GSK Moves Ahead with Consumer Health Spin-off as KKR, CVC Await Opportunity

For multinational pharmaceutical giants, spinning off non-core divisions is a key strategic move to help companies concentrate on innovation and focus on their core business.

Another multinational pharmaceutical giant has begun to split.

October 12,GlaxoSmithKline(GSK, GlaxoSmithKline) stated that the company is "firmly on track to spin off its consumer healthcare business". It is reported that the spin-off of this business willYu MingScheduled for mid-year, GSK plans to invest £120 million ($164 million) in a new headquarters for its soon-to-be-independent consumer healthcare business, and has announced the relocation of its remaining pharmaceutical and vaccine divisions.

According to reports, the consumer healthcare business jointly established by GSK and Pfizer will become a separately listed company, known for brands such as Sensodyne toothpaste and Advil pain relievers. Should GSK's consumer healthcare business go public, it will generate £8 billion ($11 billion) in proceeds to support drug research and development for its pharmaceutical division.

However, a public listing is not necessarily the ultimate destination for this newly spun-off company.。According to previous reports, numerous private equity giants are eagerly awaiting the opportunity, as the business unit may attract bids from private equity firms such as CVC, KKR, and Advent.

Although the company's publicly announced plan remains to proceed with a listing, there are still voices within its board of directors advocating for the sale of the division. Should industry giants offer a price satisfactory to GSK before the restructuring is finalized, this business unit could still change hands.

According to estimates by brokerage firm Jefferies, the consumer healthcare business is valued at approximately £45 billion.

Whether through a public listing or a sale, provided the spin-off proceeds smoothly, this will mark GSK’s largest restructuring in nearly 20 years.

GSK is yet another multinational pharmaceutical giant to announce new progress in its corporate spin-off, following a wave of major industry peers divesting their non-core businesses.

GSK Spin-off: The Time is Now

In fact, the spin-off of GSK's consumer healthcare business had already been placed on the agenda as early as three years ago.

In December 2018, Pfizer and GSK announced the merger of their consumer healthcare businesses. At the same time, GSK Chief Executive Officer Emma Walmsley also announced that upon completion of the merger, GSK would be divided into two separate entities: one dedicated to prescription medicines and vaccines, and the other to over-the-counter (OTC) products.

In February 2020, GSK officially announced a two-year separation plan to split into two independent companies: a biopharmaceutical company focused on the research and development of genetics and novel technologies in immune system-related scientific fields, and a leading consumer healthcare company.

By June this year, GSK reiterated its demerger plan, reaffirming that "the new GlaxoSmithKline" will focus on vaccines and specialty medicines.

In light of this, the renewed advancement of the spin-off and the rollout of specific plans also fall within GSK's strategic plan.

Given the severe impact of the pandemic since 2020, coupled with the evolving landscape and the complexity of the separation, GSK would have been fully justified in postponing this plan.

However, it is clear that GSK is unwilling to wait.

Because it couldn't wait.

In 2020, GSK's full-year sales for its pharmaceuticals and vaccines businesses declined by 3% and 2%, respectively. Its net profit attributable to shareholders was £5.749 billion, representing a 23.77% increase, yet it failed to meet its profit targets.

In the first half of 2021, GSK's revenue was £15.510 billion, down 7.2% year-on-year; net profit attributable to ordinary shareholders of the parent company was £2.468 billion, a year-on-year decrease of 35.53%.

Alongside performance pressures, GSK's R&D performance during the pandemic was equally disappointing.

As the world's leading vaccine giant, it has fallen behind in COVID-19 vaccine development, with no approved products to date, and its collaborative development program with Sanofi has also been stalled.

In the field of highly effective COVID-19 therapeutics, the monoclonal antibody drug co-developed by the company and U.S. pharmaceutical unicorn Vir Biotechnology initially demonstrated significant efficacy. However, due to sluggish progress in subsequent clinical trials and regulatory approvals, GSK's competitive edge in this sector has now completely vanished, as Merck's COVID-19 drug takes the lead and Roche and Pfizer rapidly close the gap.

Such a sharp decline and lackluster performance naturally sparked investor dissatisfaction. Some investors have repeatedly issued open letters expressing their disappointment and calling for the replacement of Company Chairman Jonathan Symonds and Chief Executive Officer Emma Walmsley.

Under mounting pressure, GSK’s spin-off is one of its strategic moves to lighten its operational burden and pursue greater opportunities for innovation. Through this initiative, the company aims to regain investor favor.

In fact, for large multinational pharmaceutical companies like GSK, divesting or selling non-core business units and assets outside of innovation has gradually become a common trend in corporate development.

No Spin-Offs, No Giants

GSK is not the only company pursuing spin-offs. In recent years, numerous pharmaceutical giants have already undertaken significant corporate restructuring.

In 2018, Pfizer announced the restructuring of its business from two original segments into three divisions: Innovative Medicine, Established Medicines, and Consumer Healthcare. The Established Medicines division merged with Mylan to form Viatris, the world's largest generic pharmaceutical company; the Consumer Healthcare division merged with GSK's consumer healthcare business, becoming the centerpiece of this spin-off; while the Innovative Medicine division continued operations as the core entity, accelerating its development.

In 2019, Novartis its subsidiarySandozThe US dermatology and oral generic solid dosage businesses were sold to Aurobindo Pharma for $1 billion. Meanwhile, Novartis sold its 36.5% stake in the consumer healthcare joint venture to GSK for $13 billion and spun off the Alcon eye care business into an independent company.

