Exploring spin-offs as a strategic option

Exploring spin-offs as a strategic option

The aim, typically, of spin-offs is to enhance the value of both the spin-off and parent company in relation to assets, employees, intellectual property, technology, and/or existing products. But how do companies decide when it’s time to spin off part of their business, and what does this involve?


Top 5 takeaways
1 Typical aim of spin-offs is to enhance the value of both the
spin-off and parent company in relation to assets, employees, intellectual property, technology, and/or existing products.
2 Spin-offs allow each company to focus expertise and resource allocation on a narrower, more clearly defined strategy and operational business model.
3 Consider a spin-off when brands in the portfolio become less of a priority, leading to a ‘two-speed’ company.
4 Have a clear rationale about where the enhanced growth and margins will come from, both for the spin-off and the parent company.
5 Mitigating risk means focusing on critical success factors important to deriving value from the business, post-spin-off.


In the pharmaceutical and medical technology sectors, the number of new companies being spun out of existing companies is on the rise. Recently, global medical technology company BD announced its intention to spin off its Diabetes Care business as a separate company. Shortly before that, bluebird bio announced it would be spinning off its cancer assets into a new company, 2seventy bio. And MSD has just completed a spin-off, placing its women’s health, biosimilars, and established brands into new entity Organon. The aim typically of spin-offs is to enhance the value of both the spin-off and parent company in relation to assets, employees, intellectual property, technology, and/or existing products. But how do companies decide when it’s time to spin off part of their business, and what does this involve?

The search for value
In 2011, Abbott announced it was to separate into two leading healthcare companies by the end of 2012. One was to be a diversified medical products company – Abbott – and the other a new research-based global biopharmaceutical company – AbbVie. This separation would seem logical; the two companies were quite different with regards to resources and capabilities, and there would appear to be more advantage in them being apart than together. The decision turned out to be the right one, with both companies growing strongly (and AbbVie ensuring ongoing revenues from Humira, historically the highest earning medicine globally). 

But do spin-offs really enhance value? A recent analysis of spin-off performance focusing on AbbVie, CareFusion, Mallinckrodt, and SeaSpine found that these companies grew by at least 5% more during the two years after their spin off, compared with the two years prior1. Not only did the performance of these spin-offs improve, but so did that of the parent company – the parents sustained or grew their profit margins in the year following the separation.

This performance improvement may be down to a number of factors, including greater focus on the business2, which was one of the key intentions behind another high-profile separation – the spin-off of Baxalta from Baxter. Whilst the newly formed business unit leveraged capability and experience in haematology and immunology to successfully build a presence in oncology, the parent company, Baxter, focused on dialysis equipment, IV pumps and solutions, injectable drugs and intravenous nutrition. This allowed each company to focus expertise and resource allocation on a narrower, more clearly defined strategy and operational business model.

Reasons to separate
Beyond refocusing businesses, another important reason for considering spin-offs is when brands in the portfolio become less of a priority, leading to a ‘two-speed’ company with high levels of investment and input into some business units, and relatively low levels in other units. This, in time, can lead to stagnation in those units with revenue drop-off and demoralised teams. In a press release addressing the spin-off of Organon from Merck (known as MSD outside the United States and Canada), Rob Davis, President of Merck, said that it allows the parent company to become, “a leaner, more focused and agile company”. Also quoted was the CEO of Organon, Kevin Ali, who described Organon’s portfolio as consisting of, “many well-known products that were once core to Merck’s business but have since strategically received limited resources and investment”. He added that Organon believed its portfolio would be, “responsive to commercial investment.”

So, should a business spin-off be a strategic option for your company? If the performance of your organisation is hampered by a lack of focus, competing priorities, operational inefficiencies, or one of many other reasons, then maybe a spin-off is an appropriate option. You will need a clear rationale about where the enhanced growth and margins will come from, both for the spin-off and the parent company. And whilst achieving that may sound daunting, there is a cohort of pharma companies that have been through the process successfully. Even if now doesn’t seem like the right time to spin off, exploring it as a strategic option means you are better prepared when the time comes. 

“Early consultation and collaboration with staff and suppliers are also key factors in future-proofing spin-offs”

Improving the chances of success
Perhaps buoyed by the many positive examples of pharma spin-offs over the years, companies are seeing the spin-off model as an important and potentially lucrative strategic option. However, based on evidence from other sectors, spin-offs are not without risk, including business failure, unpredicted costs and negative staff reaction where high performing employees are lost to other companies. 

Mitigating against these risk factors means focusing on critical success factors important to deriving value from the business, post-spin off. Early activation of the new business strategy prior to spin-off is one example of how businesses can manage risk – the new way of working whilst still within the parent company helps ensure the spin-off is fit-for-purpose when becoming a standalone entity. Also helpful is the adoption of benchmarks and key performance indicators more aligned to those used by ‘target’ peers rather than the parent company. Early consultation and collaboration with staff and suppliers are also key factors in future-proofing spin-offs.

A more technical area to consider is that of intellectual property, such as the importance of clearly dividing patent rights and applications between the two entities. Again, preparation is key. As Robert Watson, Patent Attorney at Mewburn Ellis notes, “spinning out an entity will bring a detailed due diligence process, including of the intellectual property. This process can be made much simpler by preparing for this in the same way as any intellectual due diligence, ie. checking everything is in order well in advance!”.

Spin-offs as a strategic option – three simple rules
Actively considering a spin-off may be a valuable aspect of your strategic review process. Reflecting on lessons from others in the pharma sector will certainly enhance your strategic thinking. To support your thought process, here are three ‘simple rules’ to equip you and your colleagues to undertake an initial review of whether a spin-off would be a prudent option:

1 Challenge your organisational structure: consider the examples of spin-offs in your therapy areas of interest and look at whether the advantages they have obtained could be achieved by spinning off part of your business, such as refocusing the business or reinvigorating disinvested product lines.

2 Identify the risks of spinning off part of the business: although there are plenty of positive examples, a successful spin-off is the result of thorough analysis, careful planning, and meticulous execution. It should not be attempted unless the business case is clear and the strategy is realistic and achievable.

3 Consult widely: you may have the best understanding of your part of the business, but you will not necessarily have the best understanding of the opportunities that could be realised by pursuing a spin-off. Ensure you gather insights and opinions from colleagues in different functions across the business, and even beyond, with trusted stakeholders outside the company.

References
[1] McKinsey (2019) Divestiture in medtech: Are you the natural owner of your businesses?
[2] Vantrappen & Polastro (2015) How to Know If a Spin-Off Will Succeed. Harvard Business Review

Paul Riley is Medical Affairs Director at Glasshouse Health. Go to www.glasshousehealth.com. Mark Davies is an NHS Consultant and Director of Res Consortium. Go to www.resconsortium.com