SKYEPHARMA- TECHNOLOGIES - Huge Potential 2005:

More deals expected from acquisitive Novartis
By Tom Armitage

ZURICH (Reuters) - For Novartis AG's (NOVN.VX: Quote, Profile, Research) Daniel Vasella, acquisition candidates are a little like London buses: you wait ages for one and then several arrive at once.

After a number of lean years, deals in the pharmaceuticals sector have picked up, prompting the Swiss drug maker to splash out $14 billion this year on various assets.

Investors worry, however, the ambitious chief executive and chairman of the world's sixth-biggest seller of prescription medicines might over-spend on the next deal.

Novartis shares have lost about 5 percent since a 4-1/2 year high of 71.70 francs was reached last month on concerns it could be among the potential suitors for Serono SA (SEO.VX: Quote, Profile, Research).

"My impression is that the market would not view a tie-up with Serono very positively," Lombard Odier Darier Hentsch analyst Karl-Heinz Koch said.

"I have spoken to a lot of investors and they are very concerned. Nobody immediately sees why Novartis should buy Serono, but if you go through the arguments it makes quite a lot of sense," he added.

Reuters reported a week ago Friday that Serono had asked drug companies to submit bids for an auction early next year, citing people familiar with the situation.

Novartis was one of six possible suitors cited by sources as interested in the group, which could fetch as much as $15 billion.

Serono, Europe's biggest biotech firm, has declined to comment beyond confirming that it has retained Goldman Sachs to help it explore its strategic options.

Novartis' Vasella also refused to be drawn by reporters on Wednesday on whether he was interested in Serono.

He confirmed, however, that Novartis looked in principle at almost all companies which came on to the market and he has said that consolidation was inevitable in a global drugs industry faced with growing pressure on margins.

Novartis has also been mentioned as a possible suitor for British drug delivery firm SkyePharma Plc (SKP.L: Quote, Profile, Research), which announced on Thursday it was opening its books to a number of companies that have expressed interest in buying it.

ACQUISITION TRAIL

This year, Novartis spent $5.1 billion buying the shares in U.S. vaccine maker Chiron which it doesn't already own, some $8 billion on two generic drug makers and a further $600 million on a portfolio of over-the-counter drugs in the United States.

The generics companies are now consolidated into Sandoz, Novartis' copycat drugs division, while the bulk of Chiron will form a newly created vaccines unit for Novartis.

This, plus the firm's ample cash flow, suggest that Novartis could still be open to other assets on the market, analysts say.

"I think they will look for other acquisitions, but from what management have said what is off is a maga-merger. That is not on their mind at the moment," said Bank Sarasin's Irene Puettner, who manages a 25 million Swiss franc healthcare fund.

"At the moment they are using an opportunistic approach. They have some late-stage projects but it is risk diversification if they look for additional sources," she said.

In terms of Serono, investors have worried about the lack of strong late-stage drug candidates in the firm's pipeline, and its reliance on multiple sclerosis drug Rebif.

However, Koch said a deal could make sense in that it would help Novartis with its ambitions to become a player in the lucrative market for multiple sclerosis treatments.

Novartis is developing a pill to treat the disease but may benefit from Serono's knowledge of the field, while Novartis' generics business could stand ready to make copycat versions of the older MS drugs on the market.

"We are picking up so many signals and they are heading in the one direction," Koch said. "I am fairly confident Novartis will want to buy, but not at any price."