As spin-out, Alcon joins a successful crowd
- Novartis spin-off Alcon began life as an independent company in the green Tuesday, a start that aligns with the historically positive market reception for companies spun out from their parents in both pharma and the broader business world.
- Since 2010, major pharma spin-offs have outperformed the S&P 500 by a median return of 5% in the first month of trading, according to an analysis by RBC Capital Markets published Wednesday. That success holds true for other industries as well, the investment bank found, citing data from the Bloomberg U.S. Spin-Off Index showing spin-offs outperformed the market at an increasing rate over the past decade.
- That trend, coupled with Novartis' successful move to shed Alcon, could potentially serve as a blueprint for Allergan, a pharma facing growing investor discontent, RBC analyst Randall Stanicky wrote. After four years of consistent share price declines, shareholder frustration could be in the spotlight at Allergan's May 1 meeting, which will feature a non-binding vote to separate the CEO and chairman roles.
Novartis' spin-off of Alcon was the result of a 2017 strategic review. The newly independent company, which employs more than 20,000 staff, will focus on a portfolio of eye care products that earned sales of $7.1 billion last year.
Spin-offs are largely aimed at generating greater stock returns, and RBC's analysis found such moves have been largely successfully in achieving that goal — judging by their short-term stock market performance, at least.
|Parent||Spin-off||Date completed||Spin-off 1-month performance||Spin-off 12-month performance|
|Eli Lilly||Elanco||Sept. 2018||-12%||-9%|
|Pfizer||Consumer health||In process||N/A||N/A|
|Reckitt Benckiser||Indivior||Dec. 2014||6%||20%|
|Theravance||Theravance Biopharma||June 2014||74%||-29%|
SOURCE: RBC Capital Markets
In the case of Allergan, shareholders may be taking a closer look at Novartis' decision.
"The solid historical performance of spin-offs suggests that it could be a compelling alternative to a sale or divestiture should Allergan pursue a break-up," Stanicky wrote.
While non-binding, the May 1 vote on splitting the CEO and chairman roles could hold broader implications for Allergan's future direction, according to the analyst.
Stanicky advocates for a business break-up and expects the board to feel more pressure if the vote garners majority support. He isn't alone either, as Bernstein analyst Ronny Gal recently called for a split of Allergan's aesthetics and therapeutics businesses.
"We believe management should address such split plans explicitly in the upcoming quarterly call," Gal wrote, referencing Allergan's first quarter earnings call set for May 7.
The Dublin-based pharma has been here before. As part of a strategic review a year ago, CEO Brent Saunders said "everything was on the table," including a split.
That process led Allergan to announce plans last May to sell its women's health and infectious disease businesses. But neither have been sold yet, and Saunders said earlier this year the company would no longer attempt to find a buyer for its women's health unit.
The stock market hasn't been kind to Allergan. Share prices have declined more than 50% since 2016, and a string of R&D failures have lowered long-term growth expectations.
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