Novartis has reached a definitive agreement with GlaxoSmithKline plc (GSK) in a three-part transaction to acquire GSK’s oncology products, to divest its vaccine business (excluding flu) to GSK, and create a joint venture for consumer healthcare with GSK. Separately, Novartis has signed a definitive agreement with Eli Lilly and Company to divest its Animal Health Division.

Under the deal, Novartis has agreed to acquire GSK oncology products for a $14.5-billion payment and up to $1.5 billion contingent on a development milestone, the results of the COMBI-d trial, a Phase III study evaluating the safety and efficacy of the combination of two drug candidates to treat metastatic melanoma: Tafinlar and Mekinist  In addition, Novartis would have opt-in rights to GSK’s current and future oncology R&D pipeline.

Sales of the acquired GSK oncology products in 2013 were approximately $1.6 billion. Key products from GSK’s oncology portfolio are Tafinlar and Mekinist, Votrient® (a VEGFR inhibitor for treating renal cell carcinoma), Tykerb® (for treating HER2+ metastatic breast cancer), Arzerra® (for treating chronic lymphocytic leukemia); and Promacta® (for treating thrombocytopenia).Novartis has more than 25 new molecular entities targeting key oncogenic pathways and 24 trials underway exploring 16 new products and indications.The addition of the GSK products is expected to expand Novartis’ position in both targeted therapies and small molecules.

Novartis also has agreed to divest its vaccines business to GSK,excluding its flu business, for $7.1 billion plus royalties. The $7.1 billion consists of $5.25 billion upfront and up to $1.8 billion in milestones. As a part of a value-maximization strategy in the context of a portfolio review, Novartis has initiated a separate sales process for its flu business. The deal strengthens GSK’s position in pediatric and meningitis franchises, which include Bexsero, a new vaccine for prevention of meningitis B. 2013 actual net sales of Novartis’ vaccines (including flu) business were approximately $1.4 billion.

Novartis and GSK also have agreed to create a consumer healthcare business through a joint venture between Novartis OTC and GSK Consumer Healthcare.GSK will have majority control with an equity interest of 63.5%, and Novartis will own a 36.5% share of the joint venture. The joint venture of Novartis OTC and GSK Consumer Healthcare would establish a consumer healthcare company with $10 billion in annual sales positioned in four key over-the-counter (OTC) categories: wellness, oral health, nutrition, and skin health.Sales in the combined business would reflect the re-supply of certain products manufactured at Novartis' facility in Lincoln, Nebraska following remediation activities at the site. Production and re-supply of these products is expected to increase and be phased in over the next two years.

The joint venture would have several strong brands with almost half of the sales derived from brands larger than $300 million in annual revenue. The geographic footprint would have a commercial presence in the developed world as well as in key emerging markets, such as Brazil, China, Mexico, and Russia. Emma Walmsley has been appointed as chief executive officer designate of the new business and will be a member of its board. GSK CEO Andrew Witty will be chairman of the board. The board will comprise directors from both GSK and Novartis. Novartis will have four of eleven seats on the joint venture’s board. Furthermore, Novartis will have customary minority rights and exit rights at a pre-defined, market-based pricing mechanism.

In a separate transaction, Novartis has agreed to divest its Animal Health Division to Lilly for approximately $5.4 billion. Sales from Novartis’ Animal Health Division were $1.1 billion in 2013. Upon completion of the deal, Lilly’s animal health business, Elanco, will be the second-largest animal health company in terms of global revenue, will solidify its number two ranking in the US, and improve its position in Europe and the rest of the world, according to information from Eli Lilly. The acquisition expands and complements Elanco’s product portfolio, R&D and manufacturing capabilities, and commercial presence in key geographies by providing Elanco with a greater commercial presence in the companion animal and swine markets, expanding Elanco’s presence in the equine and vaccines areas, and creating an entry into the aquaculture market.

The overall financing for Novartis’ obligations in the transactions is planned to be provided through a combination of excess liquidity at the time of closing, short-term financing instruments, and limited new bond issues if needed. The elements of the transaction with GSK are inter-conditional and subject to approval by GSK shareholders. All transactions are subject to closing conditions, including antitrust approvals.The transaction with Eli Lilly is expected to close by the end of the first quarter of 2015, and the transaction with GSK is expected to close during the first half of 2015. Substantial exceptional gains are expected for the divested businesses at the time when the respective transactions close. Further details on the discontinuing operations classification will be provided by Novartis during the second quarter of 2014.

After closing, GSK shareholders will receive £4 billion ($6.7 billion) capital return funded by net cash transaction proceeds and which are expected to be delivered via a B share scheme.The proposed transaction would increase GSK's annual revenues by £1.3 billion ($2.2 billion) to £26.9 billion ($45.2 billion) (on a 2013 pro forma basis) and fundamentally re-shape GSK's revenue base.These revenues would be split across pharmaceuticals 62%, consumer healthcare 24%, and vaccines 14%. Following completion, around 70% of GSK's revenues would be focused around four key franchises: respiratory, HIV (ViiV Healthcare), vaccines, and consumer healthcare.Of the remaining revenue base, approximately 14% of sales would reside in GSK's established products portfolio. GSK said it is currently reviewing this portfolio to ensure it evaluates all options to maximize its value.

GSK estimates that total annual cost savings of £1 billion ($1.7 billion) could be achievable by the fifth full year following closing. The delivery of these potential savings is expected to be phased with approximately 50% delivered by year three and the full amount by year five. GSK intends to reinvest approximately 20% of cost savings to support innovation and expected new product launches. Total costs to deliver these savings are estimated to be £2 billion ($3.4 billion), split approximately evenly between cash and non-cash charges. Contributions to the total cost savings are estimated to be approximately 40% from consumer healthcare, 40% from vaccines and 20% from savings associated with the divestment of GSK's oncology portfolio. These estimates are subject to further detailed implementation planning post closing. Potential cost savings would be generated from reductions in selling and administrative costs, removal of infrastructure overlaps and reduced third party contracting as well as through improvements in manufacturing costs. The new GSK businesses would also expect to benefit from new economies of scale and earn greater returns from leveraging sales, distribution, and purchasing opportunities across its broader global platform. The companies will conduct consultations on cost savings proposals with staff, works councils, trade unions, and other employee representatives in line with local practice and in accordance with applicable employment legislation.

The acquisition is expected to strengthen GSK's manufacturing network and increase overall capacity, notably with the addition of Novartis' secondary packaging and supply facilities in Rosia, Italy and Marburg, Germany. GSK would also acquire new manufacturing sites in India and China. In addition, the integration of the supply of a number of key antigens, currently provided to GSK by Novartis, will provide improvements and enhance the future flexibility of the business, particularly in pediatric vaccines.

Source: Novartis, GlaxoSmithKline and Eli Lilly