Emma Walmsley, chief executive officer of Glaxosmithkline Plc, speaks during a Bloomberg Television interview at the Glaxo headquarters in the Brentford district of London, U.K., on Wednesday, Dec. 19, 2018. Glaxo paved the way for a split into two companies, agreeing to create a consumer-health joint venture with Pfizer Inc. that the pharma giants plan to list on the stock market. Photographer: Luke MacGregor/Bloomberg
Emma Walmsley took over as GSK chief executive in April 2017 © Bloomberg

GSK chief Emma Walmsley has capped a year-long overhaul of one of the world’s largest drug companies by unveiling a plan to split the group into two, creating a new £9.8bn consumer health business through a joint venture with US rival Pfizer. 

The newly formed UK-based group will fold Pfizer brands such as Advil, Centrum and Caltrate into GSK’s existing line of well-known over-the-counter labels such as Sensodyne, Nicorette and Excedrin, turning the unit into the world’s largest provider of medicines sold directly to the public.

In exchange for contributing its smaller consumer products unit to the venture, Pfizer will get a 32 per cent stake, with GSK owning the rest. GSK intends to spin off the division within three years through a UK stock market listing, while its prescription drug and vaccine business remains in the hands of existing shareholders. 

The move caps a furious nine months of dealmaking by Ms Walmsley, who rose through the consumer division and took over as chief executive from Andrew Witty in April 2017, vowing to refocus on developing and commercialising lucrative new prescription drugs.

Since March, Ms Walmsley has strengthened GSK’s consumer business by taking control of a joint venture with Novartis for $13bn and then shedding its nutrition unit, including the prized Horlicks malted drink brand, to Unilever for $4bn

At the same time, she has sought to turn its weaker pharmaceuticals business into a stronger competitor by acquiring cancer-focused US biotech Tesaro this month for $5.1bn. 

“Ultimately, our goal is to create two exceptional, UK-based global companies, with appropriate capital structures, that are each well positioned to deliver improving returns to shareholders and significant benefits to patients and consumers,” Ms Walmsley said.

GSK has been under pressure since at least July from some of its largest investors, who argued the company was underperforming by keeping the reliable consumer products business and the more volatile prescription pharmaceutical unit under the same roof. 

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Shares in GSK closed 3.8 per cent higher in London while Pfizer shares were up 1.2 per cent in afternoon US trading. 

Pfizer’s decision to enter a joint venture with the UK drugmaker is likely to be the last big strategic move for chief executive Ian Read before he becomes executive chairman in the new year. The deal also comes four years after Mr Read failed in an attempt to take over AstraZeneca, the Anglo-Swedish company, and three years since he inquired  about an acquisition of GSK.

“Pfizer and GSK have an excellent track record of creating successful collaborations, and we look forward to working together again to unlock the potential of our combined consumer healthcare businesses,” Mr Read said.

The new joint venture will require regulatory approval but one person close to the deal said there were no pressing antitrust concerns. 

The companies said the new group would be the global leader in over-the-counter medicinal products with a market share of 7.3 per cent. That puts it ahead of its nearest competitors Johnson & JohnsonSanofi and Bayer, which hold about 4 per cent market shares each. 

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GSK and Pfizer said the venture would have a number one or two market share position in all key geographies, including the US and China.

Earlier this year, GSK made it to the final round of an auction to acquire the Pfizer unit for as much as $20bn in cash, but elected to walk away. It instead moved to simplify its own business by buying out Novartis from an existing joint venture.

With Novartis out of the way and no other buyers emerging for the Pfizer unit, Ms Walmsley was able to swiftly negotiate the new combination in less than three months with Mr Read, said people directly involved in the negotiations. 

With the tie-up, which is expected to be completed by the second half of next year, GSK will target cash savings of £500m annually by 2022 after one-off charges of £1.2bn. The company is planning to divest about £1bn in proceeds to cover these charges.

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Ms Walmsley refused to speculate on whether the joint venture would lead to job losses, saying: “Obviously there are going to be some impacts on people, but that’s something we’re working through.”

But she added: “If you take a longer-term view, I believe we should be optimistic about the opportunities both for growth and employment that this deal today will create.”

Under a shareholders’ agreement, GSK will have six directors on the board of the venture, with Ms Walmsley as chair, and Pfizer will have three directors.

GSK has agreed to pay a break fee of $900m to Pfizer if its board withdraws its recommendation of the deal or if it is not approved by shareholders.

The UK company said it would have the sole right to decide whether and when to initiate a separation and listing of the joint venture for five years after the deal closes. 

After five years, both GSK and Pfizer will have that right. However, if Pfizer calls on that right, GSK can acquire all of Pfizer’s equity in the venture at fair market value. In addition, after 15 years, GSK will have the right to acquire Pfizer’s equity interest at fair market value.

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