Here’s more on the Novartis-GSK-Lilly three way deal announced Tuesday. As WSJ journalist Helen Thomas writes, the megamerger chill of dread felt when rumors of Pfizer’s stalking of AZ came to light last weekend may well be exorcized by this radically different strategy:
Novartis and peers have taken a surgical approach. The Swiss company will, as promised, get out of businesses where it isn’t big enough to compete. Eli Lilly will buy Novartis’s animal-health division for $5.4 billion. Meanwhile, an asset swap with Glaxo will see Novartis largely shed its troubled vaccines unit and take over the U.K. company’s portfolio of approved cancer treatments. The pair will also form a joint venture in consumer health care, creating the second-largest business globally with $10 billion in sales.
All three companies are plausibly improving their focus, building up core areas and shedding less relevant businesses. Unlike the typical megamerger which disrupts R&D pipelines, distracts employees, and often results in a larger, but less focused company, these three firms may well emerge in a much more competitive position.
The combination certainly looks complex. But each company is making a targeted bet on areas where it can justifiably claim management expertise. While some multiples paid might raise fears that frothiness in biotechnology stocks has spread, the businesses being bought aren’t binary bets on a few potential wonder drugs. Each company can promise cost savings from their enlarged businesses. Novartis and Glaxo could also both pledge higher earnings per share from the get-go, albeit helped in the latter’s case by a £4 billion share buyback.
Pfizer take note. Megamergers just aren’t in the spirit of the times.