Vitamin tablets are arranged for a photograph in Tokyo, Japan. (Photographer: Kiyoshi Ota/Bloomberg)

Glaxo-Pfizer Deal Creates Biggest Over-the-Counter Drug Supplier

(Bloomberg) -- GlaxoSmithKline Plc paved the way for a split into two companies, agreeing to create a consumer-health joint venture with Pfizer Inc. to be listed on the stock market, sending the U.K. company’s shares to their biggest gains in a decade.

Glaxo will have a 68 percent controlling stake in the new entity, with combined sales of $12.7 billion and led by Brian McNamara, the CEO of the U.K. pharmaceutical giant’s consumer arm. The deal lets Pfizer exit a business after a yearlong sale process failed to find a buyer.

The noncash transaction creates the world’s biggest supplier of over-the-counter medicines with brands of painkillers such as Advil and Panadol and marks a shift from Glaxo Chief Executive Officer Emma Walmsley’s previously stated strategy of keeping the steadily performing consumer and vaccine businesses under the same roof as the more volatile pharma operations.

The U.K. drugmaker’s shares surged as much as 8.3 percent on the London stock exchange. Pfizer shares rose about 1.2 percent in premarket U.S. trading.

The benefits of separating into two companies -- one dedicated to prescription medicines and the other to consumer health -- outweigh the advantages that come with a more diversified structure, Walmsley told reporters on a conference call. By moving out of the competitive, lower-margin over-the-counter business, Glaxo and Pfizer can focus on drug development as research costs surge and governments and insurers demand lower prices.

“Historically we’ve liked the balance of a broader company but we’ve always been pragmatic about that,” Walmsley said in an interview with Bloomberg Television.

‘Too Small’

The deal will help “support our number-one priority, which is strengthening the pharma business,” Walmsley said. The transaction will let Glaxo focus on developing drugs for cancer, HIV and other diseases, taking it out of the business of selling low-priced products in the competitively squeezed consumer field.

In the business of selling over-the-counter remedies, where brands and heft are key, New York-based Pfizer made the bet that it wasn’t big enough on its own. An earlier attempt to sell the consumer business failed after potential buyers dropped out of the bidding process.

“Pfizer realized it was too small and that it was facing increasingly tough competition,” said Timo Kuerschner, an analyst at Landesbank Baden-Wuerttemberg.

That could be a harbinger of things to come for the consumer health market as rivals weigh how to react to the creation of a leader in the field, according to Kuerschner. Other drugmakers with integrated consumer-health divisions include Johnson & Johnson, Bayer AG and Sanofi. In another industry shift, General Electric Co. has filed confidentially for an initial public offering of its health-care unit, according to people familiar with the matter.

The newly created Pfizer venture with Glaxo will operate under the name GSK Consumer Healthcare. Tobias Hestler, the existing CFO of the U.K. company’s consumer arm, will assume the same role at the combined entity. The transaction is expected to close in the second half of 2019. After that, Pfizer said it plans to deconsolidate its share of the business, which may boost its operating margins.

Eye on Cancer

Intense price competition online from the likes of Amazon as well as own-brand store products have dented consumer-health margins in the U.S. and parts of Europe, prompting consolidation. A month after Reckitt Benckiser Group Plc ended talks to acquire the Pfizer business this year, Procter & Gamble Co. agreed to pay about $4.2 billion to acquire Merck KGaA’s consumer-health unit and gain brands such as Seven Seas vitamins.

Walmsley has been working to revitalize a lackluster pipeline of new prescription drugs at Glaxo, culling programs to focus on those that look most likely to succeed and bringing in industry veteran Hal Barron to oversee research. Earlier this month, Glaxo agreed to buy drugmaker Tesaro Inc. for $5.1 billion, expanding in cancer medicines for a price analysts deemed high.

For more details of the deal read this.

The deal follows a move by Glaxo earlier this year to pay $13 billion for Novartis AG’s stake in a consumer joint venture. Glaxo on Wednesday said it expects annual cost savings of 500 million pounds ($633 million) by 2022, with up to a quarter of that money redeployed to pursue further growth opportunities. Glaxo said it’s targeting 1 billion pounds worth of divestments.

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