Bloomberg News

Novartis Unit Sued by Oriel Shareholders Over Buyout

August 11, 2012

Novartis AG (NOVN), Europe’s largest drugmaker by revenue, was sued by investors in Oriel Therapeutics over claims one of its units defrauded them as part of an acquisition of the U.S. maker of respiratory drugs.

Officials of Novartis’s Sandoz AG’s generic-drug business made “fraudulent misrepresentations” in connection with the 2010 purchase of Durham, North Carolina-based Oriel and those statements prompted Oriel investors to sell their shares too cheaply, lawyers for former shareholders said in complaint filed yesterday in federal court in Manhattan.

The purpose of the alleged misrepresentations was “to induce the Oriel Shareholders to sell Oriel’s securities and to do so at an artificially deflated price,” lawyers for the investors said in complaint.

Novartis, based in Basel, Switzerland, agreed to buy closely held Oriel seeking to gain generic medicines for asthma and smoker’s cough and a potential share of a $32 billion market, Andrew Weiss, an analyst at Bank Vontobel AG in Zurich, said in a 2010 note to investors.

Julie Masow, a U.S.-based spokeswoman for Novartis, declined to comment on the Oriel shareholders’ lawsuit.

Novartis officials last month reported second-quarter profit declined less than analysts forecast, helped by increasing sales of new products such as the Gilenya treatment for multiple sclerosis and the Afinitor cancer drug.

Inhaler Products

Earnings excluding some costs fell 6 percent to $3.36 billion, or $1.38 a share, from $3.56 billion, or $1.48 a year ago, the drugmaker said in a statement July 19. Analysts predicted profit of $1.33 a share, the average of 14 estimates compiled by Bloomberg.

Novartis officials said in 2010 they acquired Oriel for an undisclosed price to get access to three projects targeting “leading medicines” in the area of respiratory drugs. It also gave Novartis the rights to Oriel’s FreePath drug delivery system and the Solis disposable dry powder inhaler.

Medicines accounting for about 50 percent of the $32 billion market for asthma and smoker’s cough are expected to lose patent protection by the end of 2016, Novartis said at the time of the purchase. It cited “industry estimates” for the value of the market for such drugs.

In July 2009, Oriel’s directors decided to seek a buyer for the drugmaker and later entered into “exclusive negotiations” with Novartis’ Sandoz unit, according to the suit. The companies closed the deal in June 2010.

‘Adverse Facts’

Oriel shareholders later learned Sandoz executives duped them into selling their shares by “misrepresenting and concealing adverse facts,” lawyers for the former shareholders said in the suit. Many of the investors’ claims were redacted, or blacked out, of the complaint.

“Defendants had the opportunity and the motive to defraud plaintiffs into selling Oriel’s securities,” the attorneys said. “Sandoz used improper means to obtain Oriel for less than fair consideration.”

Oriel’s investors at the time of the buyout included New Leaf Venture Partners, Thomas McNerney & Partners, HealthCare Ventures and CHF Medical Partners.

The case is Shareholder Representative Services LLC v. Sandoz Inc., 12-cv-06154, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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