GSK plc announces major three-part transaction with Novartis to drive sustainable sales growth, improve long-term earnings and deliver increasing returns to shareholders

GlaxoSmithKline plc today announces a major 3-part inter-conditional transaction with Novartis AG involving its Consumer Healthcare, Vaccines and Oncology businesses (the “Transaction”). In summary:

• GSK and Novartis will create a new world-leading Consumer Healthcare business with 2013 pro forma revenues of £6.5 billion. GSK will have majority control with an equity interest of 63.5%
• GSK will acquire Novartis’ global Vaccines business (excluding influenza vaccines) for an initial cash consideration of $5.25 billion with subsequent potential milestone payments of up to $1.8 billion and ongoing royalties
• GSK will divest its marketed Oncology portfolio, related R&D activities and rights to its AKT inhibitor and also grant of commercialisation partner rights for future oncology products to Novartis for an aggregate cash consideration of $16 billion (of which up to $1.5 billion depends on the results of the COMBI-d trial)
• GSK shareholders to receive £4 billion capital return funded by net cash transaction proceeds and expected to be delivered via a B share scheme
• Transaction expected to be accretive to core EPS from first year, reflecting execution of intended B share scheme, and thereafter with growing contribution from 2017 as projected cost savings and new growth opportunities are delivered
• Transaction is expected to complete during the first half of 2015 subject to approvals

Sir Andrew Witty, Chief Executive Officer, GSK said:

“This proposed 3-part transaction accelerates our strategy to generate sustainable, broadly sourced sales growth and improve long-term earnings.

“Opportunities to build greater scale and combine high quality assets in Vaccines and Consumer Healthcare are scarce. With this transaction we will substantially strengthen two of our core businesses and create significant new options to increase value for shareholders.

“The Novartis OTC portfolio is highly complementary to GSK’s and has many well-known, widely recommended brands such as Voltaren, Excedrin, Otrivin, and Theraflu. Together, we will create the world’s premier OTC business with clear opportunities to accelerate revenue growth.

“The acquisition of Novartis’ Vaccines business will significantly enhance the breadth of our vaccines portfolio and pipeline, notably in meningitis, with the addition of Bexsero, an exciting new vaccine for prevention of meningitis B. The acquisition will also strengthen our manufacturing network and reduce supply costs.

“The third part of this transaction would see divestment of our Oncology portfolio to Novartis. Over the last six years we have made excellent progress to develop a series of innovative medicines. This transaction provides us with a unique opportunity to crystallise an attractive value for this portfolio and allow these medicines to benefit from Novartis’ global scale in this area.

In financial terms, this transaction significantly exceeds our return criteria and delivers accretion to core earnings per share in year one and then with a growing contribution over time, particularly in 2017, as growth opportunities and projected cost savings are delivered.

“We also expect to return £4 billion to shareholders following completion of this transaction, whilst maintaining a strong capital base and our commitment to increasing dividends.

“Finally, and very importantly, this transaction strengthens GSK’s offering to patients and consumers. We will expand our portfolio to both help treat illness and prevent disease, and we will broaden our scope to improve human health with the acquired R&D and innovation expertise.”

Strategic highlights

Balanced set of core businesses and strengthened R&D
The proposed Transaction would increase GSK’s annual revenues by £1.3 billion to £26.9 billion (on a 2013 pro forma basis) and fundamentally re-shape GSK’s revenue base. These revenues would be split across Pharmaceuticals 62%, Consumer Healthcare 24% and Vaccines 14%.

Following completion, around 70% of GSK’s revenues would be focussed around four key franchises: Respiratory, HIV (ViiV Healthcare), Vaccines and Consumer Healthcare. All of these franchises operate in growing markets with new and market-leading brands and products manufactured in protected technologies.

Of the remaining revenue base, approximately 14% of sales would reside in GSK’s Established Products Portfolio (EPP). GSK is currently reviewing this portfolio to ensure the Group evaluates all options to maximise its value.

As a result of this transaction, GSK’s late-stage development pipeline would be further strengthened with the addition of 4 new candidate vaccines from Novartis. In total, GSK would have around 45 NMEs in Phase II/III clinical development. In Consumer Healthcare, both GSK and Novartis have strong track-records of brand innovation and creating scientifically differentiated products with ~15% of combined sales generated from innovation launched in recent years.

Creating a new world-leading Consumer Healthcare business
Following completion of the transaction, GSK will be a global leader in Consumer Healthcare with revenues of £6.5 billion, on a 2013 pro forma basis. The new business will hold category leading positions and brands in Wellness, Oral health, Nutrition and Skin health, combining OTC and FMCG capabilities and expertise.

In Wellness, the new combination’s £3.4 billion complementary portfolio will create the world’s largest OTC business with the leading position in more than 35 countries around the world.

The combination is geographically well-matched. Novartis’ portfolio has had relatively limited exposure to high growth emerging markets and this presents multiple new growth opportunities for several major brands and innovations, notably Voltaren, Excedrin and Otrivin. Similarly, GSK’s brands would benefit from exposure to Novartis’ highly successful CIS, Central and Eastern European business.

The combination also creates a more competitive business. With leading positions in most of the categories in which it operates, the combination will have excellent customer insight and ability to offer retailers better shopper experiences. The combination will also have significant mass market, pharmacy and expert selling capabilities with sales personnel throughout the world. The business will also have access to world-leading science capabilities and to new Rx/Cx switch opportunities from both parent companies.

