Novartis’s fourth-quarter results were nothing to write home about, so it is just as well that the company could say it was considering selling or spinning off its Alcon eye care business, a revelation that helped push its shares up 2% today.
The company believes that its efforts to turn Alcon around are beginning to bear fruit, which could help it find a buyer or float the division. However, with the ophthalmology segment being dominated by a handful of players, strategic acquirers might find it hard to overcome antitrust hurdles. And the Swiss group's chief executive, Joe Jimenez, seems keen on an IPO, suggesting that the scarcity of assets of this size in healthcare could help attract investors.
Either way, he repeatedly said that the review of Alcon was at an early stage, and that Novartis might even decide to keep the unit. The company plans to provide an update by the end of 2017.
On the plus side, Novartis will apparently not need to recoup all of the approximately $50bn that it spent buying Alcon; Mr Jimenez stressed during a media briefing that the pharma portion of the business had already been moved into Novartis’s innovative medicines division, leaving Alcon solely a medical device play.
But the company will still want to get back some of the cash it has ploughed into Alcon rather than offloading it at a firesale price, explaining why it has invested – and continues to invest – in its turnaround.
Contact lenses versus surgery
Within Alcon there has been a vastly different performance from its two subdivisions: vision care, which encompasses contact lenses, and surgical, which includes intraocular lenses and cataract surgery equipment.
While Novartis seems to have been able to stop the rot in vision care, with constant-currency fourth-quarter revenues up 5%, its surgical business is still struggling, with sales falling 4%.
Fixing the services and supply issues in the surgery business “turned out to be more challenging than imagined”, Alcon’s chief executive, Mike Ball, said during an analyst call. But he believes that the group has made great strides here and said that things should start to improve in 2017.
It sounds like there could still be some short-term pain before any long-term gains are realised. “The bottom line is we’ve got to turn the top line. We’re continuing to make investments to make that happen,” Mr Ball said, adding that 2017 could be the trough year for Alcon’s margins.
When asked whether the company would consider splitting the surgery and lenses businesses, Mr Jimenez replied that he was not ruling anything out at this stage. “But if we do go down the capital markets route, it would be better to have the critical mass of a $6bn business,” he added.
Entresto to bounce back?
Novartis is also looking to the long term with its heart failure drug Entresto, which posted sales of $170m, missing EvaluatePharma sellside consensus of $198m. Even so, this figure is still an improvement after a very slow start to the year (Entresto’s $5bn challenge, April 21, 2016).
Novartis believes that the pieces are in place for an acceleration of Entresto sales, with its pharma chief, Paul Hudson, pointing to lowering administrative barriers from US payers, as well as efforts around patient affordability.
The group forecasts a tripling in US prescription volumes by the fourth quarter, and worldwide revenues of $500m this year. Entresto still has some way to go to hit the $5bn peak that had been forecast before launch – and with generic competition to Gleevec now beginning to bite Novartis needs its big hope to keep improving.