In 2020, Takeda sold its OTC business to Blackstone for $2.4 billion and divested a portion of its prescription drug business in mainland China to Hefei state-owned assets, thereby achieving its $10 billion non-core asset divestiture target. In 2021, this strategic divestiture continued: in January, Takeda sold 16 non-core prescription drugs marketed in Europe for $562 million, followed by the divestiture of non-core products in Latin America, Japan, and Europe, as well as the packaged sale of its Consumer Healthcare Co., Ltd., among other transactions.

In August 2020, Elanco Animal Health (Elanco) announced the completion of its $6.89 billion acquisition of Bayer Animal Health. Following the closing of the transaction, five pipeline products from Bayer Animal Health were integrated into Elanco’s R&D pipeline, marking the emergence of the world’s second-largest animal health company. Elanco was spun off from Eli Lilly in 2019, while Bayer Animal Health originated as a division of Bayer. These two units, once carved out from two pharmaceutical giants, ultimately converged and merged into a single entity.

In late 2020, Merck & Co. announced the spin-off of its women's health, biosimilars, and certain established medicines into a new company, Organon & Co. Following the spin-off, Organon will be responsible for the post-marketing lifecycle management of the medicines, while the corporate R&D pipeline will be retained by Merck.

In June 2021, Sanofi decided to divest the assets of 16 consumer healthcare products sold in Europe, with the German company Stada as the acquirer.

…………

It is worth mentioning that,These spun-off businesses and assets are not without growth potential.。

In fact, these divisions not only potentially yield high profit margins, but certain business segments within them also demonstrate exceptional growth rates. Taking the GSK Consumer Healthcare business currently being spun off as an example, this segment recorded sales of RMB 12.96 billion in 2020, with a growth rate of up to 14%, serving as a key driver for the company's sustained growth.

So why are the giants making such a "drastic cut"?

The focus lies in the changes to the company's strategy.

Historically, pharmaceutical companies pursued scale and comprehensiveness, striving to become massive "super aircraft carriers" that integrated R&D, manufacturing, and commercialization. However, with shifting market and investor dynamics, the most valuable asset for pharmaceutical giants has become the "expectation" of launching the next blockbuster innovative drug.

In other words, while revenue and profits are important, they are no longer the sole focus of investors; rather, those with greater potential and determination for innovation will be the market's most sought-after players.

Therefore, spinning off lackluster business units to reduce operating costs and thereby focus on innovation has become a common strategy among many industry giants. Following the spin-off, cash proceeds generated from asset sales, public listings, and other transactions can fund the company’s R&D and external acquisitions, accelerating the discovery of the next “blockbuster drug.”

Take Pfizer as an example. After divesting its consumer healthcare business and mature drug portfolio, it has continuously doubled down on innovative medicine, successfully capitalized on mRNA vaccines during the pandemic, and emerged as the most... among established pharmaceutical giants during the outbreak.The Big Winner。

On the other hand, the business logic underlying mature medicines and consumer healthcare actually diverges from that of the core operations of innovative pharmaceutical companies. Spinning off these businesses can also free the divested units from corporate constraints, enabling them to accelerate their growth.

In light of this, spin-offs are virtually an inevitable path for pharmaceutical giants to re-accelerate growth. GSK's decision to pursue this strategy is both a rational choice and one that aligns with industry norms.

However, why has GSK currently chosen to spin off the business for a public listing rather than selling it outright?

Private Equity Giant Wants to Buy, Will GSK Sell?

As previously mentioned, although pharmaceutical giants are divesting and selling their non-core businesses, the value of these non-core operations should not be underestimated.

These business segments, including mature pharmaceuticals and consumer health, also align perfectly with the preferences of private equity giants. They not only boast significant scale, substantial profitability, and solid growth potential, but also offer greater stability compared to innovative drugs. This enables private equity firms to directly acquire high-quality assets and leverage their management expertise to identify further development opportunities for the targets.

Especially this year, private equity giants are highly aggressive, "hunting" across global markets. Now that premium targets have emerged, how could they not fiercely compete for them?

Therefore, as the spin-off progresses, it comes as no surprise that reports have emerged of private equity giants such as CVC, KKR, and Advent seeking to acquire this business unit.

In fact, compared with an IPO, GSK would also command a substantial premium if a sale is successfully executed.

However, GSK was not particularly enthusiastic about this opportunity.

Although Elliott Management and Bluebell Capital Partners are among the company's investors actively advocating for the necessity of selling the division and continue to pressure company executives, the board of directors' current strategic direction for the consumer health business remains a spin-off and public listing.

On one hand, although GSK is encountering difficulties, it is far from facing a crisis. Rather than hastily divesting a business unit that still holds growth potential amid market uncertainty, it would be more prudent to first take it public to raise capital and gauge its market valuation before considering subsequent strategic moves.Operation, only then can the maximization of returns be ensured.

On the other hand, even as GSK aims to concentrate its efforts on becoming an innovation-driven enterprise, rapidly divesting its sales capabilities could have unpredictable consequences for the company's development. Opting to divest rather than sell outright can provide greater strategic flexibility and room for maneuver.

Therefore, at present, the likelihood of GSK spinning off and listing its consumer healthcare business remains higher than that of a direct sale.

However, the division's appeal to private equity investors remains substantial, and a considerable period remains before the spin-off is finalized. Whether a "corporate raider" will make an irresistible offer in the future, whether disputes among GSK shareholders will escalate, and how firmly the board of directors is committed to taking the division public all remain to be seen.