Novartis Calls for the Doctor

The generational handover at Europe's pharmaceutical giants is gathering pace. Novartis AG is promoting chief medical officer Vasant Narasimhan to replace Joe Jimenez as CEO in February. It puts a scientist back at the helm of the Swiss drugmaker just months after rival GlaxoSmithkline Plc went the other way and installed a marketing executive to the top job. Narasimhan inherits a mixed legacy but he has some options to make shareholders happy.

In common with other large pharma groups, Novartis is grappling with the expiry of patents. Gleevec, for leukemia, lost protection last year. Treatments for multiple sclerosis and breast cancer face the same fate in 2019 and 2020. Meanwhile, Entresto, a new heart failure drug, got off to a slow start. Alcon, the ophthalmology division, has been a drag and Jimenez's last big move was to put the unit on review for separation.

Novartis is coping reasonably well. True, sales were down 5 percent in 2015 and 2 percent last year, but they're expected to be broadly flat in 2017. The shares trade at a premium to most European peers on price to forecast earnings, showing the market's faith in the company's drug pipeline. The stock has also performed in line with global pharma peers. On the face of it, there's no urgent need for Narasimhan to make radical changes after his surprise elevation.

Yet he can't just coast. The balance sheet is strong: net debt is forecast to end 2017 at $18.2 billion, just 1.3 times the current year's Ebitda. The finances will become even healthier if, as expected, Novartis sells its side of consumer healthcare joint venture to partner GSK. The Swiss company also has a big stake in Roche Holding AG that it could sell. 

Jimenez's M&A strategy is to do modest "bolt-on" deals of up to $5 billion. Narasimhan could afford to be more aggressive, and new CEOs have been known to make bold moves in this industry. Werner Baumann launched a $66 billion cash offer for seeds giant Monsanto Company almost immediately after taking the helm of Bayer AG last year.

The obvious target for Novartis would be London-listed AstraZeneca Plc. Even for Novartis, capitalized at $219 billion, that would be a lot to swallow, especially for a new boss short on M&A experience. Unfortunately there's a shortage of smaller prey that have drugs with sales profiles big enough to make a difference.

The alternative would simply be to shrink and return some cash to shareholders. Novartis has something in common with Nestle SA, the Swiss consumer group being targeted by activist Dan Loeb. It has assets like Alcon that can be seen as non-core and ripe for disposal, plus arguably a balance sheet that could be tighter. Jimenez has been tidying things up, but the job is far from done.

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

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