Novartis/private equity: divestment has generic appeal

Novartis is preparing to undergo radical treatment. Shortly after selling its $21bn stake in rival Roche, the Swiss drugs maker is mulling the sale of its Sandoz generics business. Private equity firms including Blackstone, Carlyle and EQT are considering bids of up to $25bn for the subsidiary, one of the world’s biggest makers of copycat medicines.

Strong cash flows generated by drug copyists make them a logical target for private equity. In the case of Sandoz, competition from trade buyers will be reduced by antitrust concerns. The business has been struggling amid tough competition. But there is scope to cut costs and improve profitability, as the private equity playbook dictates.

On the face of it, the mooted price looks generous. Sandoz’s peers Teva and Viatris trade on an enterprise value-to-forward ebitda multiple of 6.4 times. If Sandoz was valued similarly, it would be worth just $15bn.

But Sandoz deserves a higher rating. Though sales are only expected to grow at a rate of 2 per cent annually in coming years, that is significantly better than rivals, according to Bernstein analysts.

Sandoz’s advantage is that only a fifth of sales are in the ultra-competitive US market. It is a global leader in biosimilars, the large molecules that are often used to treat cancer and immune diseases. The segment offers scope for stronger growth and higher returns.

Focus is in fashion. Selling off the unit could help stave off an attack by activists. They could be lured by shares that are down about a tenth over the past two years. The sale might not be enough, however. GSK was besieged by Elliott Advisors even after it announced plans to divest its consumer group.

Much depends on what Novartis does with the cash. It has its eye on acquisitions in cardiovascular diseases, immunology, neurology, hematology or oncology. But valuations are high and competition for deals is intense.

Geared-up, top drugmakers have more than $1.7tn in firepower, analysts estimate. In this market, bulking up is a lot harder than losing weight.