Novartis enters deals worth more than $25 billion with GlaxoSmithKline, Eli Lilly

Novartis announced Tuesday deals worth more than $25 billion, overhauling its product portfolio by bolstering its oncology unit and creating a consumer health joint venture (JV), while divesting its vaccine unit and animal health division. CEO Joseph Jimenez remarked "the transactions mark a transformational moment... They focus the company on leading businesses with innovation power and global scale."

Novartis chairman Joerg Reinhardt said last year that the company would undertake a review of its businesses, with Jimenez later suggesting that divestitures of its non-strategic animal health and over-the-counter units were a possibility in order to focus on its core businesses of pharmaceuticals, ophthalmology and generics. Jimenez commented "we believe the divestment of our smaller vaccines and animal health divisions will enable us to realise 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."

Specifically, the Swiss drugmaker entered a definitive agreement to acquire oncology products from GlaxoSmithKline for $14.5 billion, as well as up to $1.5 billion in milestone payments. As part of the deal, which includes GlaxoSmithKline's marketed oncology drugs, related R&D activities and rights to an AKT inhibitor, Novartis will have opt-in rights to the current and future oncology R&D pipeline. The milestone payments are tied to results of the Phase III COMBI-d trial, which is evaluating the combination of the BRAF inhibitor Tafinlar (dabrafenib) and the MEK inhibitor Mekinist (trametinib) versus BRAF monotherapy.

Novartis also agreed to sell its vaccines unit to GlaxoSmithKline, excluding its influenza business, for $7.1 billion plus royalties. The companies noted that the total value consists of $5.25 billion upfront and up to $1.8 billion in milestones. Included in the deal are the meningitis B vaccine Bexsero and a further candidate vaccine in late-stage development, MenABCWY. Novartis indicated that it has initiated a separate sales process for its influenza business. Novartis and GlaxoSmithKline also agreed to create a consumer health JV, in which the Swiss company will own a 36.5 percent stake and hold four of 11 seats on the board. According to GlaxoSmithKline, whose current consumer health head Emma Walmsley will lead the unit, the JV will have annual revenues of around 6.5 billion pounds ($10.9 billion).

Further, Novartis entered a definitive agreement to divest its animal health division to Eli Lilly for approximately $5.4 billion, which it said followed a "competitive process." Eli Lilly noted that upon completion of the acquisition, its Elanco unit "will be the second-largest animal health company in terms of global revenue," while the deal "will solidify its number two ranking in the US, and improve its position in Europe and the rest of the world." The US company added that Novartis' animal health unit had revenues of approximately $1.1 billion in 2013.

According to Novartis, the transaction with Eli Lilly is expected to close by the end of the first quarter of 2015, while the deals with GlaxoSmithKline are predicted to close during the first half of next year.

Commenting on the news, Ori Hershkovitz of Sphera Funds Management said "we’re talking about three companies swapping assets so that each can specialise in what they’re good at and make it even more profitable." Vontobel analyst Andrew Weiss suggested that "the real value" of Novartis' deal for GlaxoSmithKline's oncology assets "should be searched for in the pipeline and the newly launched products, strengthening Novartis' position in melanoma and haematology." As well as the melanoma drugs Tafinlar and Mekinist, Novartis will gain rights to Votrient (pazopanib) for renal cell carcinoma, Tykerb (lapatinib) for breast cancer, the chronic lymphocytic leukaemia therapy Arzerra (ofatumumab) and Promacta (eltrombopag) for thrombocytopenia. The Swiss drugmaker noted that sales of the acquired oncology products in 2013 were approximately $1.6 billion.

Analysts at Notenstein suggested that the addition of new cancer drugs would help Novartis to more easily navigate patent expiries on some of its medicines. However, analysts at Barclays said the price of the assets was "rather hefty." Jimenez noted that overall, the deals would result in slightly lower sales, but higher profit as the addition of higher-margin oncology drugs more than offset the sale of its lower-margin vaccines business.

For related analysis, read ViewPoints: GlaxoSmithKline, Novartis embrace home comforts via innovative $25 billion deal.

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