Novartis Edges Higher After Confirming Sandoz Spin-Off

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Novartis Edges Higher After Confirming Sandoz Spin-Off
Credit: © Reuters.

By Geoffrey Smith -- Novartis (SIX: NOVN ) stock opened modestly higher in Zurich on Thursday after the Swiss pharma company said it will spin off Sandoz, a move that will create Europe's largest generic drugs company with nearly $10 billion in annual sales.

The spin-off caps nearly a year of uncertainty over Sandoz's future after its parent announced last October that it would conduct a strategic review into the business with a view to unlocking value for shareholders. Reports, earlier in the year, of a possible buyout bid from private equity came to nothing, due in part to the heavy tax bill that an outright sale would have generated.

By contrast, the spin-off - which will leave Sandoz with a primary listing in Zurich and an ADR in New York, is expected to be tax neutral.

Novartis said the 100% spin-off "would allow Novartis shareholders to participate fully in the potential future upside of both Sandoz and Novartis Innovative Medicines."

Novartis is aiming for the higher valuation typically enjoyed by specialty pharma companies, trying to close the discount that its stock currently trades at, relative to other U.S. and European drug companies. The stock currently trades at only 8.5 times trailing 12-month earnings, while the likes of Sanofi (EPA: SASY ) (NASDAQ: SNY ) and Roche (SIX: ROG ) trade at a multiple of around 17-18. Part of that discount is due to the lack of growth at Sandoz, where sales have stagnated in the last couple of years.

Novartis intends to focus on five core areas in future: hematology, cancers, immunology, neuroscience and cardiovascular, as well as researching into gene and cell therapy.

It expects the deal to close in the second half of 2023.

By 05:00 ET (09:00 GMT), Novartis stock was up 0.8% in Zurich.

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