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Novartis plans to spin off its Alcon eye care business to shareholders and buy back up to $5 billion in stock as Chief Executive Vas Narasimhan refocuses the Swiss group on prescription drugs.
Alcon, a legacy from former Novartis boss Daniel Vasella's empire building, has been problematic since it was bought for $52 billion in 2011. Narasimhan declined to give a valuation for the business on Friday, although his predecessor Joe Jimenez once estimated it at only $25 billion to $35 billion.
Bank Vontobel analysts, however, said it could be worth between $15 billion and $23 billion, adding that its ongoing recovery would influence the final price.
Novartis had to make massive investments in Alcon to reverse falling sales and losses, although revenue is again growing and it posted a $90 million first-quarter operating profit.
Once it is spun off from Novartis and distributed among investors Alcon, which has $7 billion in annual sales, will have its main listing and headquarters in Switzerland, where it would be a contender for the benchmark Swiss Market Index.
Novartis plans to seek shareholder approval for the spin-off, which is due to be completed in the first half of 2019, in February. The buyback is due to wrap up by the end of next year.
Shares in Novartis were up 3.3 percent by 0935 GMT as investors welcomed the Alcon separation and share buyback.
"Details of the transaction and its proposed valuation remain opaque but for Novartis shareholders, this should at last feel like a win," said Andy Smith, analyst at Edison Investment Research. "Actually, two wins" with the share buyback, he added.
Narasimhan, a Harvard-trained U.S. doctor, is pressing ahead with Jimenez's reversal of a decade of expansion under Vasella, the former CEO and chairman. (https://reut.rs/2KvMKPK)
Since Vasella's departure in 2013, Novartis has exited vaccines, dumped its animal health business and this year unloaded its consumer health joint venture with GlaxoSmithKline for around $13 billion.
"A company like ours needs to focus our capital in our area of strength which I believe is innovating world class medicines and I'd like to build our strength in digital and data technologies," Narasimhan told reporters.
Since last year, Novartis has focused on building specialized treatments, buying U.S.-based Avexis for $8.7 billion and French-based Advanced Accelerator Applications (AAA) for $3.9 billion, giving it a platform in gene therapy and radio-pharmaceuticals, respectively.
Novartis has also been investing in digital technology, including a mobile app, which it will retain, to collect eye disease data from trials of its prescription ophthalmic medicines, which include blockbuster hopeful RTH258 against macular degeneration.
Narasimhan said Novartis will continue to seek bolt-on acquisitions that boost technology or bring novel medicines that have the potential to transform treatment.
"We have a strong balance sheet, we have strong free cash flow, so we are able to still execute our M&A strategy...like we've done with AAA and Avexis," he said.
Alcon makes surgical equipment to treat cataracts and contact lenses, businesses that no longer fit with Novartis.
However, the Swiss firm will retain its prescription eye drugs portfolio, which it moved from Alcon into its main pharma unit and now has annual revenue of about $4.6 billion.
Remaining goodwill from Alcon, roughly $8.9 billion in the company's first-quarter 2018 report, would be split evenly between Novartis and the new listed company, Narasimhan said.
Alcon still faces a U.S. Department of Justice and U.S. Securities and Exchange Commission investigation into its business practices in Russia and Asia, both before and after Novartis bought Alcon from Nestle.
Bank of America Merrill Lynch and UBS are handling the Alcon spin-off, which will see Alcon head Mike Ball become its chairman and David Endicott its CEO. Narasimhan opted to shed the business to shareholders after a strategy review.
The buyback will be partially financed out of proceeds from the sale of its joint venture stake to GSK, Narasimhan said.
The Alcon spin-off is a welcome diversion from a political scandal in the United States triggered by Novartis paying $1.2 million in fees to President Donald Trump's personal lawyer.
Narasimhan has called the payments a mistake, and the furor cost Novartis's top lawyer his job.