Novartis Considers Sandoz Spin-off Amid Declining Generics Business

News has emerged that yet another industry giant is set to spin off or divest its generics business, with Novartis and Sandoz taking center stage this time.

On October 26, Novartis reported its third-quarter 2021 financial results, posting net sales of $13.03 billion, up 5% year-on-year; net income reached $2.758 billion, up 43% year-on-year. Notably, Novartis' China region delivered strong performance growth, with third-quarter sales reaching $839 million, up 18% year-on-year.

Meanwhile, net sales for Novartis's generics business (Sandoz) totaled $2.402 billion, down 2% year-on-year.

The financial report highlights the starkly divergent trajectories of Novartis's innovative medicines business and its generics business. Novartis projects mid-single-digit sales growth for its innovative medicines portfolio going forward, while Sandoz's generics business is expected to see a mid-single-digit sales decline.

This may also have become the "trigger" for Novartis to re-examine the divestiture of its generics business.

01 Cosentyx and Entresto Drive Growth in Innovative Business

According to the financial report, Novartis's operating revenue for the third quarter was $3.233 billion, compared to $2.412 billion in the same period last year, a year-on-year increase of 34%. Net sales reached $13.030 billion, compared to $12.259 billion in the same period last year, up 6% year-on-year; net profit was $2.758 billion, compared to $1.932 billion in the same period last year, a year-on-year increase of 43%.

By specific business segment, net sales in the Innovative Medicines segment reached $10.628 billion, up 8% year-on-year. Within this segment, the Pharmaceuticals division saw sales grow by 8%, driven by strong performance from Entresto, Cosentyx, and Zolgensma, all of which recorded growth exceeding 20%. Among them, Entresto was Novartis’s fastest-growing drug, with sales surging 44% year-on-year to $924 million. Zolgensma, the most expensive drug, continued its 28% growth trajectory, reaching $375 million in sales during the third quarter. Cosentyx achieved third-quarter sales of $1.247 billion, up 22% year-on-year.

Meanwhile, Cosentyx was also Novartis' top-selling product, with Entresto following closely as the runner-up in the innovative medicines business; Gilenya secured third place in Novartis' innovative medicines sales, generating USD 703 million in revenue.

Novartis Oncology division posted 5% growth, with Kisqali, Jakavi, and Promacta/Revolade demonstrating strong growth momentum. Kisqali grew 27% to achieve quarterly sales of $232 million, Jakavi rose 26% to generate $426 million in sales, and Promacta/Revolade sales also increased by 18%, reaching $522 million.

Additionally, Novartis noted that competition from the launch of generic drugs had a negative impact of 3 percentage points on the performance of innovative drugs.

Novartis CEO Vas Narasimhan stated that the robust growth of Cosentyx and Entresto drove strong performance in the company's innovative medicines, enabling Novartis to raise its peak sales guidance for these products. Novartis has increased its peak sales forecasts for Cosentyx and Entresto. Narasimhan revealed that Cosentyx's peak sales are now projected to reach at least $7 billion, up from a previous target of no less than $5 billion, while Entresto is expected to generate at least $5 billion in sales, compared to the prior target of at least $4 billion.

02 Reconsidering the Sale of Sandoz

In contrast to the innovative medicines business, which achieved net sales exceeding $10 billion and an 8% growth, the generics business performance was not particularly optimistic.

According to the financial report, Novartis's generics business (Sandoz) reported net sales of $2.402 billion, down 2% year-on-year. Novartis stated that although sales volume for the generics business increased by 7%, competitive pricing pressures led to drug price declines that resulted in a 9% negative growth impact. This trend was particularly pronounced in the United States, where Sandoz's sales fell by 20%.

Novartis stated it is considering selling or spinning off its generics business, Sandoz.

Narasimhan noted that the company has already initiated a strategic review of Sandoz to determine whether it still aligns with Novartis's long-term growth plans. "Novartis is exploring a range of options, from retaining the business to separating it. Despite generating $9.7 billion in sales last year, accounting for approximately 20% of Novartis's total revenue, the division's operating income this year is expected to decline at a faster pace than previously forecasted," Narasimhan stated recently.

Sandoz was founded in 1886 and became a division of the Novartis Group in 1996. It was initially launched in 2003 as Novartis's generics division. In 2020, Sandoz reported net sales of USD 9.6 billion, accounting for 20% of the Group's total net sales.

Sandoz is one of the global leaders in generic medicines and biosimilars, with its main products comprising retail generics, anti-infectives, and biologics. Its global product portfolio encompasses approximately 1,000 molecules across all major therapeutic areas, serving over 500 million patients worldwide, and it holds a prominent global position in biosimilars and generic antibiotics.

Although Sandoz has become a global leader in generic drug manufacturing and has seen increased sales volumes in recent years, the company remains adversely affected by various factors exerting downward pressure on generic drug prices. Despite Sandoz's shift toward higher-value products such as biosimilars, its revenue continues to decline.

