Novartis grabs two growth segments in one deal: Generic and cancer drugs

Swiss drug company Novartis AG (NVS) dove into the recent wave of pharma dealmaking today. The industry has been in consolidation mode as many drugs are due to come off patent in recent years, as competition from generics increases, and as pipelines at some drugmakers show little promise for future growth. Novartis' own blockbuster Diovan for high blood pressure is set to lose its patent in 2012, and like many Big Pharma players, it wants to get a bigger piece of the generic drug market.

Novartis said it agreed to acquire the specialty generic injectables business of Austrian Ebewe Pharma for $1.2 billion in cash. This would provide Sandoz -- Novartis' generic pharmaceuticals division -- an opportunity to create a strong global platform for future growth. According to Novartis, Cytotoxics (chemotherapy agents) will remain essential in anti-cancer therapy as the global oncology market is predicted to double to $60 billion by 2017.

Novartis also promises the deal would improve access to many generic oncology medicines, something patients will no doubt cheer if indeed it happens. And given how expensive traditional cancer drugs are, cheaper generic alternatives are definitely attractive for patients. Dr. Daniel Vasella, Chairman and CEO of Novartis said, "These medicines will remain the backbone of multi-drug treatments in the fight against cancer, one of the world's leading causes of death."

Several of Ebewe Pharma's products are essential components of standard-of-care guidelines for treating many types of cancers. Vasella added that "Ebewe Pharma will further strengthen our pipeline with many planned near-term launches." With that, it seems the Ebewe acquisition indeed offers potential for future growth.

But can these future returns justify the hefty price Novartis paid for Ebewe Pharma? While it delivered 20 percent compound annual sales growth since 2006, Ebewe's net sales in 2008 were $272 million and its operating income was $77 million. Meaning, Novartis paid five times 2008 sales and well over 15 times operating income -- not cheap.

Still, Ebewe has more than 20 distinct molecules that include significant near-term launch opportunities. Also, oncology drugs form one of the largest and fastest-growing sectors of the global generic injectables market. Annual sales of injectable oncology medicines were $3-3.5 billion in 2008, according to IMS Health. By 2015, annual sales are expected to grow to $9 billion.

Also, this is a specilized generics business, with less competition than other fields. Several cancer drugs with a combined $5 billion annual sales will lose patent protection in the U.S. next year. With Ebewe, Novartis is more prepared for biosimilar launches.

Bottom line? No doubt it's good Novartis is looking ahead at how to replace sales it will likely lose when Diovan comes off patent. But the deal wasn't cheap and the effects could take a while to trickle through as earnings growth, especially since profitability could be hurt in the process.

Asked about further acquisitions, Vasella told Reuters major buys were unlikely.

Investors reacted by pushing the stock up over one percent to $40.35, a somewhat muted reaction.

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