Novartis, Glaxo Do Big Deals Without the Big

It’s not just size that counts.

That’s the message coming from most big drugmakers as they re-engineer themselves in the wake of a patent cliff that eliminated the protection of a generation of big-selling drugs. In the new pharmaceutical world, the power to control a tightly focused market with the potential for growth now tops the riskier transformational megamerger of a decade earlier.

Novartis AG today announced transactions valued at $28.5 billion, which together mark the biggest industry deal since 2009, according to data compiled by Bloomberg. The fact that they were actually three separate asset purchases and sales illustrates how the world’s biggest drugmakers are focusing on targeted deals to reshape their portfolios.

“Rather than fighting each other in all areas, which hurt profit margins, big pharma companies will streamline their portfolios and specialize more to boost their bottom line,” said Enrique Quemada, head of Madrid-based advisory firm OnetoOne Corporate Finance, in a telephone interview.

Novartis agreed to buy London-based GlaxoSmithKline Plc’s cancer drugs for as much as $16 billion while selling most of the Swiss company’s vaccines division to Glaxo for $7.1 billion and its animal-health unit to Eli Lilly & Co. for $5.4 billion. Novartis is also forming a consumer-health venture with Glaxo as part of the agreement.

Novartis, in comments after the deal was announced, said it could use a sales force well-trained in pushing cancer drugs to gain more revenue from cancer medicines Glaxo already has on the market, while adding some promising early-stage Glaxo cancer candidates to its own pipeline.

Glaxo Drugs

Glaxo’s cancer drugs Votrient, for tumors of the kidney and soft tissue, and the skin cancer treatments Mekinist and Tafinlar are still relatively new to the market, Novartis CEO Joe Jimenez said on a call with analysts. “If you put those assets in the hands of our very strong development and commercial oncology business, we believe that we will maximize growth potential on those compounds,” he said.

Lilly, meanwhile, has previously stated its desire to increase its ability to control the market in animal-health, and this move gives it added strength as a leader in this area. In January, Lilly CEO John Lechleiter said “we’re buyers” in the animal health field during an interview at an industry conference. Lilly hasn’t “put a cap on what we would or wouldn’t consider,” he said at the time.

Patent Expirations

Drugmakers are facing a wave of patent expirations that are cutting billions of dollars from their top lines, forcing them to look for new therapies.

Pfizer Inc., the biggest U.S. drugmaker, lost patent protection on cholesterol pill Lipitor, the best-selling drug of all time, and sales fell from a peak of $12.9 billion to an estimated $2.07 billion this year. Lilly will lose the anti-depressant Cybalta, a $5.08 billion drug in 2013 that will be worth less than a billion in 2015. And Bristol-Myers Squibb Co.’s Plavix, an anti-clot drug that sold $7.09 billion in 2011, sold $258 million last year.

Today’s deals followed other efforts to slim and refocus after years of expansion through large deals. Pfizer, for instance, has shed non-drug units while AbbVie Inc., which split off from Abbott Laboratories at the start of 2013, has said it will no longer focus on primary care medicines.

Novartis in November sold its blood-transfusion diagnostics unit to Spain’s Grifols SA for $1.7 billion in refocusing its efforts on cancer. A month later, Bristol-Myers sold its stake in a joint venture focused on diabetes to partner AstraZeneca for as much as $4.3 billion. At the time, Bristol-Myers said the venture isn’t profitable and that it wants to focus on cancer, antiviral and specialty medicines.

About $141 billion of corporate takeovers in the pharmaceutical industry were announced or proposed in the 12 months through today, according to data compiled by Bloomberg. That’s the highest for a 12-month span since 2009, and four times the volume in the same period last year, the data show.

Smaller Businesses

“The whole deal was around trying to make those smaller businesses bigger at Novartis or look for different structures, it wasn’t around considering bigger transactions,” Jimenez, the Novartis CEO, said in a telephone interview today. “I don’t know if mega-mergers are gone or not gone, all I know is that everybody in the industry is looking at their portfolio and they are deciding how they think they should strengthen it.”

Jimenez said he was told “for many months” that a swap like this couldn’t occur because it was too complex.

“That just turned out to be dead wrong,” he said.

Megamergers, on the other hand often bring problems with integration and large-scale job cuts in unwanted divisions. Still, deal making is necessary to offset declining revenue from expiring patents and pressures on drug pricing. Takeovers in the pharmaceutical industry rose to more than $91 billion in the past 12 months, more than three times the volume in the same period last year, Bloomberg data show.

To be sure, the industry may still see some of the old mega deals. Pfizer, the world’s biggest drugmaker, held informal, now-discontinued talks with AstraZeneca Plc months ago in what would’ve been among the largest ever acquisitions in the sector, according to people familiar with the matter. The companies aren’t currently negotiating, said the people, though analysts have speculated since that the discussion may be revisited by the two sides.

Allergan, Valeant

Allergan Inc., the maker of the Botox wrinkle treatment, is also being targeted for a takeover by Valeant Pharmaceuticals International Inc. with Pershing Square Capital Management LP after rebuffing merger efforts for more than a year. Allergan has a market value of more than $42 billion.

“There will probably be more mega-mergers in the future, but more likely once companies are done cleaning up their portfolios,” said Odile Rundquist, an analyst with Helvea in Geneva, said in a telephone interview today.

Before it's here, it's on the Bloomberg Terminal.