Friday, August 26, 2022

Novartis To Spin-Off Sandoz as Stand-Alone, Public Company



My readers may recall that I disclosed (see my post at for details) some information buried in Novartis' July 20, 2022 quarterly earnings release, when buried on page 21 of the company's 64-page Q2 & half-year 2022 financial statement, when we finally learned that the company's planned insulin biosimilars first announced in late 2018 were still very much in development. In fact, the Gan & Lee-manufactured insulin glargine U-100, insulin aspart U-100 and insulin lispro U-100 bisimilars were indeed still happening and may actually be further along in development than we ever realized.


Sandoz has chosen a co-development partner offshore, specifically Beijing China-based Gan & Lee Pharmaceuticals Co., Ltd., which Sandoz originally stated was "a leading insulin supplier headquartered in China with more than 20 years' experience in insulins and production capacity with attractive cost of goods sold (COGS) structures".

It is believed Sandoz, much like such companies as Biocon as well as Lannett/HEC Pharma and even Civica/GeneSys Biologics all opted to use an offshore manufacturing partner so they were in a position to actually pay Pharmacy Benefit Managers ("PBM's") multi-billion dollar, legally-exempted kickbacks used to secure exclusive formulary placement (the exclusivity part may actually be illegal). 

Civica is unique among them in that the non-profit drug company has gone on record as saying its biosimilar insulins will be commercialized with no intention of playing the PBM kickback scheme, and instead, the benefit of lower-cost offshore manufacturing will go directly to patients in the form of lower prices. If the rebate mess sounds corrupt, it's because it is corrupt. For years, the PBM industry has sold lawmakers and Americans a falsehood that they work to save the healthcare system money, when all they do is line their own pockets with most of that cash (estimated to be $236 billion in 2021).

Still, having a significantly lower cost of goods sold would theoretically enable Sandoz to compete in the PBM rebate game as long as Sandoz is able to manage its Chinese partner's compliance with Good Manufacturing Protocols ("GMP"). Of note is that the U.S. Federal Trade Commission ("FTC"), when it unanimously voted to formally study PBM contracting practices in the spring of 2022 also issued a formal revised policy statement effectively saying that that rebates paid to PBM's that aim to exclude competition from less expensive alternatives may, in fact, constitute unreasonable agreements in "restraint of trade" under Section 1 of the Sherman Act; as well as unlawful monopolization under Section 2 of the Sherman Act; or exclusive dealing under Section 3 of the Clayton Act. Additionally, manufacturer payments that induce PBM's to place higher-cost drugs on formularies in place of lower-cost alternatives "may violate the prohibition against unfair methods of competition or unfair acts or practices under Section 5 of the FTC Act."

The FTC also highlighted that paying or accepting fees in exchange for excluding lower-cost drugs from formularies may violate Section 2(c) of the Robinson-Patman Act, "which prohibits payments to agents, representatives, and intermediaries who represent another party's interests in connection with the purchase or sale of goods.” The FTC noted "at least one court has held that this provision may reach rebates paid by drug manufacturers to PBMs."

The FTC intends to closely scrutinize the impact of rebates and fees on patients and payers to determine whether any of these provisions have been violated. Additionally, the FTC will monitor private litigation and "file amicus briefs where it can aid courts in analyzing unlawful conduct that may raise drug prices," and will continue to study this issue.

While the new FTC policy statement does not exactly bind the FTC or the public — or confer any right of action on any person — the FTC's issuance of a new policy statement on the heels of its announced inquiry of the six biggest PBM's signals a much more aggressive approach in targeting the prescription drug market. The issuance of the new policy statement "should put the entire prescription drug industry on notice: when we see illegal rebate practices that foreclose competition and raise prescription drug costs for families, we won't hesitate to bring out full authorities to bear," said FTC Chair Lina Khan in a statement. From that statement, PBM's should take note that the policy statement appears to directly challenge the PBM industry to demonstrate that rebate savings are sufficiently passed through to payers and patients and that fees are justifiable for legitimate services.

Should the FTC and the U.S. Department of Justice ultimately sue in order to dismantle the PBM rebate kickback scheme (which they should), that could position Sandoz/Gan & Lee insulins in a much more favorable position to compete with Biocon and even Civica/GeneSys Biologics if its prices are low enough. Making them offshore in China is how Sandoz plans to do so, and that was evidently the Sandoz plan all along; only now it looks more likely to happen and perhaps sooner than we initially imagined. We should look for FDA approval decisions for Sandoz insulins in the not-too-distant future, although Biocon and Lannett/HEC each have products which we know are ahead of Sandoz/Gan & Lee.

