* Abbott split and Pfizer divestments welcomed by market
* Pressure on other companies to rationalise portfolios
* U.S. drugmakers reshaping businesses faster than Europeans
By Ben Hirschler
LONDON, Feb 14 Breaking up is getting easier for
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
"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.
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, 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,
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.