LONDON – Novartis AG and Glaxosmithkline (GSK) plc are exchanging assets in a three-way, "supercomplex" deal that will see Novartis paying $16 billion for GSK's marketed oncology portfolio, while GSK acquires Novartis' vaccines arm for $5.25 billion, and the two pool their consumer health care businesses in a joint venture.

In a separate transaction, Novartis is divesting its animal health business to Eli Lilly and Co. for $5.4 billion, following a competitive process.

The CEOs of both GSK and Novartis said the deal will be "transformational" for their companies. GSK becomes the world leader in vaccines, while crystallizing the value of its oncology portfolio and becoming majority 63.5 percent owner of a consumer health care business with combined revenues of £6.5 billion (US$10.9 billion).

Novartis, meanwhile, builds on its position as number two worldwide in oncology and will have first rights to commercialize cancer products coming through GSK's R&D labs, and realizes value from its vaccines and animal health arms, while being able to focus on its big three businesses in pharmaceuticals, eye care and generics, which are world-leading.

The overall deal, which was six months in the making, began over a conversation the two companies had relating to an existing supply contract between their respective vaccines divisions. However, with a detailed review of its business in progress, Basel, Switzerland-based Novartis obviously was primed for M&A and rationalization, while London-based GSK presented the deal as in line with its strategy of focusing on areas where it has significant competitive advantage.

"There's almost never been a deal done like this; it was very difficult to pull off," said GSK CEO Andrew Witty.

The transactions, which need antitrust clearance and approval from GSK's shareholders, are expected to close in the first half of 2015. Joe Jimenez, CEO of Novartis, said their conclusion will be "a historic turning point" for the company. "We will be focusing on three lead businesses with innovation power and global scale," he said in a conference call.

Witty painted a similar picture, of GSK as owner of the biggest vaccines business in the world, selling 2 million doses per day, and with a majority stake in the largest consumer health company.

Both stressed they are still firmly committed to R&D as the engines for growth. Jimenez said, "Our strategy has not changed: We are leading through science-based innovation."

Witty said the price achieved for the oncology portfolio - at 10 times 2013 revenues - more than justified the investment over the past six to seven years in regenerating GSK's R&D operation. R&D will continue to drive organic growth. "We think it's in the right kind of shape to deal with the future," Witty said.

While GSK is divesting the marketed oncology portfolio it will maintain early stage discovery in cancer. The deal gives Novartis preferential rights to commercialize new products emerging from those efforts.

Witty said overall there will be a positive impact on R&D, with about £200 million from the sale of oncology to be invested to accelerate programs. "We're really keen to stay in the early R&D space. We did well in developing a portfolio of targeted small molecules and that's why it commands a value of $16 billion," he said.

Of the $16 billion, up to $1.5 billion depends on the results of GSK's phase III Combi-d trial (also referred to as MEK115306). The combination of Mekinist (trametinib) and Tafinlar (dabrafenib) being tested in the trial received the FDA's accelerated approval in January, and the product is expected to become the first approved combination of oral targeted therapies for treating advanced melanoma expressing the BRAF mutations V600E or V600K.

David Epstein, head of Novartis Pharmaceuticals, said the price tag on the oncology portfolio is justified because the GSK drugs have a long patent life and as the second largest company in oncology, Novartis has the scale to increase margins on what are already big-margin products. "These are high-growth products; the 2013 revenues or profits are not the whole story," Epstein said.

The $5.25 billion, GSK is paying for the Novartis vaccines arm is a markedly lower multiple. The business had turnover of $1.4 billion in 2013, of which $500 million was for flu vaccines, which are excluded from the deal. Novartis expects to sell those rights separately to a third party.

Witty said the purchase increases the breadth of GSK's portfolio and pipeline, and will strengthen manufacturing and reduce supply costs. Combining the vaccines R&D of the two companies will give GSK more than 20 products in development.

It may have taken long months of intense negotiation, but Witty said there is an advantage in doing this "supercomplex" deal over a full merger, in that both companies get what they want. "You don't have to be distracted by all the other things that come along with a big merger. In big deals there are two to three things you care about and seven to eight that you don't." The focus of the conversations between GSK and Novartis "has always been on the rational exchange of elements of the business," he said.

Both companies claim the transactions add to their financial strength and will increase growth rates and profit margins. "Each element creates value and the deal in total adds value," was how Jimenez put it. Novartis will need loans and to issue bonds to cover the deal but will continue with a share buyback scheme and will remain committed to its AA credit rating. GSK will return £4 billion of the proceeds to shareholders.