This article has been written by Shubham Singh, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

It has been published by Rachit Garg.

Introduction

A merger of companies is a method for combining two or more companies or businesses. Through a merger, the assets and liabilities of two companies are combined. Companies can be interested in a merger keeping in mind the following factors, such as:

• to improve innovation, 
• improve research and development (R&D) capabilities, 
• Eliminate the risk of potential competition, 
• expand reach to new customers and in new markets, 
• expand the products and services offered, 
• for increasing market share and revenue, etc.

Parties to merger/ combination

• GlaxoSmithKline PLC (GSK), a London, UK-based company, is a global healthcare company, and at the time of the merger, it was active in three primary areas, namely, pharmaceuticals, vaccines, and consumer healthcare. In India, at the time of the merger, GSK was active through its subsidiaries, i.e., Biddle Sawyer Limited, GlaxoSmithKline Asia Pvt. Limited, GlaxoSmithKline Consumer Healthcare Limited, GlaxoSmithKline Pharmaceuticals Limited, and Stiefel India Private Limited.
• Novartis AG (NVS), a Basel, Switzerland-based company, is another global company, and at the time of the merger, it was the ultimate holding company of a multinational group of pharmaceutical companies that are stated to be active in six broad areas of healthcare, namely, pharmaceuticals, eye care, generics, animal health, consumer health, and vaccines. In India, at the time of the merger of GSK and NVS, NVS was existing in all the afore-mentioned areas of healthcare, and NVS operated through four entities whose names were Chiron-Behring Vaccine Private Limited, Novartis Healthcare Private Limited, Sandoz Private Limited, and Novartis India Limited.

The merger / combination

In 2014, GlaxoSmithKline (GSK) agreed with Novartis AG (NVS) to proceed with a merger. GSK proposed to acquire the vaccine business and manufacturing competencies and sell the rights to its oncology portfolio, associated R&D undertaking, and AKT inhibitors. GSK’s motive behind this deal was to make its vaccine business stronger and more sustainable globally. 

The appropriate authorities in different countries and the Competition Commission of India (CCI) in India received a notice in 2014 from the merging companies, namely GSK and NVS. The notice has been filed in relation to the below-mentioned three transactions, which were inter-dependent and conditional:

1. Acquiring the entire human vaccines business of NVS, except the flu (influenza) vaccines business, by GSK in accordance with the Share and Business Sale Agreement and the Implementation Agreement;
2. Establishing a consumer healthcare business Joint Venture (JV), in which GSK would have 63.5% equity interest and the remaining 36.5% equity interest would be owned by NVS. The content of the notice also reflected that GSK would contribute its global consumer healthcare business (excluding, inter alia, GSK’s consumer healthcare business in India) and NVSs would contribute its over-the-counter consumer healthcare business (excluding the products that are managed by and reported for financial purposes within Novartis’ Pharmaceutical Division, Alcon Division, and Sandoz Division) to the JV, according to the Contribution Agreement and the Implementation Agreement; and
3. Acquiring the business of GSK relating to a portfolio of oncology (cancer) products, but not including the manufacturing by NVS according to the Implementation Agreement and the Sale and Purchase Agreement.

The appropriate/authorised authorities of other countries and the Competition Commission of India (CCI), after analysing the facts and records of the proposed merger and also the information given in the notice by the merging entities, approved the proposed combination. 

The motive for going ahead with the merger was for both GSK and NVS to focus on their primary strengths and areas of growth, which would ultimately result in improving their efficiency and lowering the cost of operations.

The deal between GSK and NVS also impacted the vaccine market in India, as it added six new vaccines to GSK’s list, which included hepatitis A, hepatitis B, polio, meningitis, and rabies. The deal was beneficial for NVS, as after the merger it managed twenty-two oncology and haematology medicine portfolios globally.

After the completion of the transaction between GSK and NVS, GSK’s intention was to return to the shareholders £4 billion of the net proceeds. The company did not expect to make any ordinary share repurchases in 2015. GSK also informed in its Annual Report for the year 2014 that no ordinary shares were purchased in the period from January 1 to February 19.

The joint venture

GSK and NVS entered into a Contribution Agreement, and as per the terms and conditions of the agreement, GSK contributed its consumer healthcare business, whereas NVS added its over-the-counter (OTC) business to the newly formed company, which would do its operations under the name of GSK Consumer Healthcare.  

The proposed deal was completed in March 2015, and as a result, GSK’s vaccine business was diversified. As per the Agreement, NVS sold its vaccine business, excluding the flu (influenza) vaccine business, to GSK for $5.25 billion in initial cash consideration and took over GSK’s cancer drug portfolio for $14.5 billion. 

The new Consumer Healthcare JV was formed with a plan to have more than two and a half dozen major brands each with annual revenues in excess of $100 million, which included Panadol, Aquafresh, Sensodyne, Otrivin, and Voltaren. This JV aimed to bring together franchises that owned some of the world’s most famous brands, including Pandol, Aquafresh, and Excedrin. The joint venture has ultimately become the global leader, with annual sales worth more than $10 billion and a market share of more than 10% globally. 

