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Glaxo creates the world's largest consumer health group with Pfizer venture

GlaxoSmithKline PLC, which acquired Tesaro Inc. earlier this month to build upon its increasing focus on oncology, said it will create the world's largest consumer health group by joining up with Pfizer Inc.'s consumer division — a business which CEO Emma Walmsley considered buying in March — and listing the company in the U.K. in three years.

Walmsley had been a strong advocate of the "logic and benefit" of Glaxo's tripartite structure, arguing that the consumer business was the cash cow for investment required in the pharmaceutical and vaccines businesses, although rumors of its potential divestment first emerged in July.

SNL Image
CEO Emma Walmsley
Source: GlaxoSmithKline

"[The] benefits to having a broader structure ... are significantly outweighed by the value creation opportunity of the deal that we are announcing today and the opportunity to strengthen two companies, and we always said it was something we would review, and this really is a unique, all-equity catalyst opportunity for us," Walmsley told reporters on a conference call following the deal announcement.

The news pushed shares in Glaxo up 7.62% to 1,558.6 pence apiece by 11:54 a.m. in London. The CEO said that Glaxo would pay an 80 pence-per-share dividend for 2019.

"Hats off to Walmsley," said an analyst with a "sell" recommendation on the stock, who spoke on condition of anonymity. "Today's news is a great move as she is now correcting the woeful capital allocation of both Witty and Garnier."

A former L'Oreal executive who previously ran Glaxo's consumer unit, Walmsley has set about transforming the U.K.'s largest pharmaceutical company since taking the helm in 2017. Earlier this year, she bought out the remaining stake in the Novartis AG consumer joint venture for $13 billion and appointed Hal Barron head of research and development in a bid to increase productivity and transform a sluggish pipeline. In boosting its oncology footprint and jettisoning respiratory assets, Glaxo is reshaping its research to focus on science that is related to the immune system and not wedded to a particular therapeutic area. More recently, Walmsley divested the consumer nutrition business in India and acquired the U.S. oncology group Tesaro Inc. on the same day.

"It’s a matter of record that earlier in the year we were looking at the Pfizer Consumer Healthcare business, amongst others," Walmsley said. "In fact, as you know, I used to lead the Consumer Healthcare business and I have long believed this was a portfolio that was extremely complementary and of exciting brands, and they are well-recognized as a company and a team with very strong talent and some complementary capabilities."

Combined sales for the new consumer group will come in at £9.8 billion and Glaxo, which will have the controlling stake, expects to make £1 billion of divestments. The company will be the leading provider of over-the-counter pain and oral health medicines, among others, including Sensodyne and Panadol, Centrum and Advil.

"We see the strategic rationale with cost savings and the opportunity to crystallize value, plus CHC's sustainable cash flows can support higher debt levels, thereby deleveraging pharma/vaccines," Jefferies analyst Peter Welford wrote in a note to clients. "Importantly GSK confirms the 80p/share dividend in 2018 and also now as the 2019 aim," said Welford, who rates the stock a "buy."