Novartis AG (NVS - Free Report) announced that it intends to spinoff its ophthalmology division, Alcon, into a separately-traded standalone company in order to grow as a medicines company solely.
Why Is Novartis Spinning Off Alcon?
The Alcon business wasn’t performing as per management’s expectations. While it did revive in between, the company decided to spin- off the same in order to focus better on its legacy drug business. We remind investors that Novartis acquired Alcon in 2011. The business then comprised surgical, vision care and ophthalmic pharmaceuticals.
In January 2016, Novartis undertook a strategic review of its business and consequently transferred Alcon's ophthalmic pharmaceuticals to the Novartis Innovative Medicines Division. The business generated sales of $4.6 billion in 2017 and also holds the potential blockbuster candidate, RTH258 (brolucizumab), which is being evaluated for neovascular AMD and diabetic macular edema. Novartis plans to retain the ophthalmic pharmaceuticals as part of its pharmaceuticals portfolio.
Novartis has been contemplating upon Alcon’s future for quite some time now, considering a divestment or a spin-off.
The Alcon Division now comprises only surgical and vision care, and generated $7 billion in 2017 sales. The new company will employ more than 20,000 employees. Mike Ball will become the chairman-designate of Alcon, effective Jul 1, 2018. Ball will report to Vas Narasimhan, CEO of Novartis. Ball will focus on preparing Alcon for the intended spin-off.
In addition, he will start the process of recruiting a board of directors (BoD) for Alcon, and meeting Novartis’ shareholders and other potential investors, in preparation for a potential spin-off. David Endicott, chief operating officer (COO) of Alcon since July 2016, will be promoted to CEO of Alcon, also effective Jul 1, 2018.
The transaction is expected to be tax neutral to Novartis. The spin-off is expected to be completed in the first half of 2019, subject to general market conditions, tax rulings and opinions, final Board endorsement and shareholder approval at the AGM in February 2019.
How Will Novartis Gain?
Novartis has a strong oncology portfolio of drugs like Afinitor, Exjade, Jakavi, Zykadia, Tasigna, Jadenu and Kisqali, which continue to boost its sales. However, it is facing the loss of patent protection for some of the key drugs. Consequently, the company has refocused its business and plans to focus on building its portfolio in markets, which promise potential.
Novartis’ shares have declined 6.9% in the year so far compared with the industry’s decline of 3.2%.
Novartis is looking to solidify its presence in the gene therapy space. It recently acquired U.S.-based clinical stage gene therapy company, AveXis, Inc. Earlier in 2018, Novartis announced a licensing agreement with Spark Therapeutics (ONCE - Free Report) covering development, registration and commercialization rights to voretigene neparvovec, outside the United States.
Planned Share Buyback
Concurrently, the company announced that it will initiate a share buyback program of $5 billion. The buyback is conducted to use the proceeds of the divestment of the consumer health joint venture stake to GlaxoSmithKline (GSK - Free Report) , after making the payment for the AveXis acquisition.
Concurrently, Novartis announced that it obtained positive opinion from the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) recommending approval of CAR-T therapy, Kymriah, for two B-cell malignancies — B-cell acute lymphoblastic leukemia (ALL) that is refractory, in relapse post-transplant or in second or later relapse in patients up to 25 years of age; and diffuse large B-cell lymphoma (DLBCL) that is relapsed or refractory (r/r) after two or more lines of systemic therapy in adults.
Kymriah is a novel one-time treatment that uses a patient's own T cells to fight cancer. It is already approved in the United States. Rival company Gilead Sciences’ (GILD - Free Report) CAR- T therapy had also won CHMP positive opinion for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL) and primary mediastinal large B-cell lymphoma (PMBCL), after two or more lines of systemic therapy.
Novartis carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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