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Spinning Off

We’re seeing an interesting convergence of big pharma business strategies these days. Merck has announced that it’s going to spin off about half its health-care products – the slower growing half – into a new company. But that’s half by head count; those drugs are only about 13% (6.5 billion) of the company’s sales. The Merck that remains will be focused on oncology, vaccines, and other high-growth high-margin areas.

Merck’s stock is opening lower this morning, but I don’t think it’s necessarily this plan that’s doing it. They missed sales forecasts for some of their big-name products (Keytruda among them, their biggest name of all), so that was going to make the stock drop no matter what. But it’s true that this spinoff plan might (in light of the earnings call) seem a bit more like something done out of the need to at least look like they’re working on bolstering earnings.

Meanwhile, GSK announced that they’re going to completely separate all their consumer health care business into a new company. That has been in the works for a while: they and Pfizer have been combining their consumer healthcare products into a new entity which was always intended to be spun off into a new company, Overall, then, we’re talking about some of the biggest outfits in the industry all trying to consolidate the hot-and-happening stuff into one pile and move everything else off into another. This is (needless to say) not a new idea. Drug companies have been undertaking similar moves for decades, with consumer products (think stuff on the drug store shelves), generic drugs, animal health products and the like being the usual candidates for sale or spinoff. One mild general problem with this strategy is that some of this stuff accumulates again, as newer drugs become older drugs and other assets come into the company through acquisitions. It’s like cleaning out your basement; stuff sort of seeps back into it over time.

It’s worth keeping in mind that this is largely a move for the benefit of Wall Street and the big shareholders. In my experience, it’s not like the folks in the R&D labs usually notice much of a difference when their parent company exits the toothpaste business. Earnings per share, all the way; you’re shrinking the company while keeping the high-revenue products to produce a more concentrated shot of earnings goodness. You might wonder, in these cases, who’s going to lining up to buy the shares of the new company: older products that don’t have much growth in them! Step right up! Well, existing shareholders are going to be the first (involuntary) customers under most such plans, but many of them will sell that stake on to someone else, presumably people who want to have some steady-performing stuff in their portfolio. High and increasing earnings-per-share are most beloved by investors, but reliable EPS (and reliable dividends) are not something to be snickered at, either.

32 comments on “Spinning Off”

  1. When I interviewed at SmithKline Beecham in the mid-90s the big King of Prussia R&D facility had a company store where you could stock up on toothpaste, mouthwash and the like at low prices.

    Loss of such bargains perhaps the one impact on R&D of these deals!

    1. mymagoogle says:

      When I interned at Schering-Plough in the early 90’s there was also a company store in the lobby. Stock up on Coppertone and Dr Scholls!

    2. P. Nitty says:

      well sure – but there can sometimes be a (temporary) upside – i work at a GSK site in Maryland, ever since they started the consumer drugs tie-up with Pfizer (that Derek mentions above) we’ve had access to Pfizer as well as GSK consumer goods in our company store!

      1. Crass Chemist says:

        So you have some nice mouthwash to knock back that Viagra with?

    3. Who Dr. says:

      I used to work at the SKB/GSK site in KOP in the 2000’s. I would buy beano at that store, especially when my mother-in-law was coming to town. That store got smaller and smaller then closed, right around the time they were getting out of oncology and swapped stuff (including people) with Novartis, but then they bought Tesaro. GSK’s basement is already getting cluttered again as they continue to get smaller and smaller until they become…

      1. Magrinho says:

        “I would buy beano at that store, especially when my mother-in-law was coming to town.”

        LMAO! That’s a gem! For her? For you?

      2. Got Horlicks? says:

        Who Dr. – any crates of Horlicks still on site? The breakfast of champions…

        1. maroonedchemist says:

          Perhaps at the UK/EU sites. Never saw it at KOP

    4. MTK says:

      The company store was great. Aquafresh , Tums, Sucrets, etc. all at bargain prices.

      Well, until they limited your purchases to one each when it was found that some enterprising employees would stock up on everything then resell them at flea markets at marked up but still less than full retail prices.

      Alway someone gaming the system then ruining it for everyone. 🙂

    5. KT says:

      Wyeth was the same back in the day – company store full of discounted goodies from both them and the parent company American Home Products.

    6. Escapee says:

      This was still the case at GSK Stevenage as of about 6 years ago. Not sure if it still is.

      Toothpaste, Horlicks, cleaning products, Lucozade etc.

