Novartis and Glaxo: Deal Making Duo

06/22/2015 8:00 am EST


Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Deal making in the healthcare sector is drawing a lot of attention, with more than $240 billion worth of mergers and acquisitions announced so far this year, observes Benjamin Shepherd, editor of Income Without Borders.

Novartis (NVS) and GlaxoSmithKline (GSK), both recommendations in our conservative model portfolio, recently completed a largely unprecedented asset swap.

Glaxo gets Novartis's vaccine business and an interest in a new joint consumer business, while Novartis gets Glaxo's cancer franchise.

As a result, Novartis will be a leader in the oncology field with 22 cancer medicines and the option to pick up cancer drugs under development at Glaxo.

Glaxo will also become a leader in vaccines, which are steady growers in terms of sales, and pick up an extra $6 billion which it plans to give back to stockholders by way of share buybacks.

This wheeling and dealing is good news for investors, particularly if you're focused on income. For instance, Novartis currently pays out about 66% of its earnings in the form of dividends for a current yield of 2.7%.

Assuming both sales and margins remain fairly constant, Novartis could add about $340 million in earnings with the pickup of those cancer drugs, which would leave about $200 million to possibly be added to the dividend.

Even more cash could be freed up for payouts if Novartis is able to squeeze greater efficiencies out of those operations.

And Glaxo shareholders aren't going to be left out in the cold either, getting an almost immediate bump thanks to share buybacks with plenty of room for dividend growth from the growing vaccine business.

We own both Novartis and GlaxoSmithKline, so we're getting the best deal out of the asset swap since we're really not losing or gaining anything in the process.

Over the long haul though, we'll catch a tailwind from the fact that they'll both be more tightly focused companies, which are uniquely positioned in fairly high growth markets.

Glaxo will now be the number one player in vaccines and vaccine sales at Novartis grew by 8% last year, largely thanks to its launch of the only meningitis B vaccine currently available.

Governments around the world, particularly in emerging markets, are already placing orders so that they can launch inoculation programs in the coming years.

Sales of Glaxo's cancer drugs jumped by a third last year and Novartis recently launched two new cancer drugs of its own, both of which are expected to become go-to treatments.

Sales of the cancer drugs it picked up in the swap could actually grow even faster in the coming years, since Novartis already has a major presence in the oncology field with a large global sales force to back it up.

Needless to say, we're pleased with the deal and continue to rate GlaxoSmithKline a buy up $54 and Novartis a buy on any dips under $100.

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