Following Merck, Another Multinational Pharma Giant Announces Spin-off Plan

Compiled by Keke

Over the past decade, the productivity challenges that have plagued large pharmaceutical companies have been largely resolved, and corporate management teams are now focusing on performance growth.

AstraZeneca has been keen on divesting non-core assets for two years, while Pfizer merged its off-patent and generic drug business unit, Upjohn, with Mylan. Recently, GlaxoSmithKline (GSK) and Merck Sharp & Dohme (MSD) also announced their respective reform plans to address the challenge of sluggish profit growth.

On February 5, MSD announced that it would spin off its women’s health products, mature products, and biosimilar products to establish a new independent publicly listed company, “NewCo,” while retaining its key growth drivers in oncology, vaccines, hospital care products, and animal health. MSD stated that NewCo was expected to generate approximately $6.5 billion in revenue in 2020, and that this divestiture would enable the company to maintain strong annual revenue growth through 2024.

On the same day, another multinational pharmaceutical company, GSK, also announced a spin-off plan: to split the company into two entities within the next two years—one focusing on pharmaceuticals and drug development, and the other on consumer healthcare products.

GSK estimates that the one-time costs associated with this spin-off will amount to approximately £600–700 million, while the two-year spin-off plan is expected to cost £2.4 billion, including £1.6 billion in cash. Meanwhile, the company has begun divesting certain non-core consumer health products, including its Latin American portfolio and several European pharmaceutical assets, with a potential value of £1 billion, to help cover the cash outlays.

Through the split, GSK aims to save £700 million annually by 2022 and improve operational performance from 2022 onwards. In fact, GSK has been under pressure from some major shareholders for years. The company attributes its poor performance to housing its slow-growing but reliable consumer health division under the same roof as its more dynamic but higher-risk drug discovery division. Jefferies analyst Peter Welford pointed out that a standalone consumer healthcare company could support higher debt levels, thereby deleveraging the pharmaceutical/vaccine business to less than 1.5x, enabling reinvestment for growth.

In the consumer healthcare sector, GSK had long been planning its move. In December 2018, it announced the merger of its consumer healthcare business with Pfizer’s consumer healthcare division to create the world’s largest healthcare company, with GSK holding a 68% stake and Pfizer holding 32%. The deal was completed in August 2019. The combined entity ranked first in the U.S. over-the-counter (OTC) market and second in China’s OTC market. The new GSK-Pfizer consumer healthcare joint venture can be considered successful, as its sales grew in 2019, reaching £9 billion (approximately $11.7 billion).

Now, GSK has decided to completely spin off its consumer healthcare business for independent operation. Recently, GSK CEO Emma Walmsley stated that for the new consumer healthcare company, GSK plans to support the development of key technological infrastructure and, when appropriate, provide support for the corporate functions necessary for its operation as an independent entity. The estimated additional one-time costs for establishing the independent consumer healthcare business are between £600 million and £700 million.

As part of its split plan, GSK is also conducting a strategic review of its prescription dermatology business. Currently, dermatology is part of GSK’s product portfolio, with total sales of £445 million in 2019, representing a 3% growth. However, considering the future of the dermatology segment and the consumer healthcare spin-off plan—where prescription skin health brands often compete with over-the-counter consumer products—GSK is likely to divest its dermatology products as well. Previously, Novartis’ Sandoz division sold its U.S. dermatology business, along with certain generic oral solid medications in the United States, to India’s Aurobindo Pharma.

However, it remains unclear how GSK plans to spin off its consumer healthcare joint venture. At the 2020 J.P. Morgan Healthcare Conference, Pfizer CEO Albert Bourla and GSK Chief Strategy Officer David Redfern presented seemingly contradictory views. While Bourla expressed a desire for an initial public offering (IPO) within three to four years, Redfern stated that no decision had been made, noting that the company had previously intended to demerge the joint venture to GSK shareholders before listing it on the UK stock market.

In terms of drug development, GSK has clearly positioned this area as a future priority. Walmsley stated that the focus will now shift to the new GSK, a biopharmaceutical company dedicated to science and R&D related to the immune system, genetics, and new technologies. The new GSK will prioritize R&D and capital allocation, ensure the efficiency of support functions, leverage the latest and ongoing technology investments, and optimize the supply chain and product portfolio, aiming to establish a competitive lineup of products and teams by 2022.

In 2019, GSK secured eight regulatory approvals for its medicines, announced six positive results from pivotal trials, and advanced four new R&D assets into pivotal trials, thereby strengthening its development pipeline. The 2019 financial report showed that GSK’s full-year sales reached £33.8 billion, a 10% year-on-year increase. However, due to pricing pressures in the respiratory medicines market, this performance fell short of analysts’ expectations, leading to a 1%–4% reduction in its earnings guidance for 2020.

In 2020, GSK was poised to secure at least six drug approvals across oncology, HIV, specialty care, and respiratory disease indications. However, the company also faced the challenge of either lagging behind competitors in all these areas or confronting greater pricing pressure. Therefore, Walmsley stated that in 2020, their top priority remained innovation to enhance their product portfolio and support new product launches. Recent data supported the company’s decision to further increase investment in research and development and new products.

Reference Source:

1、 Glaxo and Merck go on the big pharma diet

2、 GSK Sets Plan to Split the Company into Two Separate Entities

3、 GlaxoSmithKline's spinoff plan is here—and it may not be limited to consumer health