Anyway, while Sandoz has made its commercialization plans more clear and definitive, after months and months of rumors, on August 25, 2022, Novartis formally announced (see the announcement at for detail, along with the investor presentation at for more) that the company intends to formally spin-off its Sandoz generics and biosimilars business. Novartis says it is in order to sharpen its focus on its patented prescription medicines. Starting in October 2021, the company began a formal strategic review of Sandoz examining a range of options for the Sandoz business, including either retaining the business, spinning it off or selling it.

Of note is that Novartis had previously tried to divest part of Sandoz back in 2018, but a $900 million deal with India's Aurobindo Pharma ran afoul of antitrust rules in Switzerland and elsewhere. 

Novartis reportedly received interest from a number of private equity buyers, due to poor market conditions and the struggling broader market for generics, analysts said the spin-off announcement did not come as a surprise. Sandoz generated nearly $10 billion in sales last year selling generics and biosimilars (less costly versions of biologic drugs made from living organisms) will emerge as Europe's leading generics company, according to Novartis. Sandoz will return to U.S. growth, with expected biosimilar approvals for blockbuster medicines such as Humira and Tysabri next year as well as three insulin biosimilars (glargine, lispro and aspart) being co-developed with China-based Gan & Lee are also in development. 

The standalone Sandoz is expected to be headquartered in Switzerland and will be listed on the SIX Swiss Exchange, with an American Depository Receipt program in the U.S. Mr. Richard Saynor will remain CEO following the spin-off. Sandoz is also now forecast to become Europe's largest generics and biosimilars company based on sales when the spin-off occurs. The spin-off is expected to be completed in the second half of 2023 (forecast for August 2022) according to the company, subject to market conditions, tax rulings and opinions, final board endorsement and shareholder approvals, Novartis said.

In some ways, freeing itself from Novartis could actually benefit Sandoz to pursue growth in the generics and biosimilars markets the company already now competes in. However, as Biocon has discovered suggesting to The Pink Sheet, that the company's primary focus on the U.S. PBM market segment has left the company's insulin biosimilars in a curiously precarious situation. While it landed itself on the Express Scripts and Prime Therapeutics formularies, that move has eaten into margins, and a singular focus on the PBM market could ultimately prove to be a fatal error for biosimilar-makers. Biocon recently announced plans to acquire Viatris' half of the two companies joint venture, and as it discovered with its FDA-designated "interchangeable" insulin biosimilar of Sanofi's Lantus, sales have struggled. For the branded insulin Semglee, most of the revenues are pissed away as rebates paid to the PBM's, while the unbranded product has had rather low sales. To top matters off, on July 1, 2022, Sanofi slashed prices on branded Lantus to $35/vial and its Winthrop US business also launched an unbranded U-100 Insulin Glargine Product of its own, which also sells for $35/vial. That means Semglee and its unbranded identical product are currently overpriced, and not by a small margin.

Right now, patients can buy Semglee with an InsideRx coupon for a low price of $67.94/vial, which is nearly twice as costly (94% to be precise). Presumably the unbranded product is comparably priced to the "net" price for Semglee since it has no back-end rebates. By comparison, both Sanofi insulin glargine products (Lantus and the newly launched unbranded product) now sell for $35/vial with a manufacturer ValYou coupon

While we can speculate on how Biocon ultimately plans to respond, it seems clear that it needs to slash its prices at least in half. That should certainly be feasible; its the reason the product is manufactured in Johor, Malaysia in the first place.

As for Sandoz and its Gan & Lee copies of Lantus, Novolog and Humalog, again, we know that the high price it can command is $35 for the lispro and glargine products since both now have manufacturer coupons reducing prices to $35/vial right now. Only Novo Nordisk's unbranded biologic copy of Novolog (Novo Nordisk Insulin Aspart Injection U-100) is more costly; about the lowest available price for that product is currently $57.33 at Walgreens with a GoodRx coupon, which is about 20% more costly than Lilly's unbranded prandial insulin analogue (Lilly Insulin Lispro U-100) now retails for with a manufacturer coupon from Lilly.

Sandoz will need to determine whether it even wants to play the PBM rebate game (its possible the FTC and DOJ may rewrite the rules of the game to look more like they do in Europe which could change the decision-making process), or whether it will focus as a pure-play generic/biosimilar entity focused on direct-to-consumer sales. If I had to guess, I'd say it will try to market to both segments with branded and unbranded products, but as Biocon is now discovering that doesn't mean it can price its products too high or sales will go nowhere. We shall see if Sandoz as a stand-alone company is prepared for that. Starting in the 2nd half of next year, we will have detailed financial statements and investor reports from Sandoz to keep us informed of where that's going.

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