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Novartis closes in on growth formula


http://www.ft.com/cms/s/0/62a9685e-f0e2-11df-bf4b-00144feab49a.html#axzz15OqfvxCp

By Haig Simonian

Published: November 15 2010 22:30 | Last updated: November 15 2010 22:30

Novartis could be back on the takeover trail within the next four years as debt from its $50bn acquisition of Alcon falls through strong cash flow.

“Our focus will be on great execution and on paying down debt. But we have excellent cash flow, which means we’ll become debt-free in four years. And who knows after that?” asks the Swiss pharmaceutical group’s chief executive.

Novartis’s immediate priority is on integrating Alcon, the US-focused eyecare company, in which it bought a 77 per cent stake from Nestlé, says Joe Jimenez, 50, who was appointed last February.

He is reticent about Novartis’s strategy to end the months’ long standoff with Alcon’s minority investors who own the outstanding 23 per cent. A committee of Alcon’s independent directors has aggressively demanded Novartis improve its terms to buy out the minorities.

However, Mr Jimenez notes the plunge in the dollar and rise in Novartis’s share price has improved the appeal of the offer for Alcon shareholders “without changing the terms”. Alcon’s minorities have been offered 2.8 Novartis shares, denominated in Swiss francs, for each Alcon unit.

Many analysts believe Novartis will bide its time – or may even be happy to run Alcon holding a 77 per cent stake – in spite of foregoing extra synergies arising from full ownership and integration.

“The intention is to have 100 per cent. But Nestlé owned 77 per cent and the company was run very successfully for many years, so we have not ruled that out.”

Mr Jimenez declines to indicate further areas of expansion for Novartis, which has been among the more acquisitive drugs companies in moving from discovering compounds to what he calls “focused diversification”.

On Wednesday, he will make his first big public appearance since becoming chief executive to tell analysts and investors of the future approach.

Much of the emphasis will be on elaborating strategy after criticisms from some rivals that Novartis has been turning its back on discovering medicines in favour of expanding into generics, consumer healthcare and other less risky activities.

Severin Schwan, chief executive of Roche, Novartis’s crosstown rival, argued last month in an interview with the Financial Times: “A lot of people call it diversification. I call it giving up.”

To which Mr Jimenez responds: “We’re not giving up on the traditional model or the focus on research and development. I absolutely don’t see it as surrendering. Rather, we’re leveraging what are tectonic changes in our industry to grow our business.”

A former executive in consumer goods, he argues that pharmaceuticals groups are being obliged to review strategy because of severe financial pressures on healthcare providers – whether public or private – and declining drug discovery rates.

To back his arguments, Mr Jimenez notes “focused diversification” is gaining momentum in the industry, as rivals such as Sanofi, Pfizer and even Merck broaden their activities.

Having come to pharmaceuticals from outside the sector, his core message is that the new conditions oblige drugs companies to review spending and strategy, and to squeeze out unnecessary costs to maintain R&D spending.

“There’s a new cost-conscious mentality at Novartis. It’s not about cutting wildly but about spending in a smarter way,” he says

Drawing on his experience running Heinz, he points to savings Novartis has derived from global purchasing and from competitive bidding. Such procedures, though commonplace in consumer goods, are underdeveloped in pharma, he notes.

“Our third-quarter results showed the benefits, and you’ll see more. Productivity is becoming a way of life and not just a one-time event.”

He acknowledges much of the focus on Wednesday will be on how Novartis will be on risks, notably the expiry beginning next year of patent protection on the group’s blockbuster Diovan high blood pressure treatment. But his longer-term aim is to highlight new plans for allocating resources between the group’s divisions to maximise future returns. “And we’ve never directly addressed that question before.”