For all the complexities of the three-part transaction announced by GlaxoSmithKline and Novartis (and also encompassing Eli Lilly) on Tuesday, there is a wonderfully simplistic rationale to the individual components of the deal. Each of the business units sold and bought now appears to be in better hands.
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In a conference call on Tuesday morning, Novartis reiterated this view when pressed by analysts on the price ($16 billion) it has paid for GlaxoSmithKline's marketed oncology portfolio and a number of pipeline candidates. Similarly, GlaxoSmithKline's decision to largely exit the oncology rat race appears to be a tacit admission that the company has never been at the forefront of this therapy area.
Given the excitement around oncology – and the emergence of immunotherapies in particular – it is perhaps surprising to see GlaxoSmithKline make such a move, commented Bernstein's Tim Anderson in a note to investors. But the UK company has secured a favourable price for the business unit; "managing to get up to seven times prospective revenues for the oncology business is no mean feat," said Panmure Gordon analyst Savvas Neophytou.
Speaking to investors, GlaxoSmithKline CEO Andrew Witty said he was delighted with the valuation for the oncology unit, which has "grown well but is sub-scale." Despite there being "no clear anchor product" in GlaxoSmithKline's marketed portfolio of cancer drugs, added Anderson, the "business slots into Novartis nicely."
That said, the price paid by Novartis for the oncology unit is likely to be the most scrutinised element of the deal, with the Swiss company almost certain to face the charge that for $16 billion it could have acquired a handful of smaller cancer-focused biotech players. Furthermore, arguably the most exciting products in the portfolio – Tafinlar and Mekinist for the treatment of melanoma – have notable overlap with drugs already being developed in Novartis' pipeline.
Nevertheless, the deal offers the potential for commercial and R&D synergies, noted analysts, while management appears to have made some concession in the price paid in return for securing a higher price from GlaxoSmithKline for its vaccines business, suggested JP Morgan's Richard Vosser.
GlaxoSmithKline's suitability to leverage success in certain disease areas was a common theme reiterated a number of times by Witty on Tuesday morning. At the crux of the Novartis deal is a narrowing of GlaxoSmithKline's therapeutic and strategic focus, with its respiratory, HIV, vaccines and consumer healthcare units now accounting for approximately 70 percent of sales.
As a result of the transaction, vaccines and consumer healthcare will together account for a 40 percent share. While GlaxoSmithKline's oncology products look to be more at home in Basel, its integration of Novartis' vaccine business should provide a stronger platform for the continued commercialisation of Bexsero in meningitis, which Witty described as one of the most exciting vaccine products in development.
Faced with the oligopoly of competition in the form of three major, integrated vaccines players – GlaxoSmithKline, Sanofi and Merck & Co. – Novartis has struggled to "crack into the vaccines market," notes Anderson. In turn, the deal has allowed GlaxoSmithKline to scale up its US vaccines business in particular, notes Neophytou.
The marriage of Novartis and GlaxoSmithKline's over-the-counter divisions creates the world's largest consumer healthcare company with 19 brands generating sales in excess of $100 million, added Witty.
With neither company looking to exit this market, a consolidation delivers important scale, argues Anderson. With Merck also looking to possibly divest its consumer healthcare business there could be further shifts in the competitive landscape in the not-too-distant future, although Witty seemed to play down any consideration that GlaxoSmithKline and Novartis would flex their combined muscles to further expand their market leadership.
Novartis management did not rule out further bolt-on acquisitions if suitable opportunities arise, but the complexity of Tuesday's $25 billion deal means that it is unlikely to be completed until early 2015.
These complexities are tied primarily to the 'intra-conditionality' of the transaction, added Witty, but which represented a worthwhile challenge to overcome given that both GlaxoSmithKline and Novartis "stand to advance strategically in a single step." To find a "match of interests where two strong companies go into a transaction and both come out stronger" is a somewhat unique scenario within the pharma sector, added the GlaxoSmithKline CEO.
Neophytou led a chorus of approval on Tuesday, noting that in light of recent underperformance at GlaxoSmithKline (see ViewPoints: Diabetes approval provides minimal respite for GlaxoSmithKline following lacklustre Q1), "management has demonstrated it will not sit idly by waiting for the pipeline to mature but will take brave decisions to unlock shareholder value."
The deal may further move GlaxoSmithKline away from the 'white pills in western markets' model that Witty has been advocating for some time, but investors will still be looking for the UK player to deliver a stronger performance in its key respiratory portfolio over the remainder of 2014. Performance in Q1 has been weak but is now likely to receive less scrutiny when GlaxoSmithKline unveils its quarterly results at the end of the month.
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