Breaking up is easy to do. Eyecare devices maker Alcon on Tuesday debuted on the Swiss and New York stock exchanges with a market value of $28bn, higher than analysts predicted. Former parent Novartis, the Swiss pharmaceuticals group, sighed with relief. Its underperforming subsidiary will fare better alone. Novartis has one fewer excuse for its own shortcomings.
Novartis completed the acquisition of Alcon in 2010 as part of a healthcare empire-building spree by former chief executive Daniel Vasella. At $51.6bn, the deal was the largest in Swiss history, and one of the worst.
Pharmaceutical businesses with $3.8bn in annual sales were shifted out in 2016. Benefits from future drugs and any research are also unknown. Even so, Tuesday’s market valuation suggests perhaps $10bn in value was destroyed.
Novartis attempted to turn round Alcon, which reported an operating loss of $248m on sales of $7.1bn last year. Its eye surgery products as well as its contact lenses are a bet on an ageing population — and the increasing time consumers spend in front of screens. The $23bn eyecare market is growing at 4 per cent a year, and is likely to be among the faster growing medical sectors. Alcon’s managers, however, have complained of neglect and a lack of investment in innovation.
True, Alcon inherits $3.5bn in debt, which will curb capital spending initially. But investors should benefit when business unit managers are freed from healthcare conglomerates. Citi analysts reckon pharma spin-offs have averaged an 80 per cent share price outperformance over former owners after five years, before taking account of dividends.
For Novartis, Alcon’s departure marks a further dismantling of Mr Vasella’s legacy. Vas Narasimhan, a social media-friendly medic who became chief executive in February last year, is focusing on innovative medicines. At 15.5 times forward earnings, Novartis’s shares trade above those of Swiss rival Roche, which faces stiff competition from biosimilars, but at a discount to faster-growing peers.
Mr Narasimhan has splashed out on expensive bolt-on acquisitions to bolster its portfolio of new treatments, including almost $9bn a year ago on AveXis, a US specialist in spinal muscular atrophy. What matters, however, is whether he has picked long-term growth drivers — something that is hard to do.
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