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Zurich - Novartis and GlaxoSmithKline agreed to trade more than $20bn worth of assets on Tuesday to bolster their best businesses and exit weaker ones as the drug industry contends with healthcare spending cuts and generic competition.
The deals, which include Novartis' purchase of GSK's cancer drugs and GSK's acquisition of Novartis' vaccines business, came just after a newspaper report that AstraZeneca had turned down a $101bn bid approach from Pfizer, a story that sent shares up across the sector.
In addition, Novartis is selling its animal health arm to Indianapolis-based Eli Lilly for about $5.4bn in cash. That would make Lilly's Elanco unit the world's second-largest animal health business when that deal closes early next year.
A flurry of dealmaking has overtaken the global pharmaceutical industry recently as most large companies try to focus on a small number of leading businesses, while smaller specialty and generic producers seek greater scale.
Deal values have almost doubled since the start of 2014 to $77.9bn from a year earlier, according to Thomson Reuters data.
The overhaul at Novartis marks the end of a yearlong review of its sprawling portfolio after the departure of longtime Chairman and CEO Daniel Vasella, the architect of the merger of Ciba-Geigy and Sandoz that led to the company's formation in 1996.
The Swiss drugmaker said it would buy London-based GSK's oncology products for $14.5bn plus another $1.5bn that depends on the results of a trial in melanoma.
The deal will strengthen Novartis's world number 2 position in cancer behind crosstown rival Roche Holding AG.
Novartis said GSK was buying its vaccines, excluding flu, for $5.25bn plus potential milestone payments of up to $1.8bn and ongoing royalties. The companies also will form a joint venture in consumer healthcare.
The transactions, and their hint of more deals ahead for the drug sector, lifted the ARCA Pharmaceutials Index 1.8%.
Lilly's Elanco animal health unit will acquire about 600 animal health brands from Novartis, including vaccines and anti-parasite medicines that will allow it to enter the acquaculture, or fish farming, market.
This would be the eighth and largest acquisition since 2007 for Elanco, which by global sales would trail only Zoetis, which also specializes in products for farm animals and pets.
"With this transaction, we'll go from being number 5 to number 3 on the pet side globally and become a top 2 or 3 player in every segment" of products for farm animals, Jeff Simmons, Lilly's head of animal health, said in an interview.
Last year Elanco had sales of $2.15bn, compared with $1.1bn for Novartis Animal Health.
"Novartis has agreed (to) an elegant set of transactions that either removes or strengthens its underperforming assets, while boosting its oncology portfolio," Jefferies analysts said.
In afternoon New York Stock Exchange trading, Novartis shares were up 1.4% at $86.63, while GSK rose 4.2% to $55.34. Lilly dipped 0.9% to $60.32.
Fighting fit
Novartis CEO Joe Jimenez said the revamp would help make the company "fighting fit" to meet the challenges of the global healthcare industry over the next 10 years.
He told reporters the deals would lower overall sales by about $4bn but result in higher profits as the company swaps lower-margin vaccines for higher-margin oncology drugs.
Cancer is a particular focus for some drugmakers as novel medicines show promise by boosting the body's immune system.
"We reckon the real value of the (cancer) deal should be searched for in the pipeline and the newly launched products, strengthening Novartis' position in melanoma and hematology," Vontobel analyst Andrew Weiss said.
Analysts at Swiss broker Notenstein were also upbeat, saying the new cancer drugs would help Novartis to navigate patent expiries on top-selling medicines more easily.
However, analysts at Barclays described the price tag of as much as $16bn for the oncology assets as "rather hefty."
Drugmakers are stocking up their oncology pipelines as they bet that combinations of drugs will become the future of cancer care.
A desire to boost its oncology business is seen as a key factor behind Pfizer's reported interest in AstraZeneca.
Cancer is an extremely competitive marketplace, however, and some analysts said it was right for GSK to exit a field where it was only number 14 in the world.
GSK boss Andrew Witty said the company did not have the scale to compete in cancer drugs, so it made sense to put them into "the hands of somebody who is a world leader in oncology."
Conversely, he said the deals with Novartis strengthened two of GSK's core businesses: vaccines, given in more than 2 million shots every day, and consumer health, where the company will take the lead in running a business worth about $10bn in annual revenue with the Swiss group.
The deals were another step in his strategy of focusing on areas of strength, he said, moving further away from the monolithic model of drugs companies that tried to do everything.
After the deal, GSK will get 70% of sales from its franchises in respiratory, HIV, vaccines and consumer health.
Novartis said it would start a separate sale process for its flu business immediately, which was not part of the GSK deal.
Lilly said it would fund its animal health transaction with $3.4bn of cash and $2bn of loans, and it expected cost savings of about $200m per year within three years of closing the deal.
Bank of America Merrill Lynch advised Lilly, while Goldman Sachs Group Inc advised Novartis on the animal health deal. GSK said Lazard and Zaoui & Co were its joint financial advisers.
