Novartis Sets $5 Billion Buyback, Adds Business Segments

Novartis AG (NOVN) plans to buy back $5 billion in stock over two years and said it will expand in faster-growing areas of health care such as treatments for skin and heart diseases.

The repurchases will begin immediately, the Basel, Switzerland-based company said in a statement before the company’s annual investor day in London today. Novartis will develop new business segments in dermatology, heart failure, respiratory illnesses and cell therapy, it said.

The buyback is encouraging investors that Novartis is more focused on providing a return to shareholders now that former Chairman Daniel Vasella has departed, Andrew Baum, a pharmaceuticals analyst with Citigroup Inc. in London, said in a note to clients. Baum said he hopes the company commits to providing further returns to shareholders as proceeds of any asset sales pump up the company’s cash holdings.

“We anticipate further increases in cash returns as the company divests non-core assets such as animal health over the next six to 12 months,” Baum said.

The buyback is part of a 10 billion-swiss franc ($11 billion) plan announced in 2008, of which more than three-quarters still remain. Part of the mandate was used to mitigate the effect of the 2010 purchase of eye-care unit Alcon on Novartis shareholders, Eric Althoff, a spokesman for Novartis, said in a telephone interview.

Photographer: Gianluca Colla/Bloomberg

The headquarters of Novartis AG, center, stands on the bank of the Rhine river in Basel. Close

The headquarters of Novartis AG, center, stands on the bank of the Rhine river in Basel.

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Photographer: Gianluca Colla/Bloomberg

The headquarters of Novartis AG, center, stands on the bank of the Rhine river in Basel.

‘Nice Gesture’

“The market likes a buyback,” Michael Leuchten, an analyst at Barclays Plc in London, said by phone. “I’d say it’s a nice gesture, when you do the math they’re buying back 2.5 percent of their market capitalization over two years.”

Novartis fell 0.2 percent to 72.2 francs at the close in Zurich. The stock has returned 30 percent this year including reinvested dividends, compared with 27 percent for the Bloomberg Europe Pharmaceutical Index.

Novartis said it wants to save 3 to 4 percent of total sales over the next two years by focusing on procurement, consolidating research and reviewing its manufacturing sites. The company had $56.7 billion in sales last year.

Chief Executive Officer Joe Jimenez said a “strong and growing dividend” is important for the company. Last year’s dividend was 2.30 francs, and this years may be 2.40 francs, according to a Bloomberg estimate.

Pipeline Review

The drugmaker also said a review of its pipeline will lead to more approvals and higher sales by 2017. Novartis’s stable of cancer drugs and sales are set to grow annually for the next five years, despite the anticipated loss of exclusivity on its cancer drug Gleevec, the company said.

The company is interested in bolt-on acquisitions of as much as $5 billion, Jimenez said in a phone interview today, with a focus on oncology, specialty medicines, dermatology and generics. Prices for biotechnology assets “have gone through the roof,” he said, making it more difficult to add value through an acquisition in that sector.

The Alcon unit is now set to grow at a mid- to high-single digit rate. The company said last month group sales would do better than previously expected. Europe’s biggest drugmaker by sales has begun a review of units such as its animal-health operation that lack global scale.

The divestiture of some of these units would undo part of the legacy of Vasella, who stepped down from his post as chairman in February after 17 years with the company.

Novartis announced this month it would sell its diagnostics unit to Grifols SA (GRF) for $1.68 billion, part of a strategic review of its market segments. The company now has three units with global scale, Jimenez said: pharmaceuticals, the eye-care business Alcon and the generics arm Sandoz. Novartis has said it wants its businesses to be among the industry leaders or it will consider divesting them.

The drugmaker has identified its animal-health business as a top candidate for a sale, people familiar with the matter said this month. Novartis is also considering selling its over-the-counter medicines unit and the vaccines operation, they said, although no final decision on those assets has been made.

To contact the reporter on this story: Eva von Schaper in Munich at evonschaper@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net

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