Big drugmakers such as Novartis turn from expansion to divestment

November 19, 2013 12:33 pm

Big drugmakers such as Novartis turn from expansion to divestment

By Andrew Jack

When Novartis revealed the sale of its blood diagnostics business last week, investment bankers could lick their lips at the prospect of fresh fees. After the mega-mergers of the previous decade, Novartis and other larger pharmaceutical groups are considering further divestments. Under Daniel Vasella, the longstanding chairman of Novartis, the focus of the Swiss company has been on expansion and diversification through acquisitions, culminating in the staggered $52bn takeover of Alcon, the eyecare business, between 2008 and 2010.As analysts gather to attend a briefing this week by the company under its new chairman Jörg Reinhardt, they will be listening with divided views for indications on the likelihood of further sell-offs in the wake of its $1.7bn diagnostics disposal to Grifols.

“We expect near-term divestment,” wrote Andrew Baum, an analyst at Citi, last week, referring to the animal health business of Novartis, which he rates a “buy”. The group’s vaccines business and consumer health divisions are also candidates for sale in the coming months.

Expansion by larger drug companies was the norm at the start of this century, from the merger that createdGlaxoSmithKline in 2000 and the $67bn purchase of Aventis by Sanofi in 2004, to Pfizer’s $68bn paid for Wyeth, Merck’s $41bn for Schering-Plough and Roche’s $47bn buyout of Genentech in 2009.

Some midsize companies continue that pattern, withAmgen’s $10.5bn purchase of Onyx in August andShire’s $4.2bn acquisition of ViroPharma this month. Yet larger pharmaceutical companies from Abbott and Pfizer to Novartis and GSK have instead prepared spin-offs, joint ventures and sales.

“Mega-mergers sought to leverage existing infrastructure by putting new products through it,” says Jo Walton, an analyst with Credit Suisse. “Now it’s turned out that products are fewer, smaller and difficult to come by, shedding assets can be another way to focus the company.”

Joe Jimenez, Novartis’s chief executive, hints at more disposals to come. “Now we are past the Alcon integration and starting to get some good growth momentum, we are turning our attention to ensure our portfolio is strong going forward,” he says. “We need to determine how we can gain global scale. If we don’t have an opportunity to gain it, we would consider alternatives.”

He is not alone. Managements’ appetites have been whetted by a favourable investor response to the spinout at the start of this year of AbbVie, the pharmaceutical business, from Abbott, which retains animal health, nutrition and diagnostics products.

Pfizer sold its nutrition business to Nestlé for $12bn last year and over the summer finalised the spin-off of Zoetis, its animal health arm. Ian Read, the chief executive, has said that next year he will publish separate financial results for the three remaining divisions, seen as a prelude to potential sales. The divisions cover “established” or off-patent drugs; vaccines, oncology and consumer health; and innovative pharmaceuticals.

Other companies have taken a more incremental approach with sales of individual products, sometimes in particular countries. In September GSK finalised the sale of its consumer drinks brands Lucozade and Ribena for $1.4bn, and of two off-patent anti-clotting medicines, in most markets, to Aspen of South Africa.

For Novartis, the lack of critical mass of its three non-core businesses is one reason to consider sales. Another is manufacturing problems for its consumer health division in the US, which have caused supply shortages, image problems and proved a distraction to management in recent months.

For Pfizer, as for AbbVie and potentially Merck of the US, the debate is more about separating its “growth” business of innovative drugs from its more stable cash generative tail of “value” businesses of products no longer protected by patents.

Richard Girling, a partner at Centerview, a boutique investment bank, stresses each case is different: “Divestment of tail brands and non-core assets is a trend. Every major pharma company will consider it, but there will be fewer disposals than we think. When the non-core businesses are running fine and throwing off cash, they are left alone. If they start to need more capital or management time, the board may question whether it makes sense to keep owning them.”

However, in a recent note, Richard Evans, an analyst at Sector & Sovereign Research, questions the value of Pfizer “shuffling the deck” to divest its tail business, pointing out that the average age of its on-patent products is not much less than those that have expired. Divesting would do little to change its growth profile while reducing economies of scale in manufacturing.

Others stress that off-patent drugs remain important sources of steady income, and increasing profits in emerging markets. There can also be important synergies to companies with both categories of product.

The cash generated by sales allows pharmaceutical companies to buy time and placate investors in the short term through increased dividends or share buybacks. Yet investors say such actions will do little to solve the long-term need to boost productivity in new drug development.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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