In a major swap of assets, three of the world’s largest drug companies have announced a multi-part, $28.5 billion deal that enables Novartis to focus more on cancer, GlaxoSmithKline on vaccines and Eli Lilly on animal health.
In addition, GSK and Novartis will form a jointly operated consumer healthcare business, with GSK holding a 63.5% equity stake.
The transactions are part of a major realignment in the global pharmaceutical industry, spurred by the loss of revenues from best-selling products that have lost patent protection. As part of the overhaul, Novartis agreed to buy GSK’s oncology business for $14.5 billion plus $1.5 million as a reward for meeting certain business development goals as part of their vaccines agreement.
In turn, Novartis will sell its vaccine division to GSK for $7.1 billion—$5.25 million in cash plus $1.8 billion in milestone payments and ongoing royalties. However, the deal excludes the flu vaccine, for which Novartis said it plans to find another buyer.
Novartis also has agreed to sell its animal health group to Eli Lilly for approximately $5.4 billion.
In reshaping their businesses, Novartis and GSK are following a growing trend of large biopharmaceutical companies seeking ways to reduce costs by taking the mergers and acquisitions route to cut R&D and other expenses while staying ahead of rising healthcare services. Just last year, Pfizer spun off its animal health unit and, more recently, investors bid up shares of AstraZeneca after rumors swirled about AstraZeneca discussing a merger with Pfizer, which both companies denied.
“The acquisition of Novartis’ vaccines business will significantly enhance the breadth of our vaccines portfolio and pipeline, notably in meningitis, with the addition of Bexsero, an exciting new vaccine for prevention of meningitis B,” said Sir Andrew Witty, GSK’s CEO. “The acquisition also will strengthen our manufacturing network and reduce supply costs.”
In the newly created consumer healthcare business, GSK and Novartis have complementary over-the-counter medicines, Witty added, including Excedrin, Theraflu, Voltaren, Otrivin and Sensodyne toothpaste.
As for the divestment of the oncology portfolio, Witty said GSK has made excellent progress in developing a series of innovative cancer medicines over the past six years. The company recently gained regulatory approval for Tafinlar and Mekinist for melanoma. They will be part of Novartis’ potent portfolio, which includes its best-selling Gleevec cancer drug.
Some analysts said GSK’s divestment of its cancer program makes sense in a very competitive market in which it was ranked 14 worldwide. Others cited how the new GSK cancer drugs will help Novartis to more easily navigate some expiring patents on its best-selling medicines.
“This transaction provides us with a unique opportunity to crystallize an attractive value for this portfolio and allow these medicines to benefit from Novartis’ global scale in this area,” said Witty, whose company becomes a vaccines and consumer goods leader.
For Novartis, strengthening its cancer program means gaining a total of 20% of its nearly $54 billion in expected revenue from cancer drugs.
Joseph Jiminez, Novartis CEO, said in a statement the deal marks “a transformational moment” for the company, enabling it to refocus around three core strengths: innovative drugs, generics and eye care. He told reporters the deals will result in slightly lower overall sales for the Swiss group, shedding the lower-margin vaccines business for the more profitable oncology drugs.
However analysts at Barclays told Reuters in London the $16 billion price tag for the oncology assets and milestone payments is “rather hefty.”
Still, most European analysts viewed the cancer drug portion as very beneficial for Novartis.
“We reckon the real value of the deal should be searched for in the pipeline and the newly launched products, strengthening Novartis’ position in melanoma and hematology,” said Vontobel analyst Andrew Weiss.
In acquiring Novartis’ animal health business, which had revenues of $1.1 billion, Eli Lilly said it expects annual cost savings of more than $200 million within the third year after the deal is completed. Eli Lilly will have the world’s second largest animal health business by revenue after the deal closes.
The GSK-Novartis transactions are expected to be completed during the first half of 2014, subject to approvals.