percent to 83.25 Swiss francs at 12:45 p.m. in Zurich trading. The stock has gained about 13 percent so far this year, beating neighbor Roche Holding AG’s 0.5 percent increase.

Jimenez has said Alcon could be attractive to investors given a scarcity of health-care assets with a valuation ranging from $25 billion to $35 billion.

Generics Pressure

A decision on the division probably won’t come before the first half of 2019. Among the options envisioned, Jimenez said creating a stand-alone company via a capital markets exit could create “considerable shareholder value.”

In the meantime, Novartis agreed to move its over-the-counter eye products, which garnered sales of about $700 million last year, to Alcon at the start of next year. The bigger prescription eye products won’t follow.

On the prescription medicines front, Novartis is counting on newer products such as heart drug Entresto, psoriasis treatment Cosentyx and Kisqali for breast cancer to help counter a drop in sales of Gleevec, which is losing ground to cheaper copycats.

Sales of Entresto rose less than analysts expected to $128 million last quarter and will need to accelerate to meet the company’s $500 million target for the full year, Rebekah Harper, an analyst at Credit Suisse in London, wrote in a note to clients.

The company’s own generics are also suffering in the U.S. Novartis warned that sales at its Sandoz unit may see a slight decrease this year, reducing its expectation from little change, amid pressure on prices in the U.S., where it makes almost a third of its sales.

‘Deep Analysis’

Novartis’s earnings rose to $1.29 a share excluding some items in the third quarter, beating analysts’ estimates. Sales for the whole year are expected to be broadly in line with 2016, while earnings excluding some items will probably remain flat or decline by a “low single-digit” percent, the company said, reiterating an earlier forecast.

Novartis last reported an increase in the measure it calls core earnings per share in the last three months of 2014, according to data compiled by Bloomberg. Analysts had estimated core earnings per share of $1.25 for last quarter. The company, which began a share buyback program of as much as $5 billion in January, said the number of shares outstanding decreased by 46.8 million from the end of last year.

Jimenez told investors in October 2015 that Novartis was doing a “deep analysis” of Alcon and that he hoped to come up with a plan to get the unit “back to a decent growth rate.” The company has acknowledged that the turnaround has taken longer than expected. Last January, Novartis said it was considering a spin-off or IPO of Alcon.

To contact the reporter on this story: James Paton in London at jpaton4@bloomberg.net.

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net, Marthe Fourcade, Phil Serafino

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