The deal between GSK and NVS did not include the operations of the GSK Group and Novartis Group in France and the Netherlands, where it was mandatory for them to consult with a local works council. For those operations, GSK, NVS, and GSK Consumer Healthcare (when applicable) have agreed to irrevocable put option arrangements, under which GSK, NVS, or GSK Consumer Healthcare (when applicable) must buy the French and Dutch operations, subject to finishing the necessary consultation process with the relevant works council.

With increased speed to market and investment in new products, it was predicted that the business would have greater opportunities to deliver revenue growth consistently above market rates. The two portfolios were well-suited and the joint business was estimated to have the biggest share of the consumer healthcare market in more than 35 countries.

GSK also instigated a tactical review of Horlicks and other consumer nutrition products, which involved an assessment of GSK’s shareholding in its Indian subsidiary, GlaxoSmithKline Consumer Healthcare Ltd.

However, in Nigeria and India, where GSK conducts its business of consumer healthcare through its listed subsidiaries, namely, GlaxoSmithKline Consumer Nigeria plc and GlaxoSmithKline Consumer Healthcare Limited, respectively, GSK decided not to contribute its businesses to the JV.

Exit of Novartis from the joint venture

The Consumer Healthcare JV, which was established as part of a three-part deal between GSK and NVS, became a fully owned subsidiary of GSK in 2018, after GSK paid $13 billion to acquire the remaining 36.5% stake in NVS.

As per the terms and conditions of the original transaction, Novartis had the right to make GSK buy its stake (or specified tranches of it) in the Joint Venture anytime from March 2, 2018 to March 2, 2035. The new deal to purchase the stake in NVS eliminates this issue and helps in allocating the capital to its other priorities. 

As a consequence of the deal, the shareholders of GSK will benefit from the full value of GSK’s Consumer Healthcare progress. With category-leading Power Brands, a better focus on science-based innovation, and improved operational efficiencies, GSK Consumer Healthcare is well-positioned to deliver sales growth, operating margin improvements, and attractive returns.

After effects of merger/ or combinations

After the merger/combination with NVS, GSK’s revenue improved by 6% at Constant Exchange Rates (CER) to £23.9 billion in the year 2015, and the sales of new products amplified by more than 100% to £2 billion. The net profits also rose, reaching £8.4 billion from £2.8 billion in 2014. 

The pharmaceutical business dropped by 7% to £14.2 billion. The vaccine business grew by 19% to £3.7 billion. The Consumer Healthcare business of GSK disclosed sales worth £7.8 billion in 2017 and also reported that since 2015 sales have increased by 4% on a 3-year Compound Annual Growth Rate (CAGR) basis (at 2014 CER) with an overall development in operating margins from 11.3% in the year 2015 to 17.7% in the year 2017.

Also, from 2014 to 2017, the shares of the digestive health category of GSK increased from 4.3% to 6.8% worldwide, the growth was mainly due to the Tums brand.

Conclusion

The merger between GSK and NVS, where the companies swap the oncology and vaccine business with each other proved to be valuable for both of them. The merger is a win-win deal for both companies. The merger was beneficial for both GSK and NVS as it enabled GSK to become a global leader in vaccines and consumer healthcare, and at the same time, it helped NVS expand its oncology/cancer portfolio and pipeline while separating its low-profitability businesses of consumer healthcare and vaccines. The deal resulted in enhanced margin and cash flow for both companies, and as a result, there was a saving of up to $1.5 billion for GSK and $1 billion for NVS in annual costs.

Since NVS was performing best in Europe and GSK was a leader in the USA, it was a win-win situation for both companies to have a merger in some of their business lines so that they could use each other’s manufacturing activities and distribution channels to increase their sales.

Reference

1. https://www.gsk.com/media/2710/gsk-annual-report-2014-interactive.pdf (GSK Annual report 2014)
2. https://www.novartis.com/news/media-releases/novartis-announces-completion-transactions-gsk
3. http://164.100.58.95/sites/default/files/C-2014-07-188_0.pdf
4. https://www.gsk.com/en-gb/media/press-releases/gsk-completes-major-three-part-transaction-with-novartis/
5. https://www.novartis.com/news/media-releases/novartis-completes-sale-stake-consumer-healthcare-joint-venture-gsk-usd130-billion
6. https://www.gsk.com/media/9322/gsk-novartis-circular.pdf
7. https://www.eiu.com/industry/article/1804967764/key-player—glaxosmithkline/2017-01-03
8. https://clearstrategy.com/case-studies/gsk-consumer-health/
9. https://www.gsk.com/en-gb/media/press-releases/gsk-reaches-agreement-with-novartis-to-acquire-full-ownership-of-consumer-healthcare-business/#:~:text=GSK%20reaches%20agreement%20with%20Novartis%20to%20acquire%20full%20ownership%20of%20Consumer%20Healthcare%20Business,-Agreement%20with%20Novartis&text=GlaxoSmithKline%20plc%20(LSE%2FNYSE%3A,billion%20(%C2%A39.2%20billion)