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Bax to the future

27 March 2014 By Robert Cyran

Baxter International has put conscious uncoupling on pharma’s radar. The $40 billion healthcare giant is separating its biotech and medical products units. Baxter’s spinoff history suggests this latest move will create value for shareholders. This, and the success of Pfizer’s and Abbott’s recent splits, will encourage other pharma giants to follow.

Baxter knows the drill. It has carved out three companies over the past two decades, and shareholders reaped the benefit. Its pharmacy benefit company was acquired at a hefty premium a few years after Baxter set it free. It was a similar story for its Allegiance healthcare cost management business, whose worth increased sixfold in the few years it was independent. Edwards Lifesciences is still public, but the heart-valve maker’s valuation has risen sevenfold since it went independent in 2000.

The reasons for breaking the remaining company in two are familiar. Making drugs is risky and requires hefty research and development – but can generate fast growth if successful. By contrast, selling dialysis equipment and IV bags and liquids is a steady, slow-growth business that should throw off excess capital that can be given back to shareholders.

Forming two companies may attract new investors eager for growth and capital return, respectively. The substantial differences between these two businesses mean it’s probably difficult for anyone to manage both effectively. Separating them should lead to better capital allocation, management focus and profitability.

It’s another sign that days of the pharma mega-company are fading. The industry spent decades growing, and the eventual result was poor laboratory productivity and waste. Nearly all the major companies significantly underperformed the S&P 500 for the decade after 2000.

The returns from focus, meanwhile, are clear. Abbott has outperformed the market after it decided to dismember itself in late 2011. Pfizer’s stock has doubled since its decision to shrink earlier that same year. It has subsequently rid itself of two divisions and announced it may split its remaining business in three. Merck, Bayer and Johnson & Johnson may find it’ll be hard not to jump on the bandwagon.



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