Capturing the Real Value from a Pharma Business Spinout

Jul 01, 2014
By Pharmaceutical Executive Editors

Examine the landscape of pharmaceutical companies and what do you see? A host of new brands—like Abbvie, TWI Pharmaceuticals, and Zoetis—emerging as strong forces in a competitive industry marked by a growing diversity of players. In fact, eight new brands that were spinouts over the last five years are now publically traded and account for $98 billion in shareholder value. These new brands are accelerating the pace of industry change. More important, as companies divest non-core assets in the form of spinouts to unlock value, the role of a strong new parent brand has become increasingly prominent.

This trend will only grow. We see the pharma spin market as poised to move into high gear. While some companies are pursuing merger opportunities, given the complexity of the pharmaceutical industry and the ongoing challenge from post-patent blockbuster revenue decline, most analysts believe that the new norm will be greater focus and that with this, spins will continue. In fact, in March, Baxter Pharmaceuticals joined the move and announced plans to spin out its biosciences business into a standalone company, with the aim of unlocking shareholder value.

Increasingly, pharmaceutical companies see the imperative to tap corporate brand value as a way to retain shareholder confidence. While this industry is often identified through product brands—the "Lipitors" and "Nexiums"—creating real meaning in the company itself holds growing importance.

Why the corporate brand creates value

Customers need a deeper understanding of what the company stands for: When a spin or re-branding takes place, customers want to know that the new brand will preserve the integrity and reputation of the same products, services, and people they are familiar with and have thus come to trust. In today's transparent business environment, understanding what the company is about is critical to bolstering the value of the product—what are the company's values, where is the momentum behind its promises, and, most importantly, what are its intentions for keeping its customers?

Looking outside the pharmaceutical industry, the 2011 spinoff of ITT's water division into a new brand, Xylem, provides an excellent example of a company that's delivering a compelling story about relevant corporate brand meaning. Xylem's tagline, "Let's solve water," sends a very clear and inspiration message about the company's focus on tackling the world's most challenging water problems and how that differentiates from its legacy parent, ITT. It portrays a corporation with the optimism, energy, and focus to be at the vanguard of the big challenges. It rallies the team and gives confidence to customers. And it creates results: Xylem is already a winner in the market, outperforming the Clean Tech indices by almost 10%.

A publicly visible promise of who the company is, backed by real proof points, raises the stakes on performance—those companies courageous enough to make one, under today's media spotlight, send a powerful signal about what they intend to be and deliver.

Inside, companies need to win the talent war with current and potential employees: Talent markets have changed forever. Not only are employees less loyal than they were a decade ago, but the information a job hunter can discover about a company has grown exponentially. With hundreds of millions of people using LinkedIn and putting their employer name right next to their picture on Facebook, people are "badged" with their employer's brand like never before. More visible than ever in our social and professional spheres, a company and what it stands for can be as important a public signal of who we are as the car in our driveway.

The need for a corporate brand that connects with employees is accentuated in a spinout. Employees who are a part of a spin must face trepidation and uncertainty as they confront the prospect of leaving a strong, stable, and well-known parent brand. This makes employee retention a challenge. Added to this is the need to attract the best research and clinical talent from established pharmaceutical competitors and the importance of creating a corporate brand that connects with employees and recruits is clear.

With investors, a compelling brand story can drive the multiple: In the case of a spinout, a powerful corporate brand will send clear signals to an investor base that's increasingly diverse, and with the power to act instaneously: just one click of the mouse can finalize a $4 trade. For institutional investors searching an increasingly global playing field for the best investment story, a clear corporate brand direction and set of guideposts is an important signifier of attraction. New brands that have invested in a clear growth story get extra credit by garnering P/E ratios in the high teens to low twenties.

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