Vasella Quitting Wins Cheers From Novartis’s Investors

Novartis AG shareholders, disappointed with the company’s track record on acquisitions, are urging the new chairman to tear up some of the deals Daniel Vasella engineered in almost two decades building Europe’s largest drugmaker.

Yesterday’s announcement that Bayer AG’s Joerg Reinhardt will replace Vasella as chairman of Novartis’s board lifted the shares to a 4 1/2 year high. Novartis under Vasella bought a 10.9-billion-Swiss franc ($11.7 billion) stake in crosstown rival Roche Holding AG, acquired a U.S. vaccine manufacturer for $7.5 billion and sank $50 billion into eye-care company Alcon Inc. Some of those purchases haven’t paid off.

“He’s associated with what we can safely say are pretty value-destructive acquisitions,” said Eleanor Taylor-Jolidon, who manages about 400 million Swiss francs at Union Bancaire Privee in Geneva, including Novartis shares. “Everybody’s hoping that there’s going to be a restructuring now. I hope there will be a restructuring.”

Reinhardt, 56, supports Novartis’s diversification strategy, Chief Executive Officer Joe Jimenez said yesterday, a sign that investors may need to be patient if they want to see the Basel, Switzerland-based company sell some assets. Reinhardt worked at Novartis for 28 years before joining Bayer in 2010 to run the health-care business. He left Novartis after failing to win the CEO job that went to Jimenez.

Vasella, 59, oversaw the 1996 merger of Sandoz AG and Ciba-Geigy AG that created Novartis, a transaction that ranked as the world’s largest merger at the time. He served as chairman and CEO until 2010, when Jimenez became chief executive.

Founding Family

Novartis bought the 33 percent stake in Roche’s voting shares beginning in 2001, and Vasella unsuccessfully sought talks with Roche about a merger or collaboration. The family of founder Fritz Hoffmann-La Roche held a majority of the shares, forestalling a hostile takeover. Novartis held on to the stock after Vasella’s effort failed.

Roche may want to repurchase the stake, Jeffrey Holford, an analyst at Jefferies & Co., said last year. A spokesman for Roche declined to comment on that yesterday.

The acquisition of Chiron Corp., a California vaccine maker, completed in 2006, was part of a strategy Vasella to expand outside of prescription pharmaceuticals. The business hasn’t been consistently profitable, and analysts have speculated the company may sell it or scale it back.

Reinhardt may be less attached to the Roche stake and the vaccines business, and his appointment cheered investors.

Share Buyback

“The shares certainly reacted to the news,” Markus Manns, who manages a health-care fund that includes Novartis shares at Union Investment in Frankfurt, said in an interview. “People are hoping Novartis will sell the Roche stake or the vaccines unit and use the money for a share buyback.”

Novartis rose 4.1 percent to close at 62.55 Swiss francs yesterday in Zurich, the highest since Aug. 5, 2008. The shares have gained 8.9 percent this year, compared with a 5.1 percent increase for the Bloomberg European Pharmaceuticals Index of 19 companies.

Still, shareholders should remember that Reinhardt helped to shape and execute Vasella’s strategy for years, both in his most recent position of chief operating officer and before that as head of the vaccines unit, Andrew Weiss, an analyst with Bank Vontobel AG in Zurich said in an interview.

“Joerg Reinhardt and Vasella built the whole thing,” said Weiss. “I don’t have a lot of hope for a restructuring.”

Diversification Strategy

Reinhardt supports Novartis’s diversification strategy, Jimenez said when asked about a possible sale of the Roche stake at a news conference. People “shouldn’t speculate on a change in strategy,” Jimenez told analysts later in the day.

Reinhardt and Jimenez may increase the pace of acquisitions, because Novartis faces the loss of patent protection on its biggest-selling drug, the cancer medicine Gleevec, in two years, said Tim Race, an analyst at Deutsche Bank AG in London.

“It’s not clear cut that even if they did have a strategic change it would create value,” said Race, who has a hold rating on the stock. “From a strategic point of view I see more acquisitions rather than fewer acquisitions.”

Holford at Jefferies was more optimistic.

“Significant restructuring of some of the group’s undervalued assets could now see disposals over the next six to 18 months,” he wrote in a report to clients.

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