By Marta Falconi and Hester Plumridge
ZURICH-- Novartis AG and GlaxoSmithKline PLC are helping each
other get stronger.
On Tuesday, the drug giants unveiled a series of transactions
worth more than $20 billion that fundamentally transform both
companies, focusing Novartis's scope without significantly hitting
its revenue and turning Glaxo into a vaccines-and-consumer-drugs
powerhouse.
Basel-based Novartis will acquire Glaxo's oncology unit for
around $14.5 billion, adding strength to the company's
already-potent lineup of cancer products. After the deal closes,
Novartis will get roughly a fifth of its nearly $54 billion in
expected revenue from cancer drugs.
In return, London-based Glaxo will pay $5.25 billion for
Novartis's vaccines business, acquiring the company's promising
Bexsero meningitis B vaccine. In still another transaction, the two
companies will merge their consumer health businesses under Glaxo's
management, combining franchises that own some of the world's
best-known brands, including Excedrin, Panadol and Aquafresh.
( Explained: What's behind the pharma-deal frenzy?)
The Novartis-Glaxo deals come against a backdrop of increased
mergers-and-acquisitions activity in the pharmaceutical space. Big
pharmaceutical companies are looking for ways to reduce costs as
health care services pressure them to keep prices level. Instead,
pharmaceutical companies are buying each other, allowing them to
cut research-and-development and other costs.
Many drug companies have paid off debt they shouldered during a
buying spree in the early 2000s and are now generating lots of cash
that they want to put to work. That pushed deal activity up 40%
when measured by value in the first quarter, according to
Dealogic.
The action is likely to continue. Activist investor William
Ackman and Valeant Pharmaceuticals International Inc. are seeking
to buy Allergan Inc ., which makes the Botox wrinkle treatment,
according to a filing on Monday. Investors bid up shares of
AstraZeneca on Tuesday after weekend reports that it had discussed
merging with Pfizer.
The Novartis-Glaxo deals mark the long-awaited culmination of
the Swiss pharmaceutical giant's review of its businesses, which
started last year. Since former chairman Daniel Vasella left the
company last year, Chief Executive Joe Jimenez has repeatedly said
he wanted to refocus Novartis on areas in which it has the scale to
compete, rather than maintain small presences in a host of
markets.
The deals with Glaxo, and a separate deal to sell its animal
health business to Eli Lilly and Company for about $5.4 billion,
accomplish that goal, focusing the company on pharmaceuticals, eye
care and generics. Analysts at Sanford C. Bernstein & Co.
estimate sales will fall a little more than 6.5% to $53.5 billion
while operating margin will rise 2.5 percentage points to
27.2%.
"The transactions mark a transformational moment for Novartis,"
Mr. Jimenez said.
Although Novartis investors have expected the company to cut
some kind of a deal since it sold a diagnostics business to Spain's
Grifols SA last year, the scope of the transformation took some by
surprise.
"The scale of the changes is really astonishing," said Birgit
Kulhoff, a fund manager with private bank Rahn & Bodmer in
Zurich, which owns Novartis and Glaxo shares. Ms. Kulhoff said
Novartis's risk profile would increase "slightly" because of the
new set up, but said the challenges, such as patent expirations
that the company is facing or will face in the future, are
manageable.
Shares of Novartis rose more than 2% to 76.30 Swiss francs in
early afternoon trading, reflecting enthusiasm for the deals. Glaxo
shares were 5.5% higher in London.
The deals also transform Glaxo, focusing its business on
respiratory, HIV, vaccines and consumer health products. Those four
areas will account for roughly 70% of the British company's total
sales.
Glaxo will take charge of the combined consumer health
operations, which will be one of the world's largest
over-the-counter drugs businesses, with annual revenue of around
GBP6.5 billion ($10.9 billion). Glaxo will own 63.5% of the
business, which will be run by its current consumer health head,
Emma Walmsley.
The deal will also widen Glaxo's lead as the world's largest
provider of vaccines, strengthening its position in the meningitis
vaccine market and the U.S. The new business will have more than 20
vaccines in development.
Write to Marta Falconi at marta.falconi@wsj.com and Hester
Plumridge at Hester.Plumridge@wsj.com
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