Analysts disagree: This is what you can really expect from the Sandoz IPO

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Sandoz returns to independence on Wednesday. Parent company Novartis is spinning off its generics subsidiary to complete its transformation into a focused pharmaceutical company. The generic subsidiary no longer has a place in such a group.

Sandoz looks back to a long history. Novartis, a pharmaceutical company founded in 1886, was formed through a merger with Ciba-Geigy in 1996. Originally part of just one division, it became an independent reporting unit in 2005.

When Sandoz shares are listed for the first time on the Swiss stock exchange on Wednesday, Basel shareholders will previously receive one Sandoz share for every five shares. The spin-off will be completed through an in-kind dividend distribution by Novartis.

Prices are expected to fall

What will be particularly interesting for investors is the price at which new securities come to market. If you look at the forecasts of current analysts, you will see that the shares will probably start somewhere between 26 and 33 francs and fall immediately.

Unlike an IPO, there is no upfront subscription period for interested investors. Instead, all Novartis shareholders will be allocated Sandoz shares, whether they want them or not. This is exactly one of the reasons for possible price losses at the beginning.

Unlike Novartis’ Alcon eye division, which it completed years ago, its generics subsidiary SMI will not be included in the blue-chip index. All funds that only reflect SMI will have to immediately release Sandoz shares, regardless of price, because they are not allowed to hold Sandoz in their portfolios.

However, industry and stock market experts also expect prices to fall. “We have the impression that many Novartis investors have little interest in standalone Sandoz stock,” Jefferies’ preliminary report said. Experts confirm this with the overall low valuation of other generic drug stocks.

Very disappointing in terms of growth and margins

In fact, Sandoz has recently had a very disappointing image in terms of both growth and margins. Sales increased slightly between 2020 and 2022. Profitability, measured in terms of margin, fell, with spin-off costs contributing to this. Critical voices complain that Novartis is keeping its fillet bits for itself as it alienates its little-loved subsidiary with a split.

“The problem for Sandoz is that the market, like the generics market, is perceived as unattractive in terms of margins and growth prospects,” Octavian analyst Michael Nawrath said in an interview with news agency AWP. Accordingly, the management must first try to change this perception.

Other experts, such as Vontobel’s Stefan Schneider, agree: “Undoubtedly, the generics sector is characterized by intense competition, price pressure and low margins.” Critical market participants also ask why investors should invest in a company that the parent company no longer finds attractive and is therefore leaving.

Promising biosimilars

The answer to the question is “Biosimilars”. “Sandoz announced that future growth will be focused on biosimilars,” Schneider said in an interview with AWP. Biosimilars are more complex and expensive to produce; According to Schneider, this makes the competitive environment more favorable as barriers to entry for other competitors increase.

According to the expert, the US market is likely to play an important role; Sandoz is currently the market leader in Europe with its biosimilars. The US biosimilar market has not developed as initially hoped in recent years.

“The characteristics of the U.S. healthcare system have prevented this new class from reaching its full potential.” But today there are signs “that this is changing, and when it does, Sandoz, a leading provider of biosimilars, is ready to deliver.” Or as Octavian analyst Nawrath puts it: “The market for high-margin biosimilars is about to explode.” (pbe/SDA)

Source :Blick