Record Pharma-Deal Year Not Enough to Sell Mature Drugs

In a record year for health-care acquisitions, some of the largest pharmaceutical companies tried to sell their portfolios of older drugs -- and failed.

Drug companies have agreed to about $260 billion of deals so far in 2014, the most since at least 2002 and more than twice the volume last year, according to data compiled by Bloomberg. Fueled by cheap debt, buyers like Actavis Plc (ACT) and Merck & Co. (MRK) paid substantial premiums amid competition for new drug pipelines.

Meanwhile, sales of mature-drug portfolios -- made up of older medicines such as Sanofi’s blood thinner Plavix and GlaxoSmithKline Plc (GSK)’s anti-depressant Paxil -- were unsuccessful.

Faced with declining sales and expiring patents on certain portfolios, some pharmaceutical companies have been dividing assets into units that can then be split off, or beginning divestment processes for the drugs. While the strategy may help potential investors assess products in isolation, it can also create complicated structures that are difficult to value.

The selling companies, which use the revenues of established products to fund research and development, may assign more value to them than buyers such as private-equity firms, said Emmanuel Papadakis, an analyst at MainFirst Bank AG in London.

Pricing ‘Obstacles’

“There are obstacles to arriving at a price for those kinds of assets,” Papadakis said.

While the portfolios can be tricky to package and price, their cash flow and brand names can be valuable in growing emerging markets, and dealmakers say potential suitors may come back in 2015.

“Private-equity firms and trade buyers are still very interested in these assets.” said Nigel Jones, a partner at Linklaters in London who specializes in health care. “It’s not a matter of lack of funding -- there’s still money around.”

In Sanofi (SAN)’s case, the products considered for sale were made in separate plants involving hundreds of employees, many of whom are in France, where job cuts are a sensitive topic. In addition, former Chief Executive Officer Chris Viehbacher considered selling the mature portfolio -- valued at about $8 billion -- without consulting the board. That sale was scrapped.

Package’s Diversity

Glaxo said it ended the sale of its North American and European established products, with annual sales of about 1 billion pounds ($1.6 billion), because the offers weren’t high enough. Potential buyers found it difficult to value the portfolio given the diversity of treatments being offered, said a person with knowledge of the sale, asking not to be named as the process is private.

A spokesman for Sanofi declined to comment. Simon Steel, a spokesman for Glaxo in London, also declined to comment, directing questions on the business to the company’s Dec. 4 statement issued after it decided to end the process.

Sanofi and Glaxo aren’t the only ones with deals halted. This week, Brussels-based UCB SA (UCB)’s sale of its U.S. generic-drug business to two private-equity firms for $1.53 billion fell apart after U.S. regulators asked for an additional study on one of the unit’s products.

Still, there’s speculation that sales may be revived next year, with Merck also among drugmakers that may dispose of established drugs, people familiar with the matter said in May.

Asset Review

The Whitehouse Station, New Jersey-based company agreed to sell its over-the-counter consumer products business to Bayer AG for $14.2 billion in May, and a spokesman for the firm said at the time that the company assesses “on an ongoing basis whether or not particular assets are core to our strategy, whether they provide strategic advantage, and whether they generate long-term value.” A representative for Merck declined to comment.

If the planned sales are to succeed, buyers and sellers alike may need to reassess their strategies.

“Hurdles such as resolving perceived management tensions over the strategic importance of these assets, and reaching a consensus on value, will have to be overcome,” said Jones. “That may not be easy.”

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