GSK finds formula for growth with Novartis deal

Increased pharmaceutical dealmaking reflects renewed bullishness in the sector Keystone

Another day, another big pharma deal. Novartis and GlaxoSmithKline (GSK) became the latest companies to join the industry’s mergers and acquisition frenzy on Tuesday with a sweeping exchange of assets that will reshape both companies.

This content was published on April 23, 2014 minutes
Andrew Ward, Financial Times

It followed the launch of a $50bn (CHF44bn) bid by Valeant Pharmaceuticals and Bill Ackman, the activist investor, for Allergan, the maker of Botox anti-wrinkle treatments, and revelations that Pfizer had made a tentative $100bn approach for AstraZeneca.

In part, the dealmaking reflects renewed bullishness in the sector as drugmakers begin to eye new growth opportunities after clearing the worst of the patent losses and innovation drought of recent years.

But Joe Jimenez, Novartis’s chief executive, says it is also driven by anxiety over new challenges ahead as companies scramble for the best strategic positions in a changing healthcare landscape.

“Companies are looking at their portfolios and thinking about how healthcare dynamics are going to change in the next ten years,” he told the Financial Times.

“An ageing population will lead to additional healthcare spending, but governments around the world are going to have difficulty funding these needs. So we need to have market-leading businesses with global scale that can compete in a tough pricing environment.”

These forces have led Mr Jimenez and Sir Andrew Witty, GSK’s chief executive, to make their boldest moves since taking the reins of their respective companies, with an ambitious deal to reshuffle billions of dollars in assets between the rival groups.

Fast-growing market

The aim for both sides was the same: to strengthen core businesses while offloading units that lacked scale.

“It is important to focus on those areas where we think we have significant competitive advantages and then to be very clear-minded about whether there are assets where there might be a better owner if we cannot be a leader,” Sir Andrew told the FT.

This thinking led GSK to the conclusion that, as number 14 in the oncology market, there was little chance of it becoming a champion in the fight against cancer. Instead, its oncology business – including new treatments for deadly melanoma – will be acquired by Novartis for up to $16bn, bolstering the Basel-based company’s number two position in cancer therapies, behind local rival Roche.

By the same logic, GSK will acquire Novartis’s vaccine unit – including a breakthrough jab to prevent meningitis B – for up to $7.1bn, extending its lead over Sanofi, Merck and Pfizer in a fast-growing market in which the Swiss group struggled to secure a meaningful foothold.

Both companies, meanwhile, will pool their consumer health assets, ranging from GSK’s Aquafresh toothpaste to Novartis’s Nicotinell smoking cessation gum, in a joint venture controlled by the UK group. With annual sales of about £6.5bn, this will make the pair a more formidable challenger to market-leader Johnson & Johnson.

While not the biggest pharma deal, analysts described it as one of the most complex attempted in the industry. “Many people told me that product exchanges can never happen because they are too complex and you cannot get people to agree on each element of the deal,” said Mr Jimenez. “This shows companies in all sectors that it can be done.”

By exiting vaccines and animal health – sold in a separate $5.4bn deal with Eli Lilly of the US – Mr Jimenez is reversing part of the legacy he inherited from Daniel Vasella, who stepped down last year after 17 years as Novartis chief executive and later chairman.

“Diversity is still important but this will allow us to focus on businesses where we hold a leading position,” he said, referring to the group’s three remaining core units: pharmaceuticals, generic drugs and eyecare.

Witty’s difficult year

For Sir Andrew Witty, the past year has been the most difficult of his six years as chief executive of GlaxoSmithKline, writes Andrew Ward. Having been brought in to clean up after a marketing scandal in the US, he has found the company once again mired in corruption allegations – this time in China.

So yesterday’s asset swap with Novartis brought a welcome opportunity to refocus attention on his reshaping of GSK’s business.

The deal, which strengthened GSK’s vaccines and consumer operations while marking its exit from cancer therapies, was his most significant move yet to reduce dependence on big pharma’s traditional “white pills in western markets”.

The shift towards vaccines, over-the-counter products and cutting-edge biological drugs is intended to drive fresh growth as the blockbuster chemical-based pills of past decades lose patent protection.

Sir Andrew said the Novartis deal had grown out of initial talks focused solely on the Swiss group’s vaccines business. Over the past “three or four months”, however, the negotiations were expanded to cover a broader range of assets. He said it was the kind of transaction he had been waiting for to accelerate the company’s transformation. “I was always prepared to bide my time for the right opportunity.”

He has become one of the UK’s most respected corporate leaders since succeeding Frenchman Jean-Pierre Garnier in 2008, earning his knighthood four years later.

He has presented himself as an industry reformer, pushing for more transparency in clinical trials and marketing practices since agreeing a $3bn settlement with US regulators for marketing abuses in 2012.

But, this image has been dented by allegations under investigation by Chinese authorities that GSK paid up to $500m in bribes to doctors and officials.

Further claims about alleged malpractice in the Middle East and Poland have darkened the cloud over the company.

Sir Andrew hopes his marketing reforms will repair the damage. Investors, meanwhile, are focused on whether or not his growth strategy can deliver.

Copyright The Financial Times Limited 2014

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‘Elegant set of transactions’

Some analysts quibbled over whether Novartis had overpaid GSK for a cancer portfolio that, while rich with promise, still has much to prove in the market. But most welcomed what Jeffrey Holford at Jefferies called an “elegant set of transactions”.

For GSK, the expansion in vaccines and consumer health will strengthen its buffer against the patent cycles and development risks in branded drugs.

Coming in the wake of speculation about a potential Pfizer takeover of AstraZeneca, the deal will reinforce the sense of animal spirits returning to big pharma after several years of subdued dealmaking.

However, Sir Andrew was keen to distance GSK’s deal from the talk of a new round of megamergers. “I’ve been outspoken against cash-driven big M&A of the kind traditionally seen in our industry,” he said. “If you just focus the transaction on the thing you really care about, you create value in that space and don’t distract the rest of the organisation.”

While more complex in its structure, the Novartis-GSK assets swap fits an industry trend towards more targeted acquisitions and disposals of non-core assets as pharma companies try to become more streamlined and focused. In the past year, Pfizer has spun off its animal health business, GSK has sold its drinks brands, and Johnson & Johnson and Novartis have divested diagnostics units.

Expansionary takeovers

A Pfizer bid for AstraZeneca, in contrast, would rekindle the era of expansionary takeovers that reshaped the industry in the late 1990s and early 2000s. Both companies have declined to comment since it emerged over the weekend that the US company made a tentative $100bn approach late last year that was rebuffed by its Anglo-Swedish rival.

Some analysts think Pfizer has not given up on the idea, noting its need to find an outlet for tens of billions of dollars in offshore cash to avoid a big US tax bill. Other US drug companies with similar cash hoards face the same pressure. This explains why shares in UK-listed Shire, often cited as a potential acquisition target, rose 4% yesterday in reaction to the AstraZeneca speculation.

Sir Andrew insists GSK will not be tempted to join any renewed merger mania, saying the company now has the right mix of businesses for long-term growth. “The problem with massive transactions is that you end up with two or three interesting opportunities but seven or eight that you would rather not have to worry about.”

Copyright The Financial Times Limited 2014

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