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Pfizer, Glaxo Set Deal For Health-Care Units -- WSJ

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12/20/2018 | 02:48am EDT

By Denise Roland in London and Jared S. Hopkins in New York

Pfizer Inc. and GlaxoSmithKline PLC plan to combine their consumer health-care units and eventually spin off the joint venture, creating the world's largest seller of drugstore staples like Advil and Sensodyne toothpaste.

The deal will free up both companies to concentrate on prescription medicines, which tend to be more profitable if also higher risk. The new business today could command a market valuation of about $42 billion, according to Mick Cooper, an analyst at Trinity Delta, a research house. Combined sales were $12.7 billion last year.

The joint venture represents an unexpected conclusion to a yearlong process by Pfizer to shed its consumer business, as it and other pharmaceutical companies focus on higher-margin prescription drugs. While Glaxo has shared that focus, the British drugmaker had remained committed to its consumer business, which its chief executive led before her promotion to the top job last year.

The planned spinoff also represents a breakup of Glaxo, which currently generates around a quarter of its revenue from consumer products, compared with 7% at Pfizer.

Glaxo will hold a 68% stake and New York-based Pfizer the remaining 32% in the new joint venture. Among its other brands are nicotine-replacement gum Nicorette, heartburn tablets Tums and Centrum multivitamins.

The new business today could command a market valuation of about $42 billion, according to Mick Cooper, an analyst at Trinity Delta, a research house.

As a stand-alone consumer health-care business, it would be rare. Similar operations typically are part of big pharmaceutical companies, such as Sanofi SA and Bayer AG, or consumer-goods giants, like Procter & Gamble Co. and Reckitt Benckiser Group PLC.

Companies have used the steady revenue of over-the-counter drugs to help them smooth out boom-and-bust cycles for blockbuster treatments. For Glaxo, without its consumer health-care business, that role will fall to the vaccines business, which has relatively stable revenue flows. Pfizer also sells vaccines, as well as generic drugs.

"There are benefits to having a broader structure but these are significantly outweighed by the value creation of the deal we are announcing today," Glaxo Chief Executive Emma Walmsley said on a call with reporters.

Ms. Walmsley said the increased cash flow from the joint venture would allow her company to invest heavily in its pipeline of new medicines. Melding the two consumer businesses would also allow for cost cuts: Glaxo and Pfizer said they expect savings of GBP500 million ($631 million) a year by 2022.

On Wednesday, Glaxo shares gained 3.8% in London trading, while Pfizer fell 1% in New York.

Consumer products used to be integral to many big drug companies, but their businesses have diverged in recent years. Prescription drugs treat deadly, debilitating and rare diseases and require different research, sales and manufacturing capabilities.

Sales of over-the-counter medicines also can't match the growth potential of prescription drugs. For one, big retailers with a strong online presence like Amazon.com Inc. and Walmart Inc. are squeezing margins in what is termed the "Amazon effect."

Those same retailers are also increasing competition through store-brand products. Earlier this year Amazon launched some over-the-counter items with Perrigo PLC.

The Glaxo-Pfizer joint venture will expand the global reach of the U.S. company's consumer brands and buttress negotiations with major retailers, said Ashtyn Evans, an analyst at Edward Jones & Co.

For Pfizer, Wednesday's deal represents a swan song for departing Chief Executive Ian Read , who tried selling the company's consumer division outright but failed after pricing the business too high, according to people familiar with the matter. Under his tenure, Pfizer shed noncore businesses, notably its animal-health business, which is now an independent public company called Zoetis Inc.

Glaxo had been interested in Pfizer's consumer division when it was on the block, but walked away because it didn't want to acquire the business outright, according to Ms. Walmsley. Instead, the U.K. company this year bought Novartis AG's stake in the pair's consumer health-care venture for $13 billion.

Recasting the Pfizer transaction as an all-equity deal was more appealing, Ms. Walmsley said.

Dialing back on consumer health will allow incoming Pfizer CEO Albert Bourla to focus further on ratcheting up prescription-drug sales after the company weathered several years of patent expirations, including that of the cholesterol fighter Lipitor. He takes the helm on Jan. 1.

For Glaxo, the deal is Ms. Walmsley's biggest move yet to reshape the company.

Since becoming CEO in April 2017, Ms. Walmsley has bulked up the prescription-drug business with the $4.16 billion purchase of cancer drugmaker Tesaro Inc., while shedding Glaxo's nutrition business in a $3.75 billion sale to Unilever PLC. She has also shaken up the company's top ranks and cut several scientific programs to concentrate on researching drugs that focus on immunology or that have a genetic basis.

Pfizer and Glaxo aren't alone in off-loading slower-growing businesses in favor of prescription-drug pipelines. Bristol-Myers Squibb Co. on Wednesday announced the sale of its French consumer-health-care business Upsa to Japan's Taisho Pharmaceutical Holdings.

Meanwhile, those drugmakers sticking with consumer health care have made acquisitions. In recent years, Sanofi bought Boehringer Ingelheim's consumer business and Bayer snapped up Merck & Co.'s over-the-counter medicines.

Write to Denise Roland at Denise.Roland@wsj.com

Stocks mentioned in the article
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