GlaxoSmithKline plc Gives Up On Cancer

Perhaps it is just a symptom of my advancing decrepitude, but I seem to hear more about cancer every year. Rarely does a season seem to pass without a cancer diagnosis or treatment cropping up among my wider friends and family, sadly.

While the prognosis for many cancers has been getting better – not least thanks to early diagnosis via screening – news that you have the disease must rank among the grimmest you can hear from your doctor. And worldwide, the total number of new cancer cases a year is expected to surge by 70% over the next 20 years to 25 million a year, according to the World Health Organisation.

By any measure, then, this is a serious disease with potentially devastating consequences that’s becoming more commonly diagnosed.

So why would GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), one of the world’s largest pharmaceutical companies, want to get out of the business of treating it?

Cash for cancer drugs

Glaxo has turned away from treating cancer – oncology, to give it its proper medical term – as a result of an £11 billion deal with Novartis announced this week.

gskThe two companies are swapping chunks of their product lines and businesses – as well as some cash – with Glaxo getting Novartis’ vaccine business, and the Swiss company taking ownership of Glaxo’s cancer drugs.

The cash element will enable Glaxo to make a special capital return of £4 billion to shareholders — so that’s one reason to do the deal. 

But the main issue is focus.

14th isn’t good enough

GlaxoSmithKline has made some decent progress with its oncology research recently.

Earlier this year it won approval for combination use of its Mekinist and Tafinlar drugs in the treatment of melanomas (skin cancers). Analysts also like Votrient, a new-ish Glaxo drug for the treatment of cancer in the kidneys and soft tissues, and the British drug maker has other promising treatments in its development pipeline.

GlaxoSmithKlineHowever, Glaxo is ranked merely 14th in the world for oncology and the pharma giants are increasingly trying to dominate their niches to increase efficiencies. It sounds grubby to talk about it in healthcare, but on one level the drugs business is just like any other – with size and specialisation come economies of scale and extra synergies.

Moreover, while GlaxoSmithKline isn’t relinquishing all its oncology research – it says it will continue to research cancer immunotherapy and epigenetics – the move does crystalize the value of most of its pipeline.

For its part, Novartis is betting it can do better at selling, distributing and developing the acquired drugs than Glaxo might have, and that this justifies paying up for them today.

Remember that Glaxo has picked up Novartis’ vaccine business as part of this deal. Glaxo was already the world’s top vaccine player, and this cements its position in a market that’s expected to grow at 10% per annum for the next decade.

Glaxo will now have more than 20 new vaccines in development, and it will acquire Novartis’ manufacturing facilities in India and China – attractive emerging markets that Glaxo is keen to tap into. It also picks up extra packaging facilities in Germany and Italy.

Show shareholders the money

Glaxo’s own numbers suggest the deal could overall add £1.3 billion to revenues on a pro-forma basis, and cost savings of as much as £1 billion a year within five years. These are big numbers, even for an £80 billion mega-company.

And the bottom line is, well, the bottom line.

While healthcare remains a sector with massive long-term potential, in the short term a focus on austerity in Europe and industry reform in the US look like curbing growth for the foreseeable future.

In addition, shareholders have grown fed up with the uncertain returns from R&D from the big pharma companies, especially with a new breed of players typified by Valeant Pharmaceuticals Intl in the US having made a string of deals that appear to have unlocked some big profits languishing hidden in the sector.

The product swap with Novartis sees Glaxo doing this sort of restructuring itself and I think it is good news for shareholders. We must hope that moving Glaxo’s cancer treatments to the specialists in Switzerland proves to be good news for cancer patients, too.

But whatever this deal's merits, it's clear that for the big pharmaceutical companies, the days of go-go growth are over. So if you're more interested in backing companies with more exciting growth potential, you'll want to read our latest report.

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Owain owns shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.