* Novartis' one-third stake in Roche built up under Vasella
* Vasella exit, retirement of Roche chairman could thaw
* Roche seen as most likely buyer for the stake
* Could make offer in second half of this year - analyst
By Caroline Copley
ZURICH, May 16 A changing of the guard at
Switzerland's two biggest drugmakers is fuelling talk that
Novartis may finally sell its multi-billion-dollar
stake in cross-town rival Roche, potentially unlocking
value for both sets of shareholders.
The departure of Daniel Vasella after 17 years as chairman
of Novartis and the forthcoming retirement of his adversary,
Roche chairman Franz Humer, may prompt both sides to negotiate a
sale that could boost earnings per share for each - and appease
shareholders during a period of slower growth.
"If Roche can buy this stake it's more positive for them
than it is for Novartis, in terms of leverage on earnings. It's
accretive for Novartis, but very accretive for Roche," said
Jefferies' analyst Jeff Holford.
Roche declined to comment on the issue. But the company
faces slowing growth as key medicines go off patent and sales of
its hepatitis C drug Pegasys decline. It could seize the chance
to offer shareholders a sweetener in the form of a buyback.
Vasella built up the holding between 2001 and 2003 with the
aim of merging the firms into one super Swiss pharma company.
But, meeting resistance, he kept the stake as an investment and
said selling it would be very short-term thinking.
The rise in Roche's valuation has put the group out of reach
of Novartis as a takeover target, but the holding has proved a
rewarding investment: the voting bearer shares are currently
worth 12.8 billion Swiss francs ($13.6 billion) and provided
Novartis estimated income of 538 million francs in 2012.
The holding, 6.2 percent of Roche's total share capital and
a one-third voting stake, also gives exposure to any upside
potential in Roche's pipeline.
Novartis' chief executive Joe Jimenez has stressed the
holding has a strategic value that far exceeds its market price.
Still, he has indicated a willingness to dispose of the stake as
long as shareholders can be fairly compensated for its value.
Birgit Kulhoff, a money manager at private bank Rahn &
Bodmer who owns Novartis shares, thinks the drugmaker would be
best placed leaving the money where it is for now.
"I'm quite happy with the stake for the time being," she
said. "As long as current market conditions exist, anything that
pays very high dividends and has sustainable cash flow is a good
But some analysts said the stake was currently undervalued
by the market. Michael Nawrath at ZKB said Novartis could
command a premium of between 30 and 40 percent, while Jefferies'
Holford put it at 30 to 50 percent.
A sale would give Novartis a hefty cash pile to buy back its
own shares and boost core earnings per share as it goes through
a period of slowing growth.
Buying back shares is an increasingly common tactic among
large drugmakers, who are experiencing limited growth in Western
markets as patents on medicines expire. Earlier this month major
rival Merck authorised additional purchases of $15
billion of its common stock, following a lead from rivals
including market leader Pfizer.
Although Roche has no history of buybacks, it is edging
closer to its target for a net debt to assets ratio of 0-15
percent, after paying down debt from its 2009 acquisition of
Californian biotech Genentech.
The drugmaker is expected to be back within its target in
the second half of this year, giving it cash for a buyback.
Roche has two sets of shares: voting bearer shares, the type
owned by Novartis, and non-voting equity securities known as
"Genusscheine" and must include both in any buyback.
Assuming Novartis was willing to sell up piecemeal,
Jefferies' Holford said Roche could perform an extended share
repurchase programme across both the equity classes over a
period of perhaps six years at a premium of between 30 and 50
percent - boosting core earnings per share by 30 percent.
"In that way Novartis could drip feed the stake away, and
Roche would be able to drip their buyback into the market."
ZKB's Nawrath, however, suggested Novartis offer the stake
to Roche in one go, allowing it buy the 53.3 million voting
shares and then cancel them in order to increase its profit per
share ratio. Assuming a premium of 40 percent, Roche would have
to cough up around 18 billion francs for the stake.
Such a move could boost Roche's 2013 core earnings per share
growth by an extra 9 percentage points if it cancels all the
shares, Nawrath estimated.