By Ludwig Burger
(Reuters) -Novartis has raised the prospect of divesting its generic drugs unit Sandoz after years of revamping the business, as price pressures mount in the off-patent drug sector.
“Novartis has commenced a strategic review of the Sandoz Division,” the Swiss-based group said in statement alongside quarterly results in which it lifted its peak revenue estimate for its two best-selling pharmaceuticals.
Sandoz achieved sales of $9.7 billion last year, about 20 percent of the group’s total, but Novartis on Tuesday warned it expected the unit’s operating income to fall faster than previously expected this year.
“The review will explore all options, ranging from retaining the business to separation, in order to determine how to best maximize value for our shareholders,” the statement said.
Novartis added it would have more to say on the review of Sandoz, which makes cheaper copies of drugs that have lost patent protection, by the end of next year.
“It’s synergies versus freedom and the ability to allocate capital and all of these considerations will of course be undertaken now,” Chief Executive Vas Narasimhan said in a media briefing.
He started setting up the generics business as an independent unit and slashing costs in early 2019, shortly after selling most of Sandoz’s U.S. operations. Competitive pressures on prices, which have long been a burden, increased in the third quarter, with the U.S. market a particular challenge.
The company would not say whether rivals or financial investors might buy it, or whether Sandoz could be floated on the stock exchange.
Though the group’s 2021 target for group earnings growth remained at a “mid-single digit” percentage rate, Novartis downgraded Sandoz’s full-year outlook for operating income to a decline by a “mid to high teens” percentage rate,” worse than the “low to midteens” seen previously.
“Given the continued drag on Novartis growth from Sandoz, the announcement of a strategic review is likely to be well received,” JP Morgan analysts said in a research note.
Novartis shares gained 0.9% to 77.70 Swiss francs, while the STOXX Europe 600 Health Care index edged up 0.2%.
The generic drugs industry has been in consolidation mode for years. The trend culminated in the creation of Viatris from the merger last year of Mylan and Pfizer’s Upjohn unit, which expects up to $17.9 billion in revenue in 2021. It is worth close to $17 billion on the stock market.
Israel’s Teva and Sandoz, with roughly $10 billion in annual generic drug sales each, are runners-up in the sector. Other players include Perrigo, Sun Pharma and Aurobindo.
Novartis reiterated that Sandoz will need to invest in the launch of a raft of “biosimilar” drugs, which are cheaper versions of complex biotech drugs that have lost patent protection.
The group’s third-quarter operating profit, adjusted for special items, rose 10% to $4.47 billion, driven by better-than-expected sales of arthritis and psoriasis drug Cosentyx and heart failure treatment Entresto.
It increased its peak sales guidance for Cosentyx to at least $7 billion from a goal of at least $5 billion previously, and for Entresto to at least $5 billion, from at least $4 billion.
Third-quarter sales rose 6% to $13.03 billion, in line with the average analyst estimate compiled by Refinitiv, while core net income increased 10% to $3.83 billion versus a market consensus of $3.7 billion.
(Reporting by Ludwig Burger; Editing by Michael Shields and David Holmes)