Spring clean

GSK and Novartis treat each other's problems

GlaxoSmithKline and Novartis have found a way of doing a transformative deal without the bother of a full merger. The multi-billion dollar asset swaps and joint venture unveiled by the UK and Swiss pharma groups on April 22 are a neat way to treat each other's strategic ailments.

The origin of this complicated deal was GSK's interest in Novartis' vaccines unit. GSK gets that business for $7.05 billion if milestones are met. But the London-based group has also ended up selling its cancer-treating oncology business to its rival for $14.5 billion, plus another $1.5 billion depending on the outcome of trials. In addition, the pair will combine most their consumer brands into a joint venture. And separately, Novartis is selling its animal health business to US peer Eli Lilly for $5.4 billion. Strategically, the moves play to the respective clinical strengths of both GSK and Novartis. Financially, GSK seems to have had the upper hand. The oncology business is fetching 10 times historic sales, a price at the top of the range for the recent deals in the sector. That's ample compensation for reducing shareholders' exposure to one of the hottest areas of medicine. The vaccines acquisition was struck at a cheaper six times historic sales, although the unit is loss-making. Even though GSK takes control of the consumer brands joint venture, the 63.5/36.5 per cent split bakes in only 15 per cent premium based on pro-forma revenue.

GSK sees itself making £1 billion ($1.68 billion) of annual synergies from year five, with one-off costs of £2 billion. These have a net present value of at least £3.3 billion. GSK's share price reaction, up five per cent, reflects that and a bit more. It adds £4 billion of value, while cheering the strategic focus and promised return of £4 billion of surplus cash. But if Novartis has slightly overpaid for GSK's oncology business, that has been offset by the value of rebalancing its portfolio. The two per cent gain in Novartis stock adds 4.7 billion Swiss francs ($5.4 billion) to its market capitalisation.

Could there have been alternative transactions with different companies that created more value? Perhaps. But it is hard not to be impressed by the ingenuity of this inter-conditional deal. After Pfizer's reported interest in buying AstraZeneca, GSK and Novartis have shown that bilateral portfolio pruning can get you a long way.