For Drugmakers, It's All In or Get Out

It wasn’t so long ago that giant corporations specializing in non-medical products believed the drug business offered a nice piece of diversity for their portfolios.

Pick a field -- from Dow Chemical (NYSE: DOW  ) in chemistry to Procter & Gamble (NYSE: PG  ) in consumer goods to the old Tyco International (NYSE: TYC  ) in almost everything -- and you would have found some serious dabbling in pharmaceuticals.

But circumstances have changed, and corporations have been exiting the medical field to focus on their bigger business units.

Changing corporate chemistry
The latest strategic shift was Belgium’s Solvay, which said on Sept. 28 that it would sell its pharmaceutical business to Abbott Labs (NYSE: ABT  ) for $6.6 billion. Solvay said the deal will enable it to pursue a “strategic refocus of activities” for its chemicals and plastics businesses.

For decades, having chemicals and pharmaceuticals under one corporate roof was a common practice, although Dow Chemical and many large chemical companies have been out of drugmaking for quite awhile. Others have become more recent dropouts, including Akzo Nobel, which sold its Organon BioSciences division to Schering-Plough (NYSE: SGP  ) in November 2007.

Today, a handful of corporations, including Germany’s Merck KGaA (which isn’t related to the U.S. drugmaker Merck (NYSE: MRK  ) and Bayer, feature drugs among their many other businesses such as liquid crystals, plastics, coatings, and crop science products.

Seeking a narrower focus
Corporations also drop their drug units when they decide R&D costs and other financial commitments are too great.

In late August, Procter & Gamble agreed to sell its pharmaceuticals business. The acquirer is Ireland’s Warner Chilcott, which gets more brands and manufacturing facilities, while P&G gets $3.1 billion in a deal slated to close by year’s end.

P&G said Warner Chilcott will be a “better and stronger investor” in P&G’s prescription products because its goal is to grow its drug business, while P&G’s focus is to “prioritize investments” in consumer health care.

Getting out via spinning off
When Tyco International was known for multiple acquisitions rather than for a jailbird ex-CEO and his expensive shower curtain, its buying binge included companies that made drugs, imaging systems and medical devices.

The unwieldy Tyco eventually spun off its medical products business to create Covidien (NYSE: COV  ) in mid-2007. Another collection of companies was spun off as Tyco Electronics.

The deals cited above show how drugmaking has changed for conglomerates -- from a high-margin, steady-growth, cash-cow component to a high-maintenance division requiring hefty outlays for R&D.

The drug industry’s major trade group, PhRMA, cites studies and its own data saying the average successful drug costs $800 million in R&D and that only three of 10 prescription drugs for Americans generate enough revenue to meet or exceed R&D costs. For every 10,000 compounds tested, five make it to clinical trials and one reaches the market.

So, the next time you hear a corporate giant talk about “strategic options” for its drug division, get ready for a spinoff or a sale.

More merger and spinoff Foolishness:

Fool contributor Robert Steyer doesn't own shares of any companies cited in this story. Procter & Gamble is a Motley Fool Income Investor pick, and the Fool owns some shares. The Fool has a disclosure policy.


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