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Novartis-Alcon Spin-Off Case

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Novartis-Alcon Spin-Off Case Department of Business and Management Chair of M&A and Investment Banking Corporate restructuring trends in the pharmaceutical industry: Novartis-Alcon spin-off case SUPERVISOR: CANDIDATE: Prof. Luigi De Vecchi Gianlorenzo Gai 707521 CO-SUPERVISOR: Prof. Andrea Donzelli Academic Year 2019 / 2020 Table of Contents 1 Introduction ......................................................................................................................... 3 2 Chapter 1 ............................................................................................................................. 5 2.1 Maximize the Firm Value ........................................................................................... 5 2.1.1 Setting the right objective ...............................................................................................5 2.1.2 Financial Method .............................................................................................................6 2.1.2.1 Cash Flows ................................................................................................................6 2.1.2.2 Cost of Capital ...........................................................................................................7 2.1.3 Terminal Value.............................................................................................................. 17 2.1.4 Final Remarks on Firm Value ..................................................................................... 18 2.1.5 Firm Value and the stock price.................................................................................... 19 2.2 Introduction to business strategies to increase value ................................................. 22 2.2.1 Inorganic growth and the Conglomerate Boom ......................................................... 23 2.2.2 The focus premium ....................................................................................................... 24 2.2.3 The rise of corporate restructurings ........................................................................... 29 3 Chapter 2 ........................................................................................................................... 32 3.1 Spin-off in detail ....................................................................................................... 32 3.1.1 Definition and different structures .............................................................................. 32 3.1.2 Spin-off in the history of financial markets ................................................................ 34 3.1.3 Benefits ........................................................................................................................... 37 3.1.4 Disadvantages ................................................................................................................ 41 3.1.5 Effect on shareholders’ value ....................................................................................... 44 3.1.6 Tax benefits.................................................................................................................... 53 4 Chapter 3 ........................................................................................................................... 56 4.1 Pharmaceutical industry in detail ............................................................................. 56 4.1.1 Health Care sector segmentation and size .................................................................. 56 4.1.2 The pharmaceutical industry ....................................................................................... 59 4.1.2.1 Market size and segmentation ................................................................................ 59 4.1.2.2 Market Segmentation ............................................................................................. 61 4.1.2.3 Market Drivers ....................................................................................................... 63 1 4.1.2.4 Main players ........................................................................................................... 69 4.1.2.5 SWOT Analysis ..................................................................................................... 71 4.1.2.6 Environmental Social and Governance (ESG) performance ................................. 82 4.1.3 Deals trend in Pharmaceutical industry ..................................................................... 85 4.1.3.1 Rationale for deal trends: R&D, specialization and competition ........................... 85 4.1.3.2 2019 in Review ...................................................................................................... 91 5 Chapter 4 ........................................................................................................................... 97 5.1 Novartis-Alcon spinoff .............................................................................................. 97 5.1.1 Novartis AG ................................................................................................................... 97 5.1.1.1 History .................................................................................................................... 97 5.1.1.2 Group Structure and Shareholding ......................................................................... 97 5.1.1.3 Business .................................................................................................................. 98 5.1.1.4 Financial and ESG performance .......................................................................... 100 5.1.1.5 Long term portfolio strategy of the company....................................................... 104 5.1.2 Alcon: the business ...................................................................................................... 107 5.1.3 Alcon-Novartis: the acquisition in 2010 .................................................................... 108 5.1.4 2011-2019: the evolution of the deal .......................................................................... 109 5.1.5 The spin off .................................................................................................................. 111 5.1.6 The tax benefits ........................................................................................................... 113 5.1.7 Advantages................................................................................................................... 115 5.1.8 Disadvantages .............................................................................................................. 116 5.1.9 ESG aspects of the Spin off ........................................................................................ 117 5.1.10 Alcon financials after the spin off .............................................................................. 118 5.1.11 Market reaction to the spin off announcement ........................................................ 119 5.1.12 Shareholders vs bondholders ..................................................................................... 125 6 Conclusions ..................................................................................................................... 129 6.1 Is the spin off trend going to last in the pharma industry? ...................................... 129 7 References........................................................................................................................ 133 8 Summary.......................................................................................................................... 137 2 1 Introduction After the $55.3 billion1 Abbott-AbbVie spin-off in 2012, one of the biggest spin-offs of all the times, the spin-off pace in the pharmaceutical industry slowed down. In 2019, Novartis spun- off Alcon in a $31.4 billion2 deal value: the biggest stock deal in Switzerland history. After Novartis, according to recent news, more pharmaceutical companies have considered spinning- off their subsidiaries, in order to focus their operations on the core business. In particular, Merck has announced plans to spin-off its women’s health, biosimilar drugs and legacy products into a new publicly traded company, expecting the transaction to be completed in 20213, Sanofi is planning to spin off its drug ingredient subsidiary within 20224 and GlaxoSmithKline plans to spin-off the joint-venture with Pfizer within two years5. Why is the spin-off becoming so common in the pharmaceutical industry? Is this spin-off trend in the industry going to last? These are the two questions that the dissertation will try to address. To this end, the objective is to retrieve the most important aspects characterizing the pharmaceutical market and the big pharmaceutical corporations that make the spin-off an appealing deal to reshape company’s portfolios, now and in the foreseeable future. In Chapter 1 the concept of firm value and the key inputs influencing the firm value, are introduced. The chapter will provide the reader with the theoretical foundations and valuations methods that are necessary to understand why firms decide to spin-off and the Novartis-Alcon business case valuations. The chapter ends outlining the three possible strategies that a company can employ to grow and set the stage for Chapter 2, in which the spin-off features are analyzed in depth. A thorough presentation of the transaction is provided, starting with the widely accepted definition of spin-off, and the trends that characterized
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