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Roll up, roll up

5 December 2014 By Neil Unmack

Pharma’s dying assets lack an M&A remedy. GlaxoSmithKline has just scrapped a planned sale of mature drugs that were expected to fetch over $3 billion, not long after a similar move by Sanofi. The aims of the UK and French pharmaceutical groups differ, but the deal failures highlight the challenge of finding suitable owners for such portfolios.

Sanofi’s decision to scrap its sale process took place amid strategic chaos – a boardroom coup and the ouster of its chief executive. GlaxoSmithKline’s looks purely economic. It is though surprising that pharma spinoffs are proving hard to turn into reality when buyout firms were queuing up to do due diligence.

On paper, mature drugs look like a good enough candidate for a private equity rollup strategy. The buyers get what should be a profitable asset which, with some leverage, could produce double-digit rates of return even assuming a steady fall in cashflow. Building a diversified portfolio could generate some scale economies. And more focused management could eke out value by marketing drugs more aggressively. While declining cashflow makes exit strategies uncertain, the drugs in question generally have a lifecycle beyond private equity’s usual five-year horizon.

That’s why buying mature drugs is a common strategy for specialty pharma companies themselves – take Mylan’s tax-based acquisition of Abbott’s generic drugs for $5.3 billion. Pfizer, the U.S. pharma giant, has a strategy which includes harnessing M&A synergies through buying drugs neglected by peers. If private equity firms are struggling here, it may be for a lack of specialist sector expertise. That would force them to team up with strategic buyers, who may have different return hurdles and investment horizons.

But GSK wasn’t a forced seller. The established products business it was trying to offload had an operating profit margin of 65 percent in the nine months to September, twice the group’s average. Investors would not thank it selling the cashflows on the cheap when they are for now usefully buttressing GSK’s high dividend.

Buyout firms are short of targets, and big pharma needs to divert resources to finding new drugs. Desperation may in time bring both sides together.


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