Novartis is cashing out of Roche for $21B, 20 years after mega-merger that never happened


Roche and Novartis are competitors in the pharmaceutical marketplace, but for the past two decades they’ve also been financially linked. The equity investment Novartis made in its rival has more than quadrupled in value. Novartis is now cashing out.

On Thursday, the companies announced that Novartis will sell its shares back to Roche in a $20.7 billion deal. Novartis framed the transaction as a way to monetize its investment. In a separate statement, Roche said reacquiring the shares from Novartis will give the company a way to regain full strategic flexibility.

Roche has two classes of shares, bearer shares and non-voting equity shares. In 2001, Novartis paid about 4.8 billion Swiss francs (about $2.8 billion) to acquire 32 million bearer shares of Roche, which represented about 20% of the voting shares of the company. In financial statements, Novartis framed the deal as a “financial investment of a potentially strategic nature.” In 2002, documents show that Novartis added to its investment, spending 2.9 billion Swiss francs (about $2.1 billion) to acquire another 11.4% of Roche’s voting shares. As of the end of 2002, Novartis reported that its stake represented nearly one third of Roche’s voting shares.

At the time of the stock purchases, Novartis’s then chairman and CEO, Daniel Vasella, framed the transactions as “a long-term financial investment, which is also strategic in nature,” according to securities filings. That strategy was a potential merger of the two Basel, Switzerland-based companies, but the marriage never happened. The Financial Times cited an unnamed source familiar with the matter who said that Novartis never had a board seat at Roche and was never in a position to influence any decision making at the company. Despite overtures from Vasella, the source said that the Hoffman-La Roche family that controls Roche voted down a tie-up with Novartis.

Novartis kept its Roche shares, and they’ve been a good investment, resulting in an annualized return of 6.6% in Swiss francs (10.2% in U.S. dollars). According to Novartis, earnings and dividends from the stock have delivered more than $6 billion. But Novartis also said that it does not consider its Roche investment as part of its core business or strategy.

In Thursday’s announcement of the deal, current Novartis CEO Vas Narasimhan said his company concluded that now is the right time to turn the Roche investment into cash. Novartis plans to “deploy the proceeds form the transaction in line with our capital allocation priorities to maximize shareholder value and continue to reimagine medicine,” Narasimhan said.

The cash could fuel more research and development as well as dealmaking. Acquisitions in recent years include the $9.7 billion buyout of The Medicines Company, developer of an RNA interference drug for high cholesterol; the $2.1 billion purchase of cancer radiotherapy developer Endocyte; and the $8.7 billion takeover of AveXis, which is now known as Novartis Gene Therapies. During its report of third quarter financial results last week, Novartis said that it has begun a strategic review of Sandoz, the division of the company that sells generic and biosimilar drugs. The company said all options are open, ranging from keeping the business to spinning it off as a separate entity. Through the end of the third quarter of this year, Sandoz’s sales were $7.1 billion, down 4% compared to the same period in 2020.

If Novartis does sell or spin off Sandoz, it would track with a strategy chosen by several of its big pharma peers. GlaxoSmithKline’s over-the-counter products business were placed into a consumer health joint venture operated with Pfizer. Pfizer’s off-patent and generic drugs division are now part of Viatris, a new company formed by the merger of that business unit with Mylan. Merck’s legacy drugs, biosimilars, and women’s health products have been spun off into a new, publicly traded company called Organon. In each case, the big pharma companies said the transactions allowed them to focus on developing and commercializing innovative new medicines.

According to the Financial Times’ source, Novartis’s plans to sell its shares came as a surprise to Roche. Novartis initiated the talks, approaching the company weeks ago. Negotiations led to a deal approved by Roche’s board on Wednesday, the source said. Novartis is selling its Roche stock for 356.93 Swiss francs ($388.99) per share, a price that represents the average price of Roche non-voting equity securities over the 20 trading days ending on Nov. 2.

Following the repurchase, Roche plans to cancel those shares. The transaction will not result in any change in control of Roche, as the founding families of the company will continue to hold the majority of voting shares. The share repurchase still needs the approval of Roche shareholders. A shareholder meeting is scheduled for Nov. 26.

Photo: Sebastien Bozon/AFP, via Getty Images

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