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Pharmaceutical shares soar after Novartis and Glaxo deal

25/04/2014 by


Britain’s Glaxo Smith Kline and Swiss rival Novartis have agreed a multi-billion dollar swap of assets in a move that led to a rally in pharmaceutical stocks as investors bet on a renewed burst of deal making across the sector.

The two drug companies will join forces in the consumer healthcare sector to combine brands including Aquafresh, Beechams and Tixylix, while exchanging their oncology and vaccine businesses.

The deal comes amid a frenzy of takeover speculation in pharmaceuticals with the US drugs group Pfizer reportedly considering a $100bn (£60billion) bid for Britain’s AstraZeneca, while Canadian group Valeant Pharmaceuticals on Tuesday confirmed a $46.5bn move for Allergan, the California-based maker of Botox.

Shares in GSK rose 5.2% to £16.40 and Switzerland’s Novartis rose 2% to 76.40 Swiss francs (£51.28). AstraZeneca rose nearly 4.7% and the UK’s Shire jumped 4% to £30.60 on hopes of more deals to come, with the FTSE100 index climbing nearly 1%.

GSK shareholders will benefit from a £4bn capital return funded by net proceeds of $7.8bn from the Novartis deal, in which the Brentford-based firm is selling its oncology business to Novartis for $16bn and purchasing its new partner’s vaccine business for an initial $5.25bn. A further $1.8bn is promised to Novartis if the vaccines division performs well. Novartis, meanwhile, is selling its animal health division to US pharmaceutical company Eli Lilly for $5.4bn.

Sir Andrew Witty, the GSK chief executive, said the complex deal had taken months to agree but was a step on from the mega-mergers of the past under which firms might gain two or three useful businesses alongside seven or eight unwanted elements which could distract attention from developing its core business. “I believe if you really focus the transaction on just the things you really care about you can create tremendous value in that space,” Witty said.

“Opportunities to build greater scale and combine high quality assets in vaccines and consumer healthcare 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 added.

The combined consumer healthcare business will house 19 brands, including Panadol and Nicotinell, with sales of more than $10bn worldwide in what Witty described as a “powerhouse in over-the-counter products”. Witty added that the deal strengthened GSK’s global leadership in the vaccines market, increased its scale in consumer health products and would deliver immediate sales and earnings benefits once completed in early 2015. GSK will continue to develop experimental cancer treatments and could market these itself in future, although Novartis will have first refusal if it decides to seek a partnership with a third party.

Savvas Neophytou, an analyst at Panmure Gordon, upgraded GSK to a buy as he said the deal was a sensible move away from “white tablet” pharmaceuticals and the lacklustre oncology business after a tricky few weeks for the company, which has been embroiled in corruption allegations. “Today’s transaction shows management will not sit idly by waiting for the pipeline to mature but will take brave decisions to unlock shareholder value,” Neophytou wrote in a note.

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