Reckitt’s pharmaceutical spin off and GSK sell off prospects continue run of sector deals

After the excitement of the failed Pfizer bid for Astra Zeneca and AbbVie’s successful deal with Shire, there was further interest for UK pharmaceutical businesses today from both GSK and Reckitt Benckiser.

In the 1990’s and 2000’s there was plenty of mergers in the pharmaceutical arena with smaller companies combining to generate supposed efficiency of scale when it came to investment in research and development but in in addition it diversified their operations into areas like generics, animal health, vaccines or consumer health products.

A diversified approach appears to be less in favour right now. Back in April Novartis announced the sale of their animal health business to Eli Lilly and a joint venture with GSK on its consumer health products to allow it focus on its core pharma, eye care and generics businesses.

A nasty profits warning last week from Glaxo Smithkline (GSK), which saw its shares slide over 9% over the past 7 days, caused by contracting sales of its respiratory drugs and problems in China, means that Chief Executive, Andrew Witty, was quick to point out today that nothing was off the table in terms of “adding value” to shareholders. One of the ideas being considered is to float off its consumer business which sells products like Sensodyne toothpaste and Beechams cold remedies leaving it to focus on mainstream prescription pharmaceuticals. In September 2013, GSK sold off its Lucozade and Ribena brands to Suntory for £1.35 billion getting it out of the non-healthcare beverages business.

Health and household product company Reckitt Benckiser announced plans today to spin off its £780 million heroin substitute business through a London listing of its pharmaceuticals division, RBP,  in the next 12 months saying it was no longer core to its activities. The business once represented around one fifth of the company’s profits from its heroin substitute, Suboxone, but the active has now lost patent protection and the sales decline has only been stemmed by launching new delivery systems. Today’s half year results showed revenues at £344m in the six months to the end of June, down 8% year on year. Analysts are estimating that RBP could be valued at anywhere between £1.5 and £4 billion.

Reckitt’s missed out to Bayer earlier in the year to acquire the consumer health business of US giant Merck but remains committed to beefing up its consumer health operations which contains products like Lemsip, Durex, Nurofen and Gaviscon some of which have been acquired with deals to buy Boots Healthcare International’s brands and SSL International over the last few years. The RB management love the high margins of the consumer healthcare brands and continued growth particularly in emerging markets.

The current stable of pharma chief executives seem to believe that big is still beautiful but having many fingers in several pies seems to be less and less desirable right now given these recent deals and talk of deals. After several years of quiet in the  pharmaceutical business, things seem to have gone on the boil recently. Plenty of money to be made by the M&A investment bankers with the smaller biotech companies continuing to be in the cross hairs of the large pharmaceutical groups, keen as ever to replace their depleted pipelines with new products as patent expiries loom large.

Contrarian Investor UK

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