Novartis-GSK asset swap offers template for pharma and beyond

LONDON (Reuters) - The loud welcome given by investors to this week's deal for Novartis NOVN.VX and GlaxoSmithKline GSK.L to trade more than $20 billion of assets could trigger more pacts in the pharmaceuticals sector and beyond.

The logo of Swiss drugmaker Novartis is seen at its headquarters in Basel October 22, 2013. REUTERS/Arnd Wiegmann

Such swapping of assets is rare in any sector, yet it can make a lot of sense where companies are committed to playing to their strengths by building up certain businesses and divesting others, while avoiding the pitfalls of large-scale mergers.

With the Novartis-GSK template now available for all to examine, bankers and industry experts said that a milestone had been passed.

Chris Stirling, global head of KPMG's KPMG.UL life sciences practice, expects more asset swaps to be discussed in boardrooms of drugmakers and large corporations with portfolios ripe for restructuring, such as consumer goods groups.

“Where you’ve got large global businesses operating in lots of different areas, then I think this is something chief executives will now look at seriously, given that this deal provides them with a great example,” he said.

Novartis will buy cancer drugs from GSK while its British rival takes most of the Swiss group’s vaccines, with the two companies also creating an $11 billion-a-year non-prescription consumer healthcare business.


The complicated nature of the deal means it was tricky to pull off and could easily have been derailed. That risk of failure, illustrated by the collapse of earlier talks between Novartis and Merck MRK.N, has been a deterrent in the past to companies weighing such involved transactions.

The potential benefits, however, are clear. Swapping assets saves companies from having to access capital markets or selling to private equity firms at cut-throat prices, says Richard Stroud, head of the consumer goods and services practice at GLG Research.

“They’re speaking corporate to corporate, partner to partner. They’re both in the same boat, so no one’s trying to outdo each other,” Stroud said. “In consumer goods, there are some areas where it would work incredibly well.”

He suggested one potential deal, whereby the family that owns Germany's Beiersdorf BEIG.DE and the Tchibo coffee business would swap Tchibo with Joh. A Benckiser's (JAB) Coty COTY.N. Such a deal would unite Coty cosmetics brands such as Rimmel with Beiersdorf's Nivea, La Prairie and others, as well as JAB's three coffee businesses with Tchibo.

One of the biggest hurdles to asset swaps is that they require competitors to put aside traditional rivalries.

“You need the leaders of both companies to be grown-up enough to give up a good asset and trade that for a stronger position in an area where they can achieve leadership,” said one industry source who asked not to be named.


For companies that can agree on valuation and areas of focus, the payoff is a greater range of options with fewer strings attached.

“When you are already a $100 billion company, actually merging leaves an enormous cost-cutting headache,” said one industry banker. “I don’t think there is any need for more mega mergers; these companies are too big already.”

Scale, however, does matter when it comes to research and distribution of products in a global business. Without it companies cannot compete effectively and lose pricing power.

That is particularly relevant in the health sector, where governments and insurers want better outcomes at lower cost, creating a spending scenario that Novartis CEO Joe Jimenez describes as “brutal”.

Birgit Kulhoff, a fund manager and analyst at private bank Rahn & Bodmer in Zurich, said that other drugmakers with businesses that are not among the top three players in their markets could be candidates for asset swaps and joint ventures.

The line-up could include Germany's Bayer BAYGn.DE and France's Sanofi SASY.PA, both of which have over-the-counter drugs businesses that could be built up, she said.

Additional reporting by Caroline Copley in Zurich; Editing by David Goodman