By Aaron Gray-Block - Analysis
AMSTERDAM (Reuters) - Belgium’s Solvay (SOLB.BR) is likely to follow in the footsteps of fellow drug-chemical hybrids by breaking up, selling its pharma business to raise cash for acquisitions in its chemicals portfolio.
Analysts said that the drug business had limited prospects but had served the company well through the downturn, and that Solvay would look for a similarly stable business to buy in chemicals, possibly metals and specialty maker Umicore (UMI.BR).
Solvay is nearing the end of a strategic review of its hybrid profile and while the company maintains all options are still on the table, sources have said private Swiss drugmaker Nycomed NYCMD.UL is finalizing funding for a bid between 4 and 5 billion euros for the drugs unit.
“The risk is quite high that the pipeline does not deliver as they expect. It is no wonder they (Solvay) are thinking about what they will do,” Bank Degroof analyst Bernard Hanssens said, referring to setbacks such as those for schizophrenia drug bifeprunox, tipped as a blockbuster but abandoned after regulatory and partnership disappointments.
Solvay shares have risen 41 percent this year, boosted by talk of a possible sale of its drugs unit.
“We believe the market assumes the sale of the pharma unit will materialize at the high end of the mentioned (4 to 5 billion) range. Failing to do so could result in a significant fall in the share price,” said RBS analyst Mutlu Gundogan.
With 2.7 billion euros in 2008 sales, Solvay’s drugs unit is overshadowed by its few hybrid peers. Bayer BAYG.DE booked 15.4 billion euros in sales at its healthcare unit in 2008 and Merck KGaA (MRCG.DE) reported 5.43 billion euros in sales.
Solvay’s drugs unit is also underresourced compared with its bigger rivals: an analyst who did not wish to be named said companies such as Sanofi-Aventis (SASY.PA), Novartis NOV.VX or Roche ROG.VX had the scale and expertise to conduct large clinical programs — something Solvay was lacking.
“The standalone route in pharma has become less obvious than in the past unless you can partner in an intelligent way,” said KBC’s Hoste.
Solvay could take a leaf out the of the book of some of its Benelux rivals.
Dutch Akzo Nobel (AKZO.AS) sold its drugs unit Organon for 11 billion euros and is now reaping significant synergies as part of its restructuring following a January 2008 buyout of Imperial Chemical Industries (ICI) — a deal which made it the world’s largest paint maker.
Credit Suisse analysts said Akzo Nobel “astounded” them with the long-awaited margin improvement and despite a warning on the sustainability of the improvement, they assume Akzo Nobel will hit its target, and shares have risen 44 percent this year.
And another Dutch group, DSM (DSMN.AS), is also pursuing a transition, this time away from being a chemicals supplier to building strength as a life sciences and performance materials player. Its earnings have been supported by pricing power and the non-cyclical nature of the businesses.
In Germany, Bayer (BAYGn.DE) Chief Executive Werner Wenning, a champion of the company’s hybrid structure, is set to be replaced next year, prompting speculation that the firm could launch a strategic revamp to focus on healthcare.
The analyst who did not wish to be named said in the past when drugs were chemicals there were synergies to be gained between a hybrid-company’s drugs and chemicals units.
“Nowadays the new drugs are biological or biotech drugs and the end markets are different. I don’t see any synergies now,” the analyst said.
Solvay’s drugs business has been a stabilizing factor for the company’s earnings throughout the recession though and the firm has said if its divests the unit it would seek to replace it with a business of similar character.
Belgium’s Umicore, with a market capitalization of 2.37 billion euros, has been suggested as the ideal candidate to take over that role.
“Umicore could be subject to bid speculation in the near-term if Solvay decides to exit its pharma division, which could happen before year-end,” Goldman Sachs said in a note.
Bank DeGroof’s Hanssens shrugged off concerns Solvay would be more exposed to economic cycles if it divests the drugs unit, saying he thinks the company will opt to make add-on acquisitions to its existing portfolio.
Earlier this month, Solvay said it would buy Sodium Group Investments Limited’s majority stake in the Berezniki soda ash plant in Russia for an enterprise value of 160 million euros.
“The decision taken over the past five years to increasingly enter emerging economies is already giving a better growth profile in plastics and chemicals,” KBC’s Hoste said.
“Why not speed it up?”
Editing by Sitaraman Shankar