Novartis investors turn spotlight on M&A after trial setbacks

By Bhanvi Satija, Oliver Hirt and Marleen Kaesebier

LONDON/ZURICH, Sept 11 (Reuters) - Novartis investors are set to step up scrutiny of the Swiss group's dealmaking strategy after setbacks to drugs it acquired through mergers and acquisitions hit its shares, raising concerns about its pipeline.

Eight shareholders told Reuters that muscle-wasting disorder drug del-desiran's failure in a late-stage study, the second major trial setback for Novartis in days, raised questions over last year's $12 billion Avidity purchase and other acquisitions.

Novartis shares slumped 11% in one day this week, wiping nearly $30 billion off its market value and all the gains made since the start of the year after the del-desiran results.

CEO Vas Narasimhan, who has a strong track record on shareholder returns, now faces investor concern over how he plans to steer Novartis through looming patent expiries.

"It's going to take a while for confidence to return," said Gillian Hollenstein, lead manager at Point Capital Navigator Fund, which has shares in Novartis and rival Roche.

"They would have been better off doing some more smaller acquisitions, bolt-on ones rather than trying to hit it out of the park," Hollenstein added.

Some said Novartis remained on a firm footing, with promising drugs such as remibrutinib in the pipeline.

Narasimhan, who has committed more than $30 billion in the last three years on acquisitions and partnerships, told investors at the time that Avidity was an "appropriate risk".

There are currently no plans to change the company's approach towards M&A or business development, a source familiar with the matter told Reuters.

SCRUTINY OF M&A PROCESS

Artisan Partners, a major Novartis shareholder, called for a shake-up of the board to address M&A oversight, while supporting Narasimhan, who became CEO in 2018 and has now been at the helm longer than his predecessor Joe Jimenez.

The 50-year-old American has navigated post-COVID-19 pandemic shifts and mounting U.S. pressure to cut prices, first under the Biden administration and then under President Donald Trump, who has threatened Swiss businesses with tariffs.

Michael Hannig, portfolio manager at Novartis shareholder DJE Kapital, said that to rebuild confidence the drugmaker should pursue deals in the $5 billion to $10 billion range for late-stage assets or drugs nearing approval.

That could help address looming patent expiries, though due diligence was needed to ensure a strategic fit and the quality of clinical evidence, he said.

"Larger transactions will likely be assessed carefully by investors considering the mixed market reception to several prior deals," Hannig said.

Another of Novartis' top-15 shareholders, speaking on condition of anonymity, said investors would be more critical of future acquisitions.

TOO EARLY TO CALL FOR HEADS TO ROLL

Novartis points to strong returns under Narasimhan.

Its shares are up more than 60% and have delivered total returns of some 120% including reinvested dividends since he took over, compared with about 108% for Swiss rival Roche and some 200% for British-based drugmaker AstraZeneca.

Daniel Bolanowski, portfolio manager at investor Arctic Asset Management, said the scale of the share sell-off suggested investors were questioning more than the value of del-desiran, with a "deeper trust issue" about business development.

But Novartis still has two other Avidity drugs, del-zota and del-brax, in development that could generate revenue, Bolanowski said, adding: "It's a little bit premature to call for heads at this point".

Narasimhan's M&A strategy would now be viewed more critically, investors said. Generics unit Sandoz, spun off in 2023, has also far outperformed Novartis, some analysts said.

However, while the del-desiran flop was painful, the HARBOR study assessing it was designed before Novartis bought Avidity, said Guy Bettschart-Ghassabi, healthcare analyst at Novartis investor Bellevue Asset Management. He noted myotonic dystrophy, the disease it targeted, is challenging.

He reaffirmed his confidence in the company's management.

Markus Manns, portfolio manager at Novartis shareholder Union Investment, said the two failures were unfortunate but were within normal drug development success probabilities.

The next major test for Novartis is detailed data for remibrutinib in relapsing multiple sclerosis, due at a medical meeting in October. While the oral drug met the main goals of two late-stage studies, investors are waiting for fuller evidence on efficacy, disability progression and safety.

"They have to work harder to fulfill their post-2030 goals. But it's in the same camp as most other pharma companies," Manns said, adding that while the M&A strategy needed to be better, Narasimhan had a strong vision and had boosted Novartis value.

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(Reporting by Bhanvi Satija, Oliver Hirt and Marleen Kaesebier; Editing by Adam Jourdan, Dave Graham and Alexander Smith)