Novartis Overhauls Portfolio With Deals Worth $25 Billion -- 3rd Update

By Marta Falconi and Hester Plumridge 

ZURICH-- Novartis AG and GlaxoSmithKline PLC are helping each other get stronger.

On Tuesday, the drug giants unveiled a series of transactions worth more than $20 billion that fundamentally transform both companies, focusing Novartis's scope without significantly hitting its revenue and turning Glaxo into a vaccines-and-consumer-drugs powerhouse.

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 expected 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. In still another transaction, the two companies will 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.

( Explained: What's behind the pharma-deal frenzy?)

The Novartis-Glaxo deals come against a backdrop of increased mergers-and-acquisitions activity in the pharmaceutical space. Big pharmaceutical companies are looking for ways to reduce costs as health care services pressure them to keep prices level. Instead, pharmaceutical companies are buying each other, allowing them to cut research-and-development and other costs.

Many drug companies have paid off debt they shouldered during a buying spree in the early 2000s and are now generating lots of cash that they want to put to work. That pushed deal activity up 40% when measured by value in the first quarter, according to Dealogic.

The action is likely to continue. Activist investor William Ackman and Valeant Pharmaceuticals International Inc. are seeking to buy Allergan Inc ., which makes the Botox wrinkle treatment, according to a filing on Monday. Investors bid up shares of AstraZeneca on Tuesday after weekend reports that it had discussed merging with Pfizer.

The Novartis-Glaxo deals mark the long-awaited culmination of the Swiss pharmaceutical giant's review of its businesses, which started last year. Since former chairman Daniel Vasella left the company 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 deals with Glaxo, and a separate deal to sell its animal health business to Eli Lilly and Company for about $5.4 billion, accomplish that goal, focusing the company 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," Mr. Jimenez said.

Although Novartis investors have expected the company to cut some kind of a deal since it sold a diagnostics business to Spain's Grifols SA last year, the scope of the transformation took some by surprise.

"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 set up, 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% to 76.30 Swiss francs in early afternoon trading, reflecting enthusiasm for the deals. Glaxo shares were 5.5% higher 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 operations, 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 [e-mail] and Hester Plumridge at [e-mail]

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