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Et tu Glaxo

21 August 2015 By Neil Unmack

GlaxoSmithKline’s smart sale of a developmental drug comes with a cheeky earnings side effect. The UK pharmaceutical firm is selling a multiple sclerosis treatment to Novartis for up to $1 billion. It’s a logical move, but revives debate over how pharma groups account for one-off deals.

The sale of Arzerra to Novartis is one of a series of tos and fros between the groups: in 2014 they agreed to an enormous swap, in which Novartis took on the UK group’s oncology business for $14.5 billion. This deal sees Novartis buy the autoimmune treatment for a drug it already bought as part of that transaction – effectively the right to use a similar compound for a different condition.

It’s a sensible move: Novartis has a bigger franchise in multiple sclerosis, a sector that requires a lot of investment in infrastructure and marketing. And this drug is not a blockbuster: it won’t be the first to market in its sector. The upfront price of $300 million – the rest will be paid in chunks later as the drug hits certain hurdles – matches Deutsche Bank’s estimate for the full sales.

The wrinkle is that the proceeds will be included in Glaxo’s core earnings and revenue numbers, which are different from its overall reported numbers, but closely watched by analysts and investors. Core numbers should reflect recurring business, not one-offs. Glaxo sensibly deducts divestments of products to other companies from its core numbers. The difference here, it argues, is that Arzerra is not a product, but an asset in development, and a pharma group’s core business is developing assets.

For investors, it highlights the increasing challenge of valuing pharma companies, and not just Glaxo. At AstraZeneca, one-off revenue sources such as disposals, which it calls externalisations, made up $309 million of its $5.7 billion sales in the first quarter. But such gains aren’t stripped out in calculating the company’s core earnings, which are among the numbers Astra’s management must hit to get their bonuses. For Glaxo, this kind of accounting hopefully will be a one-off.


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