Forget big M&A, here comes the big divorce


As if the recent drought of significant big pharma takeover activity were not bad enough for deal-hungry M&A bankers, the fact that many of the sector’s key players have ruled out future large acquisitions as a path to growth must be particularly dispiriting.

But all is not lost. Instead, trendsetters including Abbott, Johnson & Johnson and Pfizer have seen the value of thinking smaller and are moving to divest business units. While it might be inappropriate to say so on Valentine’s Day, if recent signs are anything to go by then big divorce could soon replace big M&A as bankers’ bread and butter (see tables).

The latest example of shrinking to grow came on Tuesday when Bristol-Myers Squibb licensed several Latin American OTC brands to Reckitt Benckiser, with a view to a full-scale divestment after three years. The year had started with Abbott cleaving off its pharma arm as AbbVie, and Pfizer floating a minority stake in its Zoetis animal health business.

At the same time it is abundantly clear that hunger for big-ticket M&A is on the wane (M&A activity cools in 2012 as break-ups loom, February 7, 2013). Instead, even that inveterate conglomerate Johnson & Johnson is now thinking what previously would have seemed unthinkable, and floating the idea of divesting its diagnostics unit.

It is thus worth considering what other opportunities for divestments and demergers might exist, both at companies that have yet to embark on such a strategy and at those that already have.

Big pharma's animal health assets
Company 2012 animal health sales ($m) Share of group revenue
Pfizer* 4,299 7%
Merck & Co 3,399 7%
Sanofi 2,942 6%
Lilly 2,037 9%
Bayer** 1,601 3%
*Zoetis animal health business 80% owned after IPO
**refers to 2011 sales as 2012 financials have yet to be reported

Assuming that Pfizer’s ultimate goal is to rid itself entirely of Zoetis, there is a straight read-across to several other big pharma companies with animal health assets that could prove ripe for divestment. After all, where Pfizer leads others follow.

Looking at the diagnostics example of J&J, however, is less illuminating. Only Roche has a significant diagnostics business, and this accounted for 23% of its group sales last year. However, J&J could look to offload some of its other medtech units, such as devices, or parts of its significant consumer health arm (J&J considers diagnostics sale, but why stop there?, January 24, 2013).

Indeed, consumer health divisions, which include OTC products, could form the basis of several other corporate makeovers. Already GlaxoSmithKline has hinted that it might look to sell some of its well-known consumer health brands, and several companies had earlier divested their nutrition assets.

Big pharma's consumer health presence
Company 2012 consumer health sales ($m) Share of total revenue
Johnson & Johnson 14,447 21%
Novartis* 13,960 25%
Bayer** 8,146 17%
GlaxoSmithKline 8,125 19%
Abbott Laboratories*** 6,471 40%
Sanofi 4,061 9%
Pfizer 3,212 5%
Merck & Co 1,952 4%
*includes Alcon
**refers to 2011 sales as 2012 financials have yet to be reported
***after separation of AbbVie


The reasons for de-cluttering pharma business models are obvious; not only is drug development thought to thrive in a small, entrepreneurial environment, but a pharmaceutical company that also includes lower-margin, cyclical units is unlikely to be valued on the high multiple of the profits of its pharma division.

Specific units like J&J’s diagnostics businesses might suit a company gunning for the top spot in a given sector, and this could attract a healthy price tag, the cash then being used to strengthen the core business or otherwise fed back to investors.

Still, not every company is likely to be convinced; the flip side is that if things do go wrong at one division the performance of the others often minimises the hit to the whole business. This has been the attitude taken by Germany’s Bayer, which for years has resisted calls to release value for shareholders by separating its healthcare business.

None of which is to say that it will never happen. And given the sector’s recent willingness to embrace radical business moves even companies that already have relatively pure-play pharma units might be persuaded to rejig portfolios in a never-ending quest for efficiency. 

Available breakdown of pharmaceutical revenue
Company 2012 pharma sales ($m) Emerging markets (% of pharma) Established products (% of pharma) Generics (% of pharma) Vaccines (% of pharma)
Pfizer 51,214 19% 20% not disclosed not disclosed
Novartis 42,713 not disclosed not disclosed 20% 4%
Sanofi 40,176 37% 0% 6% 13%
GlaxoSmithKline 33,900 not disclosed not disclosed not disclosed 16%
AbbVie 23,133 not disclosed 22% not disclosed not disclosed

After all, the recent move by Elan to sell its only meaningful asset and become a cash shell looking for deals suggests that no idea, however unthinkable it might once have seemed, is now off the table.

To contact the writer of this story email Jacob Plieth in London atjacobp@epvantage.comor follow@JacobEPVantage on Twitter

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