GSK buys out Novartis for US$13 billion

GlaxoSmithKline is buying Novartis out of their consumer healthcare joint venture for US$13 billion, taking full control of products.

Background

GlaxoSmithKline plc (GSK) is a British pharmaceutical company headquartered in London, England. It was established in 2000 through the merger of Glaxo Wellcome and SmithKline Beecham. As of 2015, GSK was the world's sixth largest pharmaceutical company, after Pfizer, Novartis, Merck, Hoffmann-La Roche, and Sanofi. At the end of 2016, the company had a market capitalization of £81 billion (around US$107 billion), the fourth largest on the London Stock Exchange.

GSK's top-selling products are Advair, Avodart, Flovent, Augmentin, Lovaza, and Lamictal. GSK's consumer products include Sensodyne and Aquafresh toothpaste, the malted-milk drink Horlicks, Abreva for cold sores, Breathe Right nasal strips, Nicoderm and Nicorette nicotine replacements, and Night Nurse. In 2014, the company introduced its first malaria vaccine, RTS,S, which was available for 5% above cost. There are several legacy products developed by GSK, most of which are listed in the World Health Organization Model List of Essential Medicines, such as amoxicillin, mercaptopurine, pyrimethamine, and zidovudine.

Established in 1996, Novartis International AG is a Swiss multinational pharmaceutical company headquartered in Basel, Switzerland. It is one of the largest pharmaceutical companies by both market capitalization and sales. Novartis manufactures the drugs clozapine (Clozaril), diclofenac (Voltaren), carbamazepine (Tegretol), valsartan (Diovan), imatinib mesylate (Gleevec/Glivec), ciclosporin (Neoral/Sandimmun), letrozole (Femara), methylphenidate (Ritalin), terbinafine (Lamisil), among others.

In 2014, as part of a three-part transaction between GSK and Novartis, the Consumer Healthcare Joint Venture was formed after receiving approval from shareholders. Under the terms of the initial agreement, from March 2018 to March 2035, Novartis had the right so sell its 36.5% stake in the Joint Venture to Glaxo.

Analysis

GlaxoSmithKline plc announced that it reached an agreement with Novartis for the buyout of Novartis’ 36.5% stake in their Consumer Healthcare Joint Venture for US$13 billion (£9.2 billion). This is seen as GSK’s biggest transaction since the appointment of Chief Executive Officer Emma Walmsley last year. Last week, GSK announced its decision to quit the race to buy Pfizer’s consumer healthcare business.

“The proposed transaction addresses one of our key capital allocation priorities and will allow GSK shareholders to capture the full value of one of the world’s leading consumer healthcare businesses,” Walmsley said in a statement.

GSK said that the purchase would increase adjusted earnings and cash flows. Additionally, GSK stated that along with the termination of the Novartis venture, it would also start strategically reviewing Horlicks and other nutrition products. This announcement sparked another potential shake-up in the industry. The review will include an assessment of its majority stake in India-listed GlaxoSmithKline Consumer Healthcare. GSK has also called for bids for its consumer healthcare nutrition brands, with a regional focus on India.

The buying out is considered as excellent news for Novartis, whose shares opened 1.9% higher. However, there is a lot of market speculation surrounding Novartis’s portfolio and what it would do with the cash. In response, Novartis said the money would be used to expand its business organically as well as investments in small acquisitions.

“We want to focus our mergers & acquisition efforts on bolt on acquisitions that have either new technologies or products that fit into our core therapeutic areas,” stated Vasant Narasimhan, Chief Executive Officer of Novartis.

As a result of the transaction, GSK’s shareholders will capture the full value of GSK’s Consumer Healthcare growth. Along with new opportunities and expected operational improvements, the planned financial benefits will further support GSK’s confidence in reaching its outlooks for 2020 and investing efficiently in other priorities.

India continues to be a priority market for GSK’s investment and growth opportunities. The Consumer Healthcare business is likely to heavily invest in growth opportunities for its Over-the-Counter and Oral Health brands, such as Sensodyne and Eno. The company is also actively investing in its Pharmaceutical and Vaccines businesses, including building new manufacturing unit in Vemgal, Karnataka, and Nashik.

The transaction is subject to approval by GSK shareholders as Novartis is a related party under UK Listing Rules. The Board is expected to unanimously suggest shareholders to vote in favor of the transaction. The transaction is to be concluded by the end of 2018. However, there it is still uncertain whether the review process will result in any transaction.

Assessment

Our assessment is that the new agreement to buy out Novartis’ stake removes uncertainty surrounding GSK’s capital spending as it improves its ability to effectively allocate capital to its other priorities. It should be noted that pharmaceuticals companies face extreme price competition online, mainly from Amazon, as well as cheaper store-brand products, leading companies to doubt the stability of their long-term returns. We believe that post-completion of this transaction, GSK can increase its focus on science-based innovation and improved operational efficiencies, thus positioning GSK Consumer Healthcare to deliver sales growth, improve operating margins, and attain attractive returns.