Why Big Pharma Is Breaking Up
Breaking up might not be all that hard to do after all -- at least not for big pharma.
Merck CEO Ken Frazier stated on the Oct. 28 third-quarter results conference call that the company is considering divesting its animal health and consumer care business units. Novartis CEO Joe Jimenez just days later confirmed reports that his company could also be looking to sell its animal health business.
Why are these big pharma companies thinking about breaking up? Think of it as synergy in reverse -- the sum of the parts could be greater than the whole. That philosophy seems to have worked for other organizations recently.
Divide and conquer
Big pharma has been breaking up from A to Z in 2013 -- literally. Abbott Labs spun off its branded pharmaceuticals business into AbbVie at the beginning of the year. Pfizer followed suit with an IPO of animal health business Zoetis a few weeks later.
Both parent companies were driven by a desire to unlock shareholder value. With the year nearly at its end, how well have their efforts paid off?
Abbott's move clearly rewarded investors. The parent company's stock climbed nearly 21% year to date with solid improvement in its profit margin. Meanwhile, shares of spin-off AbbVie soared almost 42%, powered by continued strong sales of Humira.
Pfizer also has rewarded shareholders with a return of nearly 25% so far in 2013, thanks in part to the success of its cancer drug lineup. Zoetis started off strong but is up less than 3% year to date. Part of the issue, in my view, is that the stock was priced at a premium from the outset. However, even with subpar stock performance from Zoetis, Pfizer accomplished its purpose of unlocking shareholder value.
Will Merck make the move?
To understand why Merck is thinking about some sort of divestiture, take a look at its year-to-date performance. Shares are up about 14%, well below other big pharma rivals. The company is slashing its workforce by 20% in the wake of declining sales.
Merck's animal health business generated $3.4 billion in sales last year, accounting for slightly more than 7% of the company's total revenue. The consumer care unit -- including Claritin, Dr. Scholl's foot-care products, and Coppertone sun-protection products -- brought in $2 billion, or 4% of total revenue.
Goldman Sachs analyst Jami Rubin thinks that splitting out the two business units could yield roughly $12.5 billion in additional shareholder value. While Merck probably wouldn't get quite as high of a premium valuation for its animal health unit that Zoetis commands, Rubin's estimate seems to be realistic.
Merck's Frazier says the company is working to determine whether the animal health and consumer care businesses "produce the most value inside our portfolio or outside our portfolio." That answer seems likely to be "outside."
What isn't as clear, though, is which route Merck might take to divest those units and how quickly it would move to do so. Selling to another organization could be the preferred path rather than the spin-off approaches taken by Abbott and Pfizer.
Frazier shied away from giving any idea about when Merck could take action. Breaking up might not be too hard to do for big pharma, but it still takes a while.
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The article Why Big Pharma Is Breaking Up originally appeared on Fool.com.Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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