Christoph Bieri, PhD is Managing Partner of Kurmann Partners, an M&A firm advising Pharma and MedTech companies on strategic mid-market deals in Europe and the Americas. Here he looks at Novartis’ bold M&A moves and what they could mean for their generics arm, Sandoz.


Besides the large business platform acquisitions, Novartis has always been licensing and acquiring interesting drug development pipelines.


On November 15th this year, a local newspaper here in Basel reported that Novartis, the Swiss Pharma giant, was planning to spin off its generic drug division Sandoz. “Not so fast” was Novartis’ official response: Sandoz will be reorganized as an independent unit, but Novartis will remain fully committed to its ownership.


Maybe this will be the case in the next few years. But spinning off Sandoz would be a logical final step in Novartis’ long-running M&A saga. It is worthwhile to go back two decades to understand the background.


After its inception in 1996, Novartis’ vision was to become a broadly diversified health products provider, similar to J&J. By the end of 2004, Novartis’ interests went far beyond its core innovative Rx business: The group offered generics (Sandoz), OTC drugs, and vaccines, but also consumer eye care products (Ciba Vision), medical nutrition, diagnostics, and animal health products. However, some of the business units were too small to be competitive.


The conclusion was to make large acquisitions to expand the platforms.


In 2005, Novartis acquired Hexal and EON for more than US$8bn. This made Sandoz, Novartis’ generics division, one of the largest providers of generic drugs, and the leader in biosimilar development. In 2006, Novartis purchased US-based Chiron (vaccines, diagnostics, and biologicals manufacturing). From 2008 to 2011 followed the by far largest deal: the three-step purchase of Alcon for a total consideration of more than US$50bn.


By 2012, Novartis had five divisions – innovative pharmaceuticals, eye care (Alcon), generics (Sandoz), Consumer Health (including animal health), and vaccines & diagnostics. Alcon, Sandoz and some of the innovative medicines franchises (e.g. oncology) were global market leaders. But the group was becoming too large and too complex to manage.


Thus, Novartis reversed its course.


In April 2014, the group announced the sale of all units of its consumer health and diagnostics & vaccines divisions. In multiple simultaneous transactions, OTC drugs were moved into a JV with GSK, vaccines were sold to GSK, and animal health was disposed to Ely Lilly. At the same stroke, Novartis purchased GSK’s oncology program consisting of late-stage development programs and marketed innovative drugs. This strengthened Novartis oncology franchise, one of its key growth and profit drivers.


In the subsequent quarters, there were many signs that Novartis also was looking for a solution for Alcon. Moving Alcon’s eye care pharmaceutical products (approx. US$ 4bn revenues) to the innovative medicines division in FY2016 made evident that Alcon’s surgical and eye care products had lost money. Rumour has it that Novartis tried to sell the division but was not successful. Finally, by mid-2018, Novartis announced the spin-off of Alcon by means of a split of the shares, to be concluded in Q2/2019.


Besides the large business platform acquisitions, Novartis has always been licensing and acquiring interesting drug development pipelines. In the recent past, Novartis has been pursuing larger (and riskier) deals to get hold of broad innovative technology platforms. The acquisition of Advanced Accelerator Applications early in 2018 established a strong position in radiopharmaceutical drugs, and in addition, protects Novartis’ existing franchise in neuroendocrinological tumours. This acquisition is supposed to be complemented by the announced US$ 2bn purchase of Endocyte, due to close by Q2/2019.

It is difficult to be the cost leader in one division and innovation leader in another

Even bolder is Novartis acquisition of AveXis in September this year. AveXis is a gene therapy company which has one treatment in mid-stage development. This alone probably did not motivate Novartis to offer US$ 8bn for Avexis: Only 700 patients are borne each year in the USA which could benefit from AveXis’ therapy to cure spinal muscular atrophy (SMA). But AveXis’ expertise to deliver genes to somatic cells may be utilized for many other indications. And with this deal – a big bet –  Novartis cements its leadership as a developer of gene therapies, a position which was established by its successful development of the first CAR-T cell therapy.


With deals like AAA and AveXis, Novartis bolsters its platforms to sustainably grow the innovative medicines division. Which leaves the question of how Sandoz fits into Novartis’ future.


It is difficult to be the cost leader in one division and innovation leader in another. Generic drugs are under extreme price pressure around the globe, particularly in the US: Novartis already felt compelled to sell a large part of its US commodity generic business to Aurobindo. Moreover, biosimilars, Sandoz growth driver, may better fit into an oncology unit where they could be marketed as part of combination therapies.


Thus, moving the high-margin biosimilars from Sandoz to the Innovative Medicine Division, followed by a spin-off of Sandoz, looks logical. Exactly what Alcon has been going through.