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Apr 22, 2014

Extreme Makeovers: $28.5B in Deals Reshape Novartis, GSK, Lilly

Extreme Makeovers: $28.5B in Deals Reshape Novartis, GSK, Lilly

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  • Novartis today said it delivered on CEO Joe Jimenez’ promise to restructure the company through a quartet of deals, totaling $28.5 billion, in which it bought the cancer business of GlaxoSmithKline (GSK), sold off most vaccine operations except flu vaccines to GSK, formed a consumer health joint venture with GSK, and sold its animal health division to Eli Lilly.

    The deals leave Novartis with its stronger operations in pharmaceuticals, generic drugs, and eye care.

    "The transactions mark a transformational moment for Novartis. They focus the company on leading businesses with innovation power and global scale. They also improve our financial strength, and are expected to add to our growth rates and margins immediately," Jimenez declared in a statement.

    Novartis said the whirlwind of deals will refocus the pharma giant on leading businesses with global scale and what it called innovation power. More than half of the value of the deals reflected a single transaction—Novartis’ up-to-$16 billion acquisition of GSK oncology products. Novartis agreed to pay GSK $14.5 billion, plus up to $1.5 billion tied to two recently approved GSK-developed compounds, the BRAF inhibitor Tafinlar® (dabrafenib or GSK2118436) and the MEK inhibitor Mekinist™ (trametinib or GSK1120212) succeeding in the COMBI-D (Combination of MEK and BRAF Inhibitors versus dabrafenib) trial, which entered Phase III in 2012.

    Yet Novartis included Tafinlar and Mekinist among the oncology assets it acquired from GSK—assets that Novartis said would make it the market leader in treating metastatic melanoma.

    The cancer drug deal also gives Novartis opt-in rights to products in GSK's current and future oncology R&D pipeline, which Novartis said “could be a source of new compounds and new targets.”

    Novartis also agreed to buy Votrient®, a VEGFR inhibitor for renal cell carcinoma that it said “has potential for the adjuvant setting” as well as its indicated first-line treatment indication. Votrient was GSK’s best-selling cancer drug last year with £331 million ($557.2 million) in sales. Also sold by GSK to Novartis were cancer drugs Tykerb® for HER2+ metastatic breast cancer (£207 million or $348.5 million), Promacta® for thrombocytopenia (£186 million or $313.1 million), and Arzerra® for chronic lymphocytic leukemia (£75 million or $126.2 million).

    In all, the oncology products sold by GSK generated a combined $1.6 billion in sales last year—less than 4% of GSK’s total £26.5 billion ($44.6 billion) in 2013 sales—and will add to a cancer portfolio that already had more than 25 new molecular entities and 24 pivotal trials underway exploring 16 new products and indications.

    "We reckon the real value of the deal should be searched for in the pipeline and the newly launched products, strengthening Novartis' position in melanoma and haematology," Vontobel analyst Andrew Weiss told investors in a note cited by Reuters and The Wall Street Journal.

    Analysts at Swiss broker Notenstein were also upbeat, saying the new cancer drugs would help Novartis to navigate patent expiries on top-selling medicines more easily.

    However, analysts at Barclays described the price tag for the oncology assets, which could rise as high as $16 billion if certain milestones are reached, as "rather hefty."

  • Injecting New Revenues

    Novartis sold most of its vaccine business to GSK for $7.1 billion—$5.25 billion upfront and up to $1.8 billion in payments tied to development milestones—plus 10% royalties on net sales of two Novartis-developed produtss, the meningitis multivalent conjugate vaccine candidate MenABCWY and the soon-to-be-launched meningitis B vaccine Bexsero.

    GSK detailed the royalties, saying it agreed to shell out $450 million upon FDA regulatory approval for MenABCWY; another $450 million if Bexsero achieves an agreed annual net sales threshold; $450 million upon achieving a milestone relating to ACIP regulatory recommendations for either Novartis’ MenABCWY vaccine product or Bexsero; and $450 million upon achieving an agreed milestone relating to ACIP regulatory recommendations in respect of Novartis’ Group B streptococcus vaccine.

