Novartis CEO Vas Narasimhan may struggle to entice investors to Sandoz’s IPO, as lower drug prices and jittery financial markets present one of his biggest challenges in the Swiss drugmaker’s years-long transformation.
Novartis announced on Thursday that it intends to delist Sandoz from the Swiss and American stock exchanges next year, capping off a lengthy streamlining of the Basel-based drugmaker that began in 2014, prior to Narasimhan’s appointment as CEO in 2018.
Following a protracted period of underperformance driven largely by mounting pricing pressures in the off-patent drug sector, particularly in the United States, Novartis began a strategic review of Sandoz in October, examining a range of options, including retaining the business, spinning it off, or selling it.
Recognizing the challenging market conditions, Novartis attempted to sell Sandoz’s U.S. tablets business in 2018, but the $900 million deal with India’s Aurobindo Pharma was blocked by antitrust regulations.
The more commoditised generics environment, particularly in the US, remains extremely challenging, with many players reporting double-digit price deflation this year, according to Barclays analyst Emily Field.
“I don’t think investors are expecting much improvement in the environment in 2023,” she said.
“Previous pharma spin-outs have generated near-term excitement due to a strong track record of pharma spins outperforming parents. In this case, competitive pressures in the generic space are likely to translate into less interest in the near term “Citi analysts added in a note on Thursday.
Last year, Sandoz accounted for nearly a fifth of Novartis’ $51.6 billion in sales.
In 2021, European sales fell 2%, while US sales fell 15% on a constant currency basis, owing to pricing pressures and a COVID-related drop in demand.
There are, however, encouraging signs. Last month, Novartis predicted that Sandoz’s earnings would remain stable this year, owing primarily to growth in Europe.
The unit’s push into more complex generics and biosimilars (low-cost versions of biologic drugs made from living organisms) is also expected to pay off.
Narasimhan predicted a return to U.S. growth for the company on Thursday, predicting biosimilar approvals for blockbuster drugs such as the autoimmune disorder drug Humira and the multiple sclerosis treatment Tysabri next year.
Sandoz remains somewhat underappreciated, with Jefferies analysts writing in a note last month that a premium to other generic companies can be justified given no significant legal overhangs, a leading position in biosimilars as well as complex generics, and geographic breadth.
“Nonetheless, we believe that Sandoz should trade at a discount to a New Novartis. Furthermore, we believe that many Novartis investors have only a lukewarm appetite for a standalone Sandoz.”
SWISS TOP STOCK
Carving out underperforming non-pharma businesses fits a broader trend in the industry, which is increasingly focused on the lucrative market for patented prescription medicines.
Last month, GSK spun off its consumer health business Haleon in Europe’s largest listing in more than a decade. Last year, Johnson & Johnson announced its intention to separate its consumer division.
Analysts’ estimates for Sandoz’s equity valuation range from $14 billion to over $26 billion.
Even at the lower end of the range, Sandoz would be catapulted into the top 20 companies listed on the Swiss stock exchange, becoming the index’s second-largest new listing in over a decade.
Investors, on the other hand, may prefer to be cautious. The market reaction to GSK’s unit has been muted.
Haleon has lost 22% of its value since its float a month ago, bringing its market capitalization from around 30.5 billion pounds to around 24.37 billion pounds.
Following a record-breaking 2021, European IPO volumes have dropped this year, as more investors have shied away amid concerns about the geopolitical outlook in the aftermath of Russia’s invasion of Ukraine and the increasingly fragile global economy.
