Novartis and GlaxoSmithKline traded over $20 billion worth of assets on Tuesday, aiming to bolster their best businesses and exit weaker ones as the drugs industry reshapes to cope with healthcare spending cuts and generic competition.
The deals, which include Novartis buying GSK's cancer drugs and GSK acquiring Novartis' vaccines business, came hot on the heels of a newspaper report that AstraZeneca had turned down a $101 billion bid approach from Pfizer - a story that sent shares across the sector surging.
The global pharmaceuticals industry has seen a flurry of dealmaking recently as most large companies seek to focus on a small number of leading businesses, while smaller specialty and generic producers seek greater scale.
Deal values have almost doubled since the start of the year to $77.9 billion compared with the same period in 2013, according to Thomson Reuters data.
The overhaul at Novartis marks the end of a year-long review of its sprawling portfolio after the departure of long-time CEO and chairman Daniel Vasella, the architect of the merger of Ciba-Geigy and Sandoz which led to Novartis' formation in 1996.
The Swiss firm said it had agreed to buy GSK's oncology products for $14.5 billion plus another $1.5 billion that depends on the results of a trial in melanoma.
The deal will strengthen Novartis's world No.2 position in cancer behind cross-town rival Roche.
Novartis said it was also selling to GSK its vaccines, excluding flu, for $5.25 billion plus potential milestone payments of up to $1.8 billion and ongoing royalties, as well as creating a joint venture with GSK in consumer healthcare.
In addition, it is selling its animal health arm to Eli Lilly for approximately $5.4 billion.
"Novartis has agreed an elegant set of transactions that either removes or strengthens its underperforming assets, whilst boosting its oncology portfolio," Jefferies analysts said.
They added the deals also looked good for GSK, which as well as strengthening its vaccines and consumer health businesses will return 4 billion pounds ($6.7 billion) to shareholders.
"This is a landmark deal," said a source familiar with the transactions between Novartis and GSK. "We should see more of these because companies need to drive growth."
At 1220 GMT, Novartis shares were up 2.4 percent to 76.5 Swiss francs. GSK shares were up 5.1 percent to 1,638 pence.
FIGHTING FIT
Novartis Chief Executive Joe Jimenez said the revamp would help make the company "fighting fit" to meet the challenges of the global healthcare industry over the next ten years.
He told reporters the deals would lower overall sales at the Swiss group by around $4 billion, but result in higher profit as it swaps lower-margin vaccines for higher-margin oncology drugs.
Cancer is a particular focus for some drugmakers, thanks to novel medicines that show promise by boosting the body's immune system.
"We reckon the real value of the deal should be searched for in the pipeline and the newly launched products, strengthening Novartis' position in melanoma and haematology," Vontobel analyst Andrew Weiss said of the cancer deal with GSK.
Analysts at Swiss broker Notenstein were also upbeat, saying the new cancer drugs would help Novartis to navigate patent expiries on top-selling medicines more easily.
However, analysts at Barclays described the price tag for the oncology assets, which could rise as high as $16 billion if certain milestones are reached, as "rather hefty."
Drugmakers are stocking up their oncology pipelines as they bet that combinations of drugs or drug cocktails, will become the future of cancer care. A desire to boost its oncology business is seen as a key factor behind Pfizer's reported interest in AstraZeneca.
Cancer is an extremely competitive marketplace, however, and some analysts said it was right for GSK to exit a field where it was only No.14 in the world.
GSK boss Andrew Witty said the firm did not have sufficient scale to compete in cancer drugs, so it made sense to put them into "the hands of somebody who is a world leader in oncology".
Conversely, he said the deals with Novartis strengthened the group in two of its core franchises: vaccines, a business that supplied more than 2 million shots every day, and consumer health, where it will take the lead in running a business worth about $10 billion in annual revenue with the Swiss group.
The deals were another step in his strategy of focusing on areas of strength, he said, moving further away from the monolithic model of drugs companies that tried to do everything.
After the deal, GSK will get 70 percent of sales from its franchises in respiratory, HIV, vaccines and consumer health.
Novartis said it would start a separate sale process for its flu business immediately, which was not part of the GSK deal.
Eli Lilly will have the world's No.2 animal health business by revenue in the wake of its deal with Novartis. It said it would fund the transaction with $3.4 billion of cash and $2 billion of loans and expected cost savings of about $200 million per year within three years of closing the deal.
BofA Merrill Lynch advised Lilly, while Goldman Sachs Group Inc advised Novartis on the animal health deal. GSK said Lazard and Zaoui & Co. were acting as its joint financial advisers.
($1 = 0.5951 British Pounds)
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