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Goodbye Biotech "Growth Bubble"; Hello Pharma "M&A Bubble" - Novartis Enters Fray With $25 Billion In Transactions

Tyler Durden's picture




 

While the rest of the market has been largely quiet as earnings week unfolds, it have been the pharma companies that has stolen the spotlight in the past few days. First it was the rumor that Pfizer may, reluctantly, be courting Astra-Zeneca, then yesterday afternoon news broke that Valeant in conjunction with Bill Ackman (did he replace his "expert" retail analyst with a healthcare specialist?) would team up to buy Botox maker Allergan - an announcement which once again magically lifted the stock price of both potential buyer and seller - something which usually happens only at bubble peaks. And overnight, Swiss firm Novartis unveiled a sweeping overhaul of its product portfolio, selling two units and buying another in a series of transactions worth more than $25 billion.

Here are the released deal highlights:

  • Swiss giant Novartis, in the middle of a strategic rethink after an acquisition binge by its previous chairman, Daniel Vasella, agreed to buy GlaxoSmithKline's high-margin oncology unit for $14.5 billion. That deal value would rise to $16 billion if certain development milestones are met.
  • Novartis will sell its lower-margin vaccines division to GSK for $5.25 billion. The business, which relies on scale, is a better fit for GSK, and slims down the world's ranks of big vaccine makers from five to four.
  • Novartis will also sell its animal-health division to Eli Lilly for $5.4 billion.
  • Finally, GSK and Novartis will create a joint venture, majority owned by GSK, for its consumer business—essentially those drugs that can be bought over the counter, creating a new giant in that business. The combined companies will have revenue of about $11 billion, and include household names like Excedrin and Panadol.

Some additional details from the WSJ:

Basel-based Novartis said it is acquiring the oncology unit of Britain's GlaxoSmithKline PLC for around $14.5 billion. The Swiss pharmaceutical giant is also selling its vaccines unit to Glaxo for $5.25 billion. Both deals include provisions for milestone payments that could raise the total values. Novartis and Glaxo are also planning to combine their consumer divisions, which sell medicines that don't require a prescription.

 

The deals are the long-awaited culmination of a Novartis review of its businesses that the company has been conduction since last year. The transactions bring Novartis higher-margin products, such as cancer drugs, and remove the low-margin vaccine business, which depends on scale.

 

The overhaul refocuses Novartis on a handful of areas in which the company will have scale to compete, rather than maintaining small presences in a host of markets. The new structure marks a sea change from the era of former Chairman Daniel Vasella, who built Novartis into a sprawling health care conglomerate through acquisitions.

 

"The transactions mark a transformational moment for Novartis," Chief Executive Joe Jimenez said. The company said it expected sales, core operating income growth rates and margins to improve because of the deals.

 

The transactions, which will strengthen Novartis's position in melanoma and hematology, also reshape Glaxo, focusing its business on respiratory, HIV, vaccines and consumer health products. Those four areas will account for roughly 70% of the British company's total sales.

 

Glaxo will take charge of the combined consumer health operations, which will be one of the world's largest over-the-counter drugs businesses, with annual revenue of around £6.5 billion ($10.9 billion). Glaxo will own 63.5% of the business, which will be run by its current consumer health head, Emma Walmsley.

Still, not everyone was giddy at the proposed deal. Below, courtesy of Bloomberg is a summary of sell-side anlysts views on the deal:

HELVEA (NOVN: buy, PT CHF82; GSK: hold, PT 1,680p)

  • Oncology appears “pricey” though Novartis inherits a “concentrated portfolio” as Glaxo already sold off products that were small, not competitive
  • “Novartis now has critical mass in oncology": analyst Odile Rundquist said in interview.

