Pharma heavyweights GlaxoSmithKline plc (GSK) and Pfizer Inc. have reached an agreement to combine the two companies’ consumer health businesses into a “new world-leading” Joint Venture, with combined sales of approximately £9.8 billion (US$12.7 billion). As a result of this JV, GSK intends to split into two businesses in the next three years – for prescription drugs and vaccines and for OTC products, including vitamin and mineral supplements. GSK is to hold a majority controlling equity interest of 68 percent, while Pfizer will have an equity interest of 32 percent in the Joint Venture.
During a press call this morning, GSK CEO Emma Walmsley coined the announcement a “landmark day” for GSK.
“Eighteen months ago, I set out clear priorities and a capital allocation framework for GSK to improve our long-term competitive performance and strengthen our ability to bring new breakthrough medicines and better healthcare products to people around the world. We have improved our operating performance and have set out a new approach to R&D,” says Walmsley.
“The transaction we have announced today is a unique opportunity to accelerate this work. Through the combination of GSK and Pfizer’s consumer healthcare businesses, we will create substantial further value for shareholders. At the same time, incremental cash flows and visibility of the intended separation will help support GSK’s future capital planning and further investment in our pharmaceuticals pipeline,” Walmsley says.
Pfizer had initially sought to sell off its consumer health business, with Nestlé, GSK and Reckitt Benckiser among the potential bidders. Just days after GSK exited the race to buy Pfizer's Consumer Healthcare Business in March, GSK reached an agreement with Novartis for the acquisition of Novartis’ 36.5 percent stake in its Consumer Healthcare Joint Venture for US$13 billion.
For GSK, the proposed all-equity transaction represents a “compelling opportunity” to build on its recent buyout of Novartis’ stake in GSK Consumer Healthcare, to create a new world-leading consumer healthcare business and to deliver further significant shareholder value.
The proposed transaction also supports GSK’s priority of strengthening its pharmaceuticals business over the next few years by increasing cash flows and providing an effective pathway through the separation of GSK Consumer Healthcare to build further support for investment in its R&D pipeline.
The combination will bring together two highly complementary portfolios of trusted consumer health brands, including GSK’s Sensodyne, Voltaren and Panadol and Pfizer’s Advil and Caltrate, as well as vitamins and minerals supplement brands such as Centrum.
The Joint Venture will seek to be a category leader in Pain Relief, Respiratory, Vitamin and Mineral Supplements, Digestive Health, Skin Health and Therapeutic Oral Health. The Joint Venture will be the global leader in OTC products with a market share of 7.3 percent ahead of its nearest competitor at 4.1 percent and have number 1 or 2 market share positions in all key geographies, including the US and China, GSK reports.
The proposed transaction is expected to realize substantial cost synergies, with the Joint Venture expected to generate total annual cost savings of £0.5 billion by 2022 for expected total cash costs of £0.9 billion and non-cash charges of £0.3 billion. Planned divestments targeting around £1 billion of net proceeds are expected to cover the cash costs of the integration. Up to 25 percent of the cost savings are intended to be reinvested in the business to support innovation and other growth opportunities. Overall the Joint Venture will target an Adjusted operating margin percentage in the “mid-to-high 20’s” by 2022.
GSK expects the proposed transaction to be accretive to Total earnings in the second full year following closing, reflecting the impact and timing for the costs of integration; and to be accretive to Adjusted earnings and free cash flow in the first full year after closing
“Consumer healthcare is a great business to be in. It is clear the trends are in our favor with people taking more control of their own health, an aging population and growing emerging middle class,” explains Brian McNamara, CEO, GSK Consumer Healthcare, during the press call this morning. “There is still a lot of opportunity to drive growth by innovating and delivering on unmet consumer needs. The combination of GSK and Pfizer consumer healthcare brings together two highly complementary portfolios into a world-leading company with significant scale.”
Within three years of the closing of the transaction, GSK intends to separate the Joint Venture via a demerger of its equity interest and a listing of GSK Consumer Healthcare on the UK equity market. Over this period, GSK will seek to substantially complete the integration and expects to make continued progress in strengthening its Pharma business and R&D pipeline.
The intended separation of the group will reportedly allow the two resulting companies to be established with appropriate capital structures for their future investment needs and capital allocation priorities. The new consumer healthcare company with its more strong cash flows will be able to support higher leverage levels than the GSK Group today, creating the opportunity on separation to reduce the leverage in the new Pharmaceuticals/Vaccines company.
