GlaxoSmithKline, Pfizer to merge consumer healthcare divisions, paving way for eventual spin-off of UK drugmaker's pharmaceuticals business

GlaxoSmithKline and Pfizer announced Wednesday that the companies entered into an agreement to merge their respective consumer healthcare businesses, which had combined global sales of 9.8 billion pounds ($12.7 billion) last year. The deal was unanimously approved by both boards and is expected to close in the second half of 2019, after which GlaxoSmithKline will own a majority controlling equity interest of 68 percent in the joint venture, while Pfizer will hold an equity interest of 32 percent. 

According to GlaxoSmithKline, the move also "lays the foundation" for the UK drugmaker to eventually split into two new UK-based global companies, with one focused on pharmaceuticals and vaccines, and the other on consumer healthcare. Specifically, the company said that within three years of closing of the Pfizer deal, GlaxoSmithKline intends to separate the joint venture via a demerger of its equity interest and a listing of GlaxoSmithKline Consumer Healthcare on the UK equity market. 

"The proposed all-equity transaction represents a compelling opportunity to build on the recent buyout of Novartis' stake" in the companies' 2015 joint consumer healthcare venture, the UK drugmaker said. GlaxoSmithKline added that the Pfizer deal also supports the "key priority of strengthening [our] pharmaceuticals business over the next few years by increasing cashflows and providing an effective pathway through the separation of [our consumer healthcare unit] to build further support for investment in [our] R&D pipeline." 

Brian McNamara, who currently heads GlaxoSmithKline's consumer healthcare unit, will be CEO of the new joint venture, while Tobias Hestler, chief financial officer of the company's consumer healthcare unit, will serve in the same capacity in the combined entity, which will be headquartered in London. Meanwhile, GlaxoSmithKline CEO Emma Walmsley will chair the joint venture until its separation.

GlaxoSmithKline estimated that the tie-up will generate annual cost savings of about 500 million pounds ($633.3 million) by 2022. Walmsley indicated that there would be "some impact" on jobs, although she said savings would not be made only through job cuts, but also in other areas, such as procurement. GlaxoSmithKline expects the transaction to be accretive to total earnings in the second full year following closing, while Pfizer said it would be "slightly accretive" for itself in the first three years after closing.

"Eighteen months ago, I set out clear priorities and a capital allocation framework for GlaxoSmithKline to improve our long-term competitive performance and to strengthen our ability to bring new breakthrough medicines and better healthcare products to people around the world," commented Walmsley, adding "the transaction we have announced today is a unique opportunity to accelerate this work." 

Commenting on the news, Hargreaves Lansdown analyst George Salmon noted that GlaxoSmithKline's move to separate into two businesses is surprising given the drugmaker's reluctance to pursue such a move in the past. "Under [former CEO] Andrew Witty's leadership, calls for GlaxoSmithKline to spin off the consumer healthcare businesses fell on deaf ears and until now it looked like Emma Walmsley would follow suit and ignore claims that [the company's] parts are worth more than the whole," Salmon stated. He predicted that "the separation will take away the steady cash flows of the consumer business, meaning there's more pressure on the men and women in white coats to deliver the next generation of blockbusters."

Timo Kuerschner of Landesbank Baden-Wuerttemberg explained "Pfizer realised it was too small and that it was facing increasingly tough competition." The analyst suggested that the joint venture could spur similar moves by rivals as they consider how to react to the creation of a new market leader in the field.

Other recent deals by GlaxoSmithKline include the acquisition of Tesaro for $5.1 billion in cash and the sale of certain consumer brands to Unilever. 

Meanwhile, Pfizer announced last year that it would consider strategic options for its consumer healthcare unit, while Reckitt Benckiser and GlaxoSmithKline later withdrew their interest for the business. The new joint venture also comes as Pfizer's chief operating officer Albert Bourla is set to replace Ian Read as CEO of the drugmaker on January 1. 

For related analysis, see ViewPoints: GlaxoSmithKline pulls a consumer Christmas cracker out of the hat.

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