New Trend in Big Pharma: Spinoffs

Pharmaceutical companies frequently carry out M&A activities within the scope of new product development. However, in the past 5 years factors such as the pressure from governments to prohibit increases in drug prices and some companies being overdependent on a single product have significantly increased the number of megamerger transactions in the sector. For example: • Bristol-Myers Squib’s acqusition of oncology focused Celgene for 74 billion USD, • AbbVie’s acquisition of Allergan for 64 billion USD; in order to compensate for the loss of income that will occur due to the expiration of the patent of Humira, one of the biggest drugs of AbbVie, • Japanese Takeda’s acquisition of Shire Pharmaceuticals for 63 billion USD.

However, we are facing a new trend in the industry which started in 2019 and continues in 2020: companies divest off-patent drugs, generic drug divisions and divisions which grows slower / faster than the rest of the company, through spinoffs.

1. GSK Consumer Health

Pfizer had been planning to sell its consumer health products department, which suffered from slowing growth rates for a while. GSK, another major player in this field, also had a plan to separate its consumer health products division and go public. Followingthe shared vision in the area, two companies merged their departments in 2019 and it is planned to go public in 2023.

2. Alcon Due to higher EBITDA multiples in theconsumer health productssub-sector, Novartis decided to spinoffAlcon, which is manufacturescontact lenses and other ophthalmology products. The company started trading on April 2019.

3. Elanco Eli Lilly has decided to spinoffitspet food division, which has shown a rapid growth trend in recent years. Thecompanystartedtradingunder the name of Elanco.

4. Envista Danaher Corporation decided to spinoffitsdental health products division underthe name Envista. The company started trading on September 2019.

5. A Merck&Co. Spinoff: «NewCo» Whileit wasonlya research project a few years ago, the cancer drug Keytruda now generates 11 billionUSDin revenue (2019) growing55% Y-o-Y in 2018. Followingthesuccessof Keytruda, Merck decidedto exitmost areas other than oncology

"NewCo", yet unnamedcompanywhich the Merck plans to spinoffis constitutedofthe women's health products divisionknown for the Nexplanon product and off-patent drugsdivisionincluding cholesterol medications such as Zetia and Vytorin

6. Sanofi’s API Division Active pharmaceutical ingredients (APIs) used in pharmaceutical production are mostly developed in India and China. Sanofi plans to spinoff6 ofits 11 API production facilities to the to support solving pharmaceutical raw material supply problems in the European market. The company is expected to be the 2nd largest API manufacturer in the world and due to being independentfrom Sanofi, its sales potential to other pharmaceutical manufacturers in Europe will expand.

7. Viatris Patentsof most Pfizer's products, whichhelped identifyingitasa “cash cow” for years,

will expire in the next 2 years. Dueto thisfact, Pfizer decided to merge itssoon-to-beoff-patent products under the generic drug production divisionUpjohn and spinUpjohnoff. But unlike other transactionsmentioned, Pfizer will merge Upjohn operations with generic drug giant Mylan and distribute the shares of the new company to existing Pfizer shareholders.

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