GlaxoSmithKline Lines Its Pockets Courtesy of Novartis Once Again

Source: GlaxoSmithKline.

For many Big Pharma companies the worst of the patent cliff is over. Within the last couple of years we've witnessed true heavy-hitting drugs, such as cholesterol-lowering drug Lipitor and asthma therapy Singulair, lose their exclusivity and have their sales decimated by generic competition.

But for some Big Pharma companies, like GlaxoSmithKline , the pain is only beginning.

GlaxoSmithKline is about to feel the patent pain GlaxoSmithKline's blockbuster product is its inhalable COPD and asthma long-term maintenance therapy Advair (which is known as Seretide in overseas markets). Advair actually came off patent years ago, but the Food and Drug Administration took its time laying out the requirements a generic drug developer would need to surpass in order to gain approval from the FDA. With that pathway laid out in Sept. 2013, a generic version of Advair is expected probably in the next one-to-three years. In its most recent conference call, GlaxoSmithKline projected that Advair/Seretide sales, once $8 billion annually, would fall to about $3 billion by 2020. For added context, Advair/Seretide generated about $6 billion in sales in 2014.

In response to Advair's already sinking sales, and the expectations that the sales decline is only going to accelerate, GlaxoSmithKline has turned its efforts to its next-generation COPD/asthma products -- Breo Ellipta, Anoro Ellipta, Arnuity Ellipta, and Incruse Ellipta -- as well as toward business reorganization.

GlaxoSmithKline and Novartis get together for a transformative deal For Glaxo, 2014 was a truly transformative year, as it and Swiss-based Novartis linked up for a landmark asset swap that would ultimately reshape the future of both companies. Novartis agreed to purchase GlaxoSmithKline's oncology portfolio of drugs for up to $16 billion, GlaxoSmithKline agreed to purchase Novartis' vaccine unit for as much as $7.1 billion, and the two agreed to form a joint-venture and tie-up their consumer health products divisions.

Source: Novartis.

With respect to Novartis, the deal gave the Big Pharma giant a shot of growth, with oncology drugs expected to demonstrate remarkable advancement in the coming years. After hitting $100 billion in global sales in 2014, IMS Health predicts that global cancer drug sales could soar to between $117 billion and $147 billion by 2018. Additionally, the joint-venture (which is a bonus for both Novartis and Glaxo) should lead to cost synergies from the removal of overlapping operations, while also helping to boost pricing power because of the joint-venture's sheer size.

As it relates to GlaxoSmithKline, the deal met two primary goals. First, it expanded one area of focus for the company, making it one of the largest vaccine companies around the globe. Although vaccine sales can be a bit lumpy at times, and they sometimes depend on government needs and virus flare-ups to drive sales growth, broadening and diversifying its vaccine portfolio by bringing Novartis' vaccines into the fold should help alleviate some of the aforementioned lumpiness.

Second, aside from the joint-venture synergies in consumer health, the deal put a lot of capital in GlaxoSmithKline's coffers. Following the closure of the deal, GlaxoSmithKline recognized about $14.6 billion in one-time gains in the first quarter of 2015. The cash generated from this deal could be transformative when it comes to funding new research and development, a possible acquisition, a substantial share buyback, or even supporting its premium dividend when Advair sales really begin to fall off.

But little did we know it wouldn't be the last time these two pharma giants would come together.

Source: Novartis.

Novartis goes shopping once again Last week, Novartis went shopping once again, and GlaxoSmithKline was more than happy to take Novartis' money. This time Novartis purchased the rights to ofatumumab, which you may know better as Arzerra. (Arzerra was developed in collaboration with Genmab, which still receives royalties on net sales of the drug.)

Arzerra was approved last year by the Food and Drug Administration as a treatment for chronic lymphocytic leukemia (CLL) to be used in combination with chlorambucil for treatment-nave patients who don't qualify for fludarabine-based therapy. Arzerra was actually first approved all the way back in 2009 for patients with CLL refractory to fludarabine and alemtuzumab.

Source: GlaxoSmithKline.

Although you would be correct in your assumption that Novartis already acquired these indications for Arzerra from GlaxoSmithKline when it bought its oncology unit, Novartis didn't acquire the rights to explore its non-oncology uses during the asset swap. To that end, Novartis is paying GlaxoSmithKline $300 million upfront to look into using ofatumumab as a once-monthly injectable treatment for multiple sclerosis. Upon beginning a late-stage MS trial next year, Novartis will pay another $200 million to GlaxoSmithKline. And finally, Novartis will pay GlaxoSmithKline as much as 12% royalties on the future net sales of ofatumumab as they relate to autoimmune disorders, up to $534 million. All told, GlaxoSmithKline could walk away with more than $1 billion if everything falls into place.

Another win for Glaxo, a shoulder shrug for NovartisThough Novartis is gaining the licensing rights for Arzerra in autoimmune disorders, I believe it's GlaxoSmithKline that walks away as the winner from the deal.

There's one big issue that could prevent Arzerra from becoming a meaningful seller for Novartis: competition. It's not just that MS is a competitive landscape, so much as the convenience and efficacy of MS treatments is improving at a breakneck speed. Even if Arzerra wows in its late-stage clinical study, the quickest pathway to pharmacy shelves still puts it about three years out from approval.

Source: GlaxoSmithKline.

In contrast, ocrelizumab -- which works along the same pathway as Arzerra and is being developed by Rocheand Biogen-- is currently in late-stage studies, and could hit pharmacy shelves by 2017 if everything goes its way in phase 3. Ocrelizumab is also an infusion that's administered only once every six months, as opposed to every month with Arzerra. From a convenience perspective, if the safety and tolerability issues aren't markedly different between the two experimental therapies, ocrelizumab will likely win out with patients and physicians. In short, there are no guarantees that Arzerra won't be left in the dust by its competitors.

On the flipside, even if Arzerra doesn't generate a penny in sales for Novartis, Glaxo will walk away $500 million richer than before. This cash gives Glaxo that aforementioned added flexibility should it seek out collaborations or acquisitions.

However, investors should also understand that this extra money may not translate into an immediate windfall. Let's not forget that GlaxoSmithKline also drastically cut its capital return plan to shareholders from 4 billion to 1 billion in May following its original asset swap with Novartis in order to safely preserve its dividend for years to come.

To be clear, GlaxoSmithKline still has plenty of challenges left to face -- but it'll now face them with more cash in its coffers than it had a week ago.

The article GlaxoSmithKline Lines Its Pockets Courtesy of Novartis Once Again originally appeared on

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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