National Post (National Edition)
Pfizer-glaxo pact shows giants returning to lab
Combining consumer units into one firm
NEW YORK/LONDON • Two of the world’s biggest drugmakers agreed to create a giant seller of over-thecounter medicines, in yet another sign that pharmaceutical giants are slowly turning away from the grocery store and back toward the laboratory.
Glaxosmithkline PLC and Pfizer Inc. said Wednesday that they plan to combine their sprawling consumer-health businesses into a single company selling everything from Advil pain pills to Tums stomach tablets to Nicorette gum. Together, the businesses had sales of US$12.7 billion last year. The new entity, which will be 68-per-cent-owned by Glaxo, will eventually be listed on the U.K. stock market.
Drugmakers had once envisioned controlling every corner of home medicine cabinets, from everyday personal-care items to therapies for cancer and cardiovascular disease. The steady revenue produced by consumers restocking toiletries and headache remedies was seen as a stabilizer for the more volatile — though vastly more lucrative — business of developing and selling treatments prescribed by a doctor.
Recent shifts in the health-care business and in the broader economy, however, have challenged that model. Big pharmaceutical companies are increasingly focused on developing highpriced new drugs that draw on cutting-edge research in genetics and other fields. At the same time, the cost of researching new cures is climbing even as insurers and governments demand lower prices.
Meanwhile, profits in many consumer businesses have been compressed by competition and the growing power of companies like Amazon.com Inc. and Walmart Inc. to drive prices for a range of goods ever lower.
Over the past year, those pressures have yielded unconventional combinations of pharmacy operators, health-insurance companies and online retailers. At the same time, other firms that had bet big on health care are getting out — most recently, General Electric Co. confidentially filed to spin off its health business.
For Pfizer and Glaxo, standing up their consumer units as one independent company will get them out of the business of selling low-margin products in a squeezed marketplace. Glaxo will turn to its vaccines business as a source of stable revenue, while Pfizer will lean on a roster of blockbusters including nerve-pain drug Lyrica and cancer treatment Ibrance.
Pfizer has been honing its focus on its pipeline for some time. In 2013, it spun off its Zoetis Inc. animalhealth business; that stock has performed strongly, gaining 19 per cent this year. Pfizer has also shied away from splashy mergers with other big diversified drug companies, buying more mid-sized drugmakers as it tries to develop its pipeline of medications for cancer and rare diseases.
Investors have responded to the company’s shift in emphasis, driving Pfizer shares up by more than 17 per cent this year, placing them among the strongest
WE’VE ALWAYS BEEN PRAGMATIC ABOUT THAT.
performers in the Dow Jones Industrial Average in an otherwise dismal year for the broader market. The stock gained 0.75 per cent to US$42.70 in early afternoon trading Wednesday in New York.
Some rivals have started to follow Pfizer’s playbook. Earlier this year, Eli Lilly &Co. spun out its Elanco Animal Health Inc. division, and the shares have gained roughly 31 per cent since their initial public offering. On Wednesday, Lilly said it expects higher profits next year than Wall Street had previously forecast.
Finding a way to off-load the consumer unit had been a stubborn hurdle for Pfizer to clear, and the Glaxo deal marks a closure of sorts for chief executive Ian Read, who will hand the reins over to successor Albert Bourla in the new year. An earlier attempt to sell the consumer arm fizzled after potential buyers dropped out of the bidding process. Glaxo itself had explored buying it before it too opted to focus on prescription drugs.
Other drugmakers are likewise backing away from the consumer-health business. Earlier Wednesday, Bristol-myers Squibb Co. said it would sell a French over-the-counter medicines business to Japan’s Taisho Pharmaceutical Holdings Co. for US$1.6 billion. Merck KGAA sold its consumerhealth division to Procter & Gamble Co. for about US$4.2 billion earlier this year.
Glaxo chief Emma Walmsley is trying to revitalize a lacklustre pipeline at the British drug giant. She brought in celebrated drug developer Hal Barron to oversee research and reached a pact to buy the cancer-drug maker Tesaro Inc. for US$5.1 billion earlier this month. The deal with Pfizer follows an agreement earlier this year to pay US$13 billion for Novartis AG’S stake in a consumer joint venture.
“Historically we’ve liked the balance of a broader company, but we’ve always been pragmatic about that,” Walmsley said in an interview with Bloomberg Television.
Shares of Glaxo surged as much as 8.3 per cent on the London Stock Exchange on Wednesday. The company said that it expects annual cost savings of 500 million pounds (US$633 million) from the deal by 2022, and that it’s targeting 1 billion pounds worth of divestments.