GSK's ?9bn Novartis deal - what next for Emma Walmsley's strategy?

GSK chief Emma Walmsley has pulled off a rare feat for the corporate world and lined up a hefty takeover deal that seemingly pleases everybody.
When Britains biggest drug maker announced last Tuesday that it was buying out its Swiss rival Novartis stake in its consumer healthcare business for $13bn (?9bn), the firm received widespread praise from analysts and its stock jumped 5pc.
Once the deal completes GSK will have complete control of the Sensodyne toothpaste to Panadol painkiller unit, with sales of ?7.8bn that have grown around 4pc over the past three years. GSK said it may have to sell its historic Horlicks brand to help pay for it, but this didnt upset the unsentimental City.
It would have been a different reaction had GSK decided to bid for US rival Pfizers consumer division the week before, with its reported price tag of $20bn.
GSK's ?9bn Novartis deal - what next for Emma Walmsley's strategy?

GSK's consumer health division produces products including Sensodyne toothpaste

Simon Dawson/Bloomberg
Instead GSK pulled out of the running, a mere 24 hours after fellow FTSE 100 giant Reckitt Benckiser did the same, leaving Pfizer struggling to find a buyer. After quitting the race GSKs share price rose 3pc precisely because it wasnt buying.
Behind the scenes Ms Walmsley has been carrying out a balancing act, weighing the merits of two competing deals and trying to keep the joint owner of one of its major divisions, in Novartis, happy.
At the same time she has been trying to ensure she retains enough capital to meet GSKs two top priorities. These are sharpening up its under-performing pharmaceutical division which accounts for the majority of the companys ?30bn sales and maintaining a dividend for investors.
Has she pulled it off? And to what extent were these her or Novartis decisions?
The key to understanding the machinations at GSKs Brentford HQ over the past few months is a clause in the original deal between the firm and Novartis.
Three years ago the rivals completed an asset swap that saw GSK transfer its then cancer drugs portfolio to Novartis, in return for combining the two companies consumer health divisions.
GSK share price
Novartis got a put option at the time that went live at the start of March this year. If exercised this would oblige GSK to buy it out and it appears the Swiss firm wasted no time triggering it.
GSK valued Novartis stake at ?8.6bn on its balance sheet in its full-year results in February so ?600m less than the price ultimately agreed.
It is understood GSK had been factoring in having to acquire the unit by around the middle of this year. The ?8.6bn figure was discounted from a midyear estimated valuation of ?8.9bn.
Novartis threw the City off the scent by indicating last autumn that it was not ready to dump consumer health, telling analysts there was more value and synergies to be realised.
Vincent Meunier, analyst at Morgan Stanley, suggests this could have been clever tactics. I think Novartis was putting gentle pressure on GSK to extract more synergies.
If this was the ask it appears GSK fell short. Early on in the Pfizer contest it is understood Novartis made it clear it wanted to exit the consumer health joint venture. An early proposal from GSK to combine all three units was rebuffed.
With Novartis selling up, it was always a tall order for GSK to buy both divisions in one go. It would have been difficult and threatened its priority to overhaul pharma, says Meunier.
GSK stayed in the running for Pfizers consumer unit as it wanted to take a close look at assets such as Chapstick lip balm, Centrum vitamins and Seven Seas supplements. The competitive dynamic may also have helped ensure Reckitt didnt pick up the assets cheap.
GSK's ?9bn Novartis deal - what next for Emma Walmsley's strategy?

GSK insists the ?9bn deal will not threaten its top priority of sharpening up its larger drugs division

Oli Scarff/Getty Images
Johnson & Johnson and Nestle pulled out at an earlier stage. Ms Walmsley declined to comment on the content of discussions with Novartis on a call with reporters last week, saying that the talks had been constructive.
The consideration and detailed review that we did around Pfizer assets opened up this opportunity and we are both very happy to conclude it, she added.
Whatever the reasons behind the Novartis deal, what has pleased the City is she has opted for the more conservative option a business GSK already runs but didnt own 37pc of, limiting any heavy lifting required for integration.
It also limits any potential distraction from Ms Walmsleys main priorities of overhauling the pharmaceutical division and paying out a dividend.
Michael Leuchten, analyst at UBS, said he approved of the Novartis tie-up in a note, saying it gave GSK more certainty and would improve profitability immediately. He had been expecting GSKs earnings to be flat for the next two years in the face of intensifying competition in its pharmaceutical division.
But Leuchten said the Novartis tie-up had removed this plateau and would indeed boost earnings from this year. He believed the price paid was fair.
With GSK walking away from bidding for the Pfizer OTC business the dividend looks secure in our view, he added.
Ms Walmsley said the deal would allow its investors to capture the full value of one of the worlds leading consumer healthcare businesses.
GSK's ?9bn Novartis deal - what next for Emma Walmsley's strategy?

GSK is considering selling the historic Horlicks brand to help pay for the Novartis deal
GSK has been driving up profitability at the division. Since 2015 it has pushed margins up from 11.3pc to 17.7pc and is targeting mid-20pc by 2022.
Shareholders will be asked to vote on the tie-up in the coming months, with the deal expected to close by this summer.
Ms Walmsley argued the Horlicks brand which is wildly popular in India, where it is sold as a nutritional drink and other assets were likely to prove attractive.
Potential companies linked to a bid including Nestle and Unilever.
The firm is considering selling products with combined annual sales of ?550m. The strategic review of the assets will complete by the end of the year.
Commenting on Horlicks, Ms Walmsley said: This is an absolutely extraordinary brand, with more than a century of history, particularly in India [where it is] much loved.
The firm will refocus the division on over-the-counter medicine and oral health products such as toothpaste and mouthwash.
The steady consumer profits should help support investment in its riskier pharmaceutical business.
Attention will turn to its drugs division at the half-year, when GSKs new chief scientific officer, the renowned American drug development expert Dr Hal Barron, will present an update on overhauling the companys R&D pipeline.
Getting the pharmaceutical division in shape will be the bigger test of Ms Walmsleys tenure.
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