A New Consumer Health Powerhouse: GSK and Novartis to Form a Joint Venture

In the midst of significant merger and acquisition speculation among the world leading pharmaceutical and consumer health companies, GlaxoSmithKline Plc (GSK) and Novartis AG made a deal to establish a joint venture that will create the largest consumer health operation worldwide*.

The Deal

GSK and Novartis traded over US$20 billion in assets on 22 April 2014 involving the companies’ consumer health, oncology and vaccine divisions.  In a desire to focus on their strengths, Novartis will acquire GSK’s oncology unit to further bolster its position in the fast moving field of cancer drug research while GSK will take on Novartis’s vaccine unit, converting the company into the world leader in this area. The consumer health businesses of these companies will be merging forces to create a joint venture, which will operate under the GlaxoSmithKline Consumer Healthcare name and will be run by GSK’s current consumer health head, Emma Walmsley. GSK will own 63.5% of the new venture which reflects the valuation of its contribution to the deal, and GSK will retain full control of its operations in India and Nigeria. The new partnership is expected to be completed in early 2015, subject to approvals.

In a separate transaction, Eli Lilly and Company will acquire the Novartis animal health business.

A New Leader in Consumer Health

This high profile partnership is expected to establish a new global leader in consumer health. In 2013, GSK and Novartis ranked seventh and eighth in consumer health retail value sales, respectively, reaching US$4.8 and US$4.7 billion. The combined sales of US$9.5 billion would account for a value share of 4.6%, surpassing Johnson & Johnson Inc’s 3.9% of global consumer health sales.

Global Consumer Health Leaders by Retail Value Sales (With a Combined View of GSK and Novartis) Based on 2013 Data

Source: Euromonitor International

A key driver for the merger was the complementary nature of the product portfolios. Together, GSK and Novartis have over 24 brands with annual sales of US$100 million, and another 12 with sales of US$50 million or more. As these companies are mostly focused in OTC, the top selling categories will be analgesics, led by GSK’s Panadol and Novartis’s Voltaren, and cough, cold, and allergy (hayfever) remedies (CCA), led by Novartis’s Otrivin and Theraflu and GSK’s Coldrex. The new partnership should boost the venture to the leadership position in each of these highly competitive markets. It will also be a powerhouse in digestive remedies, dermatologicals, and NRT smoking cessation aids, as well as in the smaller scale categories eye care and adult mouth care.

Combined GSK and Novartis Retail Value Sales and Share by Consumer Health Category Based on 2013 Data

Source: Euromonitor International

Besides the economies of scale given the symmetry in product offering, the joint venture will open up a series of new markets that will strongly benefit both parties. GSK’s larger presence in Asia Pacific, Australasia and the Middle East and Africa and Novartis’s in Eastern Europe will allow for significant opportunities to expand product distribution. For example, GSK holds 7% of the market share of combination CCAs in China, a country where Novartis is absent in the category. On the other hand, Novartis captures 64% of retail sales of topical antifungals (tracked within dermatologicals) in Russia, where GSK has no presence. This will help establish the truly global presence of the joint venture with significant cost advantages.

The Impact on the Competitive Landscape

Talk of mergers and acquisitions have increased significantly in the health industry over the last several months. Merck & Co continues to review its consumer health division and has been accepting bids, Pfizer Inc has recently been in talks with AstraZeneca about a takeover and Valeant Pharmaceuticals International Inc made an offer to buy Allergan Inc.  Several companies, like Reckitt Benckiser (RB), Bayer and Sanofi, are bolstering their position in consumer health through smaller scale acquisitions and organic growth in an attempt to close in on Johnson & Johnson’s global leadership position. However, GSK and Novartis put their money where their mouth is and created a joint venture that will establish it as the new leader in consumer health.

*According the Euromonitor International’s definition of consumer health, which includes OTC remedies, vitamins and dietary supplements, weight management, and sports nutrition. Beauty and personal care, which may be included in the companies’ consumer health division reporting, is tracked separately.