Shares soar after $900m Novartis and Glaxo deal

GlaxoSmithKline and Swiss pharmaceuticals rival Novartis have agreed to pay the other $900m (£535m) if one of them pulls out of the major medicines swap deal that will see the British giant quit trying to make blockbuster cancer treatments.

The punitive termination fees were seen as a key indicator of the pair's confidence in pulling off what is the biggest shake-up for the company since the merger of Glaxo and SmithKline Beecham. Glaxo will sell its cancer drugs to Novartis for $16bn, buying the Swiss giant's vaccines operation for $5.25bn. The pair will merge consumer health divisions to create a £6.5bn business spanning Aquafresh toothpaste, Tixylix cough mixture and Savlon. Glaxo will have a 63.5 per cent stake, and its consumer boss Emma Walmsley will run it.

Glaxo is dangling £4bn in cash proceeds from the deal to tempt investors to approve the deal at an extraordinary general meeting. Shares in the drugmaker rose 81p to 1640p.

The transaction marks a clear admission by Glaxo chief executive Sir Andrew Witty, eight years into his reign, that the company cannot compete in the cancer research field, where its treatments have suffered setbacks and only occupy 14th in the global league tables compared with Novartis's number two spot.

But it also reinforces his belief that the days of mega-mergers and acquisitions (M&A) to create behemoths covering every division of healthcare are over – in stark contrast to rival Pfizer's strategy, with the emergence of its £76bn approach for AstraZeneca. Mr Witty said: "M&A is a strategy to be used sparingly."

Glaxo's purchase of Novartis's vaccines division gives it more muscle in a fast-growing sector. Novartis's portfolio includes inoculations against meningitis, polio, rabies and tetanus as well as flu, although Glaxo will inherit Novartis's battle with the British Government over the price it charges the NHS for its meningitis B vaccine. Such pricing pressures from buyers around the world, and the impact of cheaper generic copies of medicines as they come off patent, will continue to drive major shake-ups by the drug giants, Mr Witty said.

After the deal, 70 per cent of Glaxo's revenues will come from the areas of respiratory, HIV, vaccines and the consumer joint venture.

Rainmaker brothers: Fourth massive deal

The deal is another triumph for veteran Moroccan takeover "rainmakers" Yoel and Michael Zaoui, who advised GlaxoSmithKline on what is the fourth massive deal since the brothers set up in business together just six months ago.

For two decades, they conducted some of the biggest takeovers in the world, with Yoel running Goldman Sachs's deal team and Michael Morgan Stanley's.

Since founding Zaoui & Co they have advised L'Oreal, Peugeot and Lafarge on multi-billion dollar deals.