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Buying Opportunity Post Spin With Novartis’ Eye Care Business

The Spinoff of the world’s largest eye-care business, Alcon, Inc. (ALC), is just one of four major strategic transactions Novartis AG (NOVN) has made over the last year, with CEO Narasimhan ramping up the focus on its core leading medicines. New numbers prompted our update to the analysis however, we believe there can be a better entry point into this situation post-Spin.

What's Interesting? The Edge Intelligence...
After having a connection for more than 10-years, Novartis AG (NOVN), the Swiss pharmaceutical giant, will be spinning off its previously acquired and the world’s largest eye-care business, Alcon, Inc. (ALC), on April 9, 2019. Post Spin, NOVN will focus on its core pharmaceutical business and its upcoming blockbuster drug launches by 2020 while the Spinoff, ALC will operate two leading eye-care divisions under (i) surgical (FY17 Revenue: $3.7bn, market share 41%) and (ii) vision care (FY17 Revenue: $3.0bn, market share 22%).

Spin Part of Major Transactions (NOVN): ALC’s Spinoff will be the 4th major strategic transaction over the last year, after selling its stake in a consumer-health joint venture to GlaxoSmithKline Plc (GSK) for $13bn (in March 2018), purchasing the rare disease drug maker AveXis, Inc. for $8.7bn (in April 2018) and announcement of sale of the Sandoz’ US dermatology business for $1.0bn (in September 2018). These strategic transactions have been driven by CEO Mr. Vas Narasimhan, who was brought to the helm on February 1, 2018, with a vision to focus on NVS’s stronghold pharmaceutical business while shredding-off its other non-core segments. Mr. Narasimhan also announced a $5bn share buyback program (to be completed by end of 2019) and committed to growing its dividend.

The Edge View…
Having been previously at NOVN for 13 years before taking on his new role as CEO, Mr. Vas Narasimhan has been on a restructuring drive with a focus on its core pharma business via ALC’s split. Thinking along that similar mindset, we see the Sandoz division (a complex generics business) as potentially being the next divestiture/Spinoff candidate in the medium-to long term due to its lower FY18 operating margin profile of 20.3% compared to NVS’s innovative medicines’ FY18 operating margin profile of 32.0%.

ALC (Spinoff) will be the world’s largest eye-care business with turnaround specialists at the leadership role, Mr. David Endicott (CEO) and Mr. Mike Ball (Chairman). Further, we have noticed that ALC has regained its growth path last year (2017) and now with an increased investment in its Research and Development (9.0% over FY20E) as well as also focusing on the emerging Asia Pacific region (revenue growth of +10.3% Vs. 3.0% of the US over FY19E and FY20E), this would further brighter the prospectus of the company returning shareholder value post Spin.