DEALWATCH: Dull Pharma JV May Become Alluring Spin-Off, Sale

Pfizer Inc.'s (PFE) and GlaxoSmithKline PLC's (GSK) plan to combine their HIV franchises in a joint venture may look like a humdrum piece of restructuring designed to optimize two relatively small assets. A closer look suggests the drug makers might have something more radical in mind: selling or spinning off the JV altogether.

Glaxo CEO Andrew Witty cites reasons for the combination that make good sense. A company with a single focus could be marginally more productive in science, sales and sniffing out M&A opportunity. Presumably, managerial and operational overlaps could create savings.

But there are also odd things about the deal. The contribution Glaxo is making to the JV, measured in terms of sales, is much larger than Pfizer's. The companies stated that the 2008 sales of the JV would have been 1.6 billion British pounds ($2.4 billion). In that year, Glaxo reported GBP1.5 billion in HIV product sales, implying that Pfizer will contribute only GBP100 million. Given this, how much does Glaxo stand to gain?

It doesn't gain near-term pipeline possibilities. Neither company has an HIV product in phase III trials, meaning a new product is two to three years away -- if the phase II projects make it to market at all. As Witty points out, "All research in HIV is pretty risky, and there are many examples of projects not making it."

The joint venture will not create a scale advantage relative to the big players in the space. Gilead Sciences Inc. (GILD) sold $4.3 billion in HIV medication in 2008. Bristol-Myers Squibb Co. (BMY) has two big HIV drugs, Reyataz and Sustiva, which together generated 2008 sales equal to the JV. And importantly, Gilead and Bristol's HIV products have had strong growth: 38% and 17%, respectively.

Gilead and Bristol, therefore, will only grow their lead on the new JV. In the last three quarters, sales of Glaxo's HIV products declined, and in each quarter the rate of decline has accelerated, to -9% in the fourth quarter. Pfizer's products are growing, but off a small base. Adding to the pressure, Combivir, the biggest product in the Glaxo HIV portfolio, loses U.S. patent protection in 2012.

All this indicates that creating the JV is not much of a strategy for long-term competitiveness in the HIV space. But it may do something else: create an entity that can be neatly sold to another player or spun off as an independent company. The combination of the two companies' assets, along with any savings realized, would fetch a price greater than the two franchises sold individually.

The natural buyer would be another company with HIV assets that could attain significant scale by combining what was previously three portfolios. If the price was right, Abbott Laboratories (ABT), for example, could add the JV's assets to its HIV drug Kaletra, which had $1.5 billion in sales in 2008. This would provide Abbott's existing HIV sales force with a larger range of products to sell.

A spun-off company would face the same challenges as the JV on its own but would offer investors significant near-term cash flows and the possibility of research upside.

A Pfizer spokesperson, when asked about such a strategy, said, "At this point there are no plans for a publicly traded company, or selling to one."

However, if Pfizer and Glaxo are entertaining the idea of such a strategy for the long term, they are to be commended. The environment in the pharma industry is increasingly difficult. To survive, companies must focus on the areas where they have sustainable competitive advantages. Assets that are doomed to finish second should be turned into cash.

(Naomi Nikolajsen and Robert Armstrong are senior columnists for Investment Banking Solutions at Dow Jones Newswires. Naomi may be reached on [phone] or by email at [e-mail]; and Robert can be reached at 201-938-2319 or by email at [e-mail]. Dow Jones Newswires is enhancing its news, commentary and analysis for the investment banking community, and is providing it on this service temporarily. Stay tuned for information on continued access to the best of Dow Jones news and opinion on companies, sectors and deals for bankers and research analysts.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [e-mail]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)