Novartis reshapes business with GSK, Lilly deals

Apr. 22, 2014 @ 04:36 PM

Swiss pharmaceutical firm Novartis AG launched a major overhaul of its business Tuesday, unveiling a series of multibillion-dollar deals with Britain's GlaxoSmithKline PLC and the U.S.'s Eli Lilly & Co. that heralds more restructuring in the fast-changing industry.

Switzerland-based Novartis has agreed to buy GSK's cancer-drug business for $14.5 billion, plus up to $1.5 billion more if certain milestones are met. Two GSK cancer drugs, Tafinlar and Mekinist, would give Novartis a strong position for melanoma treatments. A drug for metastatic breast cancer and one for chronic lymphocytic leukemia are two other drugs included in the deal.
GSK’s operations in the Research Triangle Park, which are focused on HIV treatments through a joint venture with Pfizer as well as on respiratory treatments, are not largely expected to be affected by the deal. The company employs about 3,800 people in Research Triangle Park.
“We don’t know for certain, but it’s less likely to be affected because we do not have many employees in those groups that were the focus of today’s announcement,” GSK spokeswoman Mary Anne Rhyne said. “We do have employees who are in the groups responsible for the bulk of our earnings, and that’s HIV and respiratory.”
To GlaxoSmithKline, Novartis has agreed to sell most of its vaccines business for $7.1 billion, plus royalties, giving GSK better market position with Bexsero, a meningitis B vaccine. The sale would not include its influenza vaccine portfolio.
Separately, the company plans to invite bids for a sale of its flu business. As part of that sale, the company plans to sell a vaccine production-focused plant in Holly Springs in Wake County that employs about 500 full-time workers.
“Novartis’ agreement with GSK to divest its vaccine division does not include its influenza franchise,” Eric Althoff, a Novartis spokesman, said in an emailed statement. “The company has initiated a process to invite bids to sell the influenza business separately to maximize total value. “
Also, Novartis and GSK are creating a new consumer health care business through a joint venture that combines Novartis' over-the-counter drug business with GSK's consumer business. Novartis would own 36.5 percent of the venture, which is expected to generate revenue of $10 billion a year emphasizing wellness, oral health, nutrition and skin health.
And, separately, Novartis said it will sell off its animal health division to Eli Lilly for about $5.4 billion. Indianapolis-based Lilly has been hit hard by the expiration of patents protecting key products in the past few years and has staked its recovery in part on new drugs it develops and its animal health business.
Joseph Jimenez, the CEO of Basel, Switzerland-based Novartis, said the deals with GSK and Eli Lilly reflect "a very dynamic health care environment" and would reduce overall sales at Novartis but boost its profit margins.
He told reporters some 15,000 of its employees globally will be affected by the changes but that no one will be fired by Novartis — all employees whose units are being sold off will be transferred to the new owners.
"The transactions mark a transformational moment for Novartis," Jimenez said. "They also improve our financial strength, and are expected to add to our growth rates and margins immediately."
In a prepared statement in a news release, GlaxoSmithKline’s CEO Sir Andrew Witty said opportunities to build greater scale and to combine “quality assets” vaccines and consumer health care are “scarce.”
“With this transaction we will substantially strengthen two of our core businesses and create significant new options to increase value for shareholders,” he said.
While GSK’s operations in the Research Triangle Park are not largely expected to be affected, Rhyne said GSK does have some oncology employees in North Carolina and oncology is a small part of the business of a plant the company has in Zebulon that employs about 500 people.
The bulk of GSK’s oncology employees are in Pennsylvania, its consumer health business is based primarily in New Jersey and Pennsylvania, and its vaccine business is in Pennsylvania, she said.
The process of completing the deal is expected to take about a year, Rhyne said, and nothing is expected to happen immediately except that they’ve formed a transition team that will begin to look at what resources are needed where.
Investors welcomed the deals, with Novartis shares in Zurich closing up 2.3 percent at 76.40 Swiss francs. GSK's share price in London soared 5.2 percent at 16.40 pounds with investors particularly cheered by the news that company is planning to return 4 billion pounds to shareholders following the closure of the deals. Eli Lilly shares fared less well, trading 0.6 percent lower.
In many ways, the deals reflect the industry push for ways to make money and cut costs as their blockbuster drugs face competition from generics.
The pharmaceutical industry is in a state of flux as firms look to continue the growth investors have gotten used to at a time when many blockbuster drugs that routinely generated billions of dollars in annual revenue have gone off-patent, said Steve Brozak, who follows health care industries as president of WBB Securities.
"This is buying time until they can figure out what is next," he said.

Associated Press reporter Tom Murphy and Herald-Sun Laura Oleniacz contributed to this report.