In, out, in, out, Glaxo shakes consumer health about

Glaxosmithkline’s $13bn buyout of Novartis’s consumer health venture in March received a collective groan from fans of pure-play biopharma. But that move turns out to have been a prelude to a shift in the opposite direction: the consumer joint venture announced with Pfizer today will be sold within four years.

Thus Emma Walmsley has revealed her hand at Glaxo’s helm at last, and investment bankers and biotech investors will be celebrating. Not only will shuffling the deck of consumer health cards promise banking commissions, but Glaxo’s renewed focus on high-risk prescription drug development signals more deal-making.

After all, Glaxo’s pharma R&D pipeline is mediocre, notwithstanding the group’s unpopular $5.1bn takeover of Tesaro two weeks ago. Much of this is the result of the conservative strategy of Andrew Witty, Mr Walmsley’s predecessor, to get out of oncology and maintain Glaxo’s presence in everything from pharmaceuticals to toothpaste.

Just over a year ago Vantage argued that, irrespective of her consumer health background, Ms Walmsley should take Glaxo back to basics and focus on prescription drugs (Vantage View – Time for Glaxo to decide whether it is a drug developer, October 18, 2017). She should today be congratulated for grasping this nettle.

In what must be a coincidence, Bristol-Myers Squibb, another company that had flirted with a mixed business model, today sold its Europe-based UPSA consumer health business to Taisho for $1.6bn.

Majority-owned

Under Ms Walmsley’s plan Glaxo and Pfizer’s consumer activities will be merged into a joint venture that the UK company will control through a 68% stake. This will be the world’s second-biggest consumer health company, with sales of nearly $13bn, 72% derived from Glaxo.

Biopharma watchers will be most interested in what happens next: the plan is for this venture to be separated via demerger within three years of the deal closing in late 2019. This will most likely take the form of an IPO or leveraged buyout, a trade sale likely being out of the question owing to antitrust concerns.

If this has been Ms Walmsley’s aim all along then why did she blow $13bn on the Novartis business in March? To challenge the might of Johnson & Johnson you need scale, and this is what Novartis gave. Whether Glaxo investors get a return on this investment will only become clear once the Pfizer venture is exited.

In the meantime, Glaxo should be expected to do more deals to strengthen its R&D pipeline. With the Nasdaq biotech index off 20% in the past three months biotech assets are at last more affordable, though the negative market response to the Tesaro deal suggests that even current levels might be unrealistic.

One question is whether Glaxo can afford to wait nearly four years, at which time it will be flush with cash from the planned demerger, to do any big takeovers. The company might want to gear the joint venture up sooner rather than later.

In the meantime free cash from the venture should help support Glaxo’s dividends – an important consideration for the conservative pension funds that see the company as a safe haven; Glaxo says the current dividend policy will be maintained. And the early market response has been positive, Glaxo trading up 6% this morning.

On an analyst call Ms Walmsley said she was leading a change of priorities at Glaxo, having already divested or terminated around 80 R&D projects, and heralded the renaissance of the group as a new UK company focused on pharma and vaccines, with a strong focus on immunology.

The sign to the markets could not be clearer: today three big pharma companies – Glaxo, Pfizer and Bristol – followed Novartis in signalling that “safe”, low-margin consumer health was not for them. If you like biotech this is good news.