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GSK Gains Clarity For Pharma Focus



It's hard to imagine that spending $13bn (£9.2bn) could lift a weight from someone's shoulders, but that's what GlaxoSmithKline PLC has done with its purchase of Novartis AG's 36.5% stake in the companies' Consumer Healthcare Joint Venture.

GSK said on March 27 that buying Novartis' share of the JV, which became a possibility this month under the companies' 2014 agreement to combine their OTC drug and nutritional products businesses, "removes this uncertainty and improves the Group’s ability to plan allocation of capital to its other priorities." (Also see "GSK Exercises Right To Buy Out Novartis Consumer Healthcare JV For $13bn" - Scrip, 27 Mar, 2018.)

GSK has made pharmaceutical research and development, with a renewed focus on oncology, a top priority, so buying Novartis' share of the consumer health JV clarifies how much the company can spend on R&D, including business development. (Also see "Walmsley Takes On Oncology: Can GSK Become A Power Player?" - Scrip, 16 Jan, 2018.)

"Very importantly, the transaction removes an inherent uncertainty for [GSK] with the removal of the Novartis split, and this will allow us the planned use of our capital for other priorities, especially pharma R&D," GSK CEO Emma Walmsley said during a March 27 call with analysts and investors. "As I've said, strengthening and investing in our pharma pipeline is critical to support the company for its next wave of growth."

The company will provide an update on its pharma R&D strategy during its second quarter 2018 earnings report, scheduled for July 25. This will be a key period for GSK, which should know more by then about whether its pharma revenue will be hit by generic versions of its blockbuster asthma therapy Advair Diskus (fluticasone/salmeterol). SC100368

Capturing 36.5% more of the revenue flowing in from the consumer health business, combined with revenue from new products, could help GSK offset declining sales of Advair. Walmsley sold the buyout of Novartis' stake in the consumer health JV as giving investors a greater share of profits from a business that's doing well and has room for growth.

"The buyout of the Novartis stake means GSK shareholders will capture the full value of a business we believe is well positioned to deliver future sales growth and continued operating margin improvement," she told the call.

The consumer health JV launched in 2015 as part of a $28.5bn three-way deal announced in 2014 that included combining Novartis' and GSK's consumer health franchises to create a business with about $10bn in annual sales. The arrangement gave GSK a majority 63.5% stake in the JV and a commitment to buy out Novartis' share if it chose to divest its interest between March 2, 2018 and March 2, 2035. In the deal, Novartis also bought GSK's oncology business for $16bn, GSK bought Novartis' vaccines unit for $5.25bn, and Eli Lilly & Co. bought Novartis' animal health business for $5.4bn under the original set of transactions. (Also see "Novartis in $28.5bn+ mega-deal with GSK, Lilly" - Scrip, 22 Apr, 2014.)

Consumer Revenue A Boost As Pharma Is Challenged

The combined consumer health business generated sales of £7.8bn ($11bn) in 2017 with a three-year compound annual growth rate of 4% between 2015 and 2017. The unit's operating margins have improved during that period from 11.3% in 2015 to 17.7% in 2017, and GSK forecasts even greater improvement into the mid-20% range by 2022.

But while consumer health always has been an important business for the company, GSK is staking its future on pharma R&D and has invested in people and other resources under Walmsley to strengthen its prescription drug business.

The CEO described the company as "a world leader in consumer" during GSK's 2017 fourth-quarter earnings call on Feb. 7, but said "our first priority remains pharma and both investing in the launches and the execution under way, but also more specifically prioritizing the pipeline in pharma. We will not do anything that cuts across that prioritization." (Also see "Walmsley: GSK Is 'Prepared' And 'Ready' For US Advair Generic Launch" - Scrip, 7 Feb, 2018.)

That seems to suggest that GSK will not invest in consumer health outside of its commitment to Novartis under the companies' 2014 agreement. The British drug maker had been interested in acquiring Pfizer Inc.'s consumer health business, but pulled out of the bidding March 23 – just four days before announcing the buyout of Novartis' consumer health JV stake. (Also see "GSK Drops Out Of Auction For Pfizer's Consumer Health Unit" - Scrip, 23 Mar, 2018.)

"While we will continue to review opportunities that may accelerate our strategy," Walmsley said in a statement March 23, "they must meet our criteria for returns and not compromise our priorities for capital allocation.”

HIV, Respiratory, Vaccines And Oncology

Among the company's existing pharma priorities are:

Business development also will be important for GSK's pharma growth, but don't expect any mega-mergers from the UK big pharma.

Walmsley said during the company's call about buying out Novartis' consumer health JV stake: "I've been clear that our first priority is to invest in our organic growth, which starts with pharma and R&D, and perhaps that will include some early-stage [business development.]"

She indicated that there will be more commentary in that regard during GSK's R&D update as part of its second quarter earnings report in July.

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