When everyone is buying, often the best strategy is to be a seller.
Deal making in the health-care industry is booming with more than $140 billion in announced deals in the past three months, according to Dealogic. This week, drugmakers Sanofi SNY 1.71% and Celgene CELG 0.75% announced acquisitions for a combined total value of approximately $20 billion. That follows deals in sectors like hospital systems, health insurance, pharmacy benefit management and physician staffing businesses.
The latest news triggered a furious rally in biotechnology stocks, in large part because both acquisitions came at steep takeover premiums.
Company executives have a choice: they can join the rush of suitors chasing relatively scarce high-quality assets, and run the risk of destroying shareholder value by overpaying. Or they can pare their own portfolio by spinning off assets and use that rush of suitors to their shareholders’ benefit.
There has been about $118 billion in total health-care spinoffs since 2013, according to Dealogic. That marks a small fraction of total deal volume over that period, which has exceeded $2 trillion. But the recent market performance of those spinoffs suggests the tactic should be used more often.
Consider Bioverativ, formerly the hemophilia division of Biogen , which Sanofi agreed to buy this week for $11.6 billion, or $105 a share. Just over a year ago Biogen, which is focused on neurological drugs, decided to spin off Bioverativ to shareholders at about $45 a share so the new company could focus on its very different and fast-changing market. Baxalta, formerly the drug division of Baxter International , was spun off and eventually sold to Shire in 2016. Baxalta shareholders earned a roughly 45% return in just six months as a public company.
The newly spun out company doesn’t have to find a buyer to succeed; Abbott Laboratories had a market value of about $100 billion just before it spun off its branded pharmaceutical business, AbbVie , in 2013; today the companies are worth a combined $270 billion, outpacing the S&P 500 over that period. Animal-health specialist Zoetis has outperformed Pfizer , its former parent, by nearly 100 percentage points and beaten the S&P 500 over the past five years.
Today’s health-care industry is full of business combinations that might make more sense under separate roofs. Should Novartis, for example, continue to house its generic drugs business alongside its innovative medicine unit? Should Merck & Co. be focused on animal health in addition to its vast human drugs business? Will Pfizer, which has previously decided against splitting into two businesses focused on branded and off-patent drugs, reconsider?
This year, companies that are willing to ask themselves these tough questions have a strong chance of standing out from the crowd.
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