Novartis, GSK trade assets worth $20 bn as pharma industry reshapes

Novartis and GlaxoSmithKline traded over $20 billion (11 billion pounds) worth of assets, aimed at bolstering their best businesses and exit weaker ones as the drugs industry reshapes to cope with healthcare spending cuts and generic competition.

The deals, which include Novartis buying GSK’s cancer drugs and GSK acquiring Novartis’ vaccines business, comes amid a frenzy of takeover speculation with the US drug manufacturer Pfizer thought to be considering a $100billion (£59billin) bid for AstraZeneca and Valeant Pharmaceuticals looking at Botox-maker Allergan in a $40billion move; a story that sent shares across the sector surging.

The global pharmaceuticals industry has seen a flurry of deal-making recently as most large companies seek to focus on a small number of leading businesses, while smaller speciality and generic producers seek greater scale.

Shares in GSK rose over 5 percent to £16.45 and Switzerland’s Novartis rose 2 percent to 76.25 Swiss francs. AstraZeneca rose nearly 7 percent and the UK’s Shire jumped 4 percent to £30.49on hopes of more deals to come.
GSK shareholders are expected to benefit from a £4billion capital return funded by net proceeds of $7.8billion from the deal, in which the Brentford-based firm is selling its oncology business to Novartis for $16billion and purchasing its new partner’s vaccine business for an initial $5.25billion. A further $1.8billion is promised if the division performs well.

Meanwhile, Novartis is selling its animal health division to US pharmaceutical company Eli Lilly for $5.4bn.

Andrew Witty, chief executive officer, GSK, said the complex deal had taken months to agree but was a step on from the mega mergers of the past under which companies might gain two or three useful businesses alongside seven or eight unwanted elements which could distract attention from developing its core business.

“I believe if you really focus the transaction on just the things you really care about you can create tremendous value in that space. Opportunities to build greater scale and combine high quality assets in vaccines and consumer healthcare are scarce. With this transaction we will substantially strengthen two of our core businesses and create significant new options to increase value for shareholders,” Witty told The Guardian UK.

The combined consumer healthcare business will house 19 brands, including Panadol and Nicotinell, with sales of more than $10billion worldwide in what Witty described as a powerhouse in over-the-counter products.

Witty added that the deal strengthened GSK’s global leadership in the vaccines market and increased its scale in consumer health products and would deliver immediate sales and earnings benefits once completed in early 2015.

GSK is expected to continue developing experimental cancer treatments and could market these itself in future, although Novartis will have first refusal if it decides to seek a partnership with a third party.

Joseph Jimenez, chief executive of Novartis, said the agreements with GSK marked “a transformational moment for Novartis. They focus company on leading businesses with innovation power and global scale.” He said profits would improve as it brought in the higher margin cancer business and sold off the less profitable animal health and vaccines groups.

The transaction between the two major pharmaceutical companies will meanwhile lead to a cascade of smaller deals.

GSK is to accelerate a review of its historic medicines business – which include drugs such as the antidepressant Seroxat and the prostate cancer drug Avodart – and investors should “not be surprised if we are able to transact a disposal in the next year or two”. At the same time, Novartis said it would seeking a buyer for its flu-vaccine business which is not included in the wider vaccines deal with GSK.

While the Novartis-GSK transactions will face scrutiny from competition watchdogs, Witty said he did not expect a substantial number of issues as the businesses were remarkably complementary both in geographic and product terms.

Alexander Chiejina