Novartis AG is considering all possibilities for its Sandoz generics unit, which private equity companies Blackstone Inc. and The Carlyle Group Inc. are reportedly eyeing up, as CEO Vas Narasimhan braces to make a decision by the end of the year.

Sandoz has suffered from multiple years of price declines in its U.S. oral solids segment, a trend that is expected to continue into 2022. Still, at $2.5 billion, full-year sales in the generics business came in 3% above consensus, UBS analyst Laura Sutcliffe said in a Feb. 2 note to clients.

The CEO announced plans to carve the generics business out into a separate entity in 2018. After years of poor sales in the U.S., analysts have long concluded that the unit would eventually be divested.

Reports that private equity groups Blackstone and Carlyle Group are mulling a joint $25 billion bid for Sandoz — in what would be one of the biggest ever buyout deals — have emerged in recent days. Other rumored interested parties include Swedish private equity group EQT AB (publ) and Germany's Struengmann family, who originally sold the business to Novartis.

"We continue to explore all options, and we don't have a bias towards any of these options," Narasimhan told reporters on a Feb. 2 earnings call. "At the moment we are doing the work to finish the carve-out ... and we'll see what proposals come back and then make an appropriate decision at the appropriate time."

Tale of two businesses

Narasimhan described a tale of two businesses in the U.S., with biosimilars and hospital injectables producing solid sales and projected to accelerate as new biosimilars launch. Meanwhile, Narasimhan said he was optimistic that the oral solid segment will return to growth in 2023-2025.

In the event of Sandoz's separation, Novartis would maintain the capacity for the currently produced biosimilars within the Novartis network and Sandoz would invest in building up its own capacity for future biosimilars.

Biosimilars are versions of complex biologic drugs that are already available in the market to treat various diseases and conditions. Unlike generic drugs, biosimilars are not an exact copy of the therapy they are based on and are usually more expensive to manufacture.

"Valuations aside, it would not be unreasonable to assume Novartis is giving this careful thought given Sandoz has already been operationally siloed, coupled with the fact Sandoz has been somewhat of a problem child and drag on group earnings historically, and likely will continue to be so given price pressures in the U.S.," Sebastian Skeet, London-based analyst at research firm Third Bridge, said in a Feb. 2 note.

Novartis' review of Sandoz's future reflects a wider industry focus on pure-play scientific research and development. Brentford, U.K.-based GlaxoSmithKline PLC intends to spin out its consumer business with a midyear listing on the London Stock Exchange, while Paris-based Sanofi has turned its consumer unit into a stand-alone business under CEO Paul Hudson.

Novartis' M&A strategy remains unchanged, with more business development and licensing deals like the December 2021 acquisition of two Parkinson's disease therapies from Belgium's UCB SA and an alliance with China's BeiGene Ltd. expected in 2022, Narasimhan said. The focus will be on neuroscience, immunology, cardiovascular disease and oncology, with selective interest in ophthalmology and respiratory diseases.

"We remain focused on being a medicines company powered by technology, leadership in R&D, world class commercialization and global access to data science," Narasimhan said. "We focus on where to play in terms of therapeutic areas, technology platforms, and key geographies — and we are transforming Sandoz."