Drugmakers weigh carve-outs as Abbott, Pfizer set pace

LONDON Thu Feb 14, 2013 8:04am EST

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LONDON (Reuters) - Breaking up is getting easier for pharmaceutical companies.

Recent restructurings by Pfizer (PFE.N) and Abbott Laboratories (ABT.N) 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 (ABBV.N) and Pfizer's spin-out of animal health into Zoetis (ZTS.N) 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 rationalizing 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 (BMY.N) is one company ahead of the pack on divestments, after spinning off its baby food unit Mead Johnson Nutrition (MJN.N) in 2009. It took a further step to shed non-core assets with a $482 million deal this week that gives Reckitt Benckiser (RB.L) rights to sell certain over-the-counter (OTC) drugs in Latin America.

Johnson & Johnson (JNJ.N), 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 (NESN.VX) 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 (GSK.L) and Novartis (NOVN.VX) 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.

OLD BUSINESS MODEL

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 (ROG.VX), 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 (AZN.L), 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 February 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.

(Editing by Louise Ireland)

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