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Novartis Signs Deals with Glaxo, Lilly

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In an attempt to realign its portfolio, Novartis (NVS - Free Report) announced that it has entered into an agreement with GlaxoSmithKline plc (GSK - Free Report) for the exchange of certain assets.

Under the terms of the agreement, Novartis would acquire GlaxoSmithKline’s oncology products for $14.5 billion and up to $1.5 billion as milestone payments.  The agreement also provides Novartis with opt-in rights to GlaxoSmithKline’s current and future oncology R&D pipeline.

In exchange, Novartis would divest its Vaccines business (excluding flu) to GlaxoSmithKline for $7.1 billion (of which $5.25 billion is upfront and up to $1.8 billion in milestone payments)  along with royalties. We note that the Vaccines Division generated sales of $1.4 billion in 2013.

Meanwhile, Novartis has initiated a separate sales process for its flu business.

Novartis expects to close the deal with GlaxoSmithKline by the first half of 2015. In addition, the two companies will create a joint venture (JV), thereby combining their consumer divisions (Novartis OTC and GSK Consumer Healthcare) to form a consumer healthcare business. Novartis will own 36.5% share of the JV and will have four of eleven seats on the JV's Board.

In order to focus on its core portfolio of pharmaceuticals, eye care and generics, Novartis also entered into a definitive agreement with Eli Lilly and Co. (LLY - Free Report) to divest the Animal Health Division for $5.4 billion in a separate transaction. Novartis expects to close this deal by the first quarter of 2015. We note that the Animal Health Division generated sales of $1.1 billion in 2013.

Our Take

Novartis has a strong oncology portfolio with drugs like Afinitor, Exjade, Femara, Gleevec, Jakavi among others. The pipeline at Novartis includes 25 new molecular entities targeting key oncogenic pathways and 24 pivotal trials are underway exploring 16 new candidates for various indications. The addition of oncology products from GlaxoSmithKline will further strengthen its oncology business as it expands Novartis' position in targeted therapies and small molecules.

In particular, the addition of two recently approved products for metastatic melanoma, Tafinlar and Mekinist along with Votrient for renal cell carcinoma will strengthen Novartis’ position as a leader in treating melanoma. Novartis also acquired Tykerb for HER2+ metastatic breast cancer, Arzerra in chronic lymphocytic leukemia, and Promacta for thrombocytopenia. Total sales of the acquired oncology products from GlaxoSmithKline in 2013 were approximately $1.6 billion.

Meanwhile, the JV of Novartis OTC and GlaxoSmithKline’s Consumer Healthcare would establish a business with approximate annual sales of $10 billion with strong focus in four key OTC categories: Wellness, Oral Health, Nutrition and Skin Health.

We are positive on Novartis’ efforts to transform its portfolio. We remind investors that Novartis divested its blood transfusion diagnostics unit to Grifols S.A., for approximately $1.7 billion in cash in Jan 2014.

The acquisition of oncology products from GlaxoSmithKline and divestment of Vaccines business is a step in the right direction. It will broaden Novartis’ portfolio and enable it to focus better on its core capabilities besides contributing immensely to the top line. Margins are also expected to get a significant boost.

Novartis currently carries a Zacks Rank #3 (Hold). Investors looking for better-ranked stocks may consider companies like Johnson & Johnson (JNJ - Free Report) with  a Zacks Rank #1 (Strong Buy).

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