Is This a Good Deal for Novartis AG and GlaxoSmithKline plc?

Novartis and GlaxoSmithKline execute multiple transactions to add profitable scale and streamline their operations.

Apr 22, 2014 at 1:36PM

This seems to be a week for Big Pharma to do big things, and Novartis (NYSE:NVS) and GlaxoSmithKline (NYSE:GSK) are certainly doing their part. The two companies announced a series of transactions that seem to offer "win-win" opportunities to clean up and consolidate some non-core operations for both companies. Though it seems like Glaxo is getting the better deal, there's arguably less risk to the Novartis side of the transactions.

A pharma swap-meet
Novartis and Glaxo both found themselves with sub-scale businesses that didn't really fit into their long-term plans, and so they have chosen to work together on a series of transactions that will reshape both businesses.

Novartis is selling its money-losing vaccines business to Glaxo for $5.25 billion and up to $1.8 billion in milestones. Glaxo will also owe Novartis a 10% royalty on the sale of particular vaccines (including MenABCWY, Bexsero, and group B strep). This deal does not include Novartis' flu vaccine business, which is still for sale.

Novartis and Glaxo also agreed to merge their consumer OTC businesses in the form of a joint venture. Glaxo will own 63.5% of this JV, while Novartis will have the right to exit in three years (either entirely or in installments).

Last and not least, Novartis will acquire Glaxo's oncology portfolio and related R&D assets for $14.5 billion and up to $1.5 billion in milestones. This transaction includes approved drugs like Arzerra and Tykerb, as well as Glaxo's development-stage AKT inhibitor. Novartis will also have the right to opt in to partner on future Glaxo oncology drugs.

Not to be left out, Lilly (NYSE:LLY) is also involved in Novartis' spring cleaning. Lilly will be acquiring Novartis's animal health business for $5.4 billion. There had been rumors of Lilly's interest, and while this acquisition won't vault Lilly to the top of the animal health business, it will put it strongly in that second tier behind market leader Zoetis with mid-teens share comparable to Merck and Sanofi. Here too, then, Novartis is getting out of a sub-scale business and getting reasonable value for it (roughly 5x sales).

Can Glaxo do better with vaccines?
Novartis has long struggled with its vaccine business, a business that generated less than $1 billion in revenue and less than 2% of Novartis's total sales in 2013. A loss-making business, it was sub-scale and likely to remain so given competition from Glaxo, Pfizer, and Sanofi. In Glaxo's hands, though, it can be worth more. Glaxo's vaccine business is five times larger and is profitable. To the extent that products like Bexsero can be maximized, Glaxo is a good candidate to do it.

A JV leaves OTC upside
Novartis had identified its consumer health business as a target for action. Not unlike the vaccine business, this was a sub-scale operation as the segment produced less than 10% of the Novartis's revenue and a much lower percentage of profits. In combination with Glaxo's consumer health business, though, this is a $10 billion/year force to be reckoned with and a business with attractive scale and growth potential. With this deal structure, Novartis gets to participate in future upside and enjoy the benefits of a considerable scaled-up enterprise.

Paying a steep price for oncology assets
The most curious part of the Novartis-Glaxo transactions is the potentially $16 billion that Novartis is paying for Glaxo's oncology assets. Glaxo's oncology business was mostly just an "OK" business – Vortient, Promacta, and Arzerra all showed good growth in 2013, but none are really on their way to becoming a true blockbuster and this was more of a collection of good supporting actors than real stars. What's more, Glaxo's oncology pipeline is not that exciting. The company bet a lot on its failed MAGE-A3 vaccine and doesn't have much in the pipeline right now, including no particularly interesting immunotherapy assets.

In Novartis' hands, the company might be able to generate better margins and returns from the sale of Votrient, et al largely just through better sales leverage (adding existing products to existing sales reps). Even so, at close to 10x sales Novartis is paying a lot for the incremental revenue and profit potential. As for the opt-in rights, Glaxo's remaining pipeline is a collection of a half-dozen phase 1 programs and it is unclear if the company will develop these further.

For Glaxo's part, this is a good opportunity to monetize a business that was going to require major R&D investments to truly join the big leagues. With Novartis buying the existing business, Glaxo can concentrate its energies on areas where it has meaningful leadership – including respiratory care, vaccines, HIV, and consumer health.

The bottom line
I reject the notion that every deal has to have a winner and a loser. On balance, I think Glaxo is getting the best of these transactions, as the deal adds scale in vaccines, augments the consumer health business, and maximizes the value of a me-too oncology franchise. For Novartis, though, it is an opportunity to get value for a money-losing vaccine business, maximize the value of a sub-scale animal health business, upgrade its consumer health exposure, and profitably add scale in oncology with virtually no clinical risk. Even Lilly wins, as this was the most cost-effective option for adding scale. All told, then, each of the major players walks away with something they needed and wanted.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers