GlaxoSmithKline (GSK) has reached an agreement with Novartis for the acquisition of Novartis’ 36.5 percent stake in its Consumer Healthcare Joint Venture for US$13 billion, just days after GSK exited the race to buy Pfizer's Consumer Healthcare Business. GSK reports that the Consumer Healthcare Business is well positioned to drive sales and earnings growth, powered by “category-leading Power Brands, science-based innovation and improved efficiencies.” Novartis reports that the sale will enable it to further focus on the development and growth of its core businesses.

The transaction is expected to be accretive to adjusted earnings in 2018 and thereafter, with GSK reporting that it is expected to strengthen operational cash flows. The transaction is subject to approval by GSK shareholders as Novartis is treated as a related party under UK Listing Rules.

The Consumer Healthcare Joint Venture was formed as part of the three-part transaction between GSK and Novartis which was approved by shareholders in 2014. Last year, GSK’s Consumer Healthcare business reported sales of US$11 billion and sales have grown 4 percent on a 3 year CAGR basis (2015-2017 at 2014 CER) since 2015, with an overall improvement in operating margins from 11.3 percent in 2015 to 17.7 percent in 2017.

As a result of the transaction, GSK’s shareholders will capture the full value of GSK’s Consumer Healthcare growth. The business notes that it expects operating margins to approach “mid-20s” percentages by 2022 at 2017 CER.

GSK is initiating a strategic review of Horlicks and its other consumer healthcare 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 US$782 million in 2017. Novartis' products include Panadol headache tablets, Nicotinell patches and Sensodyne toothpaste.

“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. 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,” says Emma Walmsley, Chief Executive Officer, GSK.

Speaking about the decision to exit the bid on Pfizer’s Consumer Healthcare Business, Walmsley says it “was simply a matter of capital allocation, we always said that we would have a serious look at that business but that we did, however, not need it.”

“We always have said right from July last year that the Novartis purchase was an absolutely clear capital allocation for us, because it benefits both the consumer business and the group, and it allows our shareholders to capture full value of the consumer business, [which] we know very well and are confident about its prospects as we confirm today with the outlook for margins in 2022,” Walmsley said during a press call today.

“At the heart of further acceleration, we’re really talking about Power Brands mix, the brands like Sensodyne and Voltaren, a much stronger focus on supply chain cost structure and indeed across the whole of GSK we are looking at more discipline in the numbers of factories, suppliers and SKU count,” Walmsley says.

“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. 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,” says Vas Narasimhan, CEO of Novartis.