BRYAN GARNIER (NOVN: buy, PT CHF79.50)

  • Excluding milestones, Novartis should cash in around $10.6b and cash out $14.5b + tax; transactions will be accretive in core earnings in year 1 and in reported terms in year 2; est. co. will pay $5b-$6b more than it pockets
  • Deal makes Novartis more profitable, visible in its core activities for the future
  • Co. gains ‘‘interesting and rapidly growing products’’ like Promacta, Votrient and melanoma drugs Tafinlar and Mekinist, which compete against Roche’s Zelboraf
  • Total oncology sales were ~$1.6b in 2013; est. will double in size by 2016
  • Sees positive synergies at rev. level in hematology, dermatology; doesn’t see major cost-cutting potential
  • Profitability in animal health was poor due to manufacturing issues at Lincoln and third-party contracting

PANMURE (GSK: upgrades to buy vs. hold; PT 1,559p)

  • Deal shows GSK management will ‘‘take brave decisions to unlock shareholder value,” won’t sit idly by waiting for the pipeline to mature
  • Getting up to 7.0x prospective revenues (EV/Revenues) for its oncology business “is no mean feat”
  • Co. was treading water in this business for a while and pipeline wasn’t delivering as strongly as had been hoped; sale is “a sensible strategic decision”

JEFFERIES (NOVN: hold, PT CHF78)

  • Novartis takes on “fairly high risk” oncology assets at a high initial multiple (10x sales), though expects this to fall to a ~3.2x sales multiple by 2018 if products grow as est.
  • Co. will need to fund $7.6b in 2015 for these transactions
  • Vaccines business had sales of $1.4b in 2013 including flu; est. flu would be ~$100m of this, so deal represents ~5.4x 2013 sales, including milestones
  • Lilly becomes No. 2 player in animal health w/ ~$3.3b in 2013 pro-forma sales; gives Elanco greater commercial presence in the companion animal, swine, equine and vaccines areas and creates an entry into the aquaculture market

MAIN FIRST (GSK: outperform, PT 1,950p; NOVN: underperform, PT CHF70)

  • Series of transactions is “a rare win-win” for both cos.
  • Both cos. will benefit from immediate financial accretion and strategically
 

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Tue, 04/22/2014 - 07:33 | 4682035 GetZeeGold
GetZeeGold's picture

 

 

The most stunning news has been that all 22LR ammo production has been going to big pharma death panels.

 

We're not sure why.

Tue, 04/22/2014 - 07:49 | 4682050 Bernoulli
Bernoulli's picture

A bit bubblish maybe, but at least there is some

- real strategy (?)

- actual turnover & profits

- products & employees (goodwill?) and

- patents (=future profits?)

behind GSK oncology unit.

Compare that to the valuation of whatsapp, grubhub and all the other "tech"-crap out there then it still seems relatively reasonable...

Tue, 04/22/2014 - 08:15 | 4682072 Winston of Oceania
Winston of Oceania's picture

Just like you to see both sides of the equation...

BTW and for what it's worth I will come back to this site on occasion to see if those annoying ads that blast while I'm trying to read are still here. For now I will make Chaos Manner my homepage because it is just as interesting WITHOUT the assault on my senses. 

http://www.jerrypournelle.com/chaosmanor/

Tue, 04/22/2014 - 08:19 | 4682088 MythicalFish
MythicalFish's picture

End of 2012, 6 out of the 10 largest companies by market cap were foreign, end of 2013 there was just 1.

 

US looks a bit Peak Bubbly indeed.

Tue, 04/22/2014 - 07:49 | 4682051 Bangin7GramRocks
Bangin7GramRocks's picture

When they all merge together, think of how many smoking hot sales sluts will be out of jobs. The price of a high-end piece of ass will plummet!

Tue, 04/22/2014 - 08:02 | 4682059 GetZeeGold
GetZeeGold's picture

 

 

Hopefully this won't mean an end to the free Schedule 2 samples.

Tue, 04/22/2014 - 08:16 | 4682080 disabledvet
disabledvet's picture

when are they gonna get their war monkey drug on the market?
they've got the phat phuck pill down pretty good.

Tue, 04/22/2014 - 08:22 | 4682102 firstdivision
firstdivision's picture

"...and slims down the world's ranks of big vaccine makers from five to four."

This is as good as going from five TBTF banks to four.

Tue, 04/22/2014 - 09:16 | 4682252 Fuh Querada
Fuh Querada's picture

They are preparing for:

-bankruptcy of medicare and medicaid

-bankruptcy of 0zeroDontcare insurees

-introduction of the Scheiss Dollar

-full payment of medicines by the 0.01% only

Tue, 04/22/2014 - 10:33 | 4682524 azengrcat
azengrcat's picture

And they (Novartis) shuttered their RNAi research wing after getting their asses handed to them by small shops.  They'll buy back in after the technology is derisked at valuations of 20X lol. 

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