With a trio of transactions, GlaxoSmithKline Plc Chief Executive Officer Andrew Witty is expanding the U.K. pharmaceutical company’s positions in consumer products and vaccines, providing “durability” as the industry faces increased pricing pressure for medicines.
The deals, which include selling cancer drugs to Novartis AG for as much as $16 billion and buying Novartis’s vaccine business for $7.1 billion, also help shift the conversation about Glaxo away from the eruption of bribery investigations in China, Poland and the Middle East.
As part of today’s transactions, Glaxo and Novartis are forging a 6.5 billion-pound ($10.9 billion) consumer-products company, to be majority-owned by Glaxo, that will sell a range of health aids from Sensodyne toothpaste to Excedrin headache pills. With the moves, Glaxo cements its place among the global leaders in vaccines, with 29 percent of the market, and will run the largest seller of over-the-counter drugs.
“Strategically, it seems to make a whole lot of sense,” said Mark Clark, an analyst for Deutsche Bank AG in London. “After a couple of years where they have tended to undershoot expectations, this will be seen as a positive move. It’s hard to pick this apart in a negative way.”
The Novartis deals mean that 38 percent of London-based Glaxo’s sales will come from consumer goods and vaccines, using 2013 revenue figures, up from 24 percent in 2007. Unlike prescription drugs, those products aren’t as vulnerable to expiring patents or to governments unwilling to accept price increases.
‘Durable Cash Flow’
“It gives us much more of a durable cash flow profile in the future,” Witty said in an interview with Bloomberg Television.
Glaxo spent the last weeks answering questions about bribery allegations in Poland, Iraq, Jordan and Lebanon. In July, Chinese authorities announced an investigation into allegations the company’s sales representatives bribed doctors, hospitals and officials.
The deals also provide “a much-needed distraction” from issues surrounding Glaxo’s respiratory products, namely competition to the best-selling Advair for asthma and the sluggish introduction of a follow-up drug, Breo, analysts at Jefferies LLC said in a note to investors.
Glaxo began conversations six months ago with Novartis CEO Joe Jimenez about the vaccine business, as Basel, Switzerland-based Novartis is a supplier of ingredients to Glaxo, Witty said in a conference call with analysts. The possibility of repositioning both companies with a trade of products appealed to the two men, he said.
“Both Joe and I wanted to step our companies forward in one move,” Witty said. “These are very hard to do, but if you can find that match of interest, swap assets and have two strong companies go into a transaction and come out stronger, that’s what we wanted to achieve.”
By selling its cancer drugs, Glaxo escapes an underperforming oncology business. The company is No. 14 in the world in cancer medicine, Witty said on a conference call.
The company said last month an experimental therapy failed to prolong the lives of lung-cancer patients, six months after it announced it failed a similar skin-cancer test.
“Glaxo had been trying to build a franchise in oncology but they never had a critical mass that other companies had,” said Ori Hershkovitz, a managing partner at Sphera Funds Management Ltd. in Tel Aviv who owns Glaxo shares. “They tried to make a vaccine for cancer but that flunked this year. That kind of raised their red flag.”
Selling the business to Novartis made the most sense for shareholders and patients, Witty said, and also signals a model for future deals to sell drugs other companies can better market.
“This is a very rational, sensible way to crystallize the value of the pipeline we’ve developed,” he said. “We should be neutral about whether we own the product or if we sell it.”
Glaxo plans to return 4 billion pounds to investors after the completion of the deal and will maintain its commitment to increasing dividends.
When the transactions are completed next year, Glaxo will be oriented around four areas -- vaccines, consumer products, asthma medication and HIV drugs -- that will make up 70 percent of revenue. The company will consider selling some of its other medicines that have expired patents, Witty said.
Glaxo will still be dependent on prescriptions sales for the majority of its revenue, Clark said.
“Ultimately this is a drug company, so they can’t avoid government reimbursement,” Clark said. “They still have to deliver innovative products where the cost can be justified.”