Novartis Sells U.S. Generics At Discount To Aurobindo

Novartis CEO Vas Narasimhan has made significant changes to the Swiss pharmaceutical giant, revealing on Thursday that the company will offload its U.S. dermatology and generic pill divisions to India's Aurobindo Pharma Ltd. for up to $1 billion. The transaction, which involves around 300 products, is driven by recent pricing pressures in the U.S. drug market. The deal will start with a $900 million cash payment, potentially including an additional $100 million based on performance metrics.

While this move has been anticipated for several months, some analysts noted that Aurobindo is paying less than initially expected. Following the announcement, Aurobindo's stock surged by over 9%, whereas Novartis saw a slight increase of 0.2% at 1000 GMT. Aurobindo’s Managing Director, N Govindarajan, stated that this acquisition aligns with their strategy to expand and diversify their presence in the U.S., positioning them as the second-largest U.S. generics manufacturer by prescriptions. The deal will also transfer facilities in Wilson, North Carolina, as well as Hicksville and Melville, New York, to Aurobindo.

Around 750 employees and field representatives from PharmaDerm's dermatology division are set to join Aurobindo. Since Narasimhan took over as CEO on February 1, he has accelerated the streamlining of Novartis that began under his predecessor, Joe Jimenez, to concentrate on more profitable medications. This year, he sold a consumer health joint venture to GlaxoSmithKline for $13 billion and plans to spin off the Alcon eyecare unit in 2019.

Novartis' U.S. Sandoz division has faced ongoing challenges, with price pressures impacting its performance and leading to reduced growth expectations, most recently updated in July. Richard Francis, head of the Sandoz division, stated that this transaction will help refocus the business. He noted that the sale will enable him to concentrate on products like biosimilars, which are near-identical versions of successful biological drugs whose patents have expired.

Analyst Stefan Schneider from Swiss bank Vontobel highlighted that the $900 million up-front payment underscores the steep decline in the U.S. pharmaceutical and dermatology sectors. "We had anticipated a valuation at one times sales for this deal," Schneider explained. "However, it's evident that the pricing pressure in the U.S. generics market is more intense than expected, especially given last year's $1.5 billion revenue compared to just $0.6 billion in the first half of 2018."

Schneider maintains a "hold" rating on the shares. Narasimhan, a Harvard-trained U.S. citizen, has emphasized that Sandoz's European operations remain crucial to Novartis. Despite the transaction, Sandoz's U.S. portfolio will continue to feature biosimilars and complex generics, including the Glatopa version of Teva’s Copaxone for multiple sclerosis, with Sandoz achieving nearly $5 billion in sales in the first half of the year.