Novartis – GSK asset swap, sale of Animal Heath streamline portfolio

**Novartis announced this morning an asset swap with GSK with 3 components…**

…and a sale of its Animal Health Business to Lilly. Asset swap components include (1) creation of a Consumer JV with Novartis holding a 36.5% stake, and GSK holding 63.5% (2) Sales of Vaccines (excluding flu) to GSK for $5.25 bn upfront plus potentially another $1.8 bn in milestones & royalties (3) Novartis buys GSK’s Oncology business (2013 sales of $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 (COMI-AD). The Animal Health (AH) sale yields $5.4 bn. Overall, these transactions should cause combined cash outflow of $6.1-7.6 bn in 2015, incl. a $2.3bn tax charge.

**Implications for earnings**
The press release provides little commentary on the financial implications (“Transactions are expected to improve Novartis’ sales and core operating income growth rates, while improving margins. Each of the transactions is projected to be value creating”.)
**Valuation considerations of deal components**
Consumer JV: Novartis contributes 28% of sales & gets 36.5% of the equity (Novartis’ 2013 OTC sales were $2.9 bn vs. GSK Consumer 2013PF Sales of $7.4 bn) (2) the price tag for GSK’s Oncology at 7.1- 8x 2014E sales, or at least 4-4.5 x peak sales seems rich, especially in view of intensifying competition from Roche for the melanoma franchise, though perhaps is justified in view of substantial cost and revenue synergies with Novartis’ own oncology business (3) Novartis doesn’t disclose the sales level of Vaccines excluding flu, but we assume the price tag values Bexsero at $3.5-5 bn, though we see GSK as a much better owner than Novartis to maximize the value of this asset (4) Novartis achieves a good price for AH at 4.9x 2013 sales.
[+] source: UBS