Wednesday, 23 April 2014

GlaxoSmithKline share price: Novartis asset swap creates world leader in Consumer, yields £4 bn buy-back

What’s new? This morning, GSK announced an asset swap with Novartis that has three components: (1) creation of a JV in Consumer with GSK holding a 63.5% stake, and Novartis holding 36.5%; (2) GSK buys Novartis’ vaccine business (excluding flu assets) for $5.25 bn upfront plus potentially another $1.8 bn in milestones and royalties; and (3) GSK sells its Oncology business (2013 sales of GBP 969 million, $1.5 bn) for at least $14.5 bn plus potentially another $1.5 bn, depending on the outcome of the Tafinlar/ Mekinist combination study in Melanoma (COMBI-D) expected in 2H ‘2015. Overall, this should result in net proceeds for GSK of c. $ 9 bn (GBP5.4 bn), of which GSK has slated GBP 4 bn for a buy-back program to be delivered by a B-share scheme.

Earnings impact According to GSK, the “transaction is expected to be accretive to core EPS from first year, reflecting execution of intended B share scheme, and thereafter with growing contribution from 2017 as projected cost savings and new growth opportunities are delivered”. In our view, this implies net income accretion (excluding the buyback) from 2017, hinting at substantial investment behind Bexsero and high oncology profitability.

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