GSK and Novartis announce joint venture

GlaxoSmithKline announced a transformational three-part transaction with Swiss pharma Novartis on Tuesday which will see shareholders receive a £4 billion capital return funded by net cash transaction proceeds, expected to be delivered via a B-share scheme.

The Glaxo deal and rumours around a potential takeover of AstraZeneca drove UK stocks higher for a third consecutive day, the longest streak in almost two months, after markets reopened following the Easter break.

The Glaxo/Novartis agreement is based around an asset swap. Novartis will pay up to $16 billion (£9.5 billion) for Glaxo's marketed oncology business, and sells to the British group its own vaccine business, excluding influenza vaccines, for an initial cash consideration of $5.25 billion, with subsequent potential milestone payments of up to $1.8 billion and ongoing royalties. This will make Glaxo a major player in the vaccine segment.

Glaxo and Novartis will also create a new Consumer Healthcare business with 2013 pro-forma revenues of £6.5 billion derived from Glaxo products such as Aquafresh and Beechams and the Novartis enviable healthcare range that includes antiseptic range Savlon and cough and cold brand Tixylix.

Glaxo will have a majority 63.5% equity stake in the joint operation.

The real news in this deal is however that Glaxo has managed to jettison its oncology business which was falling behind its global peers such as Roche. Glaxo's chief executive Sir Andrew Witty said that the Oncology disposal was a "unique opportunity" to crystallise an attractive price for the portfolio.

The three-part deal will be accretive to the British company's core earnings from the first year after completion and its contribution will grow from 2017 as projected cost savings and growth come through.

Witty has suggested the deal could lead to more jobs being created as Glaxo plans to invest some of the deal's proceeds in research and development in Britain.

"Opportunities to build greater scale and combine high quality assets in Vaccines and Consumer Healthcare are scarce," Witty added. "With this transaction we will substantially strengthen two of our core businesses and create significant new options to increase value for shareholders."

Glaxo shares rose 5.48% to 1,643.5p by 10am on Tuesday, reversing a long-term decline.

Investor view

On the Interactive Investor discussion boards, investors liked the $4 billion return of capital. 'Nigemax' said: "It looks like vaccines, HIV, respiratory and over the counter is where GSK sees its niche in the New World. I expect more divestments going forward."

The discussions also commented on the serendipity of Witty's re-investment of 19,565 shares in the company on the 10 April at a price of 1,581.50p.

Novartis is also selling its animal health division to rival Eli Lily for $5.4 billion in an all-cash deal that transform Lilly's own animal health business, Elanco, into the world’s second largest animal health company in terms of revenue.

With a presence in approximately 40 countries and 2013 revenue of approximately $1.1 billion, Novartis Animal Health is focused on treating diseases in pets, farm animals and farmed fish.

Lilly will acquire Novartis Animal Health's nine manufacturing sites, six research and development facilities, a global commercial infrastructure with a portfolio of approximately 600 products, and a pipeline with 40 plus projects in development.