Novartis, GSK team up in consumer JV to save big money, gain big scale

Novartis CEO Joe Jimenez

Novartis CEO Joe Jimenez is on record saying he's "a big fan" of the company's consumer health business. But that doesn't mean he has to run it. The Swiss drugmaker gets to have its consumer health and hand it off, too, in a new joint venture with GlaxoSmithKline ($GSK).

One in a batch of "transformative" multibillion-dollar deals for Novartis ($NVS), all announced Tuesday, the consumer JV melds Novartis' over-the-counter medicines and health products with Glaxo's broad-based consumer unit. Result: a business with about $10 billion in annual sales, and the scale to compete with larger, consumer-only rivals.

Take a hint from the new combo's name, however: GSK Consumer Healthcare. That's because Novartis handed over some $3.5 billion in assets, while Glaxo pitched in $6.5 billion or so. Novartis will have a 36.5% stake, leaving GSK with 63.5% and managerial control.

Each company will have seats on the venture's board--Novartis with four, Glaxo with 11--and GSK chief Andrew Witty will serve as chairman.

The joint venture puts some well-known names into one big basket. Novartis' pain reliever Excedrin--and its cult following of migraine sufferers--will join up with GSK's global headache powder Beecham's and acetaminophen brand Panadol. Glaxo's stop-smoking products Nicorette and Nicoderm meet Novartis' smaller brand, Nicotinell. Top cold-and-flu brands from Novartis--Theraflu and Triaminic--will augment Glaxo's global products for the same ailments, including Coldrex, a line sold in Europe, Hong Kong and New Zealand.

The list goes on. Glaxo has a host of oral care products, from toothpastes to denture adhesive. It also sells a variety of nutritional supplements, including the Horlicks drink powders that are wildly successful in emerging markets. And there's Novartis' fiber supplement Benefiber and antifungal Lamisil.

GSK CEO Andrew Witty

"The Novartis OTC portfolio is highly complementary to GSK's and has many well-known, widely recommended brands," Glaxo CEO Andrew Witty said in a statement. "Together we will create the world's premier OTC business with clear opportunities to accelerate revenue growth."

Together with the other Novartis-GSK deals announced Tuesday morning, the consumer JV reshapes both companies' businesses. GSK will end up with 24% of its revenues in consumer health, with 62% in pharmaceuticals and 14% in vaccines. Novartis will be free of its vaccines and animal health businesses, and full of new cancer products for its oncology business to tango with.

Another thing Novartis will be able to leave in GSK's hands, presumably, is the continuing overhaul of its plant in Lincoln, NE, where the company made many of its over-the-counter drugs. Brands like Excedrin and Benefiber disappeared from store shelves after the FDA cracked down on manufacturing violations there. Novartis has been able to relaunch some of the products it was forced to recall, and other fixes are ongoing.

The joint venture will be able to take advantage of Glaxo's global reach on the OTC side, potentially feeding Novartis consumer meds into new markets worldwide. Plus, there are the usual "synergies"; GSK figures £1 billion can be squeezed out of the newly combined operations in vaccines and consumer healthcare. About 40% of that will hit the consumer business, the company said.

In addition to cutting sales and administration and jettisoning overlapping infrastructure, Glaxo sees economies of scale--one of the very things necessary for success in the hotly competitive consumer health field. Competing against giants such as Unilever ($UL) and Procter & Gamble ($PG) requires the sort of scale that allows for high-volume sales at the lowest-possible cost.

"This is a win-win for both companies," said Tim Anderson, analyst with Sanford C. Bernstein, given the opportunity to cut costs and gain scale. Though a joint venture was unexpected, it lets both companies stay in a business they consider important.

Jimenez pointed to another couple of advantages to chugging ahead in consumer health: One, the fact that consumers pay for OTC products out of pocket, rather than relying on insurance coverage. Two, these products are all branded, meaning they can sell at a premium. Put the two together, and you have consumers picking up premium-priced meds, with no worries about pharmacists substituting store brands.

The GSK-Novartis deals are expected to close during the first half of next year. The JV could find itself with a newly hefty competitor in the meantime: Merck & Co. ($MRK) is trying to sell its consumer healthcare arm, with Bayer and Sanofi ($SNY) both in the running. Reckitt Benckiser, the consumer health company looking to spin off its pharma business, is said to be eyeing the Merck unit as well.

- read the GSK release
- get more from Novartis
- see the Wall Street Journal story (sub. req.)

Special Reports: The top 10 pharma companies by 2013 revenue - Novartis - GSK | Top 10 drugmakers in emerging markets - GSK - Novartis

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