UPDATE 2-Novartis weighs joint ventures, unconventional deals for smaller businesses

Wed Jan 29, 2014 4:54am EST

Related Topics

* Q4 sales $15.08 bln vs poll average of $15.09 bln

* Core EPS $1.20 vs $1.28 forecast in Reuters poll

* Expects 2014 sales to grow in the low to mid-single digits

* CEO wants portfolio review complete by summer

* Proposes dividend of 2.45 Sfr per share, up 7 pct

By Caroline Copley

BASEL, Jan 29 (Reuters) - Novartis is looking at options, such as joint ventures, for three smaller businesses to bring them in line with its world-leading pharmaceutical operations, it said on Wednesday, in a review due to be completed by the end of summer.

The Basel-based firm has been casting a fresh eye over its operations following the departure of veteran chairman and one-time CEO Daniel Vasella, the architect of the merger of Ciba-Geigy and Sandoz that created Novartis in 1996.

While new chairman Joerg Reinhardt has defended the diversified strategy, he says Novartis wants all its businesses to be among world leaders, casting doubt over three sub-scale units: over-the-counter drugs, animal health and vaccines.

Global drugmakers are under increasing pressure from investors to step up the pace of restructuring and unlock value trapped inside large firms.

On Wednesday, Chief Executive Joe Jimenez told reporters he hoped the review would be concluded by the end of summer.

"We are considering all options including potentially unique structures that would enable them to become leading businesses in their sector," he said, adding this could include joint ventures or other unconventional set-ups different from an outright acquisition or sale.

Sources have said that Novartis is discussing swapping its animal health and human vaccines businesses for Merck & Co Inc's over-the-counter products unit in a deal that could boost earnings at both companies.

Jimenez said he was a "big fan" of Novartis' over-the-counter business, where drugs are paid for by consumers and are branded allowing for premium pricing.

He also cited the long-term potential of vaccines thanks to its meningitis B vaccine Bexsero and said its animal health division had synergies with its research operations, although it remained a smaller business.

Shares in Novartis - which gained almost 24 percent last year on investor hopes for a restructuring - were trading up 0.6 percent to 71.75 francs at 0848 GMT, in line with the European drugs sector.

DIOVAN DELAY

Novartis said fourth-quarter net sales rose 2 percent to $15.08 billion, compared to the average analyst forecast for $15.09 billion in a Reuters poll. Core earnings per share fell 3 percent to $1.20, compared to the $1.28 mean estimate.

Foreign currency swings shaved 11 percentage points off fourth-quarter operating income, with the company hit in particular by a sharp slide in emerging market currencies and a weaker Japanese yen, as well as a stronger Swiss franc.

David Kaegi, an analyst with Bank J. Safra Sarasin, said the results were solid and said productivity measures had helped offset margin pressure at the group level from generic competition.

Many of Novartis' European peers have now put the so-called "patent cliff" - where best-selling drugs lose market exclusivity - behind them.

But Novartis is still awaiting some cheaper, copycat competition for its once best-selling blood pressure pill Diovan, since Ranbaxy Laboratories has faced regulatory delays for its generic version.

While the delay granted Novartis a temporary reprieve last year, that hit has been pushed into 2014. It now expects further generic competition to launch in the United States at the beginning of the second quarter.

The Basel-based firm guided for 2014 net sales to grow in the low to mid-single digits, a slightly less confident forecast than last year, when it told investors to expect growth of at least mid-single digits this year and next.

Novartis said it still expected core earnings to grow ahead of sales, helped by productivity measures.

The company must also seek to plug the hole left by the upcoming expiration of its patent for leukaemia drug Gleevec.

It is banking on new products such as multiple sclerosis pill Gilenya and cancer drug Afinitor to help it grow sales and profits through this patent loss.

Novartis is also pinning its hopes on a slew of potential 'blockbuster' treatments for cancer, heart failure and lung disease.

But that ambition hit a stumbling block last week, when the European health regulator took an unfavourable position on its heart failure drug serelaxin, forcing the company to delay its original launch plans.

The company said it would lift its dividend to 2.45 Swiss francs per share for 2013, compared to the 2.30 francs it paid out last year.

While this is less yield than European peers like GlaxoSmithKline, Sanofi and AstraZeneca , it is comparable to crosstown rival Roche, where growth is currently more visible at Novartis, Kepler Cheuvreux analyst Fabian Wenner said.

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