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 The deals, which include Novartis' purchase of GSK's cancer drugs
and GSK's acquisition of Novartis' vaccines business, came just
after a newspaper report that AstraZeneca Plc had turned down a $101
billion bid approach from Pfizer Inc, a story that sent shares up
across the sector.
In addition, Novartis is selling its animal health arm to
Indianapolis-based Eli Lilly for about $5.4 billion in cash. That
would make Lilly's Elanco unit the world's second-largest animal
health business when that deal closes early next year.
A flurry of dealmaking has overtaken the global pharmaceutical
industry recently as most large companies try to focus on a small
number of leading businesses, while smaller specialty and generic
producers seek greater scale.
Deal values have almost doubled since the start of 2014 to $77.9
billion from a year earlier, according to Thomson Reuters data.
The overhaul at Novartis marks the end of a yearlong review of its
sprawling portfolio after the departure of longtime Chairman and
Chief Executive Officer Daniel Vasella, the architect of the merger
of Ciba-Geigy and Sandoz that led to the company's formation in
1996.
The Swiss drugmaker said it would buy London-based GSK's oncology
products for $14.5 billion plus another $1.5 billion that depends on
the results of a trial in melanoma.
The deal will strengthen Novartis's world No. 2 position in cancer
behind cross-town rival Roche Holding AG.
Novartis said GSK was buying its vaccines, excluding flu, for $5.25
billion plus potential milestone payments of up to $1.8 billion and
ongoing royalties. The companies also will form a joint venture in
consumer healthcare.
The transactions, and their hint of more deals ahead for the drug
sector, lifted the ARCA Pharmaceutical Index 1.8 percent.
Lilly's Elanco animal health unit will acquire about 600 animal
health brands from Novartis, including vaccines and anti-parasite
medicines that will allow it to enter the aquaculture, or fish
farming, market.
This would be the eighth and largest acquisition since 2007 for
Elanco, which by global sales would trail only Zoetis Inc, which
also specializes in products for farm animals and pets.
"With this transaction, we'll go from being No. 5 to No. 3 on the
pet side globally and become a top 2 or 3 player in every segment"
of products for farm animals, Jeff Simmons, Lilly's head of animal
health, said in an interview.
Last year Elanco had sales of $2.15 billion, compared with $1.1
billion for Novartis Animal Health.
"Novartis has agreed (to) an elegant set of transactions that either
removes or strengthens its underperforming assets, while boosting
its oncology portfolio," Jefferies analysts said.
In afternoon New York Stock Exchange trading, Novartis shares were
up 1.4 percent at $86.63, while GSK rose 4.2 percent to $55.34.
Lilly dipped 0.9 percent to $60.32.
FIGHTING FIT
Novartis CEO Joe Jimenez said the revamp would help make the company
"fighting fit" to meet the challenges of the global healthcare
industry over the next 10 years.
He told reporters the deals would lower overall sales by about $4
billion but result in higher profits as the company swaps
lower-margin vaccines for higher-margin oncology drugs.
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Cancer is a particular focus for some drugmakers as novel medicines
show promise by boosting the body's immune system.
"We reckon the real value of the (cancer) 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.
Analysts at Swiss broker Notenstein were also upbeat, saying 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 of as much as
$16 billion for the oncology assets as "rather hefty."
Drugmakers are stocking up their oncology pipelines as they bet that
combinations of drugs will become the future of cancer care. A
desire to boost its oncology business is seen as a key factor behind
Pfizer's reported interest in AstraZeneca.
Cancer is an extremely competitive marketplace, however, and some
analysts said it was right for GSK to exit a field where it was only
No. 14 in the world.
GSK boss Andrew Witty said the company did not have the scale to
compete in cancer drugs, so it made sense to put them into "the
hands of somebody who is a world leader in oncology."
Conversely, he said the deals with Novartis strengthened two of
GSK's core businesses: vaccines, given in more than 2 million shots
every day, and consumer health, where the company will take the lead
in running a business worth about $10 billion in annual revenue with
the Swiss group.
The deals were another step in his strategy of focusing on areas of
strength, he said, moving further away from the monolithic model of
drugs companies that tried to do everything.
After the deal, GSK will get 70 percent of sales from its franchises
in respiratory, HIV, vaccines and consumer health.
Novartis said it would start a separate sale process for its flu
business immediately, which was not part of the GSK deal.
Lilly said it would fund its animal health transaction with $3.4
billion of cash and $2 billion of loans, and it expected cost
savings of about $200 million per year within three years of closing
the deal.
Bank of America Merrill Lynch advised Lilly, while Goldman Sachs
Group Inc advised Novartis on the animal health deal. GSK said
Lazard and Zaoui & Co were its joint financial advisers.
(Additional reporting by Alice Baghdjian, Ben Hirschler, Anjuli
Davies, Ransdell Pierson and PJ Huffstutter; writing by Caroline
Copley; editing by Noah Barkin, Mark Potter and Lisa Von Ahn)
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