MNCs Accelerate Divestment from Consumer Health to Fuel Innovation in Core Pharma Businesses

May 22, 2024 21:46 CST Updated 21:46

GSK

Pharmaceutical R&D Manufacturer

Johnson & Johnson

Healthcare Product Manufacturers, Health Service Providers

Haleon

Health Product Provider

Facing intensifying competition in the external market, multinational pharmaceutical giants are severing their last ties with consumer health businesses to focus more on the development of core businesses such as prescription drugs and vaccines.

GSK Plans to Sell Its Entire Stake in Haleon

Notably, GSK is not the only multinational pharmaceutical company to make this decision. Just three days before GSK announced this deal, Johnson & Johnson also declared that it would sell 182 million shares of its spun-off and publicly listed consumer health company, Kenvue, through a "debt-to-equity conversion" method to Goldman Sachs and JPMorgan Chase. These shares account for 9.5% of Kenvue's issued capital, representing all of Johnson & Johnson’s remaining stake. Based on the closing price of the stock on that day, the value of the shares sold in this transaction was approximately $3.75 billion.

In fact, this wave of spin-offs in the consumer health sector has been ongoing for nearly a decade among multinational pharmaceutical companies. Pfizer, GSK, Merck, Sanofi, and Johnson & Johnson have all successively made this common choice with the aim of focusing more on the research and development of innovative drugs and therapies. Now, as the two pharmaceutical giants, Johnson & Johnson and GSK, are the first to bring their consumer health businesses to an end, other multinational pharmaceutical companies may accelerate the conclusion of this business according to their actual situations.

Achieve respective growth after the split

Why the Continued Reduction of Shares?

Haleon was initially formed in December 2018 through the merger of GSK and Pfizer's consumer health divisions, with GSK holding 68% of the shares and Pfizer holding 32%. In July 2022, Haleon completed its spin-off from GSK and subsequently went public on both the London Stock Exchange and the New York Stock Exchange.

Currently, Haleon owns several well-known brand portfolios, including Caltrate and Centrum in the vitamins and minerals supplements sector, Sensodyne and Polident in oral health, Fenbid and Voltaren in pain management, Contac and Flixonase in respiratory health, and Bactroban and Lamisil in skin health. In February 2024, Haleon disclosed its first full-year performance since the spin-off: revenue for 2023 was £11.3 billion, a year-on-year increase of 4.1%; adjusted operating profit was £2.549 billion, a year-on-year increase of 10.4%.

From the financial report data, Haleon, which has embarked on its independent journey, has achieved two consecutive years of revenue and net profit growth, with overall performance largely in line with industry expectations. However, for the two major shareholders determined to focus on pharmaceuticals, Haleon is merely considered a solid investment return. This is evident from GSK and Pfizer's continuous sale of Haleon shares in recent years to secure more cash flow.

After Haleon's successful spin-off and premium listing, GSK initially retained a 12.94% stake in the company. However, through three sales in May 2023, October 2023, and January 2024, GSK has sold a total of 810 million Haleon ordinary shares, reducing its stake in Haleon to approximately 4.2% as announced this time. GSK had previously stated that the spin-off of Haleon and the subsequent equity sales would allow it to focus on vaccines and infectious diseases while funding acquisition deals to bolster its pharmaceutical product line. With this latest sale of its remaining shares in Haleon, Haleon has also completed its historical mission with GSK.

Coincidentally, in March 2024, Pfizer announced plans to sell its 630 million shares of Haleon, valued at approximately £2 billion. Haleon will repurchase about £315 million worth of shares from Pfizer. After this sale and buyback, Pfizer’s stake in Haleon will decrease from 32% to around 24%. In May 2023, Pfizer had announced plans to reduce its stake in Haleon in a "gradual and orderly" manner over the following months. It now appears that Pfizer may have been waiting for a better opportunity to divest, and how it will handle the remaining shares in the future remains to be seen.

Not only Haleon, but also Kenvue is about to lose the support of key shareholders. Kenvue was formerly the consumer goods and personal health care business under Johnson & Johnson. In November 2021, it underwent a split and reorganization into a new company; in September 2022, it was named Kenvue and adopted a new corporate identity. In May 2023, Kenvue was listed on the New York Stock Exchange, breaking the record for the largest IPO in U.S. history by issuing 172.8 million shares of common stock and raising nearly 300 billion yuan. In August 2023, it officially completed its spin-off from Johnson & Johnson.

Currently, Haleon's business is divided into three segments: Skin Health/Beauty, Essential Health, and Personal Care, covering multiple fields such as cosmetics, OTC drugs, medical devices, and health supplements. It owns several well-known consumer health brands, including Band-Aid adhesive bandages, Tylenol medicines, and Listerine mouthwash, all of which are blockbuster products worth billions of dollars. The first financial report shows that in 2023, Haleon achieved net sales of $15.444 billion, with organic growth of approximately 5%.

But similar to the strategies adopted by GSK and Pfizer, Johnson & Johnson has been reducing its stake since Haleon's listing. Initially, Johnson & Johnson held up to 90% of Haleon’s shares after its IPO. In July 2023, Johnson & Johnson launched a stock exchange program allowing its shareholders to convert their Johnson & Johnson shares into ordinary shares of Haleon. Subsequently, through a series of equity swap actions, Johnson & Johnson successfully reduced its stake in Haleon from at least 80.1% to the current approximately 9.5%.

