29 April 2014
As governments worldwide try to rein in medical costs, pharmaceutical companies want to maximize income from their most lucrative drugs while spinning off products or whole divisions that are not market leaders and are unlikely to become so.
A complex asset swap announced by drug-makers Novartis and GlaxoSmithKline on April 22 points to a new era in pharmaceutical deal-making, in a break from the past focus on growth for growth’s sake.
The two companies symbolise the mega-merger era. London-headquartered GlaxoSmithKline was created in 2000 following a series of mergers involving at least five British and US companies; it had £26.5 billion in turnover last year and just under 100,000 employees. Basel-based Novartis ($58 billion in sales, 135,000 employees) is the successor to three Swiss drug companies, CIBA, Geigy and Sandoz.
Their history of mergers has left both groups with similar challenges: Each has underperforming divisions, but their stronger businesses need greater scale to compete on the global stage. Once these issues would have prompted a fresh round of mergers, but now positioning in the marketplace, not sheer size, is the focus.
Hence the innovative asset swap: Novartis will acquire GlaxoSmithKline’s cancer-drug business, while GlaxoSmithKline will take over Novartis’ vaccines unit. Lastly, U.S. giant Eli Lilly will absorb Novartis’s animal-health business.
The deal will shrink revenue for both companies, but boost their overall profitability: GlaxoSmithKline’s revenue is expected to fall by 6.5%, but its operating margin could rise by 2.5 percentage points.
Andrew Witty, GlaxoSmithKline’s chief executive, says M&A remains a valuable tool for companies if deals allow them to strengthen businesses and obtain long-term competitive advantage.
Though complex and challenging to implement, asset swaps can leave all parties to the transaction stronger. In the long term, enabling pharma companies to focus on areas where they are most competitive could also benefit patients.