    Not included in the vaccine deal are Novartis’ flu vaccines, for which the pharma giant said it has launched a separate sales process. Novartis said the vaccine deal would prove especially strong in pediatric and meningitis, while GSK’s existing strength in vaccines should enhance the planned commercial launch of Bexsero® and boost the portfolio of pipeline vaccines.

    Vaccines accounted for $1.4 billion of Novartis’ $57.9 billion in 2013 sales, though that figure includes sales from flu vaccines, and excludes the blood transfusion diagnostics unit that Novartis sold off to Grifols.

    Separately, Novartis also sold to GSK a 63.5% majority stake in its consumer health business, creating a joint venture that generated £6.5 billion ($10.9 billion) in pro forma 2013 revenues. Novartis, which racked up $2.9 billion from over-the-counter products last year, will have the remaining 36.5% share of the joint venture and four of eleven seats on the joint venture's Board—along with customary minority rights and exit rights at a “pre-defined, market-based pricing mechanism” allowing it the option of to exiting the segment at a later point.

    In all, the series of deals between Novartis and GSK would boost the latter’s annual revenues by £1.3 billion (about $2.2 billion) to £26.9 billion ($45.2 billion) pro forma, with pharmaceuticals now accounting for 62% of sales, followed by consumer healthcare (24%) and vaccines (14%).

    “This proposed 3-part transaction accelerates our strategy to generate sustainable, broadly sourced sales growth and improve long-term earnings,” GSK CEO Sir Andrew Witty said. “Opportunities to build greater scale and combine high quality assets in Vaccines and Consumer Healthcare are scarce. With this transaction we will substantially strengthen two of our core businesses and create significant new options to increase value for shareholders.

    The jumble of deals left analysts divided over who emerged stronger as a result.

    "Today's transaction shows [GSK] management will not sit idly by waiting for the pipeline to mature but will take brave decisions to unlock shareholder value," Savvas Neophytou, an analyst at Panmure Gordon, wrote in a note to investors cited by The Guardian.

    Another analyst quoted by the newspaper, Tim Anderson of Bernstein Research questioned if Novartis hadn’t emerged more of a winner over GSK: "It is odd to us that GSK would give up this business as oncology is a 'hot' therapeutic area and the company has had some pipeline successes," he said.

  • Animal Magnetism

    Novartis also sold off its $1.1 billion-a-year Animal health division to Lilly for about $5.4 billion, making Lilly the second-largest animal health company behind Pfizer spinout Zoetis. Lilly will pay for the deal with $2 billion in new debt and $3.4 billion in cash on hand. Lilly has projected annual cost savings of about $200 million within three years after the deal is closed.

    In return, the deal will give Lilly all of Novartis Animal Health's portfolio of approximately 600 products, a pipeline of more than 40 projects in development, nine manufacturing sites, six dedicated R&D facilities, a global commercial infrastructure, and the division’s more than 3,000 employees.

    Lilly expects the animal health division to generate Lilly expects the combined entity to achieve earnings before interest and taxes as a percent of revenue in the mid-20% range by 2018. Lilly also said it expects the deal to add to earnings on a cash basis beginning in 2016, but that excludes integration costs.

    Lilly will acquire Novartis Animal Health's nine manufacturing sites, six dedicated research and development facilities, a global commercial infrastructure with a portfolio of approximately 600 products, a robust pipeline with more than 40 projects in development, and an experienced team of more than 3,000 employees.

    The animal health deal is expected to close by the end of the first quarter of 2015, while the deals with GSK are expected to close during the first half of next year.

    What company not in this week’s M&A headlines do you think will be at the center of a megamerger, acquisition, or partial selloff this year?



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