Novartis reshapes business via deals with GSK and Lilly

Swiss drug-maker Novartis AG announced a multibillion-dollar revamp on Tuesday, swapping assets with London-based GlaxoSmithKline PLC and selling its animal health arm in a bid to simplify its business and increase its focus on high-margin cancer medicines.

Cancer is a particular focus for some drug-makers, thanks to novel medicines that show promise by boosting the body's immune system. Tuesday's deal will see Novartis strengthen its world No. 2 position in cancer treatments behind cross-town rival Roche.

The overhaul is part of a major realignment in the global pharmaceuticals industry as it strives to cope with a clampdown in health spending by cash-strapped governments.

"The transactions mark a transformative process for us," said Novartis Chief Executive Joe Jimenez, who has been undertaking a strategic review of the once-sprawling business.

"They also improve our financial strength, and are expected to add to our growth rates and margins immediately," Jiminez said.

Novartis said it had agreed to buy GlaxoSmithKline's oncology products for $14.5 billion, while selling to GSK its vaccines, excluding flu, for $7.1 billion plus royalties and creating a joint venture with GSK in consumer healthcare.

Novartis also said it had agreed to sell its animal health arm to Indiana-based Eli Lilly and Company for approximately $5.4 billion.

The global pharmaceuticals sector has seen a flurry of deal-making recently as large companies seek to focus on a small number of leading businesses, while smaller specialty and generic producers seek greater scale.

A desire to boost its oncology business is also seen as a key factor behind Pfizer's reported interest in AstraZeneca. A weekend newspaper said Pfizer, which has also been spinning off assets such as animal health and baby food, had made a 60 billion pound ($101 billion) bid approach that had been rebuffed by the British firm.

"We reckon the real value of the deal should be searched for in the pipeline and the newly launched products, strengthening Novartis' position in melanoma and hematology," Vontobel analyst Andrew Weiss said of the cancer deal with GSK.

Cancer treatments are an extremely competitive marketplace, however, and some analysts said it made sense for GSK to exit a field where it was only No.14 in the world.

As well as strengthening its vaccines business, GSK will take the lead in running a future consumer health business worth about $10 billion in annual revenue with Novartis.

Novartis shares were up 2.3 percent early Tuesday, while GSK shares were up 5.4 percent.

Novartis's Jimenez told reporters the deals would result in slightly lower overall sales for the Swiss group, but higher profit as it swaps lower-margin vaccines business for higher-margin oncology drugs.

Analysts at Swiss broker Notenstein said the new cancer drugs would help Novartis to navigate patent expiries on top-selling medicines more easily.

However, analysts at Barclays described the price tag for the oncology assets, which could rise as high as $16 billion if certain milestones are reached, as "rather hefty."

Novartis said it would immediately start a separate sale process for its flu business, which was not part of the GSK deal.

Eli Lilly will have the world's No. 2 animal health business by revenue in the wake of its deal with Novartis. It said it would fund the transaction with $3.4 billion of cash and $2 billion of loans and expected cost savings of about $200 million per year within three years of closing the deal.

Reuters