Novartis' trillion-dollar acquisition strategy is under intense scrutiny by the market
Novartis' promising drug failed clinical tests and this resulted in a sharp fall in the company's stock price. Investors are now wondering if the company's big buyout deals are worth it. Shareholders also want better risk checks for such acquisitions.
Novartis' stock price and market cap fell as its new drug failed clinical trials.
The company has hit multiple roadblocks in its clinical work. Trials for its key pipeline drugs failed, and investors sold off its shares heavily. Its leading drug del-desiran for rare diseases did not work as hoped in late-stage tests. This was the end of development of this drug. It was the second big clinical failure for Novartis in just a few days. Novartis' share price fell 11% in one day. It lost all the gains it had made so far this year. Nearly $30 billion of its market value disappeared, which was an unusual big drop in recent years.
For companies that develop new medicines, a failed clinical trial for a key drug means more than losing one project. It also makes investors doubt the firm's ability to carry out research and its value of drug assets. After this sharp fall, investors no longer mainly look at the company's short-term profits. Instead, they start to question whether Novartis' big buying deals in recent years make sense and whether the company has gaps in risk management.
The $10 billion merger has drawn controversy, with shareholders divided in their views.
The drug that suffered this clinical failure originated from Avidity, a company acquired by Novartis for $12 billion last December. This high-value acquisition was once the core strategy for Novartis to expand its innovative pipeline. The failure of the core research and development product has led to a comprehensive questioning of the investment value of this large-scale transaction. In the past three years, the CEO of Novartis has led a large-scale expansion through acquisitions and industrial cooperation, with cumulative investment exceeding $30 billion.
The management team stated publicly that the acquisition of Avidity could fill the company's shortcomings in the emerging therapy sector. However, the consecutive clinical failures have made the market see the potential risks of large-scale mergers. Many institutional investors believe that the management was too aggressive, preferring one-off large-scale mergers and ignoring the uncertainty of the research and development pipeline. Compared to small-scale complementary acquisitions, heavy mergers and acquisitions, once they go wrong, will bring huge impacts to the company.
Some long-term shareholders chose to support the management team and recognized the past achievements of the CEO. Data shows that since the current CEO took office, the stock price of Novartis has risen by more than 60%, and the total return including dividends and reinvestment reached 120%. This performance has outperformed European pharmaceutical companies such as Roche. Shareholders believe that drug clinical failures are part of the normal scientific risks and do not need to be overly pessimistic.
Some major shareholders have put forward clear rectification requirements. Artisan Partners, a shareholder, called for the reorganization of the board of directors, strengthening the review and supervision of merger transactions, and avoiding major investment mistakes. Institutions are not asking for a change in the management team, but hope to constrain the management's aggressive merger plans. Small institutional investors have a more cautious attitude.
The research and development efforts failed, the project still holds potential value.
Industry analysts stated that the del-desiran drug that suffered this failure had its clinical trial plan finalized before Novartis' acquisition of Avidity. It was not a decision-making error by the company after its acquisition. The drug targets a rare muscle disorder, which is extremely difficult to develop on its own, and the overall success rate in the industry is relatively low. This is a normal risk category for innovative drugs. We can not solely rely on the failure of one project to completely dismiss the value of the Avidity acquisition. The acquisition of Avidity was not a complete loss. The company still holds two new drugs in the same research field under development, which can enrich the company's innovation pipeline and retain the space for technological iteration.