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Laboratory glassware sit in a tray in a research lab at the Novartis Institutes for BioMedical Research (NIBR) campus in Shanghai, China.

(bloomberg)

(Bloomberg) -- Less than halfway through his first year as chief executive officer of Novartis AG, Vas Narasimhan plans a third major transaction to narrow its focus on developing cutting-edge medicines.

The Swiss drugmaker said Friday that it will spin off its Alcon eye-care unit while using proceeds from the $13 billion sale of its stake in a consumer-health joint venture with GlaxoSmithKline Plc, announced in March, to repurchase as much as $5 billion in shares.

Along with the April purchase of rare-disease drugmaker AveXis Inc. for $8.7 billion, the moves boost Narasimhan’s emphasis on finding and bringing new drugs to market. The Harvard-trained doctor is shedding Alcon, a sluggish performer, while revamping Novartis’s culture to try to make it a leader in innovation and the use of technology.

Novartis is looking outside the company to broaden its gene-therapy program, concentrating on cancer, neuroscience and ophthalmology after the AveXis acquisition, the CEO said in an interview. The company also wants to delve more deeply into strategies for targeting disease-related proteins that haven’t been well understood, potentially through collaboration, he said.

“We want to be able to focus our capital allocation to our core, and we believe our core is going to be novel platforms to develop innovative medicines and to invest in data and digital technologies,” Narasimhan said.

The shares rose as much as 3.6 percent in Zurich.

The latest divestiture will reverse one of the major strategic steps undertaken by Daniel Vasella, who presided over the creation of Novartis in 1996 and served as CEO until 2010. At the time of the Alcon purchase, pharmaceutical companies were diversifying in an effort to reduce their reliance on branded drugs amid competition from generic copies and delays for new products.

Novartis bought the company in stages for more than $50 billion. Earnings at the unit plummeted after the acquisition, and Vasella’s successor, Joe Jimenez, said last year the company was considering all options.

Jimenez said then that Alcon could be attractive to investors, given a scarcity of health-care assets with a valuation ranging from $25 billion to $35 billion. Stefan Schneider, an analyst at Bank Vontobel AG, valued the spinoff at $15 billion to $23 billion, according to a note to clients Friday.

Sales Rebounding

Novartis has been trying to revive the struggling eye-care unit, and Jimenez told investors in 2015 that he hoped to come up with a plan to get Alcon “back to a decent growth rate.” While signs of a turnaround emerged last year, the company had acknowledged that it’s taken longer than expected.

Jimenez said last year that a spinoff would add value while yielding two focused companies. After evaluating possibilities including a sale and an initial public offering, the company decided this was the best course to benefit shareholders, Narasimhan said on a call with reporters. He said it’s premature to comment on the new entity’s value.

After the separation, Alcon will be incorporated in Switzerland, with Fort Worth, Texas, continuing to be a key location, Novartis said. When it was acquired, the business consisted of surgical equipment, eye drugs and vision-care products including contact lenses and eye drops. The drugs now are part of Novartis’s pharmaceuticals unit and will remain with the parent company. As currently constituted -- with equipment and eye-care products -- Alcon had sales of $6 billion last year.

Swiss Listing

Alcon CEO Mike Ball will be company chairman after the spinoff, which is subject to approval by Novartis’s board and shareholders at the 2019 annual meeting. David Endicott, Alcon’s chief operating officer, will become the new company’s CEO. Listing will be on the SIX Swiss Exchange and the New York Stock Exchange, Novartis said.

Novartis is moving ahead with the spinoff at a time when Alcon’s business is rebounding. Sales in the first quarter were better than analysts had forecast, according to Morgan Stanley.

One key area for Novartis to prospect for drugs is in a field called targeted protein degradation, Narasimhan said. The strategy involves inducing cells to destroy harmful proteins using their own natural disposal mechanism.

“Our hope is this will open up a whole range of new targets” that existing drugs haven’t been able to hit, he said. “There’s a vast amount of proteins that we have an opportunity to better target.”

Novartis has ample strength in its balance sheet to take on further acquisitions in the range of its recent deals, he said. While valuations remain challenging in terms of potential purchases, Novartis is continuing to hunt for bolt-on acquisitions to bolster key businesses, he said.

(Adds CEO’s comments in fourth paragraph.)

To contact the reporters on this story: James Paton in London at jpaton4@bloomberg.net;Phil Serafino in Paris at pserafino@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net, John Lauerman, Eric Pfanner

©2018 Bloomberg L.P.

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