GlaxoSmithKline and Pfizer are old frenemies. A pioneering joint venture nearly a decade ago broke new ground. The rivals have now inked another collaboration. Plans to combine their consumer health businesses— and later spin them off — sent shares in GSK up by 7 per cent. Rightly so. This is a great deal.
The transaction is the elegant response of embattled GSK boss Emma Walmsley to calls for a break-up. Critics say consumer health distracts GSK from its higher-margin, higher-growth pharma business. But revenues from headache pills and toothpaste are bankrolling the research turnround. The deal with the US company will allow that hedge to persist for several years.
Pfizer names such as Advil and Caltrate mesh snugly with GSK brands such as Sensodyne and Panadol. But when the Pfizer unit was up for sale, GSK could not afford to buy it. GSK’s priorities were research and the £9.2bn buyout of Novartis’s stake in an earlier consumer health JV.
The UK company is in the driving seat of the new combination, but without a cash acquisition cost. It will own 68 per cent of the JV, while contributing a slightly bigger share of the profits. That gives it two-thirds of the board and control over the timing of the separation, for the first five years of the venture. GSK could sell up through a float. It hopes to demerge the business instead, saving tax for investors.
PfizKline Consumer — or whatever the group decides to calls itself — could be one of the larger businesses in the FTSE 100. Margin targets are punchy. The pro forma operating profit margins is meant to rise from below 18 per cent to the mid-to-high 20s by 2022.
That might prove overly ambitious if ecommerce sales of consumer drugs take off. But assuming operating profit margins reach 25 per cent and sales total £12bn by 2022, operating profits could be £3bn. If the business commanded a lower multiple than the Novartis stake — 19 times last year’s operating profits — PfizKline could be worth £40bn.
In the short run, cost cuts should boost GSK’s operating profits by about 3 per cent. While GSK will not raise cash, the demerger would allow the company’s core business to shed some of its debt. The plan is to load cash-rich PfizKline with debt. That will give GSK a lot more wriggle room. Ms Walmsley, too.
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