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Glaxo (GSK) Buys Novartis' Stake in Consumer Healthcare JV

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GlaxoSmithKline plc (GSK - Free Report) has entered into an agreement with Novartis (NVS - Free Report) to buy out the latter’s stake in their Consumer Healthcare joint venture (JV) for $13 billion (£9.2 billion).

With the acquisition of Novartis’ 36.5% stake, Glaxo will now have 100% ownership of its Consumer Healthcare unit, which includes products such as Sensodyne and Flonase.

Glaxo is optimistic that the deal will be accretive to adjusted earnings in 2018 and thereafter improve the company’s cash flow.

Shares of the British drug maker were up around 2.6% on Tuesday in response to this positive news. Glaxo’s stock has risen 10.1% this year so far, against a decline of 3.4% for the industry.

Glaxo and Novartis created the JV in 2015 as part of a three-part transaction between the two companies by combining their consumer divisions. Glaxo owned 63.5% share of the JV.

As part of the same asset-swap, Novartis also acquired Glaxo’s oncology products for $14.5 billion and up to $1.5 billion in milestone payments. In exchange, Glaxo acquired Novartis’ Vaccines business (excluding influenza vaccines) for $7.1 billion ($5.25 billion upfront and up to $1.8 billion in milestone payments) along with royalties.

In the 2015 deal, there was a clause, which gave Novartis the right – exercisable from Mar 2, 2018 to Mar 2, 2035 – to ask Glaxo to purchase its stake. With the latest deal between the companies, this overhang has been removed.

The transaction, expected to be completed in the second quarter, is subject to approval of Glaxo’s shareholders.

Also, Glaxo said it is looking at strategic alternatives for its Horlicks and other nutrition products to help fund the deal. These nutrition products are mostly sold by Glaxo’s Indian subsidiary, GlaxoSmithKline Consumer Healthcare. Glaxo owns 72.5% stake in the Indian subsidiary, which it said will also be included in the strategic review process. Food giants, Nestle, The Kraft Heinz Company (KHC - Free Report) and Unilever are being speculated as the frontrunners to bid for the Horlicks business.

Glaxo’s latest deal with Novartis comes in less than a week after it announced that it is withdrawing from the race to buy Pfizer’s (PFE - Free Report) Consumer Healthcare segment. (Read more: Glaxo Drops Bid for Pfizer Unit, Shingrix Gains EU/Japan Nod)

Pfizer is exploring strategic alternatives for its Consumer Healthcare segment including a partial or a full separation through a spin-off, sale or other transaction.

At that time, Glaxo’s chief executive officer, Emma Walmsley said that management is interested in deals that will improve the company’s returns and not “compromise on its priorities for capital allocation.”

Conversely, Emma Walmsley justified the new agreement to buy out Novartis’ stake by saying that it “addresses one of its key capital allocation priorities.”

Glaxo expects its Consumer Healthcare business to deliver sales and earnings growth and also approach operating margins in the mid-20’s percentage range by 2022. We believe the Novartis deal is more prudent than buying Pfizer’s Consumer unit, which would have reportedly cost Glaxo around $20 billion.

For Novartis, the sale price of this non-core business reflects an “attractive value”. Novartis said it expects to use the proceeds from the sale for driving shareholder returns, invest in core products and also for bolt-on acquisitions.

Glaxo 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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