Emma Walmsley has been appointed as Chief Executive Officer Designate of the new business and will be a member of its Board. Sir Andrew Witty will be Chairman of the Board. The Board will comprise directors from both GSK and Novartis.

Strengthening global leadership in Vaccines
The acquisition of Novartis’ global Vaccines business (excluding influenza vaccines) further improves GSK’s position as the world’s leading global vaccines supplier. Demand for vaccination remains significant with the global vaccine market projected to grow approximately 10% per annum over the next 10 years.

The transaction will strengthen the breadth of GSK’s portfolio, notably in meningitis, including the addition of Bexsero, a new vaccine for prevention of meningitis B and a further candidate vaccine in late-stage development, MenABCWY.

This portfolio expansion will be of benefit to GSK in all markets and notably in the USA, where Novartis has a strong track record of delivery. GSK’s significant presence in emerging and developing markets will also provide new opportunities for introduction and growth of Novartis’ vaccines.

GSK and Novartis’ Vaccines R&D organisations are highly complementary, bringing together respective expertise in virology, bacterial infection and different adjuvant platforms. The new business would have more than 20 different vaccines in development, including assets to prevent hospital and maternal infections and diseases prevalent in developing countries such as malaria and tuberculosis.

The acquisition is expected to strengthen GSK’s manufacturing network and increase overall capacity, notably with the addition of Novartis’ secondary packaging and supply facilities in Rosia, Italy and Marburg, Germany. GSK would also acquire new manufacturing sites in India and China. In addition, the integration of the supply of a number of key antigens, currently provided to GSK by Novartis, will provide immediate improvements and enhance the future flexibility of the business, particularly in paediatric vaccines.

Realising value for Oncology
GSK has agreed to divest its marketed Oncology portfolio, related R&D activities and rights to its AKT inhibitor and also grant commercialisation partner rights for future oncology products to Novartis for an aggregate cash consideration of $16 billion. Up to $1.5 billion of this amount depends on the results of the COMBI-d trial, a Phase III study evaluating the safety and efficacy of the combination of Tafinlar (BRAF) and Mekinist (MEK) versus BRAF monotherapy.

For GSK, this part of the Transaction represents a unique opportunity to crystallise an attractive value for its marketed portfolio and provide Novartis with the opportunity to leverage its global scale in this therapy area and deliver new growth and development opportunities for these products.

GSK’s R&D in oncology will continue with programmes to investigate potential new treatments in areas of cancer immunotherapy, epigenetics, and tumour environment.

Financial implications

Sales and earnings benefits
The proposed Transaction significantly exceeds GSK’s returns criteria and the company expects to realise benefits to sales and earnings as a result of it. The Transaction would increase overall GSK revenues by £1.3 billion to £26.9 billion, on a 2013 pro forma basis.

The Transaction is expected to be accretive to core earnings per share from the first year, reflecting the execution of the intended B share scheme, and is expected to make a growing contribution to earnings thereafter, especially from 2017, as the delivery of cost savings, new product launches and re-introduction of Novartis’ OTC products accelerates. GSK’s operating margins would reflect changes to GSK’s revenue mix which result from the Transaction.

New revenue growth opportunities are expected in both Vaccines and Consumer Healthcare as a result of the Transaction and future revenues would also reflect the benefits from recent restructuring and investment by Novartis. In Consumer Healthcare, sales would reflect the re-supply of certain products manufactured at Novartis’ facility in Lincoln, Nebraska following remediation activities at the site. Production and re-supply of these products is expected to increase and be phased in over the next 2 years.

Cost savings
GSK estimates that total annual cost savings of £1 billion could be achievable by the fifth full year following closing. The delivery of these potential savings is expected to be phased with approximately 50% delivered by year three and the full amount by year five. GSK intends to reinvest approximately 20% of cost savings to support innovation and expected new product launches across the Group, wherever returns are most attractive.

Total costs to deliver these savings are estimated to be £2 billion, split approximately evenly between cash and non-cash charges.

Contributions to the total cost savings are estimated to be approximately 40% from Consumer Healthcare, 40% from Vaccines and 20% from savings associated with the divestment of GSK’s Oncology portfolio. These estimates are subject to further detailed implementation planning post closing.

Potential cost savings would be generated from reductions in selling and administrative costs, removal of infrastructure overlaps and reduced third party contracting as well as through improvements in manufacturing costs. The new GSK businesses would also expect to benefit from new economies of scale and earn greater returns from leveraging sales, distribution and purchasing opportunities across its broader global platform.

The companies will conduct consultations on cost savings proposals with staff, works councils, trade unions and other employee representatives in line with local practice and in accordance with applicable employment legislation.

Shareholder information

Approvals
The Transaction constitutes a Class 1 transaction for the purposes of the FCA’s Listing Rules and therefore is conditional upon the approval of GSK’s shareholders at a General Meeting which is expected to be held in the fourth quarter of 2014. The Transaction is also conditional upon other matters, including receiving certain anti-trust approvals. Completion of the Transaction is anticipated to occur during the first half of 2015.

Capital return
GSK plans to use net after tax cash proceeds of $7.8 billion to fund a capital return of £4 billion to shareholders following completion of the transaction. This return is expected to be implemented through a B share scheme in 2015, subject to approvals. Specific details related to the execution of the B share scheme will be sent to shareholders in due course.

Following implementation of the B share scheme, GSK would not make any further share repurchases in 2015 but will review the potential for future share buy backs from 2016 in line with its usual annual cycle and subject to its current return and rating criteria