Regarding the initiative to review and spin off Sandoz, Narasimhan explained that Novartis has long wanted Sandoz to be "more independent," including in manufacturing, and the process has now advanced sufficiently to initiate a strategic review. "It involves weighing synergies against autonomy and the ability to allocate capital, and of course, all these considerations are currently being evaluated," Narasimhan said, adding that further details on the review will be provided by the end of 2022.

Following the announcement, U.S. stock analysts noted that Sandoz's persistent historical drag on Novartis's growth could make the strategic review well-received by shareholders, significantly increasing the likelihood of a spin-off.

This is not the first time Novartis has attempted to sell or divest Sandoz. Sandoz's performance experienced consecutive declines in 2017 and 2018—dropping by 2% in 2017 and 3% in 2018—revealing a trend that was already detrimental to Novartis's overall performance growth. Consequently, in 2018, Novartis planned to divest parts of Sandoz's business.

That year, Novartis announced the sale of Sandoz’s U.S. dermatology business and generic oral solid dosage portfolio to Aurobindo Pharma USA Inc., the U.S. subsidiary of Indian generic pharmaceutical company Aurobindo, for $1 billion. The transaction included approximately 300 products and additional development projects, encompassing Sandoz’s U.S. generic and branded dermatology business as well as its dermatology development center. As part of the agreement, Aurobindo will also acquire Sandoz’s manufacturing facilities located in Wilson, North Carolina, and in Hicksville and Melville, New York. Upon completion of the transaction, approximately 750 Sandoz employees based in Hicksville, Melville, and New Jersey, along with representatives from the PharmaDerm branded dermatology business, will transition to Aurobindo.

According to Novartis's plan, the transaction with Aurobindo was originally scheduled to be completed in 2019. Upon completion of the transaction, Sandoz US's product portfolio will include biosimilars, value-added medicines, and complex biosimilars, such as injectables, respiratory, and ophthalmic medicines. Sandoz will continue to focus on clinical development, business development, and investment in these areas.

However, contrary to expectations, this $1 billion deal ultimately fell through.

In April 2020, Novartis announced that it had reached an agreement with Aurobindo Pharma USA Inc. to terminate the proposed sale of Sandoz's U.S. generic oral solid and dermatology products business to the latter, as the transaction failed to obtain approval from the U.S. Federal Trade Commission (FTC) within the expected timeframe. The termination of the deal also disrupted Novartis's strategic adjustment process to a certain extent.

Regarding Novartis's sale of its Sandoz business, some analysts have noted that the global generics market is experiencing a wave of price reductions, and the era of razor-thin margins for generic drugs has fully arrived. With Sandoz's revenue declining for several consecutive years, if Novartis does not promptly divest its off-patent drug business, the pressure on its financial performance will continue to intensify.

03 MNC "Downsizing" Becomes the Norm

Novartis is not the first multinational company attempting to divest its generics business, nor will it clearly be the last.

In recent years, the global generic drug market has been experiencing a wave of price reductions, fully ushering in an era of thin profit margins for generics. Multinational pharmaceutical giants such as Pfizer, Bayer, GSK, Novartis, and Sanofi are accelerating the divestiture of their off-patent drug portfolios, while increasingly focusing their innovative R&D efforts on oncology, immunological agents, and other novel therapeutics.

A prime example of a multinational giant undertaking a strategic divestiture is Pfizer. Pfizer restructured its operations from two original divisions into three business segments: Innovative Medicines, Established Medicines, and Consumer Healthcare. The company placed its generics business into Upjohn and merged it with Mylan to establish Viatris. Following the divestiture of Upjohn, Pfizer's ranking among global pharmaceutical companies fell from 3rd to 8th in 2020; its consumer healthcare business merged with GSK's consumer healthcare division; while the innovative medicines segment remained operational as the core entity, continuing to accelerate its development. Pfizer has stated that after spinning off its generics and consumer healthcare businesses, the new Pfizer will be a smaller, science-based company focused on innovation.

Novartis completed its acquisition of Alcon for approximately $52 billion in 2011. However, after reaching $10 billion in revenue in 2011, Alcon's growth slowed, and by 2015, its revenue had actually declined to just $9.8 billion. With Alcon's performance falling short of expectations, Novartis announced in 2018 its plan to spin off all of its Alcon eye care equipment business.

In late 2020, Merck announced the spin-off of a portion of its business, separating its women's health, biosimilars, and certain mature medicines into a new company, Organon. Following the separation, Organon would be responsible for the post-marketing lifecycle management of these products, while Merck would retain its corporate R&D pipeline. In June this year, Merck announced that the spin-off of Organon had been completed.

GSK also announced in June this year the spin-off of its consumer healthcare business to establish "New GSK". According to GSK CEO Emma Walmsley's plans, following the separation of the consumer healthcare business, New GSK will focus on vaccines and specialty medicines. GSK plans to spin off the consumer healthcare business into an independent company by mid-2022. Under the plan, New GSK will focus on infectious diseases, HIV, oncology, and immunology, and is projected to achieve sales of £33 billion ($46 billion) by 2031.

Perhaps, for multinational giants, the strategic approach of once aggressively pursuing mergers and acquisitions to expand corporate scale has been replaced by divesting non-core segments and focusing on core businesses.