Analysis: Novartis’s Q3 could give lift needed to clinch Alcon

By Katie Reid

ZURICH (BestGrowthStock) – Novartis AG’s (NOVN.VX: ) third-quarter results could give the Swiss drugmaker’s share price the final nudge it needs to allow it to seal a buyout of U.S.-listed eyecare group Alcon (ACL.N: ).

Basel-based Novartis wrapped up its $38.7-billion buy of a 77-percent stake in Alcon from Nestle (NESN.VX: ) this summer and a recent rise in its share price means that its stock offer for the remaining 23 percent is now looking more attractive.

Novartis is currently offering Alcon’s minority shareholders 2.8 Novartis shares for every Alcon share, a bid Alcon’s Independent Director Committee (IDC) has consistently dismissed as too low, but it could also switch to a cash offer.

A string of good drug news, including approval for multiple sclerosis drug Gilenya, has boosted sentiment in Novartis’ shares recently, erasing this year’s losses. A sharp rise in the Swiss franc versus the dollar also means Novartis’s offer is now worth more than it was when it first pitched it at the start of the year.

Novartis is seen posting a 10-percent jump in third-quarter core EPS on Thursday and it could see its stock price rise further on the back of its results.

“We expect growth of 8 percent in local currencies. That should excite investors and keep them convinced that Novartis can continue to grow above the market, at least in the short term,” said Vontobel analyst Andrew Weiss.

“This should give the share price a shot in the arm and put the Alcon IDC under more pressure to accept a deal. Once the offer reaches a value around $168 it becomes increasingly difficult for the IDC to argue against it,” said Weiss.

Based on Tuesday’s closing prices, Novartis’ offer is worth $166.70, just below Alcon’s share price of $167.40. Alcon is due to hold a conference call on its quarterly results on Thursday.

The bid is now worth around 9 percent more than when it was first announced and is just short of the average price of $168 paid to Nestle, but is still shy of the $180 some shareholders have said they would be willing to accept.

“With Novartis’ share price and the dollar exchange rate where they are, I don’t see why the IDC and Novartis wouldn’t be talking,” Sarasin analyst David Kaegi said, adding that a thaw between the two parties could clear the way for a cash deal.

“We’re all curious as to whether Novartis may find a way to do it in cash. This would lower the cost of capital, which would be positive and limit flowback. This is something that Anglo-Saxon investors in particular are worried about,” Kaegi said.

Novartis has opted for a stock offer because that would still allow the group to push a deal through under Swiss merger law if it were unable to reach an agreement with the minorities, but this has weighed on Novartis’ shares as investors have worried about dilution.

BRIGHT PROSPECTS

Novartis, which is banking on its buy of Alcon to help it insulate itself against the patent loss on key medicines, such as top-selling Diovan, is likely to show on Thursday that the blood pressure drug is holding up in the face of generic competition.

A generic version of Merck & Co’s (MRK.N: ) rival drug Cozaar was launched recently.

Analysts are also hopeful that demand for Novartis’ No. 1 cancer drug Gleevec and its successor Tasigna has remained robust this quarter, while generics unit Sandoz is likely to have benefited from its generic version of Sanofi-Aventis’ (SASY.PA: ) blood thinner Lovenox.

“We expect the results and earnings call to reassure investors that Novartis remains on a growth trajectory despite intensifying Diovan competition,” analysts at Societe Generale said.

“An acceleration of Tasigna sales growth could increase investor confidence that Novartis may be able to protect part of its Gleevec franchise beyond 2015,” the analysts said.

Cost savings could also help Novartis to offset the impact of European healthcare reforms, analysts at Credit Suisse said.

The pharmaceutical industry is grappling with a tougher pricing environment for medicines as Europe’s cash-strapped governments fight to get record budget deficits under control.

Investors will focus on its strategy day on November 17 for more insight into the group’s promising pipeline.

“Novartis’ pipeline is great and there is still stuff in there that could propel the shares going forward,” Sarasin’s Kaegi said, pointing to drugs such as cancer medicine and blockbuster hopeful Afinitor, as well as gout treatment Ilaris and the meningitis B vaccine.

“There is still upside potential to Novartis shares, especially once the Alcon deal is off the table and especially if this is done in cash,” Kaegi said.

(Editing by Sitaraman Shankar)

Analysis: Novartis’s Q3 could give lift needed to clinch Alcon