Novartis AG (NYSE:NVS) – market cap as of 04/11/2017: $219bn

Advanced Accelerator Applications SA (NASDAQ:AAAP) – market cap as of 04/11/2017: $3.56bn


On October 30, 2017, Novartis announced its intention to make a tender offer for 100% of the share capital of Advanced Accelerator Applications, for a total consideration of $3.9bn. AAA’s key product, Lutathera was approved in Europe in September 2017 for the treatment of certain gastroenteropancreatic neuroendocrine tumors. The acquisition will allow Novartis to include Lutathera, a first-in-class RadioLigand Therapy (RLT) product for neuroendocrine tumors, in its projects and pursue a new treatment approach. The deal would improve Novartis oncology department with the introduction of near-term product launches and a new technology platform that will help the development of an innovative cancer treatment program.

AAA’s founder expressed optimism over the deal, saying it will support Lutathera’s launch and contribute to the development of other therapies. Novartis is expected to make a cash offer of $41 per ordinary share and $82 per American Depositary share.

About Novartis

The predecessor companies of Novartis date back to more than 250 years ago, with beginnings in the production of synthetic fabric dye. The eventual Novartis company, created in 1996 by the merger of Ciba-Geigy and Sandoz, went on to produce chemicals and pharmaceuticals. Nowadays, Novartis is headquartered in Basel, Switzerland and is known for the development of new healthcare products that address the unmet needs of patients. The company’s main operations are directed towards 3 divisions: Innovative Medicines, Sandoz (responsible for generic pharmaceuticals and biosimilars) and Alcon (working on surgical and vision care products). Novartis enjoys a leading position in the aforementioned area.

In 2016 the company’s net sales were $48.5bn with products sold in over 155 countries worldwide. Operating income amounted to $8.3bn, a decrease of c. 8% compared to the previous year. The decrease was attributed to the patent expiration of its pioneering leukemia drug Gleevec, and investments related to new product launches, including Entresto and Cosentyx. In 2016, $9bn were spend on R&D. Moreover, recently the company has been adversely effected by changes in the exchange rates. The rising value of the dollar had a 10% negative impact on sales in 2015. The first half of 2017 marked net sales of $23.8bn, while net income from operations reached $3.6bn.

About Advanced Accelerator Applications

Advanced Accelerator Applications (AAA) is an innovative radiopharmaceutical company specialized in developing, producing and commercializing molecular nuclear medicine theragnostics. Its operations are directed towards the three main fields of nuclear medicine: oncology, neurology, and cardiology.

The company was created in 2002 by founder and current CEO Stefano Buono, initially as a spin-off of the CERN. Since then, the company has developed a global manufacturing network and built 20 strategic production facilities in 8 countries. In 2015 AAA went public on NASDAQ in a $125m IPO and soon after engaged in the acquisition of IDB Group in the Netherlands, ensuring supply of lutetium 177, an ingredient essential in the making of Lutathera.

Total sales for 2016 amounted to $115.4m which represents a 23% YoY increase compared to 2015 when sales were approximately €88.6m. Overall the company has had a sales CAGR equal to 28% in the period 2012-2016. In the first quarter of 2017 the company reported sales of $34.9mn, a 21% increase compared to the same quarter of 2016, while sales growth for the second quarter of 2017 was reported at 32%. Despite the constant increase in revenues, the company still reported operating losses, amounting to $7.0m in the first quarter. Such loss can be explained by the high R&D and operating costs.

Industry Overview

In recent years the oncology drugs industry has increased in both size and revenues. There is an increasing demand worldwide for oncology medication, so pharmaceutical companies are seeing significant growth opportunities not only in the traditional markets, but also outside the United States and Europe. Rising healthcare spending in Asian countries like China and Japan make the treatment more accessible.

The most recent breakthroughs in this sector are drugs geared toward very specific kinds of cancer. This enables pharma companies to charge premium prices and at the same time face little competition in their respective niche segments of the market. This factor is an important profitability driver that leads to more focus on R&D and, in order to exploit economies of scale, pressure the leader companies in the market to make acquisitions of smaller promising firm such as AAA.

