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.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Novartis is at last weighing a separation of its under-performing Alcon eyecare unit. CEO Joe Jimenez says all options are open although a spin-off or IPO has at least one attraction: an independent Alcon would pad out the small universe of $25-$35 billion healthcare stocks.

That may be true. But size isn't the same thing as an investment case.

It makes sense for Novartis to jettison Alcon if it can. The Swiss drugmaker doesn't need the money, but could do without the distraction. Alcon was meant to counter weakness in the Novartis pipeline. Yet it's become a problem in its own right.

Better Out Than In
Spin-offs have tended to do better than the market in recent years
Source: Bloomberg

Without it, Jimenez could focus on building the pharma business as it faces the loss of billions in sales from lead leukemia drug Gleevec to generic competition. Entresto, a heart medicine Novartis expects to peak at $5 billion in annual revenue, missed already low fourth-quarter sales expectations by double digits despite escalating investment in its launch.

Alcon had $5.8 billion of sales last year and Jimenez is right to say it would stand out if it achieved a $25-35 billion value. Bloomberg’s World Pharma index has just six companies capitalized in that range. The next bracket begins at about $45 billion with the likes of Shire Plc and Merck KGaA. Then come the megacaps, starting with AstraZeneca, capitalized at $67 billion.

Join The Club
Novartis's Alcon business could become part of the $30 billion-market-cap healthcare crowd
Source: Bloomberg

The scarcity value would be helpful to an IPO. Companies this size are more attractive bid targets for big pharma because they tend to have meaningful sales or offer scope for M&A-related cost-cutting. That’s why Actelion, and before it Medivation, attracted such interest.

But Alcon must do more than just fill out a thin part of the pharma firmament. Novartis needs first to achieve its goal of returning it to growth. At least the business stabilized in the fourth quarter, in part because some of Alcon's declining drugs have been moved to other parts of Novartis.

Without some sustained evidence of recovery, Alcon's attraction to investors or bidders is weaker. While there are many drugmakers in search of pipeline assets or new medicines with good growth prospects, the appetite for a giant eye-care business is probably softer. Novartis reportedly tried and failed to sell chunks of the business last year. Valeant Pharmaceuticals International Inc., the debt-laden owner of Bausch & Lomb, reportedly attempted to sell its eye surgery business to cut its borrowings and has yet to succeed.

If Novartis is taking capital out of Alcon, where might it be reallocated to achieve some desired diversification? Its Sandoz generics business is the obvious home: it's the one Novartis unit that managed to increase sales in 2016. Sandoz has invested aggressively in so-called biosimilars -- the potentially more profitable equivalent to a generic for complex biologic medicines -- and this new market is expected to expand substantially in the next few years.

All in all, there are probably better owners for Alcon -- and better uses for the Novartis capital tied up in it. The hope will be that the market has the same vision.

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

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net