And with this exchange of the remaining shares of Kenvue to Goldman Sachs and J.P. Morgan Securities for debt, Johnson & Johnson has completely exited its century-old consumer health business. It is reported that apart from the original company logo of Johnson & Johnson still appearing on familiar products in the industry such as band-aids and body washes, the boundaries between the two companies will become increasingly clear.

Latest financial report data shows that Haleon's net sales in the first quarter of the 2024 fiscal year were $3.894 billion, higher than the expected $3.79 billion, with a year-on-year increase of 1.1% and organic growth of 1.9%. Facing the embarrassing situation of gradually slowing performance growth and without any "backing," it remains to be seen how Haleon will independently achieve new market leaps.

High Growth in Consumer Health Hard to Sustain

Sanofi, Bayer to Follow Suit in Spin-offs?

The consumer healthcare market, including over-the-counter drugs, vitamins, and nutrition, is one of the largest, most resilient, and fastest-growing segments in the consumer goods sector, with a global market size exceeding $240 billion. For a long time, the global consumer health market has been primarily dominated by traditional pharmaceutical companies through their consumer healthcare divisions. Johnson & Johnson, Bayer, GSK, Pfizer, and Sanofi are among the leading multinational pharmaceutical companies in this field.

But in recent years, against the backdrop of industries returning to innovative drug research and development, an increasing number of pharmaceutical giants are considering spinning off their consumer healthcare divisions to enhance shareholder value. In the industry's view, compared with the high investment, high risk, and high return characteristics of innovative drug R&D, although the consumer healthcare business requires relatively lower R&D investment, its revenue is also relatively modest, making it more challenging to achieve significant market growth. By spinning off the consumer healthcare business, pharmaceutical companies can not only focus on core operations through refined management but also secure certain capital returns.

In addition to GSK, Pfizer, and Johnson & Johnson, Merck also announced in February 2020 the spin-off of its women's health products, established products, and biosimilar products to form a new independent publicly traded company, which is later known as Organon. In June 2021, Merck officially completed the spin-off of Organon; in the same month, Organon began trading as an independent company on the New York Stock Exchange.

In 2023, Haleon's full-year revenue was $6.263 billion, compared to $6.174 billion in the previous year; the full-year net profit was $1.023 billion, compared to $917 million in the previous year. In the first quarter of 2024, Haleon's quarterly revenue was $1.622 billion, compared to $1.538 billion in the same period last year; the quarterly net profit was $201 million, compared to $177 million in the same period last year. Based on the financial report data, Haleon's market base remains stable, but its growth rate has slowed down.

Moreover, the news about Sanofi's spin-off of its consumer health business has been circulating for a long time. In 2021, Sanofi sold 16 consumer healthcare brands, mainly from Europe, including Mitosyl ointment, Silomat cough medicine, and Frubiase nutritional supplements to German pharmaceutical company Stada, in order to streamline its product portfolio. In 2022, Sanofi divested its consumer health division in India, which included the anti-allergy brands Allegra and Avil, pain management drug Combiflam, and vitamin D brand Depura. It is reported that this part of the business will be listed as an independent entity on the Indian Stock Exchange.

In October 2023, Sanofi announced that it was considering possible spin-off options for its consumer healthcare business. The most likely option is to create an independently operated entity headquartered in France through a capital market transaction, as early as the fourth quarter of 2024. In February 2024, reports indicated that Sanofi’s plan to spin off its consumer health business had attracted interest from several private equity firms, including private equity giants such as Advent International and Blackstone, with acquisition valuations potentially reaching $20 billion.

However, as of now, the靴子 (literal 'boot,' metaphor for a decisive event) regarding Sanofi's spin-off of its consumer healthcare business has yet to drop. According to the 2023 financial report, Sanofi’s consumer health division remains one of the company’s four major business units, alongside specialty medicines, general medicines, and vaccines, contributing €5.18 billion in revenue, a year-on-year increase of 6.3%. It is evident that the revenue generated by Sanofi's other three businesses far exceeds that of the consumer health division. Based on the current relatively stable market growth, Sanofi has not yet made a final decision on the spin-off.

But another pharmaceutical giant, Bayer, has seen a decline in its consumer health business. According to the financial report, Bayer's revenue in 2023 was 47.637 billion euros, compared to 50.739 billion euros in 2022, a year-on-year decrease of 6.1%. Among this, driven by dermatology products, pain and heart disease products, as well as the flu season, the sales revenue of the consumer health business increased by 6.3% year-on-year, reaching 6.027 billion euros. However, in the first quarter of 2024, the sales revenue of the consumer health business dropped by 9%.

Facing the industry trend where pharmaceutical companies are increasingly focusing on their prescription drug divisions, spinning off consumer health businesses and pushing them to go public may just be a matter of time. At this stage, using the cash flow from selling shares to bet on innovative drugs with greater market potential clearly aligns better with the development patterns of the industry. Just three days after Johnson & Johnson announced it would use Kenvue shares to pay down debt, it declared an $850 million acquisition of Proteologix, gaining a portfolio of early-stage bispecific immunology drugs, including a Phase I asset targeting the TSLP pathway, aiming to deepen its immunology pipeline. This marks the second acquisition by Johnson & Johnson this year.

In the industry's view, Johnson & Johnson and GSK successively clearing their shares in consumer health companies is also sending a signal to the industry that the achievements of consumer health businesses cannot gain more recognition in the capital market. Completely divesting from consumer health businesses might save companies more on costs and achieve the goal of reducing costs and increasing efficiency.

Editor: Zheng Miao