Novartis (NVS)/ GlaxoSmithKline (GSK) Deal Makes Strategic Sense, Says Analyst

Novartis (NYSE: NVS) announced that it has reached a definitive agreement with GlaxoSmithKline plc (NYSE: GSK) to exchange certain assets, building global leadership in key segments and focusing the company's portfolio. Analyst Mark Clark of Deutsche Bank said the deal makes strategic sense for GlaxoSmithKline.

"In a complex, three-part inter-conditional deal, GSK will: (1) assume control of Novartis’ OTC business (in return for granting Novartis a 36.5% stake in the combined Consumer Health business); (2) divest its marketed oncology brands to Novartis (for up to $16bn); and (3) acquire Novartis’ non-influenza vaccines business (for up to $7.1bn plus milestones/royalties). Following completion of this multi-part transaction (expected in 1H15), GSK will utilize the after-tax net proceeds of $7.8bn to fund a £4bn (c.5%) return of cash to its shareholders via a tax-efficient B share scheme (replacing its normal share buyback scheme)," said Clark.

"In our view, the combined transactions make strong strategic sense for GSK. Its OTC business will be elevated to #1 globally (and it will rank #2 only to J&J in the wider Consumer Health category) and its Vaccines business (already #1/2 globally, depending on definition) will be strengthened notably in the area of meningitis and in the EMs. Furthermore, we have long viewed its oncology assets as sub-scale and overly small molecule-based (so that the 10x sales multiple for the divestment appears generous on the part of Novartis). The overall deal also appears timely from GSK’s perspective on two important counts: first, Novartis’ OTC business has a strong collection of brands but has been hampered in the past couple of years by serious supply issues, which are well on the way to being resolved (following successful FDA GMP inspection of its problematic Nebraska facility); and second, Novartis has recently gained increased traction with payers (and recognition in the US after a recent outbreak) for its key Bexsero meningitis B vaccine after a disappointing start," he added.

Deutsche Bank has a Hold rating on GlaxoSmithKline.

For an analyst ratings summary and ratings history on GlaxoSmithKline click here. For more ratings news on GlaxoSmithKline click here.

Shares of GlaxoSmithKline closed at $53.12 yesterday.

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