GSK, Pfizer go for radical makeovers with giant consumer combo destined for spinoff

Turns out, after GlaxoSmithKline walked away from a chance to scoop up Pfizer’s consumer health business in March, it got another opportunity to team up on a deal. The two Big Pharma companies have decided to combine their consumer units into a new joint venture—only as a prelude for an eventual spinoff that will advance both companies' long-term aims.

The all-equity transaction creates a mammoth consumer player under GSK’s name with a market share of 7.3%, ahead of its competitors Johnson & Johnson, Sanofi and Bayer, or about $12.7 billion sales by 2017's number. It marks the end of a yearlong process at Pfizer to find a clear path forward for its part of the franchise and also concludes long-term speculation about whether or when GSK would divest its consumer health business.

Once the tie-up is completed as expected in the second half of 2019, GSK will keep a majority 68% stake in the JV. But the goal is to spin it off into a separate business and list it in London within three years, leaving GSK focused on innovative medicines and vaccines.

Both GSK and Pfizer—like almost all other Big Pharma shops these days—have been looking to focus on high-return innovative medicines. Now, the consumer deal will allow both companies to do just that.

"Incremental cashflows and visibility of the intended separation will help support GSK’s future capital planning and further investment in our pharmaceuticals pipeline," GSK CEO Emma Walmsley said in a statement Wednesday.

"We believe that this joint venture is a great opportunity to ensure the future success of Pfizer Consumer Healthcare while unlocking meaningful after-tax value for Pfizer shareholders," Pfizer CEO-to-be Albert Bourla said in a separate statement.

Some popular OTC brands will come under the same roof, including GSK’s Sensodyne, Voltaren and Panadol, and Pfizer’s Advil, Centrum and Caltrate. It will become the leader in areas such as pain relief, vitamin and mineral supplements, respiratory and oral care, and will have No. 1 and No. 2 market share positions in the top 2 pharma markets, the U.S. and China, respectively.

But still, GSK is looking to cut around £1 billion ($1.26 billion) worth of assets within the unit to cover the cash costs of the integration. The disposal is not about winning regulatory approvals but is made "on the basis of sharpening up the focus of the portfolio," GSK CFO Simon Dingemans said on a Wednesday briefing with analysts.

The deal follows GSK’s $13 billion play to buy out Novartis’ stake in their consumer JV. It also came after the British drugmaker openly said earlier this year that it would not buy Pfizer’s OTC unit. What happened in between?

It’s all about capital allocation, Walmsley emphasized on the call, echoing her own statement back in March.

"We’ve always loved this business. … It’s an extremely complementary portfolio, a business with a very strong reputation for innovation and talent," she said. Acknowledging that taking over the Pfizer unit combines people, capabilities and culture, she said "it was clear that although the combination would be fantastic and the synergies very significant, it was going to cut across the capital allocation priorities that I had laid out, and my first priority for capital was the strengthening of the pharma business."

However, buying Novartis’ JV stake was different. That "was an overhang for us," Walmsley said. "And it was important to buy this well and then get control of the destiny of our consumer business." So, GSK "reluctantly and rightly" walked away from the Pfizer auction in March.

"Just very recently the opportunity of an all-equity transaction came up and that’s obviously a very, very fundamental difference for us," she said.

GSK has been pressured to cut off the consumer franchise for years. Much of that pressure came from well-known British investor Neil Woodford, whose frustration over Glaxo's lack of spinoff action drove him away from the stock. In a blog post titled "Glaxit" published in May 2017—right after former GSK consumer head Walmsley took over as CEO—he said he was no longer confident in GSK's ability to deliver growth and he had therefore ended an investment spanning more than 15 years.

Besides looming competition, Woodford said he had been concerned about the company's structure for a long time, and that he had "long believed that value could be created for the company’s shareholders if it split itself into separate, more specialized business units." And because Walmsley predecessor Andrew Witty—and then Walmsley herself—didn't heed the advice, "my base assumption now … is that Glaxo remains a healthcare conglomerate with a sub-optimal business strategy," he said at the time.

GSK's executives never said never on a spinoff, though. In 2016, already under investor pressure for a consumer split-up, Witty acknowledged that one day the company might jettison its consumer health division when it’s "big enough to be conceptually thought about on its own." Obviously, with the scale of the combined business, that day is on the way.

Recently, GSK sold its Indian consumer business to Unilever for £3.1 billion ($3.9 billion) and unveiled on the same day a deal to acquire cancer-focused biotech Tesaro for $5.1 billion. While GSK’s investors were clearly unhappy about the high price it paid for the struggling maker of PARP drug Zejula, they were encouraged by the Pfizer deal, sending GSK’s shares up by more than 6% at the news.

Meanwhile, GSK and Pfizer already have a successful JV collaboration: the HIV-focused ViiV Healthcare that’s been GSK’s growth driver lately and is on its way to shaking up the HIV landscape with two-drug regimens instead of the current standard of three or four drugs.

Thanks to a fruitful, long-standing partnership and "recognizing the tremendous value creation for us both and for shareholders," the two companies were able to negotiate terms quickly and reached the terms announced Wednesday, Walmsley said.

The British pharma is now aiming to generate annual cost savings of £500 million by 2022, and it "expects to be well positioned to deliver returns to shareholders alongside continued investment in its strategic priorities."

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