GSK, Pfizer to launch consumer joint venture in market-shifting partnership
- GlaxoSmithKline and Pfizer will partner to create an expansive consumer health joint venture that will rank first globally in the sale of over-the-counter medicines, bringing top brands like Advil, Excedrin and Centrum together under one business.
- For GSK, the joint venture is a prelude to an eventual separation of consumer health from its pharmaceutical and vaccine offerings via a planned de-merger of its equity stake in the partnership and subsequent public listing of GSK Consumer Healthcare on British markets.
- If executed as laid out Wednesday, the deal would dramatically remake GSK and begin to answer long-standing questions from shareholders on whether the British drugmaker's business units would be better off together or apart. It's also the boldest move yet from GSK CEO Emma Walmsley, who took over in April 2017 with a mission to revitalize the company's competitiveness, particularly in pharmaceuticals.
For years, GSK insisted putting consumer health alongside pharma and vaccines made business sense, buttressing the riskier and more variable process of developing new drugs with steadier but lower-margin consumer health products.
The drugmaker long resisted calls from shareholders, most notably by the well-known fund manager Neil Woodford, to split itself into separate parts.
Under Walmsley, who succeeded Andrew Witty early last year, GSK is now moving toward a future where its consumer healthcare and pharma/vaccines businesses exist as separate, U.K.-based companies.
First, though, GSK and Pfizer will create a heavyweight consumer health joint venture, which will be 68% owned and controlled by the British company. Pfizer will own the remaining 32% stake in the venture.
Walmsley cited her experience leading GSK's previous consumer health joint venture with Novartis as a key factor in her confidence in pulling off the complex deal. GSK bought out Novartis' stake in that venture for $13 billion earlier this year.
Globally, the combined GSK-Pfizer venture will hold a little greater than 7% share in the market for over-the-counter medicines, ranking first or second in all major regions including the U.S. and China, the companies said.
The equity stakes roughly reflect the revenue contribution from each company to the partnership and a premium GSK offered to Pfizer in return for six of the nine seats on the joint venture's board of directors.
Notably, by partnering, the companies will enjoy increased geographical reach. Most of Pfizer's consumer revenue comes from the U.S., where GSK earns a comparatively lesser proportion of its consumer sales.
For Pfizer, the deal fulfills its promise to decide by year's end on the future of its consumer health business, which it had earlier sought to sell outright. GSK had participated in the bidding process, before deciding to drop out in a decision that surprised some.
The implications are more sweeping for GSK, which portrayed the joint venture as a stepping stone in its efforts to re-energize its drugs business.
Stronger sales and cash flow from the venture, which will initially be consolidated in GSK's financial statements, will be directed toward strengthening the company's pharma presence.
"The consumer JV's cashflow and visibility of the intended separation will help support GSK's future capital planning and the capacity for investment we want to make in our pharma pipeline over the next few years with the R&D approach that Hal [Barron] laid out at Q2," said Walmsley in a call with investors following Wednesday's announcement, noting a recent deal to acquire the oncology-focused biotech Tesaro in particular.
Within three years following the deal's closing, GSK expects to split consumer health from pharma and vaccines through a de-merger of its equity interest in the venture. GSK Consumer Healthcare would then list publicly as a separate company.
GSK expects the separation would allow its pharma and vaccines business to reduce its leverage, potentially supporting further dealmaking in the future.
On a call with investors, Walmsley downplayed any expectation of major M&A, however.
"The main focus right now is on the execution of what we have, but more to follow," she said. "In fact, this transaction supports [business development] both in terms of the visibility around our capital planning, and eventually in a few years’ time, the separation that creates this reset balance sheet and more capacity for the future."
The joint venture needs to be approved by GSK shareholders as well as antitrust regulators. The pharmas expect the deal to close in the second half of 2019, and GSK has agreed to pay a break fee of $900 million under certain circumstances.
Investors in each company reacted positively, at least initially. Shares in GSK jumped by nearly 3.5% in Wednesday morning trade, and Pfizer's stock rose before falling back to near Tuesday's closing price.
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