Dr. Anil Kumar Angrish

Vidushi Modi

Spin-offs are identified as a method which allows a parent company to separate a distinct part of its business into a new, independent entity. Major objectives of firms adopting spin-offs are to focus on core competencies, pursue growth opportunities independently, and create value for shareholders. Indian pharmaceutical companies are increasingly turning to spin-offs as a strategic maneuver to enhance focus, operational efficiency, and shareholder value. Studies have shown that a pharmaceutical company may opt for the contraction in the form of spin-off of a business unit or a division to raise additional funds in the form of equity, to separate generics, innovative products, and R&D units; sharpen focus on primary areas, to de-risk the entities from each other, capture a better valuation, or to provide visibility of operational and financial performance for the shareholders. To protect interests of all stakeholders, approval from the National Company Law Tribunal (NCLT) is mandatory in India.

A Harvard Business Review (HBR) study (2022) concluded that value is created only one time out of two, and destruction occurs only one out of four. In 2022 only, there were 44 spin-offs on Wall Street which was a 33% increase from the previous year. Spin-off is gaining traction in healthcare and pharmaceutical sector. Top global pharmaceutical MNCs are opting for spin-off, e.g., MSD completed a spin-off, placing its women’s health, biosimilars, and established brands into the new entity ‘Organon’ in 2021. In 2022 itself, GSK unyoked its US$ 36 billion Consumer Healthcare business thereby giving rise to ‘Haleon’. GSK opted for spin off to focus more effectively on its vaccine portfolio. Johnson & Johnson also successfully launched its consumer arm ‘Kenvue’ in 2023. Novartis completed its spin-off of Sandoz, Generics and Biosimilars unit of Novartis in 2023 so as to remain ‘fully focused’ on innovative medicines.

Besides pharmaceutical sector, MedTech sector has also realized the need of the hour to cut-out peripheral activities and lean into core strengths. Many prominent MedTech companies such as Olympus (2021), Zimmer Biomet (2022), and Baxter (2023) have opted for spin-off as a solution to quickly respond to changing environment. Zimmer Biomet completed its spinoff of ZimVie, Zimmer Biomet’s former Dental and Spine business in March 2022. Baxter announced in July 2023 that Vantive will be the name of the company’s proposed spinoff of its Renal Care and Acute Therapies businesses. Baxter had announced plans to separate the unit due to ‘supply-chain challenges’ and ‘weak demand’ for dialysis operations. On July 5, 2024 Vantive was in news as Private Equity firm Carlyle Group was said to be in exclusive talks to acquire Kidney Care spinoff Vantive for more than $4 billion, including debt.

Prominent Indian pharmaceutical companies also opted for spin-off in past, e.g., in 2005, Dr. Reddy’s Laboratories Limited in collaboration with ICICI Venture and Citigroup Venture Capital International spun off Perlecan Pharma Private Limited which was engaged in Clinical Development and Out-licensing of New Chemical Entities (NCE) assets. In 2006, Sun Pharma spun off its capital-intensive R&D unit – Sun Pharma Advanced Research Company Limited (SPARC) to focus on NCE and New Drug Delivery Systems (NDDS). Subsequently, SPARC was listed on stock exchanges in 2007. Nicholas Piramal India Limited (NPIL) (now, Piramal Healthcare Limited), demerged its NCE and Research Unit which was called Nicholas Piramal Research Centre (NPRC), into a new company in 2007. Glenmark Pharmaceuticals hived off its generic and API business into a separate company – Glenmark Generics Limited in 2008 which was subsequently listed on stock exchanges in 2009.

Prominent global pharmaceutical companies have shifted from a ‘bigger is better’ model to a ‘streamlined and focused’ approach. Spin-offs as a strategic move can unlock shareholder value by allowing each business to pursue its strategic direction that can lead to improved performance and increased valuations for the parent company as well as the spun-off entity. Table 1 provides the details about ten such instances in which prominent pharmaceutical companies opted for spin-off. Domain of parent company and resulting company has been listed to lay emphasis on ‘focus’ aspect. Parent Company stated the objectives behind spin-off move in terms of ‘value creation, ‘focus’, ‘independence’, ‘operational efficiency’, ‘reduction of risk’, and ‘simplification’. 9 out of 10 pharmaceutical companies opted for the spin-off to enhance ‘specific focus in terms of management, control and growth prospects’ whereas 8 out of 10 pharmaceutical companies stated ‘creation of value for both the company and the shareholder’ along with ‘ability to pursue growth plans, raise necessary resources, independently’.

