ViewPoints: Asset-swap completed, GlaxoSmithKline and Novartis face different outlooks

Two of pharma's biggest players completed one of the industry's most complicated M&A deals on Monday. However, GlaxoSmithKline and Novartis – which have completed a three-business, $20-billion 'asset swap' – face different mid-term outlooks.

Insight, Analysis & Opinion

When the deal was announced last year, analysts were quick to speculate that the novel nature of the transaction could develop into a blueprint for other Big Pharma players seeking to strengthen areas of expertise and exit those where they were struggling to compete. In essense, the collaboration between GlaxoSmithKline and Novartis allows this, enhancing the former's position in vaccines and consumer healthcare, while bolstering the latter's oncology portfolio. It is fair to say, however, that as dust settles on the deal, GlaxoSmithKline has more convincing to do.

This stems primarily from a disappointing recent performance in the respiratory market and a weaker late-stage pipeline. Set against this backdrop, some analysts have questioned the rationale in GlaxoSmithKline selling its marketed cancer portfolio, irrespective of securing a good price for the asset. Despite management's pledge that the company remains committed to cancer R&D, analysts and investors may take some convincing that the deal has not undermined the company's position in this therapy area. Analysts at Bernstein, for example, have cautioned GlaxoSmithKline may struggle to build its position here again with the company having made steady progress in recent years.

Divesture of the oncology portfolio would have been less of an issue if GlaxoSmithKline had a wealth of promising assets in other disease areas, but at present it has not. Investors will be buoyed by recent confirmation of an upcoming R&D day in October, suggest analysts, which should be indicative of promising assets as yet visible. However, some caution is necessary, argues Bernstein's Tim Anderson, given management promises in R&D that stretch back to 2003.

Analysts at UBS – who recently upgraded GlaxoSmithKline to a buy rating – note that 2015-2017 earnings consensus was cut by around 30 percent in the last quarter of 2014. Such a dramatic rebasing could provide the backdrop for "substantial earnings growth" over the next 3-5 years (for the first time in a decade) driven by the ViiV and vaccines businesses, they add. By comparison, those at Credit Suisse maintain that earnings consensus remains too high, with analysts at Bernstein and JP Morgan unwilling to be more constructive on the stock at its current price.

By contrast, Novartis' late-stage pipeline may not be overflowing with near-term blockbuster launches, but in LCZ696 for heart failure the company appears to have one such product poised to launch later this year. Critically, there are no competing products in mid-to-late stage clinical development, which should provide a lengthy period of exclusivity for LCZ696. A similar outlook is applicable at the company level; "Novartis is perhaps the lowest risk name in our coverage universe in 2015 in terms of major franchise uncertainty, uncertain FDA decisions and patent challenge decisions," wrote analysts at Bernstein recently.

One near-term challenge is loss of patent exclusivity for Novartis' leukaemia drug Gleevec over 2015/2016, a headwind that the asset swap deal is presumably designed to buffer. After a weak performance in 2014 – including exposure to a bribery investigation in China – the deal appears to be more of a back to basics strategy for GlaxoSmithKline, whilst also providing an opportunity to keep shareholders happy via a sizable capital return.

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