Pros and cons of the spin-offs and sales of Big Pharmas

Big Pharmas reduce drug discovery investment to minimize risk, burdened by the enormous investment cost

Seeks functional rebirth through divisions… investor-focused management increases

Mergers, spin-offs, buying, selling...

 

news shows that global Big Pharmas have been busy constantly changing their shape.

 

In particular, the issue that gained the most attention for the past few years was the companies' spin-offs and sales.

 

Although the companies' made the decision under the premise of ‘focusing on one’s strengths,’ such divisions and sales have brought out both positive and negative views.

 

One thing to note is that these changes have been occurring 'serially' among global pharmaceutical companies.

 

◆Change in the development trend and surging investment cost = Although it is difficult to pinpoint the root cause of the constant change, a trend is evident.

 

Development of new drugs is difficult, even without specifying the 1 in 10,000 probability of success.

 

Also, successful development does not directly translate to actual sales.

 

And this problem continues to intensify.

 

Hidden within the shadow of the often-discussed ‘open innovation' n the global market.

 

exists the rampant new drug famine.

 

Discovering new substances is difficult and the risk keeps increasing, so ‘sharing’ the burden became the solution.

 

With the field of chronic disease ruled out as ‘drugs in need have already been released,’ the industry's focus is now on anticancer drugs and rare diseases.

 

Also, with the increase of cutting-edge new drugs that have dozens of indications for a single substance, Big Pharmas are now faced with a situation where they would need to spend astronomical amounts just on the Phase III trial of its new drugs.

 

As the direct discovery of candidate substances has become increasingly difficult and buying promising new substances (candidate substances) or venture businesses that own such substances, the companies' investment spending has skyrocketed as well.

 

From the Big pharma’s perspective, this means that their already-high proportion of investments have doubled.

 

Not only Takeda, Pfizer, and MSD, which carried out spin-offs and sales of its business units, but companies that prided in their R&D such as Novartis, Sanofi, and Bayer have announced at least 3-5 acquisitions of drug substances or companies every year.

 

The size of mergers and acquisitions by global companies had already exceeded 400 trillion won in 2019.

 

The advent of the 'age of high-priced drugs’ that is emerging as a social issue is not unrelated to this large amount of investments.

 

A Business Development personnel who returned to the Korean subsidiary after working at its global headquarters said, “Big Pharmas are reducing directly conducted projects that start from substance discovery.

 

The companies have turned their direction to buying promising substances to reduce the investment risk.

 

However, the problem that companies face is that the price of venture businesses that own such substances have also been rising rapidly.” ◆Stock price and stockholders… the BU system and spin-offs = The rise in investment cost and corporate spin-offs may seem unrelated at a glance, but this is also not the case.

 

A company's stock price and its stockholders are currently exerting wider influence on the decision-making process of the Big Pharmas than in the past.

 

For example, when a company maintains its size and only increases investment, investors worry that the stock price will fall due to decreased cash flow.

 

The corporate spin-off is one option that such companies could select in these cases.

 

No matter how promising a new drug may be, investment in its substance eventually affects the financial solvency of the company.

 

Spin-offs allow the company to divide its size and profit structure.

 

In other words, the company can subdivide its business by concept to an investment-focused part and a legacy part – and recreate the company.

 

Equity spin-offs do not burden the company as there is no exercise of appraisal rights.

 

Since the company becomes a legally independent company after the spin-off, the spin-off may go public immediately afterward.

 

Prior to such spin-offs, most multinational pharmaceutical companies first proceed with restructurings that have a split-off tendency that may serve as a foothold for improving the financial solvency of the company or for the sale of its businesses.

 

For example, before Pfizer completed its spin-off of Viatris, it had established a 3-Business Unit system and separated its legacy brand ‘Upjohn,’ then spun-off Upjohn and combined it with Mylan N.V.

 

to form Viatris.

 

The recent MSD’s spin-off of Organon and Takeda’s sale of its diabetes and OTC business, Novartis’ decision to independently operate its pharmaceuticals and oncology division, and Abbott’s separation of ts biopharmaceutical division as Abbvie were all made in the same context.

 

An official from one multinational pharmaceutical company said, “The criticism that the pharmaceutical companies are now acting on behalf of its shareholders rather than their patients also stem from this phenomenon.

 

However, with the proportion of venture capital (VC) investors (financial investors) increasing, the companies do not have many options to choose from with regards to their operations."