By Julius Kalvelage
Photo: Wengang Zhai (Unplash)
Many companies in the pharmaceutical industry are facing pressure to generate sales and profit while losing ground due to expiring patents and falling returns on R&D. Against this backdrop, they have an increasing incentive to slim down their business and specialise in high-margin areas. This has resulted in an increasing number of carve-outs and spin-offs in the pharmaceuticals sector over the past few years through which companies separate themselves from non-core assets.
The Process and How it Works
In a spin-off, the parent company distributes shares in the hived off entity to its existing shareholders as a part of a special dividend who then hold shares in two separate companies. The company therefore receives no cashflow in such a transaction. In a carve out, a company sells a business unit by incorporating it and floating it.
Further Trend Analysis
Novartis, for example, which is one of the world’s largest pharmaceuticals companies, spun off its eye care division Alcon in the beginning of the year to focus more attention on medicines. The deal between Pfizer and Mylan also falls into this category as Pfizer separated itself from its generics business with the intention of specialising in the high-end of the pharmaceuticals sector. Further transactions include Eli Lilly’s carve out of Elanco, its animal healthcare unit, Mallinckrodt’s planned carve out of its generics business, and the sale of Allergan’s generics business to Teva.
There are many different underlying drivers behind this trend. A major one is to be more efficient in the allocation of capital. Together with a specialised management focus, this is meant to make the firm more effective in bringing new profitable drugs to the market. Secondly, separating oneself from non-core businesses frees up cash for the parent company which is crucial to have in order to fund the acquisitions laid out in the previous trend. Novartis, for example, carved out Alcon - valued at $27bn - at the end of February and agreed to buy The Medicines Company for $9.7bn in November while Pfizer announced its deal with Mylan only a few days after agreeing to buy Array BioPharma for almost $11bn. In both cases, the parent company spun off their low-margin businesses which is meant to improve their financial performance and alignment with their core profit drivers. In most cases, the carved-out entity is the generics business that includes off-patent drugs that face.
Who are the Main Parties Involved?
Over the past year, the largest transactions of this kind were completed by Novartis, Pfizer and Celgene which totalled USD 65bn in deal value. In general, however, this trend affects many of the larger players in the pharmaceuticals industry that tend to me more diversified than smaller competitors.
Deals to Know About
Novartis floats Alcon
Announcement date: 28/02/2019
Seller: Switzerland-based company engaged in pharmaceutical business and operating in the areas of human health care, consumer health, agribusiness and animal health
Target: Switzerland-based company specializing in eye care products
Advisors: UBS, Bank of America
Value: $26,943
Rationale:
The spin-off will allow Alcon to become more focused medical device company.
It will result in Alcon and Novartis focusing on their operating priorities and strategies enabling long-term growth and profitability
The spin-off will enable Alcon to access capital markets
Pfizer sells Upjohn (Pfizer’s generics business) to Mylan
Announcement date: 29/07/2019
Seller: US-based pharmaceutical company that discovers, develops, manufactures and markets prescription medicines for humans and animals
Advisors: Goldman Sachs, Guggenheim
Acquirer: US-based global pharmaceutical company that develops, licenses, manufactures, markets and distributes generic and branded generic pharmaceuticals, specialty pharmaceuticals and active pharmaceutical ingredients
Advisors: Centerview, PJT Partners
Target: US- based off-patent branded and generic established medicines business of Pfizer
Value: $24,623
Rationale:
This combination accelerates Mylan’s strategy to create the operational scale and commercial capabilities necessary to provide people with access to medicine.
The acquisition of Mylan will provide Upjohn with an enhanced global scale and geographical reach, thereby expanding its footprints in the US and Europe.
Also, the combined entity will have a diverse and differentiated portfolio and pipeline of products.
The combined entity is expected to generate revenues of around USD 19-20bn and have an expected adjusted EBITDA of USD 7.5-8bn with a margin of approximately 40% including phased synergies in 2020.
It is expected to generate annual cash flows of more than USD 4bn annually.
The transaction expects to achieve a ratio of debt to adjusted EBITDA of 2.5x by the end of 2021.
Consideration: All Stock
Premium paid: NA
Allergan sells its generics business to Teva
Announcement date: 27/07/2015
Seller: Ireland-based pharmaceutical company engaged in developing, manufacturing, marketing and distributing brand pharmaceutical products
Advisors: JP Morgan
Target: US-based generics business of listed, Ireland-based pharmaceuticals company Allergan
Acquirer: Israel-based pharmaceutical company that develops, produces, and markets generic and proprietary branded pharmaceuticals
Advisors: Barclays, Greenhill
Value: $39,633
Rationale:
The transaction is in line with Teva's strategy to significantly enhance its generics business and to diversify its revenue stream while increasing its market share.
The acquisition is also expected to create a generics division that is globally competitive in the pharmaceutical industry.
Teva is particularly keen to benefit from Allergan Generics' novel compounds in primary care and specialty markets and to add its strengths to Teva's existing pipeline of drug developments relating to the central nervous system, pain, migraine, and respiratory markets.
At the same time, the sale will allow Allergan to focus on its branded pharmaceutical business. Allergan will use a portion of the cash and equity proceeds from the transaction (amounting to USD 36bn after-tax leakage of 10%) to pay down its debt including certain credit facilities and bonds.
Consideration: 33,430 Cash, 6,203 Equity Eli Lilly carves out its animal health business Elanco Announcement date: 07/24/2018 Seller: Eli Lilly Advisors: N/A Target: Elanco Acquirer: public (IPO) Advisors (Lead Managers): Goldman Sachs, JP Morgan, Morgan Stanley Value: $1,736m Rationale: It will provide Eli Lilly a greater focus on human pharmaceuticals and Elanco to more efficiently deploy its resources to those growth opportunities that best serve its customers.
References
MergeMarket. (2020). [online] Available at: https://www.mergermarket.com [Accessed 27 Mar. 2020].