Novartis paid $5.1 billion to gain full control of U.S. vaccine maker Chiron Corp in 2006 in a major bet on vaccines designed to reduce its dependence on prescription drugs ahead of a wave of patent expiries.

But the division has gobbled up research and development cash with little return, making the European backing for its "MenB" vaccine Bexsero a key event.

"(It) will allow breathing space for management that has been under investor pressure to improve the outlook for the sub-scale vaccines division," said Deutsche Bank analyst Tim Race.

Chief Executive Joseph Jimenez has stood by the division, saying he still believed it could be a "profitable and important part of the company." But he has also denied that Novartis is "wed" to any of its units.

Diversifying into vaccines looked a good bet, given they are biological medicines that are less exposed to generic competition. Moreover, the world vaccine market is growing and expected reach $40 billion by 2015, according to the Centre for Vaccine Ethics and Policy.

But Novartis' division has struggled to catch up with market leaders GlaxoSmithKline, Sanofi and Merck. It posted a $22 million operating loss in the third quarter - the only one of Novartis' five units to be in the red.

PROBLEM CHILD

"You can say it's the problem child of Novartis," said Birgit Kulhoff, a money manager at private bank Rahm & Bodmer in Zurich. "2014 will be the year when they make the ultimate decision about what they're going to do with the division."

The European drug agency's recommendation, which is likely to be formally endorsed early next year, is clearly good news - but it will not automatically translate into sales.

Bexsero's success hinges on convincing cash-strapped government healthcare systems to add it to their vaccination programs - and that may not be easy, given the fact that MenB disease, while serious, is becoming rarer.

Bernstein analyst Tim Anderson, for example, forecasts 2020 sales of $700 million for the vaccine, a far cry from the multi-billion dollar sales potential heralded by some a few years ago.

Novartis' head of vaccines Andrin Oswald said he was "quite confident" countries which have a high incidence of the disease, like Britain and Ireland, would add Bexsero to their programs, although he downplayed expectations of strong 2013 sales.

"We plan to start selling next year and then we expect the vaccine to start to ramp up nicely over the years," Andrin Oswald told Reuters in a telephone interview on Friday.

Oswald disputed that there was a deadline hanging over the division, saying the business had come a long way, having already won approval for another meningitis vaccine Menveo and anticipating approval of its cell culture flu vaccine.

"If I look at our pipeline there are other promising products in there. It may take another few more years but I think as long as we deliver and bring good vaccines and innovation to the market we are on the right track."

Oswald said Novartis was still in discussions with U.S. health regulators, where there was some skepticism about the public health need for a single MenB shot given the low disease incidence at present.

He said Novartis favored a possible combination shot of Bexsero with Menveo. "If the discussions go as we think we may be able to start Phase III (clinical trials) in a reasonable amount of time," he said.

PROFITABILITY VS GROWTH

Some analysts are skeptical if the division will be able eke out a profit this year after racking up an operating loss of $291 million in the first nine months, despite seasonal flu sales.

"The unit barely breaks even on the back of the seasonal flu vaccine only," said Vontobel analyst Andrew Weiss. "There's a huge amount of expenses in R&D really in trying to get away from this seasonality and being a rounder business."

Jefferies analyst Jeffrey Holford says Novartis could create more value if it were to divest the business - which also contains a diagnostics segment - in two separate parts.

A standalone vaccines business could fetch $6.3 billion, while disposing of the diagnostics business could bring in a further $1.3 billion, he argued in a September research note.

But Oswald said it took time to build up a vaccines business, arguing: "The key priority right now is not to make the business more profitable but to grow it."

(Editing by Ben Hirschler and Jane Merriman)

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