Novartis AG (ADR): How to Deal With the Alcon Crises


Novartis AG (ADR) (NYSE:NVS) may have not completely written off a potential sale of its second-largest division, Alcon. The eye-care and surgery equipment division business have been struggling to improve its sales which have been on a decline for the past two years.

In 2015, Alcon’s revenue dropped 9% to $9.8 billion, from which $3.8 billion were generated from the drugs that are no longer part of the division. Novartis CEO, Joe Jimenez, replaced the head of the division earlier this year to reinvigorate the flagging revenue. The new Alcon head, Michael Ball, has since been focusing efforts on regaining revenue growth by the year-end. The downfall in revenue has been majorly linked to decrease in innovation and diminishing response from targeted market. Recovery may not come easy. Kepler Cheuvreux analyst, David Evans, said in a recent research note: “Alcon will either be fixed or sold.” There have been rumors making round in the industry for some time now that Novartis might as well sell off the struggling unit.

At a Mergers & Acquisitions Conference held in Zurich on Thursday, Novartis general counsel Felix Ehrat said that Alcon as leading surgical instruments maker suits the company’s prime strategy of developing subdivisions that excel in their specific sectors. However, he also believes that the option for selling Alcon cannot be ruled out. Although Mr. Ehrat believes such a step “wouldn’t be clever,” he added: “Never say never.”

Novartis stock has seen an 8.7% decline as compared to the 5% loss posted by the NYSE ARCA Pharmaceutical Index (DRG) year-to-date. The company recently lost patent protection on its blockbuster cancer drug Gleevec, which already faces generic competition. The resultant struggle faced by its largest pharma division, which makes up some 62% of its topline, has intensified the pressure on its other divisions. These include the generic drugs unit, Sandoz, apart from Alcon.

The healthcare company is now faced with two decisions; it can either continue working to improve its Alcon business which may take a long time to recover, if at all, and brace for increasing cheaper competition to its key drugs, or dispose off Alcon and utilize the cash proceeds for strategic acquisitions. Novartis has also been mulling divestment of its $14 billion stake in rival drug-maker, Roche Holding AG. Combined with $5.7 billion in cash at the end of second quarter, the company has sufficient financial capacity to afford a fairly large target or a string of smaller ones.


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Novartis AG (ADR): How to Deal With the Alcon Crises

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