The strength of Novartis is that it does what a big drug company should do: it makes original drugs that cure or ease the pain of sick people.
This should surprise no one familiar with the company’s proud history of scientific research. It was a Swiss employee of Sandoz, a forebear of Novartis, who in 1943 discovered the hallucinogenic properties of LSD.
The impressive record of Novartis in bringing new medicines to market is worth keeping in mind now that the legacy of Daniel Vasella, the group’s founder who retired as chairman in February, is under scrutiny. Novartis, under Mr Vasella, emerged as Europe’s largest pharmaceutical group. But did he make intelligent acquisitions? Did he solve the company’s “patent cliff” problem? Are some shareholders right to suggest that he should have done better?
Even though Mr Vasella remains remains honorary chairman of Novartis, he will surely not interfere, or be allowed to interfere, in the company’s strategy. The board awarded him the title in recognition of his unique role in creating Novartis, a product of the 1996 merger of Ciba-Geigy and Sandoz, and then running the group for 17 years. But he will not attend board meetings. I expect him to wield no more influence over Joseph Jimenez, chief executive, than the abdicated Benedict XVI does over Pope Francis I.
This will create space for the post-Vasella Novartis to reconsider some investments he made and some corporate structures he put in place. One deal that turned sour was the $5.1bn spent in 2006 to acquire full control of Chiron, a US vaccine maker. The idea seemed sensible enough: diversify into vaccines as a way of softening the blow of patent expiries for pharmaceutical products.
But Chiron’s lack of success is one reason why the vaccines and diagnostics unit of Novartis is, by some distance, the worst performer of the group’s five divisions. The unit reported $83m in operating loss in the second quarter, and it suffered a setback last month when UK authorities declined to include Bexsero, the division’s anti-meningitis B vaccine, in their routine vaccination programmes. As a standalone unit within Novartis, the vaccines business has a bleak future.
Mr Jimenez may choose to incorporate it into pharmaceuticals, his most important division, which accounts for 56 per cent of group sales compared with 3 per cent for vaccines. But this would merely disguise the weaknesses of a business that will never gain ground on the vaccine market leaders – GlaxoSmithKline, Merck and Sanofi. It may be wiser to bite the bullet and sell all or most of the business.
Two other Vasella deals troubled some investors. The $51.6bn purchase of Alcon, completed in 2010, turned Novartis into the world’s biggest eyecare company. It was a steep price and Alcon’s results to date scarcely justify it. But Alcon’s day may yet come: its surgical franchise is strong and, in a welcome boost, European Union regulators last month extended the range of eye conditions that can be treated with Lucentis, Alcon’s main ophthalmology drug.
It makes more sense for Novartis to persevere with Alcon – a genuine market leader – than to hold on to the stake in Roche, a Swiss rival, which Mr Vasella built up in 2001-03. Foiled in his plan to seize all of Roche, Mr Vasella ended up with a third of its voting stock and 6.2 per cent of its share capital. The holding is worth a good $10bn. Yet, for Novartis today, it serves no strategic purpose.
To some extent, what emerges from the Vasella era is a picture of imperfect investments and occasional murmurs of disapproval among investors. Matters were not helped by the uproar over the board’s ill-judged offer, abandoned in February, to pay Mr Vasella $78m over six years for a bit of consulting work and an agreement not to help competitors of Novartis.
Yet the bottom line is that Mr Vasella left Novartis in good shape. Unlike some European companies, Novartis has achieved a sound geographical balance in its global revenues. It does not depend too much on a Europe sinking into economic stagnation. Mr Vasella also never forgot the importance of groundbreaking research. The patents for Diovan and Gleevec, the company’s blockbuster drugs for blood pressure and cancer, will soon run out. But Novartis is working on almost 140 projects to develop new medicines that, next to recently launched winners such as Gilenya, its multiple sclerosis drug, will compensate for the loss of earlier patent protections.
The “patent cliff” has piled pressure on all drug companies. But Novartis is one of the least likely to topple over the edge.
Tony Barber is the Financial Times’ Europe editor
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