Pharma giant GlaxoSmithKline (GSK) surprised the market this morning with news that it will merge its consumer health business with that of US rival Pfizer to create what it describes as a 'world-leading' business.
The joint venture will have combined sales of around £9.8bn with GSK holding a 68% controlling stake and Pfizer the remaining 32%.
Shares in GSK received a 7% boost to £15.52 on expectations the deal will create a global leader in over-the-counter products.
By mid-2022 the firm intends to spin off the joint venture into a separate company.
‘Demergers often result in positive stock market returns as they allow the unbundled firms more freedom and greater focus and often lead to value which was not recognised as part of a larger entity being factored in by the market,’ comments AJ Bell’s Russ Mould.
Mould does question the strength of Pfizer’s portfolio after both GSK and Reckitt Benckiser (RB.) walked away from a bid for the consumer health business earlier this year.
BENEFITS OF THE JOINT VENTURE
The joint venture is expected to dominate pain relief, respiratory and skin health treatments and therapeutic oral health among other categories, and will have dominant market share positions in all key geographies.
People may already be familiar with some of the companies' products such as Sensodyne toothpaste and pain relief products Panadol and Advil.
GSK says the joint venture will strengthen its pharmaceuticals division by boosting cash flows and delivering annual cost savings of £500m by 2022.
Up to a quarter of the cost savings will be reinvested in the business, making it a vital lever for future growth.
Shore Capital analyst Adam Barker estimates both companies will earn a 4% return on assets contributed to the joint venture, which is forecast to rise to 6% if savings are delivered.
Emma Walmsley, chief executive of GSK, described today's deal and the future separation of the joint venture as 'a clear pathway to create a new global Pharmaceuticals/Vaccines company... and a world-leading Consumer Healthcare company'.