The oncology drug market is estimated to be worth almost $94bn. Most of the top pharmaceutical players are either currently manufacturing oncology drugs or have oncology medications in their R&D pipelines. The pharmaceutical industry’s 20 top-selling cancer drugs generate annual sales of over $50bn worldwide, thereby taking more than half of the market share. Roche’s Rituxan, Avastin, and Herceptin lead the pack, with about $23bn in sales (FY 2016) for these three drugs alone. Roche’s top oncology line represented about 40% of the top 20 in combined sales. Novartis is well positioned but with stagnant growth. Its main drugs in the top-20 are: Gleevec ($3.3bn sales as of FY 2016), Afinitor ($1.7bn), Sandostatin ($1.6bn) and Tasigna ($1.5bn). While a strong player, Novartis’s Gleevec sales have gone down 28% in the last year, weakening the company’s stance significantly.

The radio pharma market is currently worth $4.67bn, but it is expected to reach $7.27bn by 2021, growing at a CAGR of 9.3%. Some of the major players in the market are Cardinal Health Inc. (U.S.), Mallinckrodt plc (Ireland), GE Healthcare (U.K.), Lantheus Medical Imaging, Inc. (U.S.), Bayer AG (Germany), Bracco Imaging S.p.A (Italy), Eczacibasi-Monrol Nuclear Products (Turkey), Nordion, Inc. (Canada), Advanced Accelerator Applications S.A. (France), and IBA Molecular Imaging (Belgium).

Deal Structure

The Memorandum of Understanding signed by the two companies provides for an all-cash tender offer from Novartis to buy all the outstanding shares of Advanced Accelerator Applications, including shares represented by American Depositary Shares, for $41 for and $82 per share respectively (implying EV/Revenues of 25.2x and Price-to-Book of 10.9x). The transaction is planned to be fully funded through external short and long-term secured debt.

Under the terms of the agreement, which has been approved by the AAA Board of Directors, Novartis will commence a tender offer upon completion of the works council consultation and AAA’s BoD recommending the tender offer to AAA shareholders.

The deal is subject to customary regulatory approvals and other customary closing conditions.

Deal Rationale

The deal further strengthens the Swiss drug maker’s position in the oncology business, already boosted by the acquisition of GlaxoSmithKline’s marketed cancer drugs back in 2015 and by the approval of a ground-breaking antigen receptor therapy (known as Car-T, for children and young adults with a type of leukemia) back in August, as generic competition eats into the sales of blockbuster blood-cancer drug Gleevec. The move fits with the strategy set by Novartis CEO Joe Jimenez of pursuing deals worth up to $5 billion instead of looking for larger targets.

A deal would hand Novartis the recently-approved Lutathera, a first-in-class RLT product for neuroendocrine tumors (NETs), which belongs to a small but growing class of therapies known as radiopharmaceuticals. Radiopharmaceuticals are unique medicinal formulations containing radioisotopes which are used clinically for both diagnosis and therapy. Lutathera targets gastroenteropancreatic neuroendocrine tumors, a rare form of cancer that occurs in the gut and pancreas (the type of cancer that killed Apple founder Steve Jobs). It was shown to significantly increase the chances of survival in patients with neuroendocrine tumors that couldn’t be surgically removed, when compared to the standard hormone therapy. The European Medicines Agency gave Lutathera the nod in September, while the US Food and Drug Administration is expected to make a decision on the treatment next January.

Lutathera is expected to generate $500m of sales at its peak, but it would still help Novartis’s oncology business, which – as previously mentioned – is under pressure after Gleevec, the blood cancer drug that generated nearly $5bn a year, lost its patent protection in 2016.

Bruno Strigini, head of Novartis Oncology, said the acquisition would allow the company to expand the global reach of Lutathera. Mr. Strigini also said the acquisition would allow Novartis to build on the technology platform of AAA, which is in the early stages of developing radio-pharmaceuticals for other types of cancer, including prostate and breast.

Novartis isn’t the only large drug maker to place a bet on radio-pharmaceuticals. Germany’s Bayer AG already sells a product called Xofigo that irradiates bone metastases in prostate cancer patients who don’t respond to hormone therapy.

Market Reaction

The acquisition seems to have had little effect on Novartis stock. It stopped the declining trend of the week before, but the mere 0.07% rise was not enough to bring the title back to the $85.9 of October 23. This is probably due to the fact that Lutathera is not expected to become a block buster. Indeed, the $3.9bn price might appear as too expensive, given AAA had sales of just $78m in the first half of 2017. Nevertheless, as the acquisition strengthens Novartis’s ongoing strategy to gain market share in oncological pharma industry, it might lead to a long-run growth trend.


PJT Partners and Shearman & Sterling advised Novartis, while Jefferies and Davis Polk & Wardwell advised AAA.


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