Solvay continues to rise on strategic review of pharma business

Analysis

In a move that has caught many industry observers on the hop, Solvay, the Belgium industrial group, has confirmed that it is indeed reviewing its business and is in discussions with other pharmaceutical groups about the future of its drugs business.

Rumours had been circulating that the group, also known for its large chemicals unit, is in discussions with French company Sanofi-Aventis about a sale of the pharma division for about €5bn ($6.7bn). What has got many in the market foxed is why Solvay would consider selling off the best performing part of its business to leave it with chemicals and plastics operations, which are expected to continue to lose money due to high energy and raw materials costs, as well as lower consumer demand.

The pharma business accounts for roughly one third of Solvay's business, with plastics and chemicals also contributing a third each to group turnover. In terms of profits the pharma division disproportionately pulls its weight.

Hazy logic

Bernard Hanssens, healthcare analyst of Bank Degroof, said that the idea of selling the division was puzzling because it was completely at odds with the former stated strategy of the company, of using more stable revenues from the pharma business to shield it from the cyclical down turns of the plastics and chemicals units.

What Solvay may have decided is that its business currently lacks critical scale to give it the real option to compete with other players. The group also has lower than average margins for its products that are largely in the primary care end of the market, such as TriLipix, its lipid lowering drug and hormone replacement product, AndroGel.

If this is the reason why the group may have put itself on the block, which seems unlikely, then there is also the question of what Solvay would do with the estimated €5bn-€8bn that could be generated from a sale of the pharma division.

Few available acquisitions

Marcus Konstanti, healthcare analyst at Sal Oppenheim, said that it was rather unlikely that the group would be looking to use any money from a sale for acquisitions to build up the either the plastics or chemicals businesses.

“They have reached the worldwide number one and two positions in their non-pharma business so to get something else could be difficult in several areas because of competition reasons. There are also few good assets out there and if they wanted to diversify then what would be available would be cyclical, so you would take additional risk onto the P&L and balance sheet,” he said. 

There are also question marks around why Sanofi-Aventis, which is the lead candidate to buy the business, might want to add it to its product portfolio when its stated strategic aim is to make acquisitions to give its business more global reach.

Other bidders?

While Solvay may not seem like an obvious choice for a company looking to diversify its sales base, it does have a growing presence in emerging markets. Last year 20% of pharma sales were in emerging markets. Today Sanofi also announced that it would be buying Laboratorios Kendrick, a leading Mexican generics group.

Solvay also looks cheap, if the price tag of €5bn is to be believed. According to EvaluatePharma’s NPV Analyzer Solvay’s total marketed and developmental pipeline of drugs is worth €8.72bn ($11.5bn), with the majority of value coming from TriCor, the product that Abbott Laboratories co-produces and sells.

This makes Abbott look a more likely partner. Solvay is also expected to benefit from Abbott and AstraZeneca’s filing of a combination of TriLipix and Crestor in the second half of the year, another reason that Abbott rather than Sanofi might be the mystery bidder.

While there may be little apparent logic for this deal, the market certainly believes that there is something in the rumours, and shares in Solvay, which have risen by an impressive 40% over the last month were 3.5% higher at €59.51.

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