LONDON & BASEL, Switzerland—In an industry where most asset gains stem from mergers or the wholesale acquisition of companies, GlaxoSmithKline plc (GSK) and Novartis AG are forging a new path with an innovative asset swap.
The companies announced a three-part agreement consisting of the sale of select businesses from each firm and the formation of a joint venture. Under the agreement, GSK will acquire Novartis’ global vaccines business (excluding influenza vaccines) for an initial cash consideration of $5.25 billion, with additional potential milestone payments of up to $1.8 billion and ongoing royalties. Novartis will be acquiring GSK’s marketed oncology portfolio, as well as related R&D activities, rights to its AKT inhibitor and commercialization partner rights for future oncology products, for which it will pay an aggregate cash consideration of $16 billion (up to $1.5 billion of which is dependent on the results of the COMBI-d trial). The transaction is expected to be complete during the first half of next year.
“This proposed three-part transaction accelerates our strategy to generate sustainable, broadly sourced sales growth and improve long-term earnings,” Sir Andrew Witty, CEO of GSK, said in a press release. “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 noted that the deal significantly exceeds GSK’s return criteria and “delivers accretion to core earnings per share in year one and then with a growing contribution over time, particularly in 2017, as growth opportunities and projected cost savings are delivered.” GSK expects this transaction to be accretive to core earnings per share from the first year, forecasts that the deal will increase its annual revenues by £1.3 billion to £26.9 billion (on a 2013 pro forma basis) and expects to return £4 billion to shareholders following its completion.
The joint venture will unite Novartis’ over-the-counter business with GSK’s consumer business to create a consumer healthcare business that, according to Novartis, could see roughly $10 billion in annual sales. Once complete, Novartis will own 36.5 percent of the joint venture and hold four of 11 seats on its board of directors, as well as customary minority rights and exits rights at a predefined, market-based pricing mechanism. GSK’s Witty noted that the joint venture will “create the world’s premier OTC business with clear opportunities to accelerate revenue growth.”
“The transactions mark a transformational moment for Novartis. 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,” commented Novartis CEO Joseph Jimenez. “We have also created a world-leading consumer healthcare business in our joint venture with GSK. We believe the divestment of our smaller Vaccines and Animal Health divisions will enable us to realize immediate value from these businesses for our shareholders, and those divisions will benefit from being part of large, global businesses that are also leaders in their segments. 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.”
Zacks Investment Research noted that “The addition of oncology products from GlaxoSmithKline will further strengthen [Novartis’] oncology business as it expands Novartis’ position in targeted therapies and small molecules … The acquisition of oncology products from GlaxoSmithKline and divestment of Vaccines business is a step in the right direction. It will broaden Novartis’ portfolio and enable it to focus better on its core capabilities besides contributing immensely to the top line. Margins are also expected to get a significant boost.”
Novartis’ vaccine business generated “less than $1 billion in revenue” last year, noted Motley Fool Analyst Stephen D. Simpson, and was unlikely to improve significantly in light of competition from GSK, Pfizer and Sanofi. As part of GSK, however, he says it has a chance to see greater value. In addition, while Novartis’ consumer health business was “a sub-scale operation” according to Simpson, “In combination with Glaxo’s consumer health business … this is a $10-billion-per-year force to be reckoned with and a business with attractive scale and growth potential.”
Some feel that this arrangement is not only beneficial, but perhaps a template for similar deals to be struck in its image. In a Reuters article, Chris Stirling, global head of KPMG’s KPMG.UL life-sciences practice, said that, “Where you’ve got large global businesses operating in lots of different areas, then I think this is something chief executives will now look at seriously, given that this deal provides them with a great example.”