It's been a big week for big pharma. And at the top of the pile of deals is GlaxoSmithKline 's (GSK) asset trade with Swiss competitor Novartis (NYSE: NVS). The two drugs giants have agreed to swap a number of businesses in a multi-billion dollar deal, which will ultimately see £4bn of net proceeds returned to GSK shareholders.
GSK will sell its oncology unit to Novartis for $16bn and buy the Swiss group's vaccine unit for up to $7bn, while the two will develop a co-owned consumer health arm in a joint venture controlled by GSK, which will own a 64 per cent share. Separately, Novartis will sell its animal health unit to US-based pharma outfit Eli Lilly (NYSE: LLY) for just over $5bn.
When news of the deal broke, analysts praised the decisions of Novartis chief executive Joe Jimenez and GSK boss Andrew Witty to restructure both businesses in order to deliver future growth. Analysts at Deutsche Bank argue that GSK's newly-enlarged vaccines business will be stronger thanks to the addition of meningitis treatments from Novartis and will have increased access to emerging markets. Similarly, Novartis can look to eliminate issues in its consumer health division - such as long-standing supply problems - from the soon to be shared over-the-counter venture. In essence, analysts are dubbing it a "win-win" transaction, although it is not due to complete until the first half of 2015.
In terms of future earnings potential, analysts expect the transaction to be "modestly accretive" in the first and second years, with a more significant impact expected from 2017. In fact, the first couple of years could result in marginally diluted EPS as Novartis' vaccines business is currently loss-making. But handing back cash to shareholders should offset any decline in EPS during the first two years post-deal.
The transaction will leave GSK with four focal businesses - respiratory conditions, HIV, vaccines and consumer healthcare. It will also reduce the company's dependence on high-risk drug development, particularly where cancer treatments are concerned. Analysts previously concluded GSK's oncology development programme was sub-scale compared to its main competitors, and most argue that Novartis' $16bn offer is more than generous.
Regardless, offloading oncology also allows GSK to launch a strategic review of its older and established products. A full asset disposal looks unlikely, but it is easy to foresee future asset sales or write-offs, as GSK embarks on a new and more efficient era.
