Glaxo, Pfizer To Merge Consumer Health Units, Form New JV

GlaxoSmithKline plc (NYSE:GSK) and Pfizer, Inc. (NYSE:PFE) announced an agreement to merge their consumer healthcare unit into a new joint venture (JV) to create the world’s largest consumer healthcare business. While Glaxo will own a controlling stake of 68% in the JV, Pfizer will own 32%. The JV will operate under the GSK Consumer Healthcare name.

Meanwhile, within three years of transaction closing, Glaxo intends to separate the JV as an independent company via a demerger of its equity interest. It eyes a listing of the independent consumer healthcare company on the UK equity market. This means eventually Glaxo will split into two UK-based global companies - one dealing in prescription drugs and vaccines, the other focused on consumer healthcare/over-the-counter (OTC) drugs.

The news was cheered by investors, pushing shares of Glaxo up 7.2% in pre-market trading on Wednesday. So far this year, Glaxo’sshares have outperformed the industry, rising 4.5% compared with a 3% increase for the industry.

The deal will bring together some popular OTC brands like Glaxo’s Sensodyne, Voltaren and Panadol and Pfizer’s Advil, Centrum and Caltrate. The JV will cater to pain relief, respiratory, vitamin and mineral supplements, digestive health, skin health and therapeutic oral health areas. It will lead to the creation of a consumer healthcare giant with a market share of 7.3%, well ahead of others like J&J (NYSE:JNJ) who command around 4%.

The transaction is expected to generate substantial cost synergies. Total annual savings are expected to be £0.5 billion for Glaxo by 2022. Pfizer said it expects to deliver $650 million in peak cost synergies. Adjusted operating margin percentage of the JV is expected to be in the ‘mid-to-high 20s’ by 2022. Global sales of the combined business were approximately 9.8 billion pounds ($12.7 billion) in 2017.

Glaxo clarified that it still expects to pay dividends of 80 pence per share for 2019. The transaction, subject to several regulatory approvals including that of Glaxo’s shareholders, is expected to close in the second half of 2019.

Pfizer has been exploring strategic options for its Consumer Healthcare unit since October 2017. Back then, the company had said the options included a partial of a full separation through a spin-off, sale or other transaction. Pfizer also said then that it may ultimately opt to retain the business. A decision regarding the same was expected to be taken this year.

However, the company faced trouble finding a buyer for the same. We remind investors that in March, Glaxo as well as another British drugmaker, Reckitt Benckiser Group pulled out of the discussion with Pfizer to buy the segment. The deal with Glaxo resolves this pending issue for Pfizer.

The consumer healthcare tie up comes a few months after Glaxo bought Novartis’ (NYSE:NVS) 36.5% stake in their consumer health care joint venture for $13 billion (£9.2 billion). With the acquisition of Novartis’ stake, Glaxo gained 100% ownership of its Consumer Healthcare unit. Glaxo believes that the latest deal with Pfizer will build on this minority buyout of Novartis’ stake to create significant shareholder value. Emma Walmsley, chief executive officer (CEO) of Glaxo said that the combination of Glaxo and Pfizer’s consumer healthcare businesses will create substantial shareholder value.

Meanwhile, the separation of its Consumer Healthcare unit will allow Glaxo to concentrate better on its pharmaceuticals business.

Brian McNamara, currently CEO of Glaxo’s Consumer Healthcare unit, will be CEO of the new JV while Emma Walmsley will be the chairperson.

Glaxo has announced several strategic deals lately to allow it to focus on its pharmaceuticals business. Earlier this month, Glaxo said it is divesting its Horlicks and other nutrition products business in India and Bangladesh to London-based consumer giant Unilever (LON:ULVR) for 3.3 billion euros ($3.8 billion) in a cash and stock deal. Walmsley, who took over last year, said that the proceeds generated from the deal will be used to invest in Glaxo’s growing pharmaceuticals business.

On the same day, announced a definitive agreement to acquire small cancer biotech, TESARO, Inc. (NASDAQ:TSRO) for $5.1 billion including the latter’s debt. The acquisition will add TESARO’s ovarian cancer drug, Zejula to Glaxo’s product portfolio and strengthen the latter’s position in the oncology market. However, the acquisition announcement did not go down well with investors as they found it to be a costly deal for Glaxo, considering that Zejula is at an early stage of commercialization in a fiercely competitive market.

Glaxo currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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