Dramatic acquisitions and divestitures could reshape GSK, Novartis, Lilly, Valeant and Allergan

Investment bankers on two continents were working overtime in the past several days as a flurry of transactions have been announced in the past 24 hours. The upshot: GSK will deepen its stake in consumer healthcare products by purchasing Novartis assets, while the latter will deepen its investment in oncology with GSK assets. Eli Lilly becomes the No. 2 animal health company worldwide by picking up GSK’s business there. Meanwhile, Valeant Pharma, having gobbled up Bausch+Lomb last year, has issued what could become a hostile takeover bid of Allergan. In an unusual move, it is allied with Pershing Capital, a “activist” investment firm led by William Ackman, which has already acquired 10% of Allergan. Usually, such activist investors take a position in a company, agitate for change, and then hope to benefit from either a friendly “white knight” acquirer or a restructuring of the target company. Ackman has stated that Pershing Capital will retain stock ownership in the eventual combined entity.

In after-hours trading on April 21, and after markets opened on April 22, all of the firms involved saw their shares rise—in Allergan’s case, by over 25%; typically, such a positive response means that the acquisitions and transactions will go through (barring governmental actions) without shareholder objection, although the dramatic price rise of Allergan could elicit other bidders.

Some details:

• GSK is forming a joint company with Novartis, which will have majority-GSK ownership, for consumer healthcare, combining the GSK and Novartis assets.
• GSK is buying Novartis’ vaccines business for $5.25-7.05 billion (depending on milestone payments. Novartis says that it will sell its flu vaccines business separately.
• Novartis is buying GSK’s oncology portfolio for upwards of $16 billion (depending on clinical trial outcomes).
• GSK expects annual cost savings of about $1.7 billion by the fifth year following closing, apportioned by 40% in consumer health, 40% in vaccines and 20% from divesting its oncology portfolio. Novartis did not identify cost savings, but noted that the GSK oncology products had 2013 sales of $1.6 billion, and has opt-in rights for GSK’s oncology pipeline products.
• Eli Lilly is buying Novartis Animal Health for approximately $5.4 billion in an all-cash transaction; Lilly will fold this into its Elanco business. Lilly says that it will achieve annual cost savings of $200 million within three years of closing the deal.
• Valeant and Pershing Capital are offering upwards of $15 billion in cash and a partial share-for-share trade for Allergan. Valeant says that it expects $2.7 billion in cost savings—with 80% achieved in the first six months after transaction completion. The combination will have significant portfolios in ophthalmology, dermatology and aesthetics (notably, Allergan’s Botox franchise); Valeant is also a major generics manufacturer.

The deal that has only been rumored about is Pfizer bidding $101 billion for AstraZeneca; according to various reports, the deal has been rejected by AZ. In the Valeant-Allergan deal, Valeant’s CEO, J. Michael Pearson, said that Allergan “made it clear, both privately and publicly, that they were unwilling to enter discussions with us about creating a value-enhancing combination.”

Valeant has a reputation for stripping acquired assets of what it considers non-essentials; in its bid, while noting that the combined company would be spending $300 million annually on Phase III R&D, Pearson also said that “The New Company will sell or eliminate Allergan’s earlier stage programs where Allergan’s track record has been largely unproductive.”