?e? ?????µe t?? ap??t?s?!!!

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Strapped for cash, fighting to breathe, Novartis seems to be hitting blind by investing valuable cash in M&As

The Bible has one of the first references to Quo Vadis, aka, “Where are you going?” A question the world seems to be asking of the Swiss drug behemoth, Novartis, quite pertinently. Sectorally, the global drug industry is anything but in good health; and Novartis seems to be trying hard to combat this losing battle by diversifying – the recent $39 billion acquisition of a 77% stake (25% now and 52% between 2010-2011) in the eye-care firm Alcon (from Nestlé) a leading case to point.

Danielle Vasella, Novartis Chairman and CEO, is pretty clear that he needs to find newer avenues for growth; and overt reliance on precociously radical pharmaceutical is not a remedy he can rely on. Digest this. In 2005, Vasella doled out $13 billion to buy out cheap generic German drugmakers Hexal and Eon Labs. And in year 2006, Vasella splashed out $5.7 billion to acquire US vaccine maker Chiron in a bid to enter global vaccines market. On the positive front, the global vaccine market is expected to touch $20 billion in 2009 (more than 100% increase over 2004). And creditably, even Novartis’ generic arm, Sandoz, is No. 2 worldwide.

So what’s right with the Alcon deal? It’s the leading player of the $25 billion eye care industry. Claudia Lenz, Bank Vontobel analyst, told B&E, “Alcon...will undoubtedly become a profitable source of growth for Novartis once it acquires the majority sometime in 2010 or 2011.” Novartis already has a massive hold on the global contact lens business; and with Alcon’s globally sold glaucoma drugs and cataract surgery products (double digit sales growth), the company will also help Novartis tap developing economies, where Alcon’s markets grew 21%.

So what’s wrong with the deal? “This acquisition removes the financial flexibility of Novartis to meaningfully address its structural problems as the company heads for a patent cliff in 2012,” asserts Karl Heinz Koch, leading pharma analyst at Bank Vontobel. Even Morgan Stanley forecasted that Novartis, in the next four years, will be facing generic competition to approximately one third of its revenue sources. Add to this the hitting Bear Sterns assessment that clearly downgraded the deal as rank expensive.

If diversification were Vasella’s paradigm, one wonders why last year he sold off the top performing Gerber Foods to, hold your breath, Nestlé itself (for $8 billion). It’s a predicament he’s yet to resolve, especially at a time when cash at Novartis is disappearing faster than Elvis left the building! Quo vadis Mr. Vasella?! We know what his grudging response (in Greek, of course) would have been, “?e? ?????µe t?? ap??t?s? [I don’t know the answer!]” Elvis fights on...

Priyanka Rajpal

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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