As part of a three-piece asset swap, Novartis AG and GlaxoSmithKline PLCform a joint venture that could become the global leader for OTC drugs and provide much-needed help for each firm’s consumer products business

The pharma giants’ April 22 agreement to combine their consumer portfolios “forms the biggest (to date) peer-to-peer cooperation which should benefit both companies and unlock significant shareholder value,” analysts with Panmure Gordon & Co. said in a same-day note.

The JV would strengthen GSK’s consumer products business, which would account for 24% of its revenues, and help Novartis recover from widespread OTC business setbacks linked to quality-control problems.

In addition to establishing the JV, GSK sold its marketed oncology brands to Novartis for up to $16 billion and acquired Novartis’ non-flu vaccines business for up to $7.1 billion plus milestones and royalties, the firms announced. In a separate deal announced the same day, Novartis sold its animal health business to Eli Lilly & Co. for about $5.4 billion.

The combined consumer business will create about $10 billion in annual sales with category-leading positions and brands in wellness, oral health, nutrition and skin health, said Novartis CEO Joseph Jimenez during a conference call with European market analysts.

The agreement involves multiple strong brands from each firm and “almost half” of the JV’s sales would come from brands with annual revenues of more than $300 million, Novartis says.

Glaxo adds in a release that OTC drugs will account for $5.72 billion of the JV’s overall sales and the OTCs will hold the leading position in more than 35 countries.

These factors will help elevate the combined OTC business to No. 1 globally, analysts with Duetsche Bank say. They add the overall JV will rank second in the wider consumer health category behind only Johnson & Johnson.

The JV will not be divided equally. GSK will assume 63.5% control and Novartis will take 36.5% in a split that reflects each firm’s proportional contributions to the arrangement.

GSK’s OTC products – including Gaviscon heart burn reliever, Nicorette nicotine replacement therapy and Tums for acid indigestion – will contribute 72%, or $7.4 billion in sales, to the venture, UBS analysts say.

Novartis, which markets Prevacid 24HR heartburn reliever, Triaminic branded allergy and cold relievers and Lamisil antifungal cream, will contribute 28%, or roughly $2.9 billion in sales, based on 2013 figures, UBS analysts add.

As minority holder, Novartis has an exit strategy, if needed. A 20-year put option allows it to sell its share after three years.

According to the firms, GSK Consumer Health President Emma Walmsley will lead the JV as chief executive officer designate and as a member of the board. GSK CEO Andrew Witty will chair the 11-member board, which will include four representatives from Novartis.

In addition to combining complementary portfolios, the deal allows both firms to expand their geographic footprint in consumer health and provides competitive advantages of increased scale – including improved manufacturing capabilities – Rx-to-OTC switch opportunities and general cost savings, the firms note.

The firms expect the deal to be accretive in the first year, and to contribute increasingly higher earnings after 2017, “as the delivery of cost savings, new product launches and re-introduction of Novartis’ OTC products”, GSK said in a release.

Firms Expand Geographic Reach

Both firms say a significant benefit of the JV is a substantially increased geographic footprint and ability to expand global distribution of top brands from each company.

“The geographic footprint would span all regions, with scale and commercial presence in the developed world as well as in key emerging markets, such as Brazil, China, Mexico and Russia,” Novartis notes in a release.

Specifically, Novartis’ allergy nasal spray Otrivin and pain-relievers Excedrin and Voltaren, have had relatively limited exposure to emerging markets and could experience “new growth” through GSK’s distribution in these areas, GSK said.

Likewise, GSK said its “brands would benefit from exposure to Novartis’ highly successful [Commonwealth of Independent States], Central and Eastern European business.”

Because both firms already have sales and research personnel worldwide, the combination will “have significant mass market, pharmacy and expert selling capabilities,” as well as access to world-leading science capabilities, GSK added.

GSK Takes Over OTC Manufacturing

The deal also will give Novartis the help it needs to ramp up OTC manufacturing and increase related sales, which faltered in recent years due to good manufacturing practice violations identified during FDA inspections at the firm’s Lincoln, Neb., facility.

Novartis suspended marketing of some OTCs due to problems at the Nebraska plant, which it shut down in 2012 to address repeat quality control issues ([A#05130506005]).

Although FDA inspectors gave the facility an all-clear in October 2013 and Novartis resumed production there, the firm’s OTC revenues still dropped in 2013 and Novartis has looked for buyers for its OTC business ([A#05131028005]).

The JV with Glaxo answers Novartis’ questions not only about the future of its OTC business, but also about its manufacturing.

Upon closure of the JV, GSK will take over manufacturing of Novartis’ OTC products, Jimenez said. He refrained from providing a timeline for full financial recovery until after the deal closes and details are fully addressed.

Glaxo noted that “production and re-supply of these products is expected to increase and be phased in over the next two years,” which will help the JV’s earnings to jump after 2017.

In the meantime, GSK anticipates improvements in manufacturing will contribute to significant cost savings – estimated at $1.68 billion annually by the end of the first five years of the JV. Glaxo says half of those annual savings should be delivered by year three.

Other potential cost savings would come from reductions in selling and administrative costs, removal of infrastructure overlaps and reduction of third-party contracting as well as from the oncology and vaccine business switch between the firms, GSK notes. The firm expects consumer health care to contribute about 40% of the total cost savings.

The deal hinges on GSK shareholder approval and other conditional and regulatory clearances, such as anti-trust approvals, but is expected to close in the first half of 2015, the firms note.

Glaxo And Novartis Scratch Each Other’s Back With Consumer Product JV

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