After Spurning Pfizer GlaxoSmithKline Cuts $13B Deal with Novartis

GlaxoSmithKline walked away from a potential deal to acquire Pfizer’s consumer health unit four days ago and instead opted to invest in its own consumer unit. GSK will acquire the stake controlled by Swiss pharma giant Novartis. The deal will give GSK 100 percent ownership of the business unit.

GSK plunked down $13 billion for Novartis’ 36.5 percent stake in the joint venture business unit that markets products such as Sensodyne toothpaste and Panadol headache tablets. The two companies have had a stake in the business unit since a 2014 asset swap that included the consumer health business, as well as a vaccines and oncology business. Under terms of the 2014 agreement, this month marked the first time that Novartis had the option to sell its stake in the consumer health business unit. Last year the healthcare unit reported sales of nearly $11 billion (£7.8 billion).

Shares of GSK were up more than four percent in premarket trading following the announcement. Shares of Novartis also slightly increased.

The deal marks the biggest move GSK Chief Executive Officer Emma Walmsley has made since taking over the reins of the company last year. Walmsley said the deal with Novartis addresses one of GSK’s key capital allocation priorities and will allow company shareholders to "capture the full value of one of the world’s leading consumer healthcare businesses." Walmsley added that the deal will be good for GSK’s overall financial health. GSK, Walmsley said, anticipated operating margins of the business unit to approach ‘mid-20’s’ percentages by 2022

"Most importantly it also removes uncertainty and allows us to plan use of our capital for other priorities, especially pharmaceuticals R&D," Walmsley said in a statement.

Last week GSK walked away from a possible acquisition of Pfizer’s consumer health business, which has been valued at nearly $20 billion. In a brief statement at the time, Walmsley said any deal GSK strikes must meet the company’s criteria for returns and not compromise its priorities for capital allocation.

To help fund the transaction GSK said it may sell its Horlicks malted milk brand, as well as other nutrition products that are primarily sold in India. GSK said it is initiating a strategic review of those brands as it moves forward with the Novartis deal.

For Novartis’s new CEO the move was the right one for the company. Vas Narasimhan said that the consumer business unit has been doing well, but the time was right for Novartis to divest a "non-core asset at an attractive price." Narasimhan added that the sale will allow the company to focus on the development and growth of its core business.

"This will strengthen our ability to allocate capital to grow our core businesses, drive shareholder returns, and execute value creating bolt-on acquisitions as we continue to build the leading medicines company, powered by digital and data," Narasimhan said in a statement.

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