Novartis deals with GSK and Lilly switch up manufacturing landscape

The full manufacturing implications of the complex three-way business swaps and sales that Novartis ($NVS), GlaxoSmithKline ($GSK) and Eli Lilly ($LLY) announced today will take some time to sort out. That is because:

  • GSK is selling its oncology business to Novartis, but the deal includes a 5-year manufacturing supply agreement for the transferred products.

  • The two are combining their over-the-counter businesses, which will include Novartis' troubled OTC plant in Lincoln, NE.

  • Lilly gets 9 animal health manufacturing plants with its $5.4 billion buyout of Novartis' animal health business.

  • But GSK was adamant today that where manufacturing is concerned, its deal to buy Novartis' vaccine business (sans its influenza vaccines operations) will be a good move, expanding its vaccine manufacturing capabilities while still cutting costs.

With the deal, GSK gets the Swiss drugmaker's diphtheria/tetanus antigen bulk manufacturing facilities at Marburg, Germany, and its manufacturing and R&D sites in Rosia and Siena in Italy. The Marburg and Rosia sites also have secondary packaging operations. GSK said it is also buying new manufacturing sites in India and China. "The acquisition is expected to strengthen GSK's manufacturing network and increase overall capacity, notably with the addition of Novartis' secondary packaging and supply facilities in Rosia, Italy and Marburg, Germany," the company said.

This will all be added to GSK's extensive vaccine manufacturing operations. GSK's vaccine unit is headquartered in Wavre, Belgium, where the company maintains what has been termed the largest biotechnology production and research complex in the world. The Wavre site has 4,500 employees. It includes four bulk vaccine manufacturing facilities, a new formulation facility, a filling unit and a large facility where it packages most of the vaccines manufactured at all of the sites. GSK is also adding a polio vaccine manufacturing facility at Wavre that will include more efficient technology and a greater capacity than the facility it replaces. Another 3,500 people work at its Rixensart, Belgium, site, where most of GSK's vaccines were discovered. That site also includes bulk, conjugation, formulation, freeze-drying and filling facilities in addition to its extensive R&D operations.

The vaccine deal doesn't include Novartis' influenza vaccine operations, which Novartis said it will sell separately. That business includes a manufacturing site at Speke in the U.K., as well as the plant Novartis is building in Holly Springs, NC, with support from the U.S. government's pandemic prevention program.

On the OTC side, the deal looks a little less beneficial from a manufacturing standpoint. The two are creating a consumer business joint venture, with GSK assuming 63.5% control. It is also taking over responsibility for the combined OTC manufacturing network. That will include a Novartis OTC plant in Prangins, Switzerland, that it is expanding, as well as the troubled plant in Lincoln.

As GSK pointed out, the Lincoln plant was closed in 2012 because of extensive quality problems and has been under remediation since. The operation started producing some products last November, but exactly when it will be able to return to full production is a question that hangs over that part of the deal. GSK said the ramp-up is expected to take place over the next two years.

GSK said it expects to realize £1 billion ($1.682 billion) in annual savings by the fifth year from the new alignment. It said 40% will come from the combined consumer healthcare business, 40% from vaccines and 20% from selling off its oncology operations. How will that be achieved? Not only with reductions in selling and administrative costs but also by "removal of infrastructure overlaps and reduced third party contracting as well as through improvements in manufacturing costs," GSK said.

For Novartis, the deals announced today give it the more tightly focused business that CEO Joe Jimenez has said he wants. But it will also further slim its manufacturing network, a process the drugmaker has had underway for about four years. In January, during the year-end earnings call, Jimenez said the drugmaker had closed or sold about 20 of its 100 production facilities since 2010 and expected to unload even more. In the deals announced today, the drugmaker will be eliminating more than a dozen production facilities and turning over its OTC manufacturing to GSK.

- here's the GSK release