June 04, 2019

Healthcare Divestitures: The Big Break Up?

By Suzy Bibko, EMEA Content Marketing Manager, Merrill Corporation

Although megamergers in the healthcare sector have been grabbing headlines, spin-offs and divestures may be the new game of the day. Most prominent have been Novartis’ recent spin-off of Alcon and GlaxoSmithKline and Pfizer’s announcement that they plan to combine and then divest their consumer healthcare businesses. Smaller recent deals include Takeda Pharmaceutical’s recently announced sale of its Xiidra ophthalmic solution business to Novartis for $3.4 billion and Agfa-Gevaert’s decision to put Agfa Healthcare up for sale. 

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Divestitures by large-cap healthcare companies are expected to continue at the same level or increase in the coming months, according to a recent study by West Monroe Partners and Mergermarket. A recent Merrill InsightTM survey also backs this up: 42% of global dealmakers polled predicted more restructuring and divestitures in the year ahead. With $624 billion ready for investment, the healthcare market is primed for asset sales, according to PwC.  

Source: West Monroe Partners and Mergermarket, Reshaping Healthcare M&A: How Competition and Technology are Changing the Game, May 2018

What are the reasons behind this shedding of assets? For some, it’s part of a long-term portfolio shuffle. For others, it’s increasing investor pressure to divest or spin-out non-core businesses. Indeed, in a Merrill InsightTM poll on the rise of shareholder activism, 48% of finance respondents said they were most concerned about shareholders pushing for strategic and operational changes such as asset sales.

Finally, the shift is likely a result of increasing geopolitical and regulatory resistance to tie-ups. Thirty-five percent of 230+ healthcare M&A professionals polled by Merrill InsightTM flagged political uncertainty and 21% cited competition and national security regulations as most likely to sink healthcare deals next year. Faced with higher market barriers, companies may be turning to spin-offs and divestitures as smoother paths to creating shareholder value.

Making the Best of It

So, if divestitures are on the horizon, what are some best practices? In our recent healthcare webinar (May 2, 2019), experts shared their thoughts.

“I think a key item in these transactions is to understand the infrastructure of the company [being divested],” says Andrew Kaplan of Bain Capital. “Often divested assets have gone years with a lack of investment focus, so it can need quite a bit of a lift to be a stand-alone, independent, thriving company.” In terms of infrastructure, Kaplan says that includes the systems that generate the KPIs, whether management has access to them, whether the organisation is on one IT platform or a few and if the platforms have been integrated, and the like.

“Moreover, you need to anticipate all the questions that a sponsor would want answered,” says Christopher French of CG / Petsky Prunier. “Remember that these businesses have often been part of a larger organization and have not contemplated being an independent business. So, we try and construct what a stand-alone business would look like.” This includes asking whether the business operates independently or through the parent company in areas including sales, partnerships, IT and operations and benefits. A stand-alone analysis can reveal significant incremental costs, negatively impacting valuation. French says benefits is a particular focus area since the new stand-alone company may not be able to self-insure like the parent company can.

The additional internal complexity of a carve-out or spin-off necessitates more prep time than in a traditional acquisition or merger. Being organized, though seemingly obvious, can make a big difference in the deal from the start, including from a document and data room perspective. Therefore, having the correct tools to achieve success is essential.

This all sounds like sage advice. So, why not do it right the first time around?

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