Novartis and GSK’s multi-billion dollar swaps to transform both companies

Novartis has unveiled a dazzling multi-billion dollar business deal which sees it divest its vaccines and animal health divisions, build its oncology portfolio, and create a new joint venture market leader in OTC medicines.

The four-pronged strategy begins with the acquisition of GSK's oncology portfolio, which includes all of its marketed products and late-stage candidates, for $14.5 billion, with a further $1.5 billion dependent on milestones.

The deal will not only transform Novartis, but GSK as well, with both companies clearly focusing on strategies to make them true market leaders in their chosen areas. The underlying thinking for both firms is to exit therapy areas where they are an 'also ran' and create critical mass in key areas.

The deal also see Novartis divest its animal health division to Lilly for around $5.4 billion.

Creating market leading franchises

For Novartis, oncology is a key strategic area, but it is still short of dominating the field. It wants to get ahead of competitors such as BMS, Merck, Pfizer, and in particular, its Swiss neighbours and cancer leaders Roche.

The deal includes two recently approved GSK products for metastatic melanoma, Tafinlar and Mekinist, which will help Novartis break into this key cancer type, where BMS, Merck and Roche are all active.

Also included in the acquisition is Votrient, Tykerb and Arzerra, products which all lag behind the leaders in their particular cancer sub-types, but which Novartis will aim to revive, using its proven track record in oncology franchise management.

Meanwhile GSK is to pay $5.25 billion upfront and up to $1.8 billion in milestones for the Novartis vaccines business, excluding its flu vaccines franchise, for which another buyer will be found.

The interaction with GSK goes deeper, with Novartis and GSK announcing a merger of their OTC divisions to create a new joint venture which will be number one in the sector. This mirrors an earlier move from GSK's chief executive Sir Andrew Witty, when his firm created ViiV, a HIV-focused joint venture with Pfizer in 2009.

Finally the sale of Novartis' animal health division to Lilly for $5.4 billion reflects major changes in the animal health market, sparked by the spin-off of Pfizer's animal health division into standalone company Zoetis last year.

Creating value immediately

The deals, reminiscent of playground swapping of collectable cards, are part of a current trend to break up diversified businesses within the sector and focus on core areas. Pfizer has led the field in this, divesting its animal health and nutrition divisions, and re-configuring its existing business to maximise profitability and returns for shareholders. Novartis, GSK and Lilly all say the deals will help improve margins and returns for shareholders immediately, and in the long term.

Novartis chief executive Joe Jimenez has long made clear his aim to break up the existing Novartis structure, created by his successor Daniel Vasella, where some divisions have been seen to drag down the firm's profitability and competitiveness.

Jimenez said the transactions marked a 'transformational moment' for the firm.

"They focus the company on leading businesses with innovation power and global scale. They also improve our financial strength, and are expected to add to our growth rates and margins immediately."

He hailed the creation of a world-leading consumer healthcare business in its joint venture with GSK, and predicted greater returns for shareholders of the vaccines and animal health divisions, as well as greater productivity.

Jimenez concluded: "Patients will benefit from even higher levels of innovation that this focus may afford. Looking ahead, this positions Novartis well for future healthcare industry dynamics."

GSK

For GSK, the divestment of its entire marketed oncology portfolio is an eye-catching and bold move, as cancer is one of the most lucrative and growing sectors in the industry.

The UK-headquartered firm says this part of the deal represents a "unique opportunity to crystallise an attractive value for its marketed portfolio". Close examination of the returns from this portfolio clearly made it plain that GSK would struggle to make strong margins in the sector, but slotted into Novartis's renowned oncology portfolio, its profitability will be transformed.

The sale does not mean a complete exit from oncology for GSK – it will continue with programmes in immunotherapy, epigenetics, and tumour environment. The deal with Novartis includes the potential for further out-licensing from GSK's oncology pipeline, and the UK-based firm is likely only go it alone if a potential market leader in the area emerged from its pipeline.

In contrast, the vaccines transaction gives GSK a new star product - Bexsero, a new vaccine for prevention of meningitis B. The drug is the first-in-class, and has been given a Breakthrough Therapy Designation by the FDA, and has just been approved in Europe. Analysts predict peak sales of the drug around the $1 billion mark, but forecasts vary, partly because of the novelty of the therapy area.

GSK also acquire a further meningitis candidate vaccine in late-stage development, MenABCWY.

The deals will significantly re-shape GSK - around 70% of GSK's revenues will be in four key franchises: Respiratory, HIV (ViiV Healthcare), Vaccines and Consumer Healthcare. The firm says all of these franchises operate in growing markets with new and market-leading brands and products manufactured in protected technologies.

Chief executive Sir Andrew Witty said: "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."

The firm says it expects to return £4 billion to shareholders following the completion of the deal, reflecting similar payouts made by Pfizer following its spin offs.

Finally, for Lilly, the $5.4 billion acquisition will help its existing Elanco Animal Health group expand its presence in the field. Chief executive John Lechleiter says Elanco has doubled its revenues since 2008, and has pledged savings and new opportunities for growth from the acquisition.

Divergent business models

The three way exchange of assets shows that these three major pharma players are happy to pursue divergent strategies – Novartis being the most focused on human prescription medicines, with Lilly and GSK in particular, following a more diversified business model.

GSK's shift towards areas with lower risk may not play well in the long term with investors eager for excitement in the glamorous 'high stakes' therapy areas such as cancer – although these moves don't preclude further acquisitive moves by the firm.

Links

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