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GSK & Novartis – Alternative Path to Development

 5 min read / 

The pharmaceutical industry has reached an exciting stage in its development. Perhaps a breaking point where the largest firms within the industry attempt to maintain their competitive edge through mega-scale mergers and acquisitions. In the face of new challenges, two firms GlaxoSmithKline (GSK) and Swiss company Novartis have taken an alternative path. By trading up to $20 billion worth of assets, these firms have reinforced the strength of their greatest businesses whilst eliminating costs by offloading units which lacked competitive potential.

When possibilities such as the $101 billion offer to AstraZeneca Plc from Pfizer Inc had become a reality, it was obvious that all of the leading pharmaceutical firms felt a sense of unease. Additionally a story which has positively affected the price of shares across the sector, it is clear a spark of deal-making activity has become increasingly prevalent. With this growing sense of anxiety at the executive level of pharmaceutical giants, GSK and Novartis have proven to be innovative and risk-taking at a time when all firms are fiercely competing for the best strategic position.

Leading up to the net worth of $20 billion, GSK sold its portfolio of cancer drugs at a value of $16 billion combined with a trial in Melanoma, which if successful will be a $1.5 billion contribution. This decision was brought about by the new focus for a greater level of specialisation in their stronger businesses. GSK is ranked 14th in the oncology market and by selling their holdings, it will improve the market presence of Novartis ranked 2nd in cancer treatment challenging the current leader Roche Holding AG.

Furthermore the Swiss group has exchanged its vaccines unit at $7.1 billion, known for producing inoculations against a vast range of diseases and infections such as Meningitis and Polio. Following similar ideas, they concentrated their efforts into the areas where there was an obvious comparative advantage, GSK’s acquisition included a jab preventing Meningitis B. Now with a vast addition of resources in this sector, GSK will have the ability to supply 2 million vaccines everyday to more than 90 countries. In essence these factors have allowed the British pharmaceutical firm to adapt the Swiss struggle into their favour, therefore permitting GSK to overtake firms such as Samofi and Pfizer in a rapidly expanding industry.

The two firms will pursue a different path for their consumer health business, as they combine their resources settling for a join venture with GSK owning a 63.5% stake. Income from assets such as GSK’s Aquafresh toothpaste and Novartis’s Nicotinell nicotine gum will be merged, and with sales of £6.5 billion market leading firms will be threatened by their new market presence.Another transaction occurred, which demonstrates the Novartis selling their animal health business to the US company Eli Lilly for $5.4 billion. The unit sold contains up 600 animal health brands, an addition to the variety of vaccinations and anti-parasitic medicine, which will greatly aid the American company to enter the aquaculture market.

Another transaction occurred, which demonstrates the Novartis selling their animal health business to the US company Eli Lilly for $5.4 billion. The unit sold contains up 600 animal health brands, an addition to the variety of vaccinations and anti-parasitic medicine, which will greatly aid the American company to enter the aquaculture market.

Following these transactions, evidently one can describe the deal to be the most complex within the industry. A very different ideology was used by Joe Jimenez (Chief Executive of Novartis) in contrast to the recent eruption of mega-merger activities. His view reflected the inevitable failures of behemoth companies striving to become the superior in every division of healthcare. As such following this concept he favoured the acquisitions of smaller, efficient bio-tech businesses in emerging markets. This greatly complimented the views of Sir Andrew Witty (Chief Executive of GSK), believing that by avoiding the multitude of complications coinciding with a merger, he focused his efforts towards a deal which wouldn’t “distract the rest of the organisation”. Understanding the problems of an ageing population and the limited government ability to fund for additional healthcare, the benefits of such a strategy will be clear in a market where firms have such limited price competition.

With the recent desirable prospects assumed abundant during this period of merger activity, the combination of resilience and innovative business strategy have been exhibited by these two firms. Taking their approach to come together and trade resources, they have gained benefits simply from their areas of comparative advantage. Consequently they have renewed business and have improved the prospects of new growth opportunities, after the adverse effects from patent losses in recent years.

The deal being cost efficient has ensured job cuts are either minimal or non-existent, since Novartis already act as long term suppliers of vaccines to GSK. Additionally the entire process was carefully analysed by renowned financial institutions all offering their advice to allow for an “elegant set of transactions”, Bank of America Merrill Lynch for Eli Lilly, Goldman Sachs with Novartis and both Lazard with Zaoui Co for GSK.

This pact between the two elites was successful following its basis on the idea of specialisation and the goal of mutual development. The final result led to the acquisitions of a mix of businesses to improve competitiveness, further enhanced by the removal of weaker business branches. Together these elements will equally prepare GSK and Novartis for their goal to achieve sustainable long-term growth.

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1 Comment

1 Comment

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  1. James D.

    April 29, 2014 at 7:46 AM

    Nice article Jason, but what does this add other than what Reuters has already documented? Would have been nice to get your thoughts on the future

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