Novartis and GSK Agree US$20bn+ Asset Swap Deal

Pharmaceuticals giants Novartis and GlaxoSmithKline (GSK) will trade more than US$20bn worth of assets to strengthen their core businesses and exit those in which they are less dominant.

Under the deals agreed between Swiss multinational Novartis and UK multinational GSK, Novartis will acquire GSK’s cancer drugs while GSK gains Novartis’ vaccines business.

In addition, Novartis is to sell its animal health division to US group Eli Lilly in a cash deal worth around US$5.4bn. The deal, which is due to close early next year, will see Lilly’s Elanco division become the world’s second-largest animal health business.

Novartis said it would start a separate sale process for its flu business immediately, which was not part of the GSK deal.

The deals form part of the pharmaceutical sector’s response to healthcare spending cuts and competition from generic brands. They come as reports suggest UK-Swedish group AstraZeneca has rejected a US$101bn takeover offer from US multinational Pfizer.

Deal values in the sector have almost doubled since the start of 2014 to US$77.9bn from a year earlier, according to Thomson Reuters data.

Fitch Commentary

In its commentary, Fitch Ratings said that the Novartis-GSK asset swap deal highlights the industry’s growing emphasis on efficiency through more focused research and development (R&D) and the pursuit of scale in consumer healthcare. The credit ratings agency (CRA) does not expect the transaction to affect either company’s credit rating when it completes.

As the risk and cost of bringing new drugs to market rises, Fitch expects pharmaceutical companies to concentrate on a smaller number of therapeutic areas. With a full late stage oncology pipeline across the sector, the CRA sees oncology drugs as a key area of competition due to the high returns available and the prospects for next generation treatments, particularly in combination with already established drugs.

Adding to its already strong oncology portfolio and the potential for combination therapies are likely to be key benefits for Novartis in its acquisition of GSK’s oncology business, which will consolidate the group’s position as the second largest in the field. For GSK the disposal of its cancer drug portfolio, where it didn’t have the scale to compete, and the acquisition of Novartis’ vaccines business will enable it to focus on the stronger areas in its R&D pipelines, including vaccines and respiratory drugs.

The combination of the companies’ consumer healthcare arms highlights the importance of scale in driving efficiency in this segment. The joint venture will create the second largest global consumer healthcare business, improving geographic reach and supply chain logistics. The limited geographical and product overlap should help the companies obtain regulatory approval.

If the deal is approved it’s likely to have little impact on GSK’s financial ratios, given that a large portion of the proceeds will be passed through to shareholders via extraordinary share buybacks, but Fitch expects some margin benefit in the long term from cost savings. The group’s business profile would benefit from becoming the global leader in the vaccines segment in addition to the improved position in consumer healthcare. This creates a more stable growth platform with still sufficient diversification.

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