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.