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The Spin Cycle

Merck
Copyright © 2009-2016 Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc., Kenilworth, N.J., U.S.A. All rights reserved.

Merck, the global pharmaceutical company, announced it will spin-off roughly 90 of its lower-growth products into a new publicly-traded company focused on woman’s health, legacy brands (generic drugs) and biosimilars (the generic equivalent for biologic drugs).  

Why?

By separating its portfolio of lower value products, Merck “remain-co” will be a higher-growth company focused on oncology, vaccines and animal health, three of the hottest sub-sectors in the healthcare arena.

The industrial logic is that by separating, each business will be able to focus on their respective strengths.  And hopefully, investors will place more collective value on the separate entities, each with their own growth and risk profiles.

This tactic has become popular in the world of big-pharma.  Last summer, Pfizer announced it would merge its off-patent drugs into Mylan, a generics and specialty pharmaceutical company. 

 

The Takeaway

For many years, spin-off companies generated significant investor interest and outperformed the broader market by a wide margin.  Spin-offs including PayPal (separated from eBay) and Zoetis (separated from Pfizer) have been fabulous success stories.

But lately, the spin-off trade hasn’t worked as well.  The S&P Spin-Off Index (yes, a real thing) has achieved a 5% annual return over the last three years, vs. nearly 16% for the S&P 500 overall.  Investors didn’t appear thrilled with Merck’s announcement out of the gate, with shares down nearly 3%.

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