Novartis-Glaxo Unit Swaps Show Industry Overhaul

A flurry of billion-dollar deals announced today including a swap of cancer and vaccine drugs between Novartis AG and GlaxoSmithKline Plc will reshape the pharmaceutical industry as it looks to cut costs and may herald another round of mergers and acquisitions.

Novartis, based in Basel, Switzerland, agreed to buy cancer drugs for as much as $16 billion while selling most of the vaccines division to Glaxo for up to $7.1 billion and its animal-health unit to Lilly for $5.4 billion. Glaxo and Novartis also will form a consumer-health joint venture.

The three-way deal came on the same day that Valeant Pharmaceuticals International Inc. offered to buy Allergan Inc. in a $45.7 billion transaction that would give the Canadian company the Botox wrinkle treatment. The shuffling reflects how drugmakers are seeking to re-engineer themselves as patents expire on a generation of best-selling medicines. Their strategy now is to control a narrow market with high growth potential, such as Novartis in cancer and Glaxo in vaccines.

“We’re talking about three companies swapping assets so that each can specialize in what they’re good at and make it even more profitable,” said Ori Hershkovitz, a managing partner at Sphera Funds Management Ltd. in Tel Aviv whose fund owns shares of all three drugmakers.

More transactions may follow. Merck & Co. is in talks to sell its consumer-health unit, according to people with knowledge of the matter. Germany’s Bayer AG and Paris-based Sanofi have both said they are interested in consumer health. And while a potential deal between Pfizer Inc. and AstraZeneca Plc recently fizzled, it may be revived, or Pfizer could seek a merger with Amgen Inc. or Shire Plc, according to analysts.

‘So Critical’

“You have to be No. 1, No. 2 or No. 3 in your segment,” Novartis Chief Executive Officer Joe Jimenez said in an interview with Bloomberg Television. “This was so critical we talked with virtually everyone.”

The swap of assets was the biggest shakeup of Novartis since Jimenez took over in February 2010. The vaccines purchase is the largest for Glaxo since Andrew Witty became CEO in 2008. Lilly will become the second-largest animal-health company by sales.

The acquisition of the oncology drugs will heighten Novartis’s competition with with crosstown rival Roche Holding AG, the world’s largest maker of cancer medicines.

Daniel Vasella, the former chairman and CEO of Novartis, amassed a 33 percent voting stake in Roche more than a decade ago and has unsuccessfully sought a merger of the companies. Descendants of Roche founder Fritz Hoffmann-La Roche, who control more than 50 percent of the voting stock, still want the company to stay independent, Roche said in October. The Roche stake “continues to be a good asset,” Jimenez said.

Novartis Rises

Novartis, which rose as much as 3 percent in Zurich, has lagged behind Roche and Sanofi in the past four years. The stock was up 2.2 percent to 76.35 Swiss francs at 1:18 p.m. Glaxo, whose performance has lagged behind Novartis in the same period, advanced 5.6 percent to 1,646 pence. It was the stock’s biggest intraday gain since 2009.

Novartis, whose best-selling medicine is Gleevec for cancer, will add London-based Glaxo’s recently approved Tafinlar and Mekinist for melanoma.

With its vaccines purchase, Glaxo will gain Bexsero for meningitis to its Cervarix for human papillomavirus. The Novartis-Glaxo consumer-health venture brings together brands including Novartis’s Excedrin painkiller and Glaxo’s Sensodyne toothpaste.

Cancer Deal

The price for the cancer drugs includes as much as $1.5 billion as a reward for meeting certain development goals. Novartis will also have the option to rights for Glaxo’s current and future cancer treatments in development.

Novartis will pay royalties and as much as $1.8 billion in payments based on the achievement of certain business goals as part of the vaccines agreement, Novartis said in a statement today. The deal excludes flu vaccines, and Novartis will begin to seek a buyer immediately for those products. Excluding that treatment from the deal with Glaxo will help Novartis get the most value for it, Jimenez said.

For Glaxo, the deals shift the company away from prescription drugs and toward consumer products and vaccines, which are less vulnerable to the patent life cycle. The new joint venture with Novartis will be the second-largest consumer health-care company by revenue, trailing only Johnson & Johnson, and it will control 29 percent of the global vaccine market. It also signals a willingness to sell off promising drugs that other companies may be better positioned to market.

Consumer Health

Glaxo and Novartis’s consumer-health venture will have about 6.5 billion pounds ($10.9 billion) in revenue, Glaxo said. The U.K. company will have majority control, with an equity interest of 63.5 percent.

“What this transaction does for GSK is it takes one of the leading position in consumer health care and truly elevates us to a global leadership position,” Witty said on a conference call. “It gives us a very rare, extremely rare opportunity to substantially strengthen our vaccine business. And it finds a home for our nascent oncology business.”

Glaxo said the transaction will probably be completed during the first half of 2015 subject to approvals. The company said it expects to return 4 billion pounds to shareholders after the completion of the deal and will maintain its commitment to increasing dividends.

Animal Health

Lilly said the Novartis animal-health business had 2013 sales of about $1.1 billion. The Indianapolis-based drugmaker said it will take on about $2 billion of debt and pay the rest with cash on hand. Lilly expects annual cost savings of about $200 million within the third year after the deal is completed.

BofA Merrill Lynch advised Lilly, while Goldman Sachs Group Inc. advised Novartis on the animal-health deal. Glaxo said Lazard and Zaoui & Co. are acting as joint financial advisers. The U.K. company has also received financial advice from Citigroup Inc. and Arkle Associates. Lazard and Citigroup are acting as joint sponsors for the transaction, Glaxo said.

Novartis began a strategic review of animal health, vaccines and consumer health last year because the units were too small. Jimenez said the company wanted to be the leader in its businesses or it would consider selling them. Novartis’s bigger operations include prescription drugs, the Sandoz generic-pharmaceuticals unit and the Alcon eye-care operation.

In the Valeant-Allergan deal, Allergan investors would receive $48.30 in cash and 0.83 percent in Valeant stock for each share they own, according to a Valeant statement today. Pershing Square Capital management LP, the fund run by Bill Ackman, Allergan’s largest shareholder, supports the offer, Valeant said.

Valeant has been expanding from its major emphasis in generic drugs into speciality medicines and areas where it had a smaller presence such as opthalmology and dentistry.

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