Baxter puts conscious uncoupling on pharma radar
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Baxter International has put conscious uncoupling on pharmaâs radar. The $40 billion healthcare giant is separating its biotech and medical products units. Baxterâs spinoff history suggests this latest move will create value for shareholders. This, and the success of PfizerâsÂ and AbbottâsÂ recent splits, will encourage other pharma giants to follow.
Baxter knows the drill. It has carved out three companies over the past two decades, and shareholders reaped the benefit. Its pharmacy benefit company was acquired at a hefty premium a few years after Baxter set it free. It was a similar story for its Allegiance healthcare cost management business, whose worth increased sixfold in the few years it was independent. Edwards LifesciencesÂ is still public, but the heart-valve makerâs valuation has risen sevenfold since it went independent in 2000.
The reasons for breaking the remaining company in two are familiar. Making drugs is risky and requires hefty research and development â but can generate fast growth if successful. By contrast, selling dialysis equipment and IV bags and liquids is a steady, slow-growth business that should throw off excess capital that can be given back to shareholders.
Forming two companies may attract new investors eager for growth and capital return, respectively. The substantial differences between these two businesses mean itâs probably difficult for anyone to manage both effectively. Separating them should lead to better capital allocation, management focus and profitability.
Itâs another sign that days of the pharma mega-company are fading. The industry spent decades growing, and the eventual result was poor laboratory productivity and waste. Nearly all the major companies significantly underperformed the S&P 500 for the decade after 2000.
The returns from focus, meanwhile, are clear. Abbott has outperformed the market after it decided to dismember itself in late 2011. Pfizerâs stock has doubled since its decision to shrink earlier that same year. It has subsequently rid itself of two divisions and announced it may split its remaining business in three. Merck, BayerÂ and Johnson & JohnsonÂ may find itâll be hard not to jump on the bandwagon.