Big Pharma is boosting the blockbuster business with spin-offs

Frankfurt The pharmaceutical industry is in the middle of a profound structural change. The leading companies in the industry are increasingly specializing in drug production. And part with fringe activities such as the consumer business. Current example: GSK. Next Monday, the British pharmaceutical group (formerly Glaxo Smithkline) will list its division for over-the-counter medicines and health products on the London Stock Exchange.

The new company, which goes by the name of Haleon (stock exchange code: HLN), is expected to have a market capitalization equivalent to just under 33 billion pounds (around 39 billion dollars and euros), according to analysts at Credit Suisse. Enterprise value including debt will be approximately $53 billion. The transaction is the largest spin-off in the pharmaceutical industry in almost a decade.

Haleon will become the world’s largest pure-play consumer health group with annual sales of £9.5 billion (around $11.2 billion) – and, according to GSK boss Emma Walmsley, will devote itself entirely to the topic of everyday health. Meanwhile, the new GSK is to reposition itself as a research-based drug manufacturer.

Pharmaceutical industry: Pfizer, Merck and Bayer are increasingly outsourcing consumer divisions

Only the consumer health division of the US health care group Johnson & Johnson achieves even larger sales of over-the-counter medicines and health products. And a spin-off is also already firmly planned for them. There is also speculation that sooner or later Sanofi could also withdraw from the consumer business.

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The long-term trend towards focusing on the innovative medicines business is gaining ground. In recent years, the change in the industry has been shaped almost as much by divestments and spin-offs as by takeovers and mergers. Among other things, a number of companies from the field of animal medicines said goodbye.

But even the drug business, which requires a prescription but is older and already off-patent, is often up for grabs. Pfizer, for example, merged its activities with the generic drug manufacturer Mylan to form the independent pharmaceutical company Viatris.

The list is extensive: Merck & Co made a large part of its old products independent in the company Organon. The pharmaceutical company Novartis is currently examining the separation from its generics subsidiary Sandoz, after saying goodbye to the areas of consumer healthcare, ophthalmology, diagnostics and vaccines over the past few years.

In addition, there are many smaller transactions in which pharmaceutical companies part with individual old products. Bayer, for example, has now sold its testosterone preparation Nebido to the pharmaceutical manufacturer Grünenthal for up to 500 million euros.

The change is now clearly reflected in the structure of the industry. At the beginning of the 2000s, almost all big pharmaceutical companies still had various side businesses in the healthcare sector. Today, seven of the world’s ten largest pharmaceutical companies, including GSK, operate purely as research-based drug manufacturers. During this period, the share of R&D expenditure in total sales increased from an average of 13 percent to more than 18 percent.

Higher pace of innovation

Behind the trend are both strategic and financial-tactical goals. Pharma and other healthcare sectors each function very differently. According to many industry experts, a spin-off opens up the possibility for each area to better focus on its specific requirements.

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On average, the large pharmaceutical companies invest their sales in research and development. In the early 2000s it was 13 percent.

Advances in basic research and new technologies (such as gene and cell therapies or mRNA technology) also offer the prospect of increasing the pace of innovation in drug development. The pharmaceutical giants therefore tend to be less dependent on secure sources of income such as consumer healthcare to balance the risk.

With the separation of peripheral areas, they also strengthen their cash positions and balance sheets for higher investments in research and acquisitions in the biotech sector. GSK, for example, gives Haleon around 13 billion dollars in financial debt and can thus significantly reduce its own debt.

Added to this is the effect that focused companies tend to be valued higher on the capital market than diversified ones. In the current case, analysts at Berenberg expect the new GSK without Haleon to have a market capitalization of £81 billion, while GSK including Haleon was most recently around £85 billion. At the end of last year, GSK rejected a £50 billion takeover bid for Haleon by consumer goods group Unilever as too low.

More background on the pharmaceutical industry:

Haleon itself is already the result of the structural change. Novartis brought its non-prescription medicines into a joint venture with GSK in 2015. Three years later, the Swiss sold their 36.5 percent stake in this joint venture to GSK for $13 billion. In 2019, the British merged the entire consumer health business with the corresponding division of the US group Pfizer. Since then he has held 32 percent of the joint venture.

Wide range of products from Odol to Voltaren

Thanks to the previous mergers, Haleon can now compete with a wide range in the oral care, pain and digestion product areas. The portfolio includes successful brands such as Voltaren, Otriven, Centrum Nutritional Supplements, but also Panadol, Advil and Theraflu. In the oral hygiene mass market, the company is represented by brands such as Sensodyne, Dr. Best, Odol Med 3 and Parodontax successfully.

Combining the businesses with Pfizer should result in total savings of 600 million. Overall, Haleon has steadily improved its adjusted operating margin over the past few years, from 19.5 percent in 2019 to 22.8 percent last year. According to the regular data of the IFRS financial statements, it was around 17 percent. According to analysts from Credit Suisse, Haleon has roughly reached the level of the industry peer group, although they see potential for growth.

Haleon CEO Brian McNamara is targeting organic growth of between four and six percent annually over the coming years. The analysts at Credit Suisse, on the other hand, assume a medium-term growth rate at the lower end of 4.2 percent.

>> Read also: Diabetes, obesity, fatty liver, cardiovascular diseases – Eli Lilly relies on injections to combat diseases of affluence

Before the demerger, GSK and Pfizer paid an extraordinary dividend of around £11 billion. As a result, Haleon’s debt has risen to more than four times operating income (Ebitda), but is expected to be reduced back to less than three times by the end of 2024.

Specifically, the so-called demerger works as follows: All GSK shareholders receive one Haleon share for each GSK share. Pfizer will receive Haleon shares corresponding to the 32 percent stake. On July 18, Haleon shares will be listed on the London Stock Exchange for the first time. GSK’s shares will then trade for the first time without the Haleon stock, and as a result their valuation is likely to fall.

On July 19, GSK will then reduce the number of its shares to the extent that the value of the individual papers corresponds to the value before the Haleon spin-off. The goal is better comparability.
According to the plans, GSK shareholders will hold around 54.5 percent of Haleon after the merger, Pfizer another 32 percent. GSK itself will own up to six percent of the shares, with a further 7.5 percent going to GSK pension funds.

GSK plans to sell its 6 percent stake over time to invest in its drug and vaccine pipeline. Co-owner Pfizer is pursuing similar goals. According to the US group, the stake in Haleon will be disposed of “in a disciplined manner with the aim of maximizing the value for Pfizer shareholders”. It is likely to increase its already lavish financial reserves by an amount in the double-digit billions.

More: Billion deal in the vaccine industry – Glaxo-Smithkline takes over Affinivax.

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