Wall Street Journal - April 17, 2009
Jeanne Whalen And Dana Cimilluca

GlaxoSmithKline PLC and Pfizer Inc. are combining their HIV-drug businesses in a rare collaboration as the pharmaceutical rivals attempt to breathe life into a challenging product segment.

The deal shows the lengths to which drug companies are going in search of sales growth as many of their biggest products lose steam. Glaxo initially will get 85% of the joint venture and Pfizer 15%. The new company, which could be worth as much as ú5 billion ($7.5 billion), will hold 19% of the HIV market.

Glaxo, of Brentford, England, is one of the biggest sellers of HIV drugs, but its products are relatively old and not growing as much as the company would like. Glaxo also has relatively few new drugs in development for HIV, the virus that causes AIDS.

New York-based Pfizer has several HIV drugs in development but few on the market, and has a smaller sales force than Glaxo's. The companies hope that by pooling resources, they can cut costs and create a broader business with better potential for long-term growth.

The transaction is the latest sign of deal making in the pharmaceutical industry, which is trying to cope with a revenue decline from patented products and difficulties developing new drugs. Pfizer is separately in the process of combining with Wyeth in a $68 billion deal.

"I think you see an industry facing the reality of the challenges that exist," Glaxo Chief Executive Andrew Witty said during a conference call. "You also see to some degree a new generation of management prepared to come forward with new solutions." Mr. Witty took over as CEO last year. Jeffrey Kindler became CEO of Pfizer in 2006.

Mr. Witty often has said Glaxo isn't interested in a large merger and pointed to the HIV venture as the kind of smaller, more creative collaboration the company will seek. "We'll be looking for other ways to do similar things," he said.

In a statement, Mr. Kindler said the new company would "reach more patients and accomplish much more for the treatment of HIV globally than either company on its own."

The combined businesses had sales of ú1.6 billion last year and operating profit of ú870 million. Analysts typically value such businesses at two to three times sales, which would give the new company a value of about ú4 billion to ú5 billion. The venture will have 11 products on the market, including Combivir and Selzentry, and as many as seven in development.

Examples of cooperation among drug giants are unusual -- Pfizer and Glaxo are the world's top two drug companies by sales, respectively -- since big pharmaceutical companies compete to sell products, attract top talent and bring the best new drugs to market. Such arrangements aren't unprecedented, though: In 2007, AstraZeneca PLC and Bristol-Myers Squibb Co. struck a partnership to develop and market two diabetes drugs.

Mitigating the high risk of drug development is one attraction of working together. Putting a drug through clinical trials can cost hundreds of millions of dollars, and many drugs fail.

HIV is a tough area of drug development. There are a few dozen good treatments available, and coming up with something better has proved difficult.

Companies also have drawn criticism from AIDS activists for charging too much in both wealthy and poor countries. This pressure has led most companies to lower prices in recent years to not-for-profit levels in the poorest nations.

The HIV business has been a drag on Glaxo's sales growth. Glaxo had HIV sales of ú1.5 billion last year, up 5% from 2007, while its total sales grew 7% to ú24.4 billion. Pfizer's pipeline will help Glaxo "stay in the game," Mr. Witty said.

The venture also will allow the companies to combine some products into new combination pills, which are widely used in HIV treatment.

The agreement allows Pfizer to increase its stake in the venture to as much as 30.5% if enough of its HIV drugs make it to market. If Pfizer's products don't reach the market, its share will drop to 9%, the companies said.

Glaxo veteran Dominique Limet will be CEO of the new venture. A Frenchman trained as a physician, Dr. Limet for the past year has led Glaxo's work in personalized medicine, which seeks to deliver treatments tailored to each patient's genetic profile. Glaxo said it expects annual pretax savings of as much as ú60 million from the deal by 2011. Mr. Witty said some jobs will be lost, but he declined to say how many.

The companies will contribute their sales and marketing teams, marketed drugs and experimental treatments to the venture. They will each keep HIV research staffs, and the venture will have the option of developing any experimental drugs they generate. Mr. Witty said the venture will also consider buying the rights to promising drugs from outside companies.

Goldman Sachs Group Inc. and UBS AG advised Glaxo. J.P. Morgan Chase & Co. advised Pfizer.

Write to Jeanne Whalen at jeanne.whalen@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

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