  2. Hap says:

    Getting rid of consumer healthcare products gets rid of dependable and consistent revenue for potentially higher-yielding revenue sources. This is nice for investors (can tune their investments for their risk tolerance) but is likely to make the resultant company (the potentially higher yielding part) less resilient. A similar example would be Bob Evans selling off their stores to rent them from someone else – while that move makes the assets they have do more, it exposes them to risk if their restaurants don’t do as well as expected. (The people expecting the rent checks are not as likely to be tolerant of not having them as Bob Evans itself would have been – while Bob Evans might have the desire to look for future revenue from a temporarily badly performing store, while someone getting the rents doesn’t necessarily care if Bob Evans survives or not, only that someone is paying the rent). The high-yielding company is likely to have less margin for failure.

    I guess this is an example of the conflict between long-term investors (who need the company to survive longer and thus sacrifice some yields to do so) versus shorter-term investors (who want yields, and so having savings that don’t make money now but help the company to be more resilient don’t benefit them).

    1. A Nonny Mouse says:

      Too true; Wellcome only survived in the pre-acyclovir days due to sales of Sudafed and the like which were subsequently sold off.

    2. boo says:

      Preach it, Hap!

  3. zero says:

    This is basically partitioning risk. Banks used to be forced to do this, keeping their deposit business and their investment business separate. It’s one of the regulations that came from the robber-baron age when people lost everything as their banks crashed and burned along with the stock market. Of course, we’re in a new gilded age so large banks are being allowed to risk taxpayer and depositor funds again with little oversight.

    I know it looks like financial engineering (and it is), but this direction is probably better for the average person in the long run. All the high-risk stuff is compartmentalized and can be driven by investor interest without blowing up perfectly viable product lines after a big failure. The low-risk stuff gets to live on in a nice, boring corporate structure, quietly making sales to the masses for decades. Maybe we will have fewer of these orphaned drugs as a result.

    1. yf says:

      High risk business needs high reward to entice people.
      Low risk business needs security to retain people.
      They attract people with completely different dispositions. Paying them with same level of salary and bonus is communistic. It is one of the reasons that explains why big pharms have few innovations.

  4. Cynic says:

    Too much of this baloney is driven by business consultants who have only their own interests at heart. I’ve seen too many cycles of “Merge and acquire to get bigger and diversify” followed by “Divest and get lean to unlock value”. None of this impacts true scientific productivity in a positive way for pharma, meanwhile the consultants and bankers reap their commissions and comfortably retire.

    1. anon the II says:

      I’m gonna agree with Cynic. This is driven more by “Don’t just stand there, Do something” than by anything else. I’m beginning to suspect that most business school and consulting firm computers have macros that can spew out the same old rationalizations for any and all major business decisions, regardless of which direction they’re going.

      1. HFM says:

        Exactly. Having run out of opportunities to take Bold and Decisive Action (TM) by merging with other companies, they will now earn their paychecks by splitting the company into parts. Plus ca change…

    2. Dr. Manhattan says:

      >snark onsnark off<

      Yep, you nailed it, Cynic!

    3. Jake says:

      The enterprise, long divided, must unite; long united, must divide.

    4. mjs says:

      Exactly. Dishonest stockbrokers increase their commissions by churning their customers’ accounts. The MBAs increase their commissions and fees by churning the organization of corporations. And anon the II is probably right, that the consultants have business-speak macros. Probably called “synergies” and “focusing_on_core”

  5. Petros says:

    When I worked at a Beecham site (yes way back in time) the offerings include cheap Coke as well as toothpaste etc. The company had the distribution franchise for half the UK.

    The pharma +/- consumer products seems to be a cyclical thing with periodic spin offs followed some time later by acquisitions.

  6. Barry says:

    The NCVIA was necessary because vaccines (at least childhood vaccines) were not a profit center. Does Merck see the world changing? I certainly do see that–as antibiotics are ever less efficacious–we’ll need other approaches to infectious disease. And vaccines should be part of that

    “The National Childhood Vaccine Injury Act (NCVIA) of 1986 (42 U.S.C. §§ 300aa-1 to 300aa-34) was signed into law by United States President Ronald Reagan as part of a larger health bill on Nov 14, 1986. NCVIA’s purpose was to eliminate the potential financial liability of vaccine manufacturers due to vaccine injury claims[1] in order to ensure a stable market supply of vaccines, and to provide cost-effective arbitration for vaccine injury claims.[2] Under the NCVIA, the National Vaccine Injury Compensation Program (NVICP) was created to provide a federal no-fault system for compensating vaccine-related injuries or death by establishing a claim procedure involving the United States Court of Federal Claims and special masters.”

    1. loupgarous says:

      How quickly can Merck (and everyone else in Big Pharma) make a vaccine for a new disease? Just wondering, because the word “vaccines” doesn’t automatically bring images of Keytruda-like return on investment.

