Novartis highlights big pharma diversity drive

ZURICH (Reuters) - Novartis AG's move for eye care company Alcon underscores a refocus for big pharma, seeking to combat threats to top-selling drugs with new areas like vaccines and non-prescription healthcare.

Novartis and other drugmakers including the world's two largest, Pfizer Inc and GlaxoSmithKline Plc, see diversification as a way to cut dependence on the fading blockbuster model, which faces ever more competition and tougher paths to market.

In the latest step to broaden its portfolio from a core prescription drug business, Novartis said on Monday it will acquire Nestle's stakes in eye care company Alcon for $39 billion.

"It is interesting that we have seen a trend with the full-year results of companies concentrating on their other businesses, highlighting how attractive they are," said Denise Anderson, analyst at Landsbanki Kepler.

The reasoning?

Big drugmakers face a "cliff" of patent expiries between 2010 and 2012, which will make it easier for generics companies to launch copy-cat versions of some of the world's top-selling drugs.

That is pushing big pharma away from its core towards businesses which until recently they would have turned their noses at. Pfizer, for example, sold its consumer health products, including Listerine mouthwash, in 2006 in a move that analysts say now looks short-sighted.

Novartis's own top-seller, Diovan, for treating high blood pressure, loses patent protection in 2012 and the Swiss-based company has been a trend-setter in broadening its base, buying vaccines maker Chiron and bulking up its Sandoz generics unit.

NOVARTIS LEAD

Pharmaceutical price-earnings multiples reflect the depressed outlook for the sector. Pfizer and France's Sanofi-Aventis SA both trade at just 8.4 times forecast 2009 earnings and Glaxo at 11.0 times.

Those compare with Novartis, with a 2009 multiple of 12.4, and Johnson & Johnson at 14.1, which now appear to have stolen a march in the drive for diversification -- and other companies may now look to follow the lead.

Pfizer, itself facing the looming expiry of a patent on $12-billion seller cholesterol drug Lipitor, said last month it was eyeing emerging markets and biogenerics while Glaxo gave unusual prominence to consumer healthcare and vaccines in its 2007 annual report.

Morgan Stanley believes drugmakers need to invest more in areas like vaccines, molecular diagnostics and animal health to offset problems in conventional drug discovery, as new drug pipelines look increasingly spartan.

Novartis may be ahead of the curve but it still faces problems, Morgan Stanley analyst Paul Mann said.

Its profit growth is seen slowing from 2011 and even falling 2 percent in 2012, according to Reuters data.

"Approximately 35 percent of Novartis revenues will face generic competition between 2011 and 2015," Mann said.

"With no new product launches until mid to late 2009, it is inevitable that Novartis will enter a period of declining revenues and earnings in 2011," he said.

Nevertheless, the situation is more acute for Pfizer, where profit is expected to fall from 2010, and Sanofi, whose margins are seen contracting from 2011.

PRESCRIPTION DRUGS

Even Novartis still generates only a minority of its revenue from its non-drugs units -- pharmaceuticals accounted for 63 percent of total 2007 sales of $38.07 billion.

"The core business is and remains pharma," said Philipp Buchli, a fund manager at Q Investments, who believes the eye care business could be spun off, perhaps in two or three years' time.

Generics unit Sandoz was next, with 19 percent, followed by consumer health at 14 percent and vaccines and diagnostics at 4 percent.

"I think the complication with that is that the markets still really value these companies on their pharmaceutical businesses and I don't really see that changing," said Kepler's Anderson.

"Will it (diversification) really change fundamentally the view of the companies? That I don't see," she said.

(Additional reporting by Paul Arnold; Editing by Paul Bolding)