GSK has most to prove after $16 bn Novartis deal

The $16 billion dollar ‘asset swap’ deal between GlaxoSmithKline (GSK) and Novartis has been formally completed today, with the UK-headquartered company exchanging its oncology portfolio for the Swiss firm’s vaccines business.

The move allows both companies to become more dominant players in their respective focus areas, and also includes a new joint alliance in consumer healthcare, allowing them to share costs and risk in a valuable but lower-growth market segment.

First announced in April last year, the deal was a highly complex and original transaction, but many analysts believe that Novartis has done better out of the swap, and that GSK still has much to prove in its strategy.

Specifically, many analysts view GSK’s decision to exit oncology as a curious one, as cancer is the most important therapy area in the industry, and is set to continue its market growth thanks to increasing demand from patients and promising innovation in R&D.

Last month, analysts at Bernstein noted: “Even if GSK received a high price, it let go of a strategic business that would be difficult to get back,” and said the deal was reminiscent of Pfizer’s decision to sell its consumer health division to J&J a decade ago, one that Pfizer later rued.

Chloe Thornton, GlobalData’s company analyst, also recently observed that GSK has major problems with a lack of growth in its flagship respiratory franchise, which fell by 10 per cent year-on-year to just over £6 billion ($9.8 billion) in 2014.

The GSK oncology products it has sold on to Novartis were worth approximately $2 billion in 2014, having posted a growth of around 32 per cent compared to the previous year.

The drugs include Tafinlar and Mekinist, two metastatic melanoma treatments, which have recently shown promise in combination with each other.

Other drugs in the portfolio include Votrient, for renal cell carcinoma, Promacta for thrombocytopenia, HER2+ metastatic breast cancer drug Tykerb and chronic lymphocytic leukaemia treatment Arzerra.

Chloe Thornton commented: “The strength of GSK’s oncology portfolio against a backdrop of decline elsewhere across its pharma business somewhat calls into question the decision to trade these assets to Novartis.”

Selling its oncology portfolio for $16 billion and acquiring the vaccines business for $7.1 billion gives GSK billions off extra cash to play with – after contingent payments are factored in, the sum comes to $7.8 billion.

Thornton says the company could dispel concerns by investing its windfall in “areas of high growth potential”, but these are hard to find, particularly if GSK is not looking to reinvest in oncology.

However a major outlay looks unlikely, at least in connection to the Novartis deal. GSK has confirmed earlier plans to spend £4 billion ($6.17 billion) – virtually all the $7.1 billion amount – via a capital return to shareholders.

The company is depending on continued growth in vaccines – it predicts the global vaccines markets to grow approximately 10 per cent per annum over the next 10 years. The biggest vaccine brand it has acquired in the deal is Bexsero, a new vaccine to prevent meningitis B, with a further candidate vaccine in late-stage development, MenABCWY.

GSK intends to report its Q1 results for 2015 and host an investor meeting on 6 May 2015, at which the company says it will provide 2015 earnings guidance and ‘profile the medium and long-term shape and opportunities’ for the business.

Novartis

Analysts are more convinced by the strategic rationale for Novartis, as it helps them consolidate their presence in the fast-moving oncology sector.

None of these products are in a market-leading position within their therapy areas, but Novartis has a very strong track record in maximising the value from cancer drugs, including extending licences into new niche therapy areas.

Novartis also has opt-in rights for GSK’s current and future oncology R&D pipeline (excluding oncology vaccines), which could provide further new compounds and new targets.

One further area of doubt is GSK’s strategy for oncology in the future – the company insists that it has not withdrawn from cancer, and indeed signed a new development deal with Adaptimmune last June on cell-based therapies. GSK’s rationale for the Novartis deal was that it did not have sufficient scale to take on market leaders in cancer therapy areas, but it will clearly face even bigger obstacles if and when it chooses to re-enter the field again.

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