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April 23 (The following statement was released by the rating agency)
Novartis and GlaxoSmithKline's (GSK) asset swap deal
highlights the industry's growing emphasis on efficiency through more focused
research and development (R&D) and the pursuit of scale in consumer healthcare,
Fitch Ratings says. We do not expect the transaction to affect either company's
credit rating when it completes.
As the risk and cost of bringing new drugs to market rises, we expect
pharmaceutical companies to concentrate on a smaller number of therapeutic
areas. With a full late stage oncology pipeline across the sector, we see
oncology drugs as a key area of competition due to the high returns available
and the prospects for next generation treatments, particularly in combination
with already established drugs.
Adding to its already strong oncology portfolio and the potential for
combination therapies are likely to be key benefits for Novartis in its
acquisition of GSK's oncology business, which will consolidate the group's
position as the second largest in the field. For GSK the disposal of its cancer
drug portfolio, where it didn't have the scale to compete, and the acquisition
of Novartis' vaccines business will enable it to focus on the stronger areas in
its R&D pipelines, including vaccines and respiratory drugs.
The combination of the companies' consumer healthcare arms highlights the
importance of scale in driving efficiency in this segment. The joint venture
will create the second largest global consumer healthcare business, improving
geographic reach and supply chain logistics. The limited geographical and
product overlap should help the companies obtain regulatory approval.
If the deal is approved it's likely to have little impact on GSK's financial
ratios, given that a large portion of the proceeds will be passed through to
shareholders via extraordinary share buybacks, but we expect some margin benefit
in the long term from cost savings. The group's business profile would benefit
from becoming the global leader in the vaccines segment in addition to the
improved position in consumer healthcare. This creates a more stable growth
platform with still sufficient diversification.
For Novartis, FFO adjusted leverage is likely to rise to around 1.3x to 1.4x for
the next two years after the deal, remaining below our 1.5x guidance for the
maximum level compatible with the 'AA'/Stable rating, even after allowing for
continued share buybacks and bolt-on acquisitions. Management has reiterated its
commitment to the 'AA' rating category. While diversification would be reduced,
it would still be satisfactory for the current rating, given the group's leading
eye care and generics divisions, which have been confirmed as core businesses.