Health

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Novartis AG seems to have a growing appetite for M&A and is developing some new tastes along the way.

The Swiss drugmaker is in talks to buy U.S. generics maker Amneal Pharmaceuticals LLC for as much as $8 billion, according to Bloomberg News.

If consummated, the deal would break Novartis's guidance that “bolt-on” deals wouldn't be much bigger than $5 billion -- and would fail to provide a much-needed boost to its drug pipeline.

It isn't hard to see why Novartis wants bigger deals. The company is going through a soft patch: Gleevec, its best-selling drug for blood cancer, has lost patent protection. Alcon, its eyecare business, has been a disappointment and may have to be sold if its performance can’t be improved.

Doctor, I'm Feeling Down
Novartis's sales have been on the slide in all divisions.
Source: Bloomberg

Novartis's revenue fell 5 percent last year and 3 percent over the 12 months through Sept. 30. The stock is down 11 percent this year.

Group Hug
Like its peers, Novartis has had a torrid year
Source: Bloomberg

Hopes for a future blockbuster rest on Cosentyx (which treats psoriasis) and Entresto (a heart failure drug). But neither is ready to pick up the slack, hence the pressure on Novartis to secure its long-term future through acquisitions.

The company has ample financial resources. Net debt of $19 billion is just higher than annual Ebitda. Novartis's 12.4 billion Swiss-franc ($12.4 billion) holding in rival Roche Holding AG provides a ready source of firepower, and the company could dispose of Alcon too.

Some analysts think Novartis, which has a market value of almost 190 billion francs, needs a transformational deal -- a takeover of AstraZeneca Plc, for example.

Closely held Amneal is no such thing. And it would be surprising to see Novartis do such a big bolt-on in generics -- cheap copycats of drugs that are already on the market. True, Novartis had included generics on its shopping list, but investors may have expected a target of this size to be an early stage pharmaceutical firm doing something really pioneering in drug discovery.

What’s more, an all-cash deal here might slightly weaken Novartis’s balance sheet: Amneal’s credit rating is BB- at S&P Global Ratings, while Novartis is at AA-.

So why bother? A deal would put a broader range of medicines in Novartis' cabinet and provide some stability to earnings. It would also further diversify its revenue -- generics were only 19 percent of sales last year. Amneal would provide an extra cushion if Alcon, which accounts for 20 percent of sales, were ever jettisoned.

Whatever the explanation, there’s a whiff of need, ambition and opportunism here. Investors were expecting deals from Novartis. These may be getting bigger and bolder.

--With assistance from Gadfly's Max Nisen

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net