Novartis’s risky punt

The Swiss drug giant is making a very expensive bet on AveXis, an American gene-therapy company. Will it be worth the risk? Alice Gråhns reports.


CEO Vasant Narasimhan deserves the benefit of the doubt

"Gene therapy is no longer a pipe dream," says Lex in the Financial Times. Want proof? Swiss drug giant Novartis has just splashed out $8.7bn of hard cash on US gene-therapy specialist AveXis. The deal is a bet that the company will deliver on its promise to treat a muscle-wasting disease known as spinal muscular atrophy by repairing a defective gene.

With 23,500 potential patients, the one-off treatment which uses a virus to insert DNA into cells could produce sales of at least $2bn a year. Still, this exciting prospect comes with a hefty price tag an 82% premium to the target's average share price over the past three months. The share price was already at "giddy heights" before the latest news, having risen 480% since AveXis went public in February 2016.

AveXis "could not be more different from the consumer-healthcare joint venture that Novartis exited last month" by selling out to partner GlaxoSmithKline in a $13bn deal, notes Neil Unmack on Breakingviews. But while "it's a bigger mouthful than expected", the purchase is consistent with Novartis CEO Vasant Narasimhan's plan to invest in innovative drugs with a clear medical need.

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A promising pill

Investors should keep in mind, however, that some analysts reckon the drug's prospects are overstated, says Lex. It has only been tested on 15 patients, for instance, and it faces competition from an existing treatment as well as from several other medicines that are currently being developed.

Nevertheless, Narasimhan, who took the helm only two months ago, "deserves the benefit of the doubt", says Chris Hughes on Bloomberg Gadfly. AveXis's lead therapy uses a different approach to an existing treatment sold by US neurology specialist Biogen. Assuming the drug is approved, the group could start earning revenue in 2019. Novartis also gains the underlying technology, which could have other applications, including oncology. AveXis also brings some manufacturing capabilities in gene therapy. Sales could start boosting Novartis's bottom line in 2020.

The deal underlines a reality for the whole pharmaceuticals industry, says Charley Grant in The Wall Street Journal: "A promising pipeline is the most valuable asset a drug company can offer its shareholders." Failing to develop a solid line-up of experimental drugs leads to weak stock performance, as investors anticipate eventual generic competition to drugs on the market. Adding AveXis to its stable "certainly helps Novartis on that front".

However, prices in recent biotech deals have been driven up by interlopers witness Sanofi's trumping of Novo Nordisk for Ablynx. For now, says Hughes, "Novartis investors will have to hope the premium is evidence of an auction just completed and not the starting point for one about to begin".

The big bling upswing

"Just how many Louis Vuitton monogrammed handbags does the world need?" asks Andrea Felsted in Bloomberg Gadfly. "A lot, it seems." Strong demand at the label helped parent LVMH deliver unexpectedly strong sales growth in its fashion and leather-goods division in the first quarter. It also helped fuel a 13% jump in group-wide sales to €10.85bn. Bulgari watches, Givenchy perfumes and Hennessy cognac also did well.

The performance, "all the more impressive given that it compares with a very strong period a year earlier, cements LVMH's position as the sector's wardrobe workhorse" and sent shares to an all-time high. LVMH is showing that "the luxury party that began in the second half of 2016 continues unabated. But there are reasons for caution. "One blot was the strength of the euro," notes Lex in the Financial Times. Foreign-exchange fluctuations knocked 10% off LVMH's sales figures. The depreciation of the Chinese renminbi against the single currency, moreover, bodes ill for margins in China.

On the plus side, Chinese customers have returned after a crackdown on corruption. But that only focused on a small elite in any case, and has been more than offset by "the rampant consumerism of China's emerging middle class". More broadly, the luxury sector is in a structural upswing. The rich "are always with us". And in China and other emerging markets, their numbers are growing.

City talk

Mothercare has ousted boss Mark Newton-Jones and replaced him with David Wood, a former director at Tesco. Newton-Jones "can hardly be surprised" his four-year tenure is over, says Nils Pratley in The Guardian. The group is in danger of breaching its banking covenants. Chairman Alan Parker's insistence that the group needs effective leadership feels "very limp", however. "If Mothercare has been too slow to react to the rise of online retailing, doesn't the chairman, who has been there since 2011, share the blame?"

A profit warning at Rank Group, which runs bingo halls, has sent the shares down 16%. Yet the downgrades "were not catastrophic", says Lex in the Financial Times. Full-year operating profit is expected to land between £76m-£78m, 7% below last year's figure. And margins remain high. Still, the warning is "proof of structural problems". Same-hall revenues are falling, reflecting the general "malaise" on the high street.

CEO Henry Birch is now moving to Shop Direct. His strategy of increasing online gaming and scale has given mixed results. Digital revenue is up 17%, but a 2016 joint bid with 888 to buy William Hill failed. Rank needs "a new caller... [and] new ideas".

"Nothing's ever appreciated until someone else wants it," says Alistair Osborne in The Times. Until last week, "hardly anyone noticed" Fidessa, a maker of software for equity and derivatives trading. Now a £1.4bn offer from Switzerland's Tenemos has suddenly flushed out "two other wannabe suitors": Dublin-based Ion Investment and SS&C Technologies of the US. The shares, which have flatlined for years, are about to become a lot more volatile.

Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.