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Novartis Has a Big Pile of Cash and Investors Are Demanding Action

Novartis Has a Big Pile of Cash and Investors Are Demanding Action

Switzerland’s two major pharmaceutical companies reside in the same sleepy city, Basel. Until recently, Novartis AG even owned a large chunk of Roche Holding AG, located within walking distance in a pair of gleaming white towers on the River Rhine.

The highest skyscrapers in Switzerland, Roche’s imposing headquarters stand in stark contrast to the low-slung buildings grouped around a park-like campus that Novartis calls home on the other bank of the river. Lately, the two drugmakers have also diverged in other ways.

While Novartis grapples with convincing investors of its pipeline of drugs and integrating a series of acquisitions, Roche has benefited from a record number of potential new treatments in late-stage development and strong demand for Covid-19 tests. Roche shares have climbed 20% this year, compared with a 9% drop for Novartis. Almost four years after taking the reins, Novartis Chief Executive Officer Vas Narasimhan is under growing pressure to reshape the pharma giant and make some shrewd moves. 

The urgency to act has only grown with the sale of a $21 billion stake in Roche this month that has given Novartis the financial firepower for a transformational deal. Buying a biotech company is one option, with Alnylam Pharmaceuticals Inc. -- a company with a market value in excess of $20 billion -- a prime potential target, according to people with knowledge of the matter, who spoke on condition of anonymity because the discussions are private.

Alnylam rose as much as 9.8% to $189.69, the biggest gain since the start of the year. Novo Nordisk A/S also today agreed to buy Dicerna Pharmaceuticals Inc., a company that uses similar technology to Alnylam’s, at an 80% premium.

Novartis and Narasimhan, 45, could use a spark. Some of the drugs that were supposed to drive growth have failed in clinical trials, run into safety issues or been delayed. Among the setbacks are canakinumab, a would-be lung cancer drug that failed in trials this year, and a new version of Zolgensma, a gene therapy for children that’s up against competition from a Roche drug.

The company declined to comment on potential acquisitions, or make its CEO available for an interview for this story.

“You want the pipeline story -- you want to see where future growth will come from,” said Stefan Schneider, a Vontobel analyst in Zurich who advises investors hold Novartis shares. “You look at it as an investor and say, ‘We spent all that money to get a pipeline story on the table, but I don’t see it, yet.’”

Novartis Has a Big Pile of Cash and Investors Are Demanding Action

Narasimhan, a Novartis veteran, has already orchestrated a massive overhaul. The decision to end the two-decade investment in Roche and a potential spinoff or sale of the Sandoz generic-drug unit unveiled last month cap a series of strategic moves to sharpen the focus on cutting-edge medicines and break with the diversification of the past. If Narasimhan opts to sell Sandoz, he’d gain even more ammunition -- as much as $50 billion -- to pursue deals.

“He’s basically removing what one might argue are hedge and safety measures and doubling down on innovation,” said John Rountree, a managing partner at London-based pharmaceutical consulting firm Novasecta. “That’s what investors want. They don’t want all of this distraction.”

Disposal

Investors are eagerly awaiting Narasimhan’s next moves after he ditched a stake in a consumer-health venture and spun off the Alcon eye-care unit in recent years. Other drug companies, including GlaxoSmithKline Plc, are making similar bets on therapies that could have a profound impact on both patients and profits while shedding assets that aren’t at the heart of their mission. Johnson & Johnson reinforced the point last week, announcing plans to separate the consumer division.

The Roche disposal triggered speculation Novartis could snap up promising gene therapies, cancer treatments and other medicines. Alnylam, known for turning a Nobel Prize-winning concept called RNA interference, or RNAi, into approved treatments for rare genetic conditions, is one possibility. Vertex Pharmaceuticals Inc., Intellia Therapeutics Inc., Biogen Inc., Incyte Corp. and BioMarin Pharmaceutical Inc. are among a range of other companies seen as potential targets.

“Management could elect to deploy most of the proceeds on a single large acquisition with late-stage clinical or marketed drugs,” which could improve the narrative around the stock, Jefferies analysts including Peter Welford wrote in a report.

Novartis Has a Big Pile of Cash and Investors Are Demanding Action

Sandoz opens up further possibilities. A spin-off could dilute Novartis shareholders, as the business is likely to trade at a lower multiple than the parent, according to people familiar with the discussions. 

While the parent company may prefer a straightforward sale, the unit’s growth prospects and a lack of buyers with sufficient firepower are possible hurdles. Novartis has said keeping the unit is also an option.

It’s not that Narasimhan hasn’t already shown his dealmaking credentials. The drugmaker gained gene therapy Zolgensma through the $8.7 billion purchase of AveXis in 2018 and picked up Endocyte, a developer of cancer treatments, the same year. In 2019, Novartis agreed to buy Medicines Co. and heart drug inclisiran for $9.7 billion. Narasimhan said in a 2019 interview that he wanted to consistently spend the equivalent of about 5% of Novartis’s market value on deals each year. That’s about $10 billion today.

With or without a Sandoz sale, additional deals are a tricky proposition. 

Four of Narasimhan’s last five acquisitions haven’t yet lived up to investors’ expectations, and because the company needs growth fast, it will continue to face high price tags for the next deals, Vontobel’s Schneider said. By contrast, a robust pipeline allows Roche to concentrate on earlier-stage deals that are cheaper.

Novartis Has a Big Pile of Cash and Investors Are Demanding Action

Novartis could also invest the Roche proceeds into research or development efforts -- or technology and artificial intelligence projects -- already underway internally.

Novartis has likely been overshadowed by developers of successful or highly promising Covid vaccines and therapies, John Tsai, Novartis’s head of global drug development, said in an interview. Novartis sold its vaccines business several years ago, and its experimental Covid therapies haven’t panned out yet. Attractive assets in a vast pipeline targeting a range of other diseases are being overlooked, Tsai said.

“The external world is undervaluing our mid-stage and late-stage pipeline significantly,” he said.

Dismantling an Empire

Yet some investors are anxious about the pace of a transformation that was set in motion years ago.

Former chief Daniel Vasella oversaw the 1996 merger of Sandoz and Ciba-Geigy that created Novartis, a transaction that ranked as one of the largest combinations in the industry. Later, he bought the Roche shares, acquired a U.S. vaccine manufacturer for $7.5 billion and invested $50 billion into Alcon. Vasella’s departure as chairman in 2013 led some investors to speculate that the company would unwind some of the deals he had engineered. 

Now, almost nine years later, Novartis is on the cusp of a new chapter, led by an engaging chief who shunned his predecessor’s quiet corner office in favor of a seat out in the open, has vowed to “reimagine” medicine and moved to “un-boss” the pharma behemoth and its more than 100,000 employees.

Although massive deals look less likely, Narasimhan could pull off a transaction similar to AstraZeneca Plc’s move into rare diseases with its late 2020 purchase of Alexion Pharmaceuticals Inc. for $39 billion, Novasecta’s Rountree said.  said. That could give Novartis shareholders something to cheer.

“Novartis is sort of plowing on with its strategy and for some investors that’s less exciting,” he said. “Investors aren’t necessarily seeing Novartis in that innovative way yet.”

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