Investors Relieved as Novartis AG CEO Seeks Only $5 Billion Bolt-On Acquisitions, Not Huge M&As

Published: Jun 01, 2017

Investors Relieved as Novartis AG CEO Seeks Only $5 Billion Bolt-On Acquisitions, Not Huge M&As June 1, 2017
By Mark Terry, Breaking News Staff

Just a day after investors expressed concern that Novartis AG might make an unwanted large acquisition, the company’s chief executive officer, Joe Jimenez, assured them that he planned to focus on $5 billion bolt-on acquisitions.

Novartis had recently discussed selling off some of its larger assets. That includes Alcon , which it acquired in 2011 for $52 billion. However, over the last two years, the unit’s sales and profits have performed poorly. Novartis is considering selling off Alcon’s surgical devices and contact lens businesses, which could bring in $25 to $35 billion. Jimenez has also considered unloading its $14 billion stake in Roche as well as the over-the-counter (OTC) drugs partnership with GlaxoSmithKline , which is valued around $10 billion.

If Novartis were to sell off all these assets, it would have around $50 billion in cash. Which doesn’t sound like the worst thing in the world, but has nonetheless made some investors nervous. An unidentified top-60 Novartis investor told Reuters that the Alcon and Entresto missteps are what is making everyone question whether Novartis could handle a big acquisition. “A big deal might solve some of their issues, but personally I would prefer to see them doing smaller acquisitions,” he told Reuters. “A cash mountain of $50 billion would definitely make me nervous.”

Novartis’ sales have dropped nine quarters, which has prompted Jiminez’s strategic review. Most investors now view the Alcon acquisition as an expensive mistake. In addition, the company is lagging behind its competitors in the immuno-oncology market, although recent news and an update on the company’s pipeline should assuage those fears.

Just yesterday, the company announced findings from a pilot study of CTL119, a CAR-T cell therapy, that were nothing short of dazzling. Of 10 patients evaluated with relapsed/refractory chronic lymphocytic leukemia (CLL) who had been on Imbruvica (ibrutinib) for at least six months, but were not in complete remission, but received CTL119, eight were in complete remission in three months, and one was in partial remission. The tenth did not produce evaluable data.

Also yesterday, Novartis hosted its fourth annual Meet Novartis Management event in Cambridge, Mass., where it discussed its pipeline and strategy going forward. Thirty company executives met with investors, which is where Jimenez made his statements about bolt-on acquisitions. In the context of its immuno-oncology pipeline, the company noted it has 18 immuno-oncology assets in the clinic and 22 combination trials in the clinic by the end of this year.

Jimenez told investors that because of this activity and depth, it didn’t need an immuno-oncology acquisition. “Obviously,” he said, “there’s been a lot of speculation because that would be a lot of capital. We don’t need a big deal. Our strategy in M&A is to do bolt-on acquisitions.”

Certainly the news on the I-O pipeline should calm investors, who have noted it was lagging behind competitors Roche (RHHBY), Merck and Bristol-Myers Squibb .

Although probably outside the price Jimenez is considering, Tesaro has recently floated that it is up for sale, even though the interest has been lukewarm. The company’s Zejula (niraparib) for maintenance treatment of women with recurrent epithelial ovarian, fallopian tube, and primary peritoneal cancer who are in complete or partial response to platinum-based chemotherapy was approved by the FDA on March 27. Analysts project peak sales of $2 billion annually.

However, Novartis has indicated it’s not interested, possibly because Tesaro’s market cap is currently about $8 billion. Any sale would likely be at least double Novartis’ stated $5 billion threshold. Leerink’s Seamus Fernandez wrote, “Novartis acknowledged that the lack of a PARP inhibitor was a gap in its oncology portfolio, but commented that valuations were too high to justify a major deal in the space.”

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