GlaxoSmithKline (GSK) has agreed to buy Novartis’ 36.5% stake in the companies’ consumer healthcare joint venture for $13 billion that would provide GSK full ownership of the business. The companies formed the joint venture as part of a three-part transaction between GSK and Novartis that was completed in March 2015.

The joint venture was formed in 2015 as part of Novartis’ portfolio transformation, which comprised a three-part inter-conditional transaction with GSK, including the combination of Novartis’ over-the-counter (OTC) business with the GSK consumer healthcare business into the existing joint venture. Novartis also acquired certain oncology products and pipeline compounds from GSK and divested its non-influenza vaccines business to GSK.

Under the original transaction, Novartis had the right, exercisable from March 2, 2018 to March 2, 2035, to require GSK to purchase its stake (or specified tranches of it) in the joint venture. GSK says that this put option, in both size and possible timing, creates inherent uncertainty for its capital planning. GSK said that the new agreement to buy out Novartis’ stake removes this uncertainty and improves the company’s ability to plan allocation of capital to its other priorities.

 “The proposed transaction addresses one of our key capital-allocation priorities and will allow GSK shareholders to capture the full value of one of the world’s leading Consumer Healthcare businesses,” said Emma Walmsley, Chief Executive Officer, GSK, in a March 27, 2018, company statement. “For the Group, the transaction is expected to benefit adjusted earnings and cash flows, helping us accelerate efforts to improve performance. Most importantly, it also removes uncertainty and allows us to plan use of our capital for other priorities, especially pharmaceuticals R&D.”

Overall, in 2017, GSK’s consumer healthcare business reported sales of £7.8 billion ($10.9 billion). Since 2015, sales have grown 4% on a three-year compound annual growth rate (CAGR) basis (2015–2017 at 2014 constant exchange rates) with an overall improvement in operating margins from 11.3% in 2015 to 17.7% in 2017. GSK said it expects the business’s operating margins to approach the mid-20’s percentages by 2022 at 2017 constant exchange rates.

“While our consumer healthcare joint venture with GSK is progressing well, the time is right for Novartis to divest a non-core asset at an attractive price,” said Vas Narasimhan, CEO of Novartis, in a March 27, 2018 company statement. “This will strengthen our ability to allocate capital to grow our core businesses, drive shareholder returns and execute value creating bolt-on acquisitions as we continue to build the leading medicines company, powered by digital and data.”

In addition, GSK is initiating a strategic review of Horlicks, a malted milk hot drink, and its other consumer nutrition products to support funding of the transaction and to drive increased focus on OTC and oral health categories. Combined sales of these products were approximately £550 million ($771 million) in 2017. The majority of Horlicks and other nutrition products sales are generated in India. In India, these products are sold by GlaxoSmithKline Consumer Healthcare Ltd, a public company listed on the National Stock Exchange and Bombay Stock Exchange. The strategic review will include an assessment of GSK’s 72.5% shareholding in the company. GSK expects the outcome of its strategic review to be concluded around the end of 2018.

GSK said India remains a priority market for the company’s investment and growth. It says that the consumer healthcare business will continue to invest in growth opportunities for its OTC and oral health brands, such as Sensodyne and Eno. The company said it is also actively investing in its pharmaceutical and vaccines businesses in India, including building new manufacturing capacity in Vemgal, Karnataka, and Nashik.

The transaction between GSK and Novartis is subject to approval by GSK shareholders, and GSK says its board intends to unanimously recommend that shareholders vote in favor of the transaction.

Four of the 11 directors of the joint venture board are appointed by Novartis. They will step down in connection with the completion of the transaction.

Source: GlaxoSmithKline and Novartis