Novartis's CEO Pressures France With Public Pitch on Aventis Deal
By GAUTAM NAIK and ANITA RAGHAVAN
Staff Reporters of THE WALL STREET JOURNAL
March 24, 2004; Page A3
LONDON -- Novartis AG Chief Executive Officer Daniel Vasella publicly made the case for the Swiss drug maker to acquire Aventis SA of France, but said it would proceed with such a plan only if Aventis was a willing partner and the French government gives them the green light.
Mr. Vasella's comments, made in a far-ranging interview, are remarkable because chief executives rarely discuss the merits of a potential acquisition before a formal offer is made or merger negotiations have even started. His remarks are an attempt to put pressure on the French government, which has strongly signaled its preference for an all-French merger of Aventis and France's No. 2 drug maker, Sanofi-Synthelabo SA. Earlier this year, Sanofi launched a €46 billion ($57 billion) hostile bid for Aventis.
A merger of Novartis and Aventis would create the world's second-largest pharmaceuticals company, by market share, after New York-based Pfizer Inc., with a powerful portfolio of diabetes, cardiovascular and cancer drugs. Mr. Vasella said his company recently had presented the business case for a Novartis-Aventis transaction. "Now we wait" to hear from Aventis, said Mr. Vasella. Mr. Vasella said a merger of the two companies is "an attractive idea. If you look at the therapeutic areas, we have complementary [drugs] in diabetes, oncology and cardiovascular. We'd also be stronger in all markets, including Europe, U.S. and Japan. As a business scenario, I believe it's viable."
Mr. Vasella's move is certain to complicate Sanofi's effort to gobble up Aventis. Sanofi, far smaller than Novartis, may now be forced to boost its offer price for its French rival. Or, if Aventis responds favorably to Novartis's overture, Sanofi may have to bow out entirely.
Until now, Novartis had said only that it was examining the possibility of such a deal. Novartis hasn't made a bid for Aventis and stated that it hasn't had any discussions about price. Yesterday, Novartis said that it would enter merger talks only if formally invited by the Aventis supervisory board and if the French government assumed a neutral position. By singling out the need for an invitation from Aventis's board, Mr. Vasella appears to be appealing to Aventis shareholders to put pressure on the French company to back Novartis.
At the heart of the Novartis proposal is a plan to take Novartis's and Aventis's older and less-innovative drugs, bundle them together, and spin off those businesses as a separate entity. "By this model you would create focus and reduce the impact of job reductions," Mr. Vasella said. The prospect of job cuts in France is seen as a big obstacle to a deal between Novartis and Aventis, or even one between Sanofi and Aventis.
Mr. Vasella so far has had one phone conversation with Igor Landau, CEO of Aventis, during which Mr. Landau invited Novartis to do a "feasibility study" for a merger of the two drug giants, said people familiar with the matter.
Aventis said it had received the Swiss drug maker's overture and was reviewing it. "We plan to continue discussing it [with Novartis] but no formal negotiations have started," a spokesman said.
Novartis has made no secret that its preferred acquisition target is crosstown rival Roche Holding AG, in which it owns a 33.3% stake. But Mr. Vasella's efforts to take over that company have been stymied because the family that controls Roche wants it to remain independent. His interest in a potential transaction with Aventis was sparked by Sanofi's hostile bid, he said.
A big hurdle to a potential Novartis-Aventis merger is the French government's hostility to the idea of a foreign company acquiring Aventis, one of the country's corporate jewels. The prime minister, Jean-Pierre Raffarin, recently warned that any deal had to serve France's national interest. He singled out Aventis's vaccines business, which, he argued, was vital to the country's defense against bioterrorism. Mr. Raffarin's statement was widely interpreted as a warning to Basel-based Novartis not to get involved in what Paris deems to be an all-French affair. Both Sanofi and Aventis are based in France, though Aventis also has large operations in Germany.
"The implementation risk of [a Novartis-Aventis deal] is significantly higher because of the negative attitude of the French government," Mr. Vasella said. "It negatively influences our considerations. We'd only start negotiations on a formal invitation by the Aventis board and if the French government took a neutral position." He said Novartis wouldn't move to the next phase of merger discussions unless those issues were addressed.
A French finance ministry official declined to comment on Novartis's statements. Under a March 2003 decree, the ministry has to approve any direct foreign investment that concerns defense, public security or is deemed "of a nature to create serious risks compromising public health." Even if the French government didn't block a transaction, it could make life difficult for Novartis through drug-pricing rules, labor laws or other statutes.
Some portfolio managers were troubled at the prospect of Novartis acquiring a French company, given Mr. Raffarin's comments. "This is a very strong statement by the French and a very direct influence in free markets," said Dieter Winet, senior portfolio manager at Swissca Portfolio Management Ltd., which owns roughly nine million shares of Novartis and about 500,000 Aventis shares.
Mr. Winet said he felt Mr. Raffarin's arguments relating to terrorism were "quite far-fetched," because "against terrorism there are no issues of nationality." He said that if "the management of Aventis has expressed its free will to be acquired by Novartis, this statement by Raffarin very much reduces Aventis's free will."
Novartis and Aventis have similar therapeutic interests. Novartis is keen to boost its presence in the fast-growing market of diabetes medicines -- and Aventis owns several big drugs in that area, including two potential blockbusters, Lantus and Exubera. Novartis also would be able to bolster its anticancer portfolio of Gleevec and Zometa by adding Aventis's Taxotere, a big-selling chemotherapy treatment.
There are other areas of overlap. The Swiss pharmaceutical giant has a growing over-the-counter drug operation, which could benefit by marketing Allegra, Aventis's popular hay-fever pill, when that medicine loses patent protection. Novartis also could boost its small vaccine operation with the addition of Aventis Pasteur, a major player in the area.
A Novartis-Aventis combination is also likely to yield greater cost savings than the €1.6 billion envisaged by Sanofi in a deal with Aventis. Analysts at Swiss private bank Lombard Odier Darier Hentsch estimate that a Novartis-Aventis deal could yield at least €2.5 billion in savings. Analysts at Kepler Equities put the figure at €3.2 billion.
"I think from a business standpoint, a combination between Novartis and Aventis makes sense," said Markus Manns, a portfolio manager at Union Investment in Frankfurt, which owns 11.4 million shares of Aventis, 6.5 million shares of Novartis and three million shares of Sanofi. "They wouldn't have to divest major products. And if you look geographically, it makes sense."
Novartis shares rose 1.9%, outpacing the benchmark SMI's 0.8% rise. Shares in Aventis and Sanofi were little changed in Paris
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