Capturing the Real Value from a Pharma Spinout

Jul 08, 2014
By Pharmaceutical Executive

The pharma spin market is poised to move into high gear as companies see the imperative to tap corporate brand value to retain shareholder confidence. Allen Gove explains how understanding what the company is about is critical to bolstering the value of the product.

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.

Doing it right—Zoetis, a case study

Zoetis, the new company created when Pfizer spun out its Animal Health business in 2014, provides a case study example of the power of a corporate brand. Its 2013 IPO was the largest since Facebook and third largest of that year, generating strong demand in the market and raising more than $2.2 billion, with an initial market cap of $13 billion. In 2014, the company’s branding and communications work was broadly recognized.

How has the new Zoetis used its corporate brand to drive success?

Telling the bigger story: The Zoetis story is not solely about what the new company sells. As a new brand, Zoetis tells a much bigger story—about what the company believes and the role it plays in society. It pushes beyond products and services and describes the critical role of Zoetis in ensuring the health of animals and why this matters —from keeping animals healthy to provide comfort and companionship as well as helping to efficiently create safe, high quality protein to feed the world’s growing population

This story is crafted to meet the needs of different audiences, from the livestock farmer and veterinarian who want to partner with a leading animal health company to grow their business, to the Wall Street trader who needs to better understand the attractiveness of the animal health market with a vertical that is outpacing human health.

Delivering a branded experience: While a story is important, it’s virtually impossible to lean on messaging alone to build a brand. Experience is critical to support the story and it is this that is often of the greatest concern to current customers and employees. In the case of Zoetis, the company’s on-the-ground presence through its network of field representatives and technical specialists is central to its brand’s differentiation from the competition. As a new company, it was critical to continue to invest in and support this broad-based network to allow Zoetis to react quickly to local-market needs and be well positioned to help customers increase their business productivity. Since the spinout, not only has Zoetis continued to tell the story of the reach of their team; it has also invested in building out this network. Through this network, Zoetis is able to market its products and to provide value-added services that make its field force feel less like a vendor and more like consultants that help to drive the productivity of their customers’ businesses.

Appealing to the team’s passion: Employees are the face of the new brand and need to believe in its purpose. Employees must be the ones empowered to bring that purpose to life. In the case of Zoetis, the company’s leadership team partnered in the development of a common purpose that focuses on “building partnerships for results that matter” along with a set of six core beliefs that were central in the internal launch of the new company. Together, the idea of “delivering results that matter”—caring for the health of animals to create companionship for humans and ensuring a safe food supply for the world—along with the core beliefs help to motivate employees by demonstrating the link between results and their individual daily actions.

Investing enough: While there may be a tendency to invest heavily at the launch of the new brand and then to scale back, this is a pitfall that should be avoided. Since the launch of Zoetis, the company has continued to invest in the corporate brand, expanding the corporate communications team to better promote the brand externally and initiating partnerships. The latter includes a high-profile sponsorship with the Smithsonian, a nationwide traveling exhibit called “Animal Connections: Our Journey Together.” The brand investment goes beyond mere advertising—spanning every touch point, from how the new brand comes to life in workspaces around the world to the detail aids field reps use with customers to traditional publications and activities such as the annual review and annual meeting—all of which are under watchful eye of the brand team.

Keeping the corporate brand at the forefront: As the pharmaceutical industry continues to push for greater specialization and as new brands are created to unlock value, the importance of the corporate brand should not be overlooked. The corporate brand is a powerful asset that can be used to drive loyalty across customers, investors, and employees and win points with potential customers, investors, and recruits. Building a strong corporate brand requires companies to deliver an engaging story, to support the story with a branded experience, to engage employees, and support the brand as a strategic investment in future growth.

About the Author
Allen Gove is a senior partner at Lippincott PLC. He can be reached at mailto:allen.gove@lippincott.com.