      BBC reported that Inovio at San Diego said once the Chinese sent them the sequence of 2019-nCoV, they were able to design a vaccine for it in three hours. They expect to get a DNA-based vaccine in initial human trials early this summer and into production for larger scale human trials at outbreak site by end of year.
      Reuters reports that Moderna from Cambridge, MA and NIH are talking about getting a messenger RNA-based vaccine in production, then into human trials this summer.

      According to the South China Morning Post Shanghai East Hospital of Tongji University and the Chinese start-up Stemirna Therapeutics announced work on what Professor Yuen Kwok-yung, chair of infectious diseases at the University of Hong Kong (whose team is also working on a vaccine) speculates the Shanghai group’s working on a killed-virus vaccine. Yuen questions the Shanghai group’s announcement that they expect to produce sample lots of the vaccine by mid-March, saying it doesn’t leave time for the needed safety and efficacy trials to assure the vaccine works and doesn’t create a worse reaction in those immunized to wild coronavirus than they would have had not being immunized.

      Vaccines have traditionally not been profit centers for Big Pharma (which is why the Reagan administration had the Federal government step in to shoulder damage claims for childhood vaccines). But the announcements of vaccines for 2019-nCoV being ready for trials in months, not years, suggest Merck didn’t spin their vaccine business off because it sees the potential for higher and quicker revenue from vaccines made with newer mechanisms of action and manufacturing techniques.

    2. Sisyphus says:

      From the MRK press release, “Human Health Vaccines 2019 Worldwide Sales Grew 15% to $8.4 Billion; Excluding the Impact from Foreign Exchange, Sales Grew 17%.”

  7. Earl Boebert says:

    There’s also the possibility that these spinoffs will be picked up by a leveraged buyout gang, subjected to a jolly party of asset stripping and debt loading, and eventually dropped at the feet of the bankruptcy courts.

  8. MikeC says:

    I seem to remember from somewhen back near the dawn of this blog a discussion of the value of Pfizer vs the value of Pfizer + the that of all of the companies it merged with. Sure, the total market cap for PFE went up. But compared to the combined (pre merger) market caps it was a disaster.

    So … spinoffs are just the reverse of this process, right? Imagine the profits! (And ignore any suspicious transfers of debt/liabilities to the spinoffs)

  9. Anon-censored says:

    If you are going on anymore that 1-2 plane trips over the next year, you are anti-science and need to resign from whatever science job you have ( see climate change).

  10. loupgarous says:

    Well, allrighty, then. We’ll go back into the buggy-whip and harness business and put ol’ Dobbin to work. Whaddya you say there, sonny? Dobbin farts too much, and the methane’s 28-36 times worse a greenhouse gas than CO2? Send him to the soap factory with all those cows we kiboshed because they’re gassy, too. (Making notes for the 21st century film adaptation of Animal Farm.)

    In the meantime, Tom Steyer can go back into the pipeline business, moving all that greenhouse gas methane around the country to light America (and leaking 20% of it out of fracked wells, transmission stations and his Transmountain Pipeline), because some genius left nuclear power out of the Green New Deal.

    It’s at this point that Robert Heinlein becomes an unintentional prophet. In his novel Friday, a few centuries into the future mankind gets around by horse-drawn carriages and electrically-powered “authorized power vehicles” (for mass transit) for relatively short trips, suborbital spacecraft for transoceanic passenger travel, and starships (using the “Forward Drive”, in an homage to the physicist) for the really long runs.

    1. loupgarous says:

      Technical notes to the above:
      – Germany, since eschewing nuclear power, has had disappointing luck with wind and solar. Their primary baseload power comes from domestically-stripmined coal and natural gas from Russia. So, unless battery technology and other off-peak power storage takes off dramatically, wind and solar will still require reliance on fossil fuels. Possibly why Sen. John Cornyn (R, TX) is a new-found convert to the Green New Deal.
      https://www.epa.gov/ghgemissions/understanding-global-warming-potentials is where I found that methane is 28-36 times as efficient in trapping heat in the atmosphere as carbon dioxide.

      Thus, reliance on methane for baseload electrical energy is reliance on a power source that leaks into the atmosphere at every point in its production, from fracking and drilling, through compression for transmission through the pipeline network, tankers, and other transport, to where it’s burned when the sun’s down or the wind’s not blowing just right to make power. And it still makes CO2 when it’s burned.

      But for some reason, nuclear power is bad juju and can’t be used, even when if we’re STILL dumping greenhouse gases in the air for the foreseeable future in order to make a renewable power economy work. That was when I realized carbon dioxide wasn’t the real issue. The real point behind the Green New Deal was concentration of political and economic power in politically-influential hands.

  11. Me says:

    “In my experience, it’s not like the folks in the R&D labs usually notice much of a difference when their parent company exits the toothpaste business.”

    2 words for you: Staff shop!!

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