Table 1:- Focus of Parent and Resulting Pharma Companies on Spin-off

Source: Compiled from annual reports of respective pharma companies

Resulting Company is separately listed on stock exchanges. Out of above ten companies, only Sanofi Consumer Healthcare India Limited was not listed. Seven companies were listed within 12-18 months after spin-off. Glenmark Lifesciences and Ravinder Heights took little longer for listing.

Table 2:- Market Capitalization of Parent Company and Spin-off Company

Amount (Rs. in Cr.)

Source: Compiled from annual reports of respective pharma companies and NSE website

Second aspect is of improved valuations. To compare valuation, valuation of the parent company as on March 31 of the year prior to the spin-off move, and valuation of parent as well as spin-off entity as on March 31 immediately after the listing of spin-off entity. From Table 2, it can be observed that significant increase was observed in market capitalization of combined parent and spin-off of Alembic, Jubilant and Ortin Labs. Increase in market capitalization of Alembic Limited (parent) and Alembic Pharma Limited (spin-off entity) in aggregate was 331% in comparison to market capitalization of Alembic Limited alone (prior to spin-off). This increase in market capitalization was 425% in case of combined Ortin Labs (parent post spin-off) and Vineet Labs (spin-off entity) as compared to parent – Ortin Labs (prior to spin-off). Change in market capitalization was 278% in case of Jubilant Life Sciences Limited and Jubilant Ingrevia Limited in comparison to parent company’s valuation prior to spin-off. Moderate increase of 22% in case of Glenmark entities, 15% in case of Piramal entities, and 9% in case of SMS Pharma was observed. Post spin-off, combined market capitalization decreased in case of Aarti Industries & Aarti Pharmalabs (-39%), Panacea Biotec & Ravinder Heights (-27%) and Suven Life Sciences & Suven Pharma (-15%). In case of Sanofi India Limited, market capitalization of parent company went up by 40.66%. To conclude, increase in valuation was observed for 7 companies whereas decrease was observed in case of 3 companies which had opted for spin-off. In case of Suven Life Sciences, it can be observed that potential fall in valuation of the demerged company, post spin-off, has to be seen in view of its domain of operations. Drug Discovery Services are inherently capital-intensive in nature. The new company, Suven Pharmaceuticals Limited has gained significant valuation as its area of operation is Contract Research and Manufacturing Services (CRAMS).

In Corporate spin-off, assumption of achieving higher multiple will not be achievable merely by spin-off. Complexities in the separation of functions and operations due to high levels of entanglement, regulatory issues, legal pre-requisites, target financials, etc. are of utmost importance to ensure the success of spin-off move. Management is expected to ensure that separation is not based on a faulty premise. Divisions in pharmaceutical companies already run separate operations, and in many cases, with no shared functions or systems. These can be separated easily. But in those cases, where high level of entanglement exists across operations and functions, separation becomes difficult. Companies revisit their plans too so that move does not go wrong, e.g., Medtronic, a global leader in MedTech, Services, and Solutions had unveiled its plan to separate out the Patient Monitoring and Respiratory Intervention (PMRI) Businesses in October 2022. The plan was to complete the transaction within 12 to 18 months. These divested segments were to be made part of a standalone company with combined sales of US$ 2.2 bn comprising ventilators, bedside monitors, anesthesia hardware, pulse oximetry sensors, telehealth platforms, and other technologies. Many interested buyers were in the queue too. In February 2024 the company announced that it ‘no longer plans’ to spin-off it PMRI business. Advice of late Henry H. Buckley, an Australian politician, is appropriate in this context that ‘mistakes are costly and somebody must pay. The time to correct a mistake is before it is made. The causes of mistakes are first, I didn’t know; second, I didn’t think; third, I didn’t care’. In a spin-off that goes wrong, all stakeholders may suffer.

Dr. Anil Kumar Angrish- Associate Professor (Finance and Accounting), Department of Pharmaceutical Management, NIPER, SAS Nagar (Mohali), Punjab

Vidushi Modi– MBA (Pham.), Department of Pharmaceutical Management, NIPER, SAS Nagar (Mohali), Punjab

Disclaimer: Views are personal and do not represent the views of the Institute.