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$16B deal for GlaxoSmithKline oncology meds turns Novartis into cancer heavyweight

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GlaxoSmithKline CEO Sir Andrew Witty

Why would GlaxoSmithKline ($GSK) sell most of its cancer business to Novartis ($NVS)? In today's deal announcement, that particular sale stands up for questioning.

After all, Glaxo has scored some recent victories in oncology, including the approvals of its melanoma treatments Tafinlar and Mekinist. And cancer is one of the hottest fields in the drug business.

CEO Andrew Witty had a couple of things to say about that. First, it's a way to capture some present-day cash for a portfolio that would pay off little by little, mostly in the long term. That $16 billion in cash will also fund a £4 billion shareholder payoff, Witty notes.

"Over the last six years we have made excellent progress to develop a series of innovative medicines," Witty said in a statement. "This transaction provides us with a unique opportunity to crystallize an attractive value for this portfolio."

And then there's focus: Hiving off oncology focuses GSK more tightly on its biggest prescription drug franchises, respiratory and HIV meds. Glaxo wasn't a leader in cancer--as Reuters points out, its oncology business ranked 14th worldwide--so handing it over to Novartis makes sense.

The company is hanging on to some cancer R&D programs, including immunotherapy and epigenetics research. Future oncology products would be comarketed by Novartis, which will be a big cancer player after swallowing GSK's other cancer products.

And that's the explanation for the other side of this transaction. Novartis already boasts an array of cancer products, including the groundbreaking blood-cancer drug Gleevec and its follow-up, Tasigna; the kidney cancer treatment Afinitor, which recently won a new approval in breast cancer; and more recent entries, including Jakavi, for a rare bone marrow disorder, and Signifor, a Cushing's disease therapy.

It doesn't have melanoma meds, and Glaxo's twin treatments together promise blockbuster-level sales. They're approved for singular use, but designed to work in tandem; a trial testing the combo against Roche's ($RHHBY) Zelboraf is ongoing (and part of the purchase price--$1.5 billion--depends on those results). And they're targeted drugs--Mekinist is a MEK inhibitor, while Tafinlar is a BRAF inhibitor--that could prove themselves in other types of cancers.

Novartis figures its oncology infrastructure can "optimize" the launch of these two melanoma drugs, "positioning Novartis as the leader in treating melanoma," the company said in a statement.

Indeed, Novartis has the same case to make about all of GSK's marketed cancer meds, from Votrient, a targeted kidney cancer drug that complements its other treatments in that area, to the leukemia drug Arzerra, which would add to its blood-cancer franchise. The company is adept at developing new uses for drugs, and that isn't likely to stop with Glaxo's products.

Meanwhile, the R&D Glaxo is keeping will serve as a pipeline of sorts for Novartis. The company will have "opt-in rights" for GSK's new compounds and new development targets, Novartis points out.

Analysts appear to agree that the deal offers a nice boost for the Swiss drugmaker's oncology lineup. They don't agree on whether the price is right. Some see that $16 billion as a "rather hefty" amount to pay for the cancer assets, Reuters notes. Time will tell about that. Immediately, however, Novartis CEO Joe Jimenez sees his margins improving, as he hands off low-margin vaccines and picks up high-margin oncology products.

Sanford C. Bernstein analyst Tim Anderson is among those with quibbles about the cost. "[T]he price tag is on the higher end when looked at as a multiple of current sales," he said; the GSK products currently bring in about $1.6 billion. Still, it could work. "This business slots into Novartis nicely, and synergies should be achievable," he said. And oncology will now account for about 20% of the company's sales.

- see the release from Novartis
- get more from GSK on the deal
- read the Reuters story

Special Reports: Top 10 pharma companies by 2013 revenue - Novartis - GSK | Pharma's top 10 M&A deals of 2013

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