Global Insight Perspective | |
Significance | GSK (U.K.) has made no secret of its desire to bulk out its Consumer Healthcare division through acquisition. It previously lost out in bids for the over-the-counter (OTC) arms of Pfizer (U.S.), Boots (U.K.) and Roche (Switzerland). |
Implications | The acquisition of CNS is on nothing like the same scale, although at 4.8 times sales the purchase price shows that OTC businesses still carry a premium. The deal gives GSK bolt-on assets that expand the scope of its OTC portfolio and offer potential for future geographic expansion and pipeline innovation. |
Outlook | As such, the U.K. company may be keeping an eye out for further opportunities in the OTC market. Meanwhile, the submission of a European approval application for Tykerb closely follows a U.S. filing last month and lends further credibility to GSK's efforts to build up a competitive oncology portfolio. |
GlaxoSmithKline (GSK, U.K.) is paying US$37.50 per share in cash for CNS, the U.S. manufacturer of Breathe Right nasal strips and FiberChoice dietary supplements. The deal values CNS at around US$566 million and represents a 31% premium over the trading price of its common stock at the close of business on 6 October.
GSK has long sought an acquisition to fill out its well-established Consumer Healthcare business as a steady trend of consolidation in the OTC sector has thrown up a succession of major targets over the last few years.
On at least three occasions the U.K. company has been beaten to the punch by other Big Pharma players, keen to mitigate the sharper risks in their prescription-drug businesses by tapping into the brand longevity and stable revenues of the OTC market, with its potential to pick up the slack from healthcare cost-containment worldwide through more active self-medication.
GSK saw Germany's Bayer—now looking for further acquisition candidates—prevail in the bidding for Roche's OTC division in 2004, although the U.K. company did snap up valuable OTC rights in the United States to the Swiss company's weight-loss treatment, orlistat (Xenical). The following year, GSK was among the suitors for the U.S. and Canadian consumer-care business of Bristol-Myers Squibb, which eventually went to Switzerland's Novartis. In October 2005, fellow U.K. company Reckitt Benckiser beat GSK in the running for Boots Healthcare International. And last June, U.S. healthcare giant Johnson & Johnson (J&J) outbid GSK for Pfizer's consumer health unit.
Given that J&J ended up paying a startling US$16.6 billion in cash—4.3 times 2005 sales—for Pfizer's OTC arm, the disappointment at yet another damp squib was mixed with relief that GSK had avoided paying over the odds. That is not to say CNS has come cheap: the total consideration of around US$566 million—agreed after CNS and its financial advisors had conducted a review of potential (unnamed) suitors—is around 4.8 times the U.S. company's sales of US$118.5 million in the 12 months to June 2006. But viable OTC targets are getting thin on the ground and, on its limited terms, CNS has built a strong and fast-growing business.
Focused and Dynamic
What GSK is buying is essentially the Breathe Right line of nasal strips and related products for relief from snoring and congestion due to colds and allergies, in addition to FibreChoice fibre supplements in various formulations. The latter are marketed solely in the United States, while Breathe Right products are available in 27 countries around the world. Nonetheless, 86% of CNS' total sales come from the U.S. market.
If GSK is not gaining much in the way of geographical reach, it is acquiring a focused and dynamic OTC portfolio. Breathe Right and FiberChoice have delivered compound annual sales growth of 12% and 54% respectively over the past three years, while CNS' overall sales for the year to June were 18% higher than in the 12 months up to June 2005.
Moreover, they take GSK into niche areas which supplement the company’s current range of OTC products. While GSK has some presence in the cough and cold market (e.g., through Contac, a line extension to Panadol, Solpadeine), it is better known for its analgesics (Panadol, etc), gastrointestinal remedies (Tagamet, Tums), smoking-cessation therapies (NiQuitin/Nicoderm/Nicorette) and its antiviral Zovirax. And Breathe Right nasal strips are really in a league of their own, with strong links to the sporting world.
Similarly, FibreChoice fibre supplements have some synergies with GSK's nutritional healthcare business, which sells leading brands, such as Ribena and Horlicks, but the U.K. company's commitment to dietary supplements has been somewhat patchy; for example, the Abtei line of vitamins and naturals is dependent on the German market, while Os-Cal calcium supplements are rooted in the United States.
The transaction, which is subject to the approval of CNS shareholders and other conditions, such as antitrust clearance under the U.S. Hart-Scott-Rodino Act, is expected to close by early next year. In the meantime, GSK has made further progress in its efforts to fill out a traditionally rather meagre oncology pipeline, filing an approval application with the European Medicines Agency (EMEA) for the oral anticancer, Tykerb (lapatinib ditsylate).
As in the United States, where an approval submission for Tykerb went in last month (see United Kingdom: 19 September 2006: GlaxoSmithKline Submits U.S. Filing of Tykerb for Advanced Breast Cancer), the drug is being offered in combination with Xeloda (capecitabine, Roche) for the treatment of advanced or metastatic ErbB2 (HER2) positive breast cancer in women who have received prior therapy, including Roche's (Switzerland) Herceptin (trastuzumab). GSK noted that Tykerb was its third European oncology filing this year, following topotecan (Hycamtin) for relapsed cervical cancer and nelarabine (Atriance) in June (see United Kingdom: 30 June 2006: GSK Submits EU Application for Injectable Rare-Cancers Treatment, Atriance). By the end of 2006, the company plans to have lodged Tykerb for approval in Australia, Canada and a number of Middle-Eastern countries.
Outlook and Implications
While CNS may not be the big score GSK was looking for in the OTC sector, it is a useful bolt-on acquisition, which the U.K. company says presents opportunities for "growth through geographic expansion and pipeline innovation." It allows GSK to expand an already solid OTC business, with a strong foothold in the emerging lifestyle segments of the prescription-to-OTC switch market (NiQuitin and OTC Xenical, once it gets U.S. approval), without putting much of a dent in the company's finances. GSK said the acquisition would be earnings-neutral in 2007 and accretive in 2008. It is unlikely the company is finished with its plans for non-organic OTC growth.
The European submission for Tykerb is another milestone for a product that has shown impressive potential in Phase III trials for slowing disease progression in advanced breast cancer. Some analysts are talking about a US$4-billion-a-year product, although it may be a few years yet before Tykerb's true promise emerges through data comparing efficacy with Herceptin in early-stage breast cancer.
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