Novartis Cancer Move Adds Spice to Crosstown Roche Rivalry

Apr 23, 2014 11:57 am ET

(Updates with Basel official comment in 13th paragraph. For more on drugmaker deals, see EXT7 <GO>)

April 23 (Bloomberg) -- Sitting just two miles apart on opposite banks of the Rhine river in Basel, Switzerland, Novartis AG and Roche Holding AG have long had a complex crosstown rivalry. It’s just gotten more so.

Novartis’s planned acquisition of GlaxoSmithKline Plc’s cancer medicine business will swell the Swiss company’s annual oncology sales by almost 40 percent, to $11.2 billion by 2018. That will boost competition between Novartis, No. 2 in market share for cancer drugs, and Roche, the world’s biggest.

Now, instead of a possible merger as contemplated a decade ago, the companies may find themselves poaching researchers from each other, said Jerome Forneris of Banque Martin Maurel.

“It will be interesting indeed to have two cancer giants based in Basel,” said Forneris, who helps manage $8.5 billion in Marseille, France, and holds shares in both companies. “This will for sure increase the competition between them.”

Novartis will pay as much as $16 billion for the cancer assets as part of a swap in which it will sell most of its vaccines division to Glaxo for up to $7.1 billion.

Roche used acquisitions, too, to become the biggest oncology drugmaker. The company paid about $46.8 billion in 2009 for the 44 percent of Genentech Inc. that it didn’t already own. The South San Francisco, California-based company brought Roche its best-selling products -- the Rituxan treatment for leukemia and lymphoma, and Avastin for colorectal, breast, lung, kidney and ovarian cancers.

Immune System

Roche had cancer sales of $25 billion last year, more than three times Novartis’s. The company is among the front-runners in the race to develop experimental therapies that use the body’s immune system to fight cancer, targeting proteins known as PD-1 and PD-L1, a field in which both Glaxo and Novartis lack leading candidates.

Oncology will grow to about a fifth of Novartis’s total annual sales, said Tim Anderson, an analyst at Sanford C. Bernstein & Co. in New York. Its best-selling medicine is Gleevec, a treatment that scientists say turned a deadly blood cancer into a chronic illness.

Glaxo’s drugs Votrient, for tumors of the kidney and soft tissue, and the skin cancer treatments Mekinist and Tafinlar, are still relatively new to the market, Novartis Chief Executive Officer Joe Jimenez said in a telephone interview.

‘Incredible Expertise’

Novartis plans to use a sales force well-trained in selling cancer drugs to gain more revenue from those products, while adding some promising early-stage Glaxo cancer candidates to its own pipeline.

“We are the No. 2 oncology business behind Roche-Genentech and believe that the action we took today will strengthen our oncology franchise,” Jimenez said yesterday when asked about competition with Roche. “Oncology is a place where we have incredible expertise.”

The Swiss canton of Basel-City, with a population of almost 200,000, boasted more than 15,000 employees in the pharmaceutical industry in 2012, according to the Office of Economy and Labor.

“We consider the strengthening of the therapeutic area in oncology at Novartis as an opportunity,” said Christoph Brutschin, head of the canton’s department of economic, social and environmental affairs. “It’s still too early to determine the consequences for the location Basel.”

Cancer Rivalry

Roche declined to comment on competition with Novartis in oncology, said Claudia Schmitt, a Roche spokeswoman. Novartis shares eased 0.2 percent to 76.25 Swiss francs in Zurich trading today, while Roche slipped 0.2 percent to 256.20 francs.

Some analysts are skeptical on Jimenez’s comment. Novartis can only justify the price paid for Glaxo’s oncology portfolio if it can accelerate sales and improve profitability, said Birgit Kulhoff, an analyst and fund manager for Rahn & Bodmer in Zurich. And even with the purchase, Novartis may drop to third in oncology behind Celgene Corp., according to research firm Evaluate Pharma.

“Overall I’ve always thought of the GSK oncology assets, perhaps aside from Votrient, as sort of second best,” said Alexandra Hauber, a UBS AG analyst, on a conference call yesterday with Novartis executives. “What really justifies this huge price tag” -- almost 50 times earnings?

Good Deal

The acquisition will look like a good deal when it becomes clear how fast sales of the drugs will grow, said David Epstein, head of pharmaceuticals for Novartis. And Jimenez noted in the interview that one big risk -- whether the drugs can get regulatory approval -- has already been removed.

“Will this deal add to competition between Roche and Novartis ? Yes it will,” said Manish Singh, who helps oversee $2 billion as head of investments at Crossbridge Capital LLP in London and owns both Roche and Novartis shares. “Through this deal Novartis is buying years of R&D into cancer drugs.”

As part of the deal, Novartis also agreed to form a joint venture with Glaxo in consumer health and sell its veterinary unit to Eli Lilly & Co.

One thing Novartis didn’t do: Sell the 33 percent stake in Roche’s voting stock that Novartis’s former chief executive officer, Daniel Vasella, acquired when he was pushing for a merger. Novartis may eventually sell the stake, Jimenez said. The stake has a market value of 13.6 billion francs ($15.4 billion).

As long as Novartis holds on, speculation about a deal between the two companies will remain. The descendants of Roche founder Fritz Hoffmann-La Roche spurned Novartis’s advances for years, and reiterated their opposition as recently as October.

“It continues to be a good asset for us, but you could see us take action,” Jimenez said of the stake on a conference call yesterday discussing the asset disposals. “This doesn’t preclude that.”

--With assistance from Naomi Kresge in Berlin and Corinne Gretler in Zurich.