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Posted on 5th October 2019

Sandoz standalone

It is all change at Sandoz this year, as Novartis has executed a 180-degree strategy shift. No longer is it pursuing its previous policy of ever closer union with the innovative pharma division, but instead it now favours far greater autonomy for its generic unit. Along the way, it has lost the former divisional head, Richard Francis, and picked up a replacement in the form of Richard Saynor, previously head of GSK’s Established Brands but with a strong generic CV that includes stints at Generics UK, Hexal and Sandoz itself.

Putting someone from the generics industry in charge of its generics division is certainly revolutionary at Novartis and sends a clear signal that Sandoz is heading in a new direction, but the goals that Novartis has set for Sandoz are not particularly novel. These are: to reduce costs and hence improve profitability; to shift the portfolio further towards differentiated products (particularly biosimilars); to simplify the operating model; and to become more flexible and responsive to market conditions. In other words, to behave like any other large generics company, so maybe there is some novelty there after all…..

On the cost-cutting front, pushing down COGS was given a specific mention. This has been a recent area of focus for many companies, particularly those that, like Sandoz, have been built up through multiple acquisitions that have left them with numerous supply agreements for the same products, not to mention excess internal capacity. At present, Sandoz’s own manufacturing remains in a different business unit to its market-facing activities, making it harder for Sandoz’s new MD to exert too much influence on it, but we assume that the two parts of the business will be brought back together at some point. Sandoz also intends to reduce its current workforce of c13,000 (this excludes manufacturing, which would take the total to more like 30,000) by about 900, partly by shutting its development centre in Holzkirchen. We suspect that these 900 employees will not be the last to go, as simplifying the structure and making Sandoz more nimble is likely to involve removing a number of management layers, not to mention many of the functions that have accreted above country level.

Five years ago, we reported on the issues facing Richard Francis as he took up the helm at Sandoz (Sandoz at the Novartis ‘Meet the management’ event, 24th June 2014), noting that biologics then accounted for less than 5% of the turnover of the division and that the remainder was clearly running hard to stand still. We also suggested that the buoyancy of the US generics market was unlikely to last and that all the ingredients were in place for a price war, a prediction that came true so spectacularly that Sandoz last year agreed to sell its crumbling US generics business to the Indian company Aurobindo. Whether this was actually a sensible thing to do is a moot point. Profitability may have plunged in the US but it remains the best place in the world to make money if you have a generic product that nobody else has, be that due to complexity, successful patent-busting or simply getting to market before anyone else. By dumping most of its US assets Sandoz has made its growth look better in the short term but handicapped its ability to grow in the longer term and our betting is that it ends up re-entering the US retail generics market at some point.

In the meantime, Sandoz retains its hospital and biosimilar portfolio in the US, where it hopes to replicate the success that it has had in Europe. To date, no biosimilars have done particularly well in the US as innovators have used a variety of tactics to shut them out of the market. This situation is unlikely to last for ever but the risk is that once the market finally frees up, it will go the same way as Europe, which is to say that there will be a race to the bottom on price. In some ways, this is already happening, but with the innovators taking the lead by offering big discounts to the PBMs in order to make sure that their products remain preferred. Generic companies are then having to lower their own prices even further, to have any hope of capturing volume. This phenomenon was well illustrated recently in the respiratory space, when Mylan, which has spent years trying to get a generic version of GSK’s blockbuster asthma drug Advair approved, eventually launched its product but at a 70% discount to the brand despite there being no other generics yet authorised.

In the era of Jeff George (Richard Francis’s rather short-lived predecessor), Sandoz’s stated aim was to cover the ground in value-added products, with a wish list encompassing respiratory, dermatological, injectable and ophthalmology drugs as well as biosimilars. It made major investments into respiratory developments and big acquisitions in other areas (Fougera for dermatology, Ebewe for injectables, Falcon for ophthalmology). However, under Mr Francis all these other areas were de-prioritised. Ebewe proved a GMP nightmare, Fougera turned out to be as vulnerable to price pressure as any other US generic business and was included in the sale to Aurobindo, and the launch of the first European Seretide generic at the start of 2014 was a flop (Sandoz’s AirFluSal achieved global sales of €33m in 2018 according to IQVIA, after tens of millions of development costs). Sandoz still has a Seretide (Advair) generic in registration in the US, where it has a far better chance of generating meaningful sales (DPI products are generally not substitutable in Europe, which is one reason why AirFluSal has done so badly), but as noted previously, Mylan is already on the market with a deeply discounted price, so even here returns are likely to be far lower than Sandoz would originally have hoped.

In H1 this year, Sandoz generated 15% of its revenues from biologics, which is clearly an improvement on 2014 but nevertheless is hardly enough to say that it is a company dominated by value-added products. The company would claim that around a third of its total sales come from what it calls ‘differentiated therapeutics’ but since this mostly consists of generics sold under brand names in those countries – mainly the emerging markets – where pharmacy substitution is not widespread, we are sceptical of how differentiated most of these products actually are. What this says to us is that anyone running the Sandoz generics business should probably be focusing a bit more of their attention on the 85% of the revenue that doesn’t come from biosimilars.

So what advice would we give Mr Saynor as he settles in to his new job? Firstly, to look hard at the biosimilar development pipeline that he has inherited and, if necessary, make some tough decisions about which products are really viable. Sandoz has historically spent hundred of millions on R&D in this area and while it has been pretty successful with some of its earlier projects, the marketplace has become so crowded that returns are diminishing fast. More recently, Sandoz seems to have shifted to an outsourced model, signing in-licensing deals rather than trying to do everything itself. This seems to make sense, but even here he needs to be sure that he is not going to end up with the fifth product to market.

The second area of focus should be the parts of Sandoz that have been neglected under the previous regime, particularly its operations outside Europe and the US. Richard was once in charge of this part of the Hexal (and then Sandoz) business, so it would be a chance to re-energise his former fiefdom. The reality is that in many parts of the world, biosimilars are not ever going to be the major driver for Sandoz because the innovator products never gained any traction. In these countries, a strong pipeline of branded generics is what is required, ideally supplemented with some old innovator brands

The third and biggest challenge is to turn Sandoz back into a real generics company. This means doing away with confusing internal structures, working harder to build a pipeline of everyday (and low cost) generics as well as more differentiated ones and empowering local managers. Having country managers who stick around rather than seeing the job as a short stint on their way up the management ladder might also help. Not only should this exercise make Sandoz into a nimbler and more effective generics company, it should also cut a lot of cost. We note that Teva now has 42,500 employees, which is vast, but its turnover is $19bn, almost double that of Sandoz ($10bn), whereas its total headcount is only about 40% higher. Not that we would suggest that Teva’s own headcount reduction programme has been an unalloyed success, but there is food for thought here surely.

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