Novartis retools with two deals

GlaxoSmithKline, Eli Lilly pacts to affect 15,000 workers

A man stands inside Novartis AG’s headquarters in Basel, Switzerland, in January. The drug maker on Tuesday announced multibillion dollar deals with GlaxoSmithKline PLC and the Eli Lilly & Co.
A man stands inside Novartis AG’s headquarters in Basel, Switzerland, in January. The drug maker on Tuesday announced multibillion dollar deals with GlaxoSmithKline PLC and the Eli Lilly & Co.

GENEVA - Swiss pharmaceutical firm Novartis AG started an overhaul of its business Tuesday, unveiling multibillion-dollar deals with Britain’s GlaxoSmithKline PLC and the U.S.’s Eli Lilly & Co.

Joseph Jimenez, the chief executive of Basel, Switzerland-based Novartis, said the deals with GlaxoSmithKline and Eli Lilly reflect “a very dynamic health-care environment” and would reduce overall sales at Novartis but improve its profit margins. He told reporters some 15,000 of its employees globally will be affected by the changes but that no one will be fired by Novartis - all employees whose units are being sold will be transferred to the new owners.

“The transactions mark a transformational moment for Novartis,” Jimenez said. “They also improve our financial strength, and are expected to add to our growth rates and margins immediately.”

The deals unveiled Tuesday are the latest in a string of recent mergers and acquisitions in the industry.

All of Novartis’ deals with GlaxoSmithKline were timed to close simultaneously. Novartis has agreed to buy Glaxo-SmithKline’s cancer-drug business for $14.5 billion, plus up to $1.5 billion more if certain milestones are met. And the Swiss company has agreed to sell most of its vaccines business to GlaxoSmithKline for $7.1 billion, plus royalties, giving GlaxoSmithKline better market position with Bexsero, a meningitis B vaccine.

Two GlaxoSmithKline cancer drugs, Tafinlar and Mekinist, would give Novartis a strong position for melanoma treatments. Tykerb, for metastatic breast cancer, and Arzerra, for chronic lymphocytic leukemia for thrombocytopenia, are two other drugs included in the deal.

The two firms are also creating a new consumer healthcare business through a joint venture that combines Novartis’ over-the-counter drug business with GlaxoSmithKline’s consumer business. Novartis would own 36.5 percent of the venture, which is expected to generate revenue of $10 billion a year emphasizing general health, oral health, nutrition and skin health.

Separately, Novartis said it will sell off its animal-health division to Eli Lilly for about $5.4 billion. Indianapolis-based Lillyhas been hit hard by the expiration of patents protecting key products in the past few years and has staked its recovery in part on new drugs it develops and its animal-health business.

Investors welcomed the deals, with Novartis shares in Zurich closing up 2.3 percent at $86.33. GlaxoSmithKline’s share price in London soared 5.2 percent to about $27.60 with investors enthusiastic about news that the company is planning to return $6.7 billion to shareholders after the closure of the deals. Eli Lilly shares fared less well, falling 83 cents to close Tuesday at $60.03.

Ishaq Siddiqi, a market strategist with ETX Capital in London, said traders are “ generally feeling upbeat on the back of some high profile deal activity in the pharma sector.”

In many ways, the deals reflect the industry push for ways to make money and cut costs as their blockbuster drugs face competition from generics.

The pharmaceutical industry is changing as firms look to continue the growth investors are accustomed to at a time when the patents have expired for many blockbuster drugs that generated billions of dollars in annual revenue, said Steve Brozak, who follows health-care industries as president of WBB Securities.

“This is buying time until they can figure out what is next,” he said.

Patent expirations have exposed those blockbusters to cheaper generic competition, and drugmakers, who have also been helped by growth in Medicare prescription drug coverage in the United States, haven’t been able to churn out more billion-dollar drugs. Mergers and acquisitions give them additional sources of revenue and new ways to cut costs and become more efficient.

“There are no blockbusters,” Brozak said. “We’re seeing the logical extension of behavior that has taken place not over just the last few years, but in the past decade.” Information for this article was contributed by Tom Murphy of The Associated Press.

Business, Pages 25 on 04/23/2014

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