LONDON, Feb 14 (Reuters)
Recent restructurings by Pfizer and Abbott Laboratories have set the pace
for others as investors applaud the unlocking of value trapped inside large
drugmakers. The success of deals such as Abbott splitting off its innovative drugs into
AbbVie and Pfizer's spin-out of animal health into Zoetis has increased the
pressure on other boards to consider smarter corporate structures.
"We will see more," said Jeff Greene, head of life sciences
transactions at Ernst & Young. "It doesn't mean we are not going to
see a lot of merger and acquisition activity as well, but there is going to be
a focus on rationalising portfolios."
Two factors are driving the trend: the changing nature of the market -
which demands different offerings in different countries - and a more rigorous
approach to capital allocation, prompting firms to carve out some areas while
adding others.
Bristol-Myers Squibb is one company ahead of the pack on divestments, after
spinning off its baby food unit Mead Johnson Nutrition in 2009. It took a
further step to shed non-core assets with a $482 million deal this week that
gives Reckitt Benckiser rights to sell certain over-the-counter (OTC) drugs in
Latin America.
Johnson & Johnson, arguably the ultimate healthcare conglomerate, is
also considering selling its diagnostics business or turning it into a stand-alone company.
And Pfizer, which sold its nutrition business to Nestle for $12 billion
nine months before floating Zoetis, is not ruling out an even bigger split of
its premium branded drugs from its generic products, although such a step, if
entertained, is likely to be some way off.
European drugmakers have been more wary about such radical reshaping,
reflecting their broader global footprint relative to U.S. rivals.
"Since the European companies have twice the emerging markets presence as the U.S. companies, they have been moving more towards
diversification - global presence tends to dictate a broader business
model," said UBS analyst Gbola Amusa.
That means a wide range of OTC, generic products and vaccines are core to
the likes of GlaxoSmithKline and Novartis in a way they are not for Bristol. "U.S. drug companies are less globally diversified than those in
Europe, so they need fewer types of businesses in order to succeed," Amusa
said.
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Still, there is some movement in Europe. GSK, for example, may sell its
Lucozade and Ribena drinks, which together represent just over 2 percent of
group sales. More significantly, it is also reviewing pharma operations in Europe, where
cash-strapped governments are reluctant to pay for costly new drugs, putting
the region at odds with more rewarding markets such as the United States and Japan.
"There is not really a global market for innovative drugs, which the
industry's old business model assumed there was," said Chris Stirling,
head of life sciences at KPMG. "As a result, the big companies are trying to shape their businesses
to the reality that Europe is different to the U.S. and Japan, which in turn are different to emerging markets."
GSK has said its new approach in Europe may involve simple partnerships for
certain drugs or more complex joint ventures, along the lines of its HIV drugs
collaboration ViiV Healthcare.
Novartis is another company where shareholders are hungry for change, as
evident from the share price jump when Chairman Daniel Vasella said last month
he was stepping down after 17 years at the top of the Swiss group.
Investors hope Novartis will now consider disposals to generate cash for
redistribution through share repurchases. In particular, investors are eyeing a $12 billion stake Novartis holds in
cross-town rival Roche, which Vasella bought between 2001 and 2003. The stake
is "increasingly likely" to be sold back to Roche, according to
Jefferies analysts. Such a move would be likely to trigger earnings-boosting
share buybacks at both Novartis and Roche.
Some companies, such as AstraZeneca, are more focused on acquisitions to
rebuild their business. But even Astra may have scope for creative
restructuring, perhaps by running its diabetes tie-up with Bristol as an
separate unit, bankers said. Certainly, the welcome given by the market to industry actions so far gives
managements food for thought.
Abbott has outperformed the sector and the wider market since unveiling its
planned split in 2011 and the two units secured a combined market value of some
$105 billion, slightly above the legacy group, when they finally divided last
month.
Pfizer's Zoetis public offering, meanwhile, was priced above its expected
range and the shares have risen 29 percent since their Feb. 1 debut, valuing
the business at $17 billion. "There is value in a break-up and we are entering a phase when
everyone knows this is the kind of thing they need to consider," said one
healthcare banker.