How Novartis AG (ADR) (NYSE:NVS) Uses Proceeds From Asset Sales Would Determine Its Future

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The legacy of Joseph Jimenez, who has been the chief executive officer of Novartis AG (ADR) (NYSE:NVS) for seven years now, could be determined by how the pharmaceutical giant handles investments and asset disposals in the coming months. One of the big decisions he will be required to make is whether to sell the firm’s stake in a joint venture the Switzerland-based company undertook with the UK drugmaker, GlaxoSmithKline plc (ADR) (NYSE:GSK).

A majority of the shareholders at Novartis are of the opinion that Jimenez should dispose of the stake to GSK. The asset sale is expected to generate $10 billion, funds which could be used to expand the pharmaceutical giant’s portfolio. The funds could also be used to expand Novartis’ generics business.

Full merger

Novartis also has a 6% stake in Roche, a rival based in Switzerland and selling this asset could raise an extra $14 billion. This stake in Roche was acquired in the early 2000s in preparation for what was expected to be a full merger which failed to materialize.

But while it makes perfect sense for Novartis to dispose of the two assets, it is not so clear what Novartis should do with Alcon, an eyecare unit it acquired from Nestle in 2010 for $51.6 billion. Alcon was acquired during the reign of Novartis founder Daniel Vasella.

During the most recent quarterly results, Novartis indicated that Alcon would post an increase in revenues in the full fiscal year. However, the division has not lived up to expectations and is considered one of the worst acquisitions in the drugs industry. Besides grossly underperforming, the patents that Alcon holds for blockbuster drugs are set to expire in the near future. And in the United States, the division is also coming under intense price pressures.

“Although Alcon profits continued to decline, this is now moderating and showing signs that the company have it under control,” said an analyst at Deutsche Bank, Tim Race.

Legal tangles

In markets such as South Korea and Russia it has also been disrupted and incurred financial costs after various legal tangles. But while Novartis executives are optimistic that Alcon is now on a recovery trajectory making it possible to spin it off or sell it as a going concern, its value is estimated to range between $25 billion and $35 billion. Selling it at such a price would result in Novartis having to book a huge loss.

But if all these assets were to be disposed of, Novartis would have between $50 billion and $60 billion at its disposal. This is an amount that is enough for Jimenez to transform the company.

On Wednesday shares of Novartis Ag fell by 0.08% to close at $85.27.

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