MechanizedIntelligence

Pharmaceutical giants Novartis and GSK announced a large swap in business units on Tuesday, resulting in both companies becoming significantly more specialized — reversing their decades-long traditional strategies of greater diversification across product lines. The Wall Street Journal has more than half a dozen articles about the news and what it might mean for the industry.

• Swiss giant Novartis, in the middle of a strategic rethink after an acquisition binge by its previous chairman, Daniel Vasella, agreed to buy GlaxoSmithKline’s high-margin oncology unit for $14.5 billion. That deal value would rise to $16 billion if certain development milestones are met.
• Novartis will sell its lower-margin vaccines division to GSK for $5.25 billion. The business, which relies on scale, is a better fit for GSK, and slims down the world’s ranks of big vaccine makers from five to four.
• Novartis will also sell its animal-health division to Eli Lilly for $5.4 billion.
• Finally, GSK and Novartis will create a joint venture, majority owned by GSK, for its consumer business—essentially those drugs that can be bought over the counter, creating a new giant in that business. The combined companies will have revenue of about $11 billion, and include household names like Excedrin and Panadol.

Focusing on core competencies, gaining efficiencies of scale, greater negotiating power and increasing competition for clinical trial patients were all mentioned as reasons for the changes at both companies. While the companies are becoming more specialized, they are pursuing somewhat opposite strategies.  Novartis is consolidating around more risky high margin business lines, while GSK is taking a lower margin, high volume approach.  Novartis does still own a significant generics business, however.  It’s not clear how that unit figures into its strategy.

Clearly the thinking is that diversification across a wide range of product lines and disease areas is now less optimal.  Analysts expect that other firms will respond.  Merck, for example, is already considering selling off animal drugs and over-the-counter medicines.  Pfizer is rumored to be interested in acquiring Astra Zeneca, possibly for that company’s early stage immunotherapy drugs to bolster its oncology pipeline.  It will be interesting to see if other firms also consolidate into more limited product types and/or disease areas.

Unfortunately, pursuing economies of scale likely means another round of post-merger layoffs will hit the industry again, possibly as early as this year.