GSK buys Novartis out of joint venture

$13 Billion Deal

GlaxoSmithKline (GSK) is buying Novartis out of the consumer healthcare joint venture the two companies had. The $13 billion buyout will give GSK full control of products such as Sensodyne toothpaste, Panadol headache tablets, muscle gel Voltaren, and Nicotinell anti-smoking patches. Under the terms of the 2014 deal to pool their consumer assets, Novartis had the right so sell its 36.5 percent stake to Glaxo. The transaction should be complete in the second quarter of 2018, subject to necessary approvals.

According to an article in Reuters, which describes the move as a shakeup, GSK’s biggest move since Emma Walmsley became its chief executive in 2017 comes on the heels of GSK’s recent decision to stop trying to buy Pfizer’s consumer healthcare business. That jeopardizes an auction the U.S. company had hoped would yield as much as $20 billion. While over-the-counter consumer remedies have lower margins than prescription drugs, they are usually brands well-known by customers.

According to Walmsley, “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.”

While some pharmaceuticals groups have desired to hang onto consumer care products, there are some concerns. Because of steep price competition online, largely from Amazon, as well as less expensive store-brand products, other companies have doubted the stable returns of consumer products over the longer term. The British group’s shares climbed 6.1 percent, outperforming a 2 percent gain in the STOXX Europe 600 Health Care .SXDP.

In addition to ending the Novartis venture, GSK said it would begin a strategic review of Horlicks and other consumer nutrition products, possibly creating another industry shakeup. GSK’s review will include an evaluation of its majority stake in India-listed GlaxoSmithKline Consumer Healthcare.

According to Ketan Patel, co-manager of the Amity UK Fund at EdenTree Investment Management, who holds GSK shares, “The decision not to pay up for Pfizer’s consumer assets will have led GSK CEO Emma Walmsley to remove uncertainty by bringing all the consumer revenues in-house and assisting toward efficient capital allocation. Long-term investors will welcome the greater clarity this brings to both companies.”

GSK expects the purchase to bolster adjusted earnings and cash flows. Meanwhile, Pfizer has been have difficulty selling its consumer healthcare business after GSK and Reckitt Benckiser both withdrew from the bidding. Differences in price expectations have also made it difficult for German drugmaker Merck KGaA to sell its consumer products unit. GSK’s call for bids for its consumer healthcare nutrition brands, with a regional focus on India, could divert attention from Merck’s asset, which is highly dependent on sales of vitamins and dietary supplements in emerging markets.

While Barclays analysts claimed that Glaxo was paying less than 17 times expected 2018 core earnings for the joint venture stake, sources have said that both Merck and Pfizer had asked as many as 20 times for their respective assets. Analysts at Baader Helvea called the cash price gotten by Novartis as “excellent news” for the Swiss company, whose shares opened 1.9 percent higher. Deutsche Bank analysts claimed that the move “decluttered Novartis’s portfolio,” while saying that the Swiss group was being too vague about what it would do with the cash.

Novartis’s new CEO Vas Narasimhan explained, “The time is right for Novartis to divest a non-core asset at an attractive price. We want to focus our M&A efforts on bolt on acquisitions that have either new technologies or products that fit into our core therapeutic areas.”

Narasimhan is stressing the use of technology to achieve greater returns on research investment.  Novartis is also contemplating a spinoff of its Alcon eye care unit to shareholders in early 2019.