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Second opinion

23 January 2013 By Quentin Webb

Corporate surgery might be in order at Novartis. Europe’s second-largest pharmaceutical group has rehired an old hand to replace veteran Chairman Daniel Vasella. That suggests continuity. But the new-old broom might ask if the sprawling group could do fewer things, better.

The incomer, Joerg Reinhardt, spent 28 years at Novartis and its predecessors – and only left for Bayer in 2010 after missing out on the chief executive’s job. So he hardly represents radical change. And Vasella retains influence as honorary chairman. Still, now would be a good time to rethink M&A policy and the group’s shape.

The onslaught of generic competition, and a dearth of money-spinning blockbuster drugs, means these are hardly vintage times across Big Pharma. But Novartis still trails the field. In the nearly three years since Joe Jimenez pipped Reinhardt to the CEO’s office, total returns to shareholders have barely topped 20 percent. That lags all major rivals. Some peers, notably local nemesis Roche, are merely a few percentage points ahead. But the sector’s leaders have returned 60 percent-plus. Over the years, Vasella also alienated investors by paying top-dollar for takeovers such as Hexal in generics, Chiron in vaccines, and Alcon in ophthalmology.

Novartis covers everything from on- and off-patent products to eyecare, vaccines, diagnostic tools, over-the-counter medicines, and veterinary drugs. That looks increasingly anomalous as others have narrowed focus. Pfizer sold out of baby food and is floating an animal-health unit. Abbott split up.

Diversification, of course, can offer useful protection against the tyranny of patent expiries. But several of its businesses – in vaccines, OTC, animal health, and diagnostics – look middling if not mediocre. Novartis could sell out of some and use the proceeds for smart acquisitions elsewhere. Or return cash to investors.

In contrast, its generics arm – Sandoz – has genuine scale and offers a useful route into emerging markets. So it looks like a keeper. Still, making copycat drugs is a fast-moving and combative game. The unit probably needs a shakeup, to give it a touch more of the entrepreneurial zeal of the sort sported by Teva, the world number one.

A slimmer Novartis, a bolder Sandoz, and happier shareholders: just what the doctor ordered.


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