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By Greg Roumeliotis and Olivia Oran
July 11 Big Pharma companies are trying to
offload low-growth, mature drug portfolios to firms such as
Blackstone Group LP and TPG Capital LP which need to
figure out how to carve them out, in one of private equity's
greatest dealmaking challenges.
While these portfolios face declining sales, some buyout
firms believe they can make a profit if they buy them at prices
that are sufficiently low. In order to achieve this, they must
create viable new companies - a highly complex and uncertain
feat that now preoccupies some of private equity's brightest
GlaxoSmithKline Plc, Sanofi SA and Merck &
Co Inc are just some of the companies looking to shed
older drugs, many of which have lost patent protection and face
These drug portfolios, worth tens of billions of dollars
combined, offer an opportunity for private equity firms to put a
lot of money to work at a time when stock markets continue a
record-setting rally and aggressive corporate buyers are pushing
deal valuations to multiyear highs.
Corporate carve-outs, because of their complexity, can be
less competitive in attracting possible buyers than outright
sales of companies, so valuations of the assets involved tend to
be not as frothy. Yet the acquisition of mature drugs differs
substantially from other corporate carve-outs with which some
private equity firms have become comfortable.
In most corporate carve-outs, the new companies usually have
the assets needed to survive on their own or require only
temporary support from their parent. The private equity owner of
drug portfolios, however, must also sort out the manufacturing
and sales arrangements necessary for a stable business.
Some of the world's biggest buyout firms, including
Blackstone, Carlyle Group LP and TPG, are evaluating the
acquisition of mature drug portfolios, according to people
familiar with the matter. Representatives for these firms
declined to comment.
While a few buyout firms have in the past acquired one-off
drugs to fold into their healthcare portfolio companies, none
has bought a big chunk of older drugs on a large
Adding to the challenges, mature portfolios typically post
annual revenue declines of between 5 and 10 percent. Such
negative growth raises questions about how private equity buyers
could profitably exit their investments in a few years' time.
"You're buying a sparkler that's halfway burned," said
Debbie Wang, a research analyst at Morningstar.
"It's going to burn out soon, and that's my question for
private equity - how quickly can they make the proper portfolio
changes? Because you're running on a clock once you buy this."
Big Pharma companies are eager to make the deals work
because such divestments of low to negative growth businesses
could free up cash to invest in higher-margin products. They
hope their stock price will then be rewarded.
For private equity firms sitting on a record amount of
unspent capital - $1.2 trillion according to market research
firm Preqin - the opportunity to write big checks for deals that
attract little competition from strategic buyers is sometimes
proving hard to resist.
"One of the areas that we really have focused on a lot,
frankly, is these large corporate carve-outs. It is a tough,
dirty job to take a big division out of a giant big company and
set it off on its own," William Conway, co-chief executive of
Carlyle, said on the firm's latest quarterly earnings call. He
was speaking in general and not specifically about drug
For example, Carlyle last month completed a large healthcare
corporate carve-out with the acquisition of Johnson & Johnson's
diagnostics unit for $4 billion.
With mature drug portfolios, private equity firms have to
decide if their new company outsources the manufacturing, often
to the parent, or also buys manufacturing facilities from the
seller that would have been of little use to them otherwise.
If there are manufacturing and operational agreements with
the seller, private equity firms may have to negotiate a
perpetual relationship versus a transitional period of three to
five years seen in other types of corporate carve-outs.
Moreover, the acquired portfolio must have sufficiently
attractive and specialized drugs to make it easy to market and
so that the new company can resist the pressure on sales that
confronts generic medicines.
While private equity firms may have portfolio companies that
can serve as a potential platform to add new drugs, like TPG's
Par Pharmaceutical Companies Inc, they are likely insufficient
to handle the scale of most of the portfolios up for sale, the
One possibility under consideration by investment bankers
running the auctions for these portfolios is breaking them up
into smaller divisions based on specific therapeutic areas,
allowing private equity buyers to take better advantage of drug
pricing opportunities by focusing on a more targeted set of
This is because some categories of generic drugs, such as
generic injectable drugs, are in hot demand. Private equity
firms may choose to expand on such categories through bolt-on
acquisitions of drugs following a carve-out.
"You are talking about recreating a generics company in some
sense, but without any of the infrastructure," said Jeffrey
Greene, global transactions leader for life sciences at Ernst &
"So as a private equity firm, you will have to find a
platform to put all that together and potentially outsource key
activities such as manufacturing and even sales in some cases."
(Reporting by Greg Roumeliotis and Olivia Oran in New York;
Additional reporting by Michele Gershberg in New York; editing
by Soyoung Kim and Matthew Lewis)