What's going on?
Pharmaceuticals giant GlaxoSmithKline (GSK) has agreed to pay $13 billion to take full control of a joint consumer health venture it currently manages alongside competitor Novartis, as GSK doubles down on consumer health despite headwinds for the sector.
What does this mean?
Formed just three years ago, the partnership between GSK and Novartis is responsible for selling a pretty extensive range of consumer medicines, including Sensodyne toothpaste and Excedrin painkillers.
Tuesday’s deal marks the first big move for both companies’ new CEOs. Novartis’ head wants to focus more on developing research-intensive medicines related to cancer and other complex diseases – and as part of the deal, Novartis is slated to pick up GSK’s cancer drugs business. GSK’s new boss, who previously ran the company’s consumer health branch, says she likes the slow but steady revenue it gets from consumer products, which she plans to use to help fund more cutting-edge pharma programs.
Why should I care?
For markets: Shares of GSK were up 5% on the news, while Novartis rose 2%.
Despite forking out a decent amount, GSK expects buying Novartis out of the joint venture to end up boosting its earnings. Some think investors are relieved that GSK now appears certain to abandon its attempts to buy the pricey consumer arm of fellow pharma giant Pfizer (although it’s also said that GSK could afford to take on some debt to pay for another big consumer health deal).
The bigger picture: Pressure on the consumer health sector is fueling consolidation.
Even though demand for consumer pharmaceuticals is usually pretty steady – at least until a cure for the common cold appears – growth has slowed recently. On top of that, the sector has come under pressure as competition between drugstores and ecommerce outlets has increased, making it harder for pharma firms like GSK to charge more for their goods. That’s perhaps why some firms like Pfizer and Novartis are looking to higher-risk, higher-reward products for drug dollars…