By Marta Falconi and Hester Plumridge
ZURICH--Drug companies are back in deal mode.
On Tuesday, Novartis AG and GlaxoSmithKline PLC unveiled a
series of transactions worth more than $20 billion that
fundamentally transform both companies, more tightly focusing
Novartis's scope without significantly crimping its revenue, while
turning Glaxo into a vaccines-and-consumer-drug powerhouse.
The deals, announced before trading opened in Europe, follow
news that activist investor William Ackman and Valeant
Pharmaceuticals International Inc. had hatched plans to buy
Allergan Inc., the maker of Botox wrinkle treatment. That deal, if
completed, would create a behemoth in the eye-care and skin-care
drug sectors.
The planned transactions come amid a resurgence of deal-making
in the pharmaceutical sector, which is pumping out cash after
having paid down debt shouldered in the last surge of merger
activity in the early 2000s. Unlike that wave, in which drug
companies merged into unwieldy giants, the new generation of deals
is narrower, focused on transactions that create businesses capable
of competing as leaders in their fields, rather than simply staking
a presence.
"M&A is a strategy to be used sparingly," said Glaxo Chief
Executive Andrew Witty on a conference call Tuesday. "But it has an
extremely valuable role to play if you can find targeted
transactions which allow you to strengthen in the places where you
have long-term competitive advantage."
Becoming more focused has helped create value for investors.
Pure-play drug companies such as Bristol-Myers Squibb Co. and
AstraZeneca PLC, which lack large generics, consumer-health or
diagnostics businesses, are currently valued higher than very
diversified rivals. Shares of Pfizer Inc. have risen sharply since
it floated Zoetis, its animal-health business, in a $2.2 billion
initial public offering last year, as has Abbott Laboratories since
it spun off its pharmaceutical unit AbbVie in 2012.
Among the deals that have captured attention: AstraZeneca paying
$2.7 billion to buy Bristol-Myers Squibb's share of a diabetes
joint venture--part of AstraZeneca's efforts to focus on the
disease--and GlaxoSmithKline selling off noncore businesses, like
its drinks brands Ribena and Lucozade, where it doesn't have the
heft to compete.
In the first quarter, health-care deal activity jumped 40% from
the same period a year earlier to $16.9 billion, according to
Dealogic, a data tracker.
Mr. Ackman's unusual partnership with Valeant is another example
of the targeted deal-making trend that characterizes the current
wave of activity. Mr. Ackman's Pershing Square Capital Management
LP is working with Valeant to buy Allergan, a competitor in the
market for eye care and cosmetic drugs. Valeant sees potential cost
savings of $2.5 billion if its pairs up with Allergan, while also
expanding the portfolio of products it can sell.
The Novartis-Glaxo transactions fall squarely in the new style
of deal-making, allowing each company to build on its strengths,
while removing smaller noncompetitive businesses.
Since former Chairman Daniel Vasella left Novartis last year,
Chief Executive Joe Jimenez has repeatedly said he wanted to
refocus Novartis on areas in which it has the scale to compete,
rather than maintain small presences in a host of markets. The
company has been reviewing its businesses and sold a diagnostics
business to Spain's Grifols SA last year.
The deals with Glaxo, and a separate deal by Novartis to sell
its animal-health business to Eli Lilly & Co. for about $5.4
billion, accomplish that goal, focusing Novartis on
pharmaceuticals, eye care and generics. Analysts at Sanford C.
Bernstein & Co. estimate sales will fall a little more than
6.5% to $53.5 billion while operating margin will rise 2.5
percentage points to 27.2%.
"The transactions mark a transformational moment for Novartis,"
said Chief Executive Joe Jimenez.
Basel-based Novartis will acquire Glaxo's oncology unit for
around $14.5 billion, adding strength to the company's already
potent lineup of cancer products. After the deal closes, Novartis
will get roughly a fifth of its nearly $54 billion in estimated
annual revenue from cancer drugs.
In return, London-based Glaxo will pay $5.25 billion for
Novartis's vaccines business, acquiring the company's promising
Bexsero meningitis B vaccine. Both deals could carry higher price
tags if certain milestones are met.
The two companies have also agreed to merge their
consumer-health businesses under Glaxo's management, combining
franchises that own some of the world's best-known brands,
including Excedrin, Panadol and Aquafresh.
"The scale of the changes is really astonishing," said Birgit
Kulhoff, a fund manager with private bank Rahn & Bodmer in
Zurich, which owns Novartis and Glaxo shares. Ms. Kulhoff said
Novartis's risk profile would increase "slightly" because of the
new setup, but said the challenges, such as patent expirations that
the company is facing or will face in the future, are
manageable.
Shares of Novartis rose more than 2.3% to 76.40 Swiss francs
($86.32) on Tuesday, reflecting enthusiasm for the deals. Glaxo
shares rose 5.2% to GBP16.40 ($27.54) in London.
The deals also transform Glaxo, focusing its business on
respiratory, HIV, vaccines and consumer health products. Those four
areas will account for roughly 70% of the British company's total
sales.
Glaxo will take charge of the combined consumer-health
operation, which will be one of the world's largest
over-the-counter drugs businesses, with annual revenue of around
GBP6.5 billion ($10.9 billion). Glaxo will own 63.5% of the
business, which will be run by its current consumer-health head,
Emma Walmsley.
The deal will also widen Glaxo's lead as the world's largest
provider of vaccines, strengthening its position in the meningitis
vaccine market and the U.S. The new business will have more than 20
vaccines in development.
Write to Marta Falconi at marta.falconi@wsj.com and Hester
Plumridge at Hester.Plumridge@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires