Conscious Uncoupling for Drug Makers

Conscious Uncoupling for Drug Makers


MARCH 27, 2014, 2:42 PM  1 Comments

Baxter International has put conscious uncoupling on pharma’s radar.

The $40 billion health care giant isseparating its biotech and medical products units. Baxter’s spinoff history suggests this latest move will create value for shareholders. This, and the success of Pfizer’s and Abbott’s recent splits, will encourage other pharmaceutical giants to follow.

Baxter knows the drill. It has carved out three companies over the past two decades, and shareholders reaped the benefit. Its pharmacy benefit company was acquired at a hefty premium a few years after Baxter set it free. It was a similar story for its Allegiance healthcare cost management business, whose worth increased sixfold in the few years it was independent. Edwards Lifesciences is still public, but the heart-valve maker’s valuation has risen sevenfold since it went independent in 2000.

The reasons for breaking the remaining company in two are familiar. Making drugs is risky and requires hefty research and development – but can generate fast growth if successful. By contrast, selling dialysis equipment and IV bags and liquids is a steady, slow-growth business that should throw off excess capital that can be given back to shareholders.

Forming two companies may attract new investors eager for growth and capital return, respectively. The substantial differences between these two businesses mean it’s probably difficult for anyone to manage both effectively. Separating them should lead to better capital allocation, management focus and profitability.

It’s another sign that days of the pharma mega-company are fading. The industry spent decades growing, and the eventual result was poor laboratory productivity and waste. Nearly all the major companies significantly underperformed the Standard & Poor’s 500-stock index for the decade after 2000.

The returns from focus, meanwhile, are clear. Abbott has outperformed the market after it decided to dismember itself in late 2011. Pfizer’s stock has doubled since its decision to shrink earlier that same year. It has subsequently rid itself of two divisions and announced it may split its remaining business in three. Merck, Bayer and Johnson & Johnson may find it’ll be hard not to jump on the bandwagon.


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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