Novartis AG NVS -1.84% said it is considering the sale or spinoff of its generic drugs business Sandoz, a move that would focus the once-sprawling healthcare conglomerate solely on innovative prescription drugs.
Sandoz, like many generic drugmakers, has struggled with falling prices in the U.S. in recent years. Generic drugs are lower-cost versions of prescription medicines whose patents have expired. While their prices are usually far below those of the branded drugs that they imitate, increased competition has driven those prices even lower in recent years.
In response to greater competition, Novartis has pivoted Sandoz toward higher-value generics, such as biosimilars, which are near-replicas of biologic drugs made using living cells. Sandoz has also become an autonomous unit within Novartis, to give it more flexibility. But the unit, which accounts for around a fifth of total sales for Novartis, has still proven a drag on the company’s growth. In the third quarter, Sandoz sales fell 2% at constant currencies to $2.4 billion despite volumes increasing. Sandoz’s U.S. sales dropped 20%.
Novartis shares were up 0.9% in early trading.
Chief Executive Vas Narasimhan said Tuesday it was the right moment to review Sandoz’s strategic fit within Novartis. The company said it had launched a strategic review of Sandoz that would consider all options, from retaining the business to separating it. Dr. Narasimhan said he expects to complete the review by the end of next year.
Wimal Kapadia, analyst at Bernstein, said in a note that while Sandoz was a reliable cash-generator for Novartis, the unit would be more profitable, and probably generate higher returns on capital, if it were to be sold or spun out into a stand-alone business.
A separation of Sandoz would be the final step toward Novartis focusing solely on innovative drugs. Over the last decade, it has shed units that sold animal medicines, vaccines, drugstore staples, contact lenses and tools for eye surgery.
Since taking the helm in early 2018, Dr. Narasimhan has doubled down on innovative medicines and cutting-edge technologies such as gene therapies and radiopharmaceuticals, drugs that carry radioactive particles to tumors for close-range radiotherapy. He also placed a big bet on cholesterol-lowering drug inclisiran, which Novartis acquired around two years ago through a $9.7 billion deal for The Medicines Company. Inclisiran is currently under review with the Food and Drug Administration with a decision expected early next year.
The announcement of the Sandoz review came as Novartis reported that third-quarter sales increased 5% at constant currencies to $13.03 billion, driven by strong sales of some of its prescription drugs. Operating income rose 32% to $3.23 billion.
Novartis also boosted its long-term sales expectations for its two top-selling drugs, Entresto for heart failure and Cosentyx for various immunological conditions. It now expects Cosentyx to generate revenue of at least $7 billion a year at its peak, up from earlier guidance of $5 billion. It expects Entresto to make at least $5 billion a year at its peak, up from $4 billion previously.
Write to Denise Roland at Denise.Roland@wsj.com
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