GlaxoSmithKline PLC's decision not to bid for Pfizer Inc.'s consumer healthcare business has left the U.S. pharma giant without an obvious industry suitor and open to a bid from private equity companies, following their record year for deal-making in the sector in 2017.
Pfizer announced a review of its consumer healthcare business in October 2017 and industry sources believe the price tag ranged from $15 billion to $20 billion. Bloomberg reported that Reckitt Benckiser Group PLC and GSK were the two front-runners for the unit but both dropped out of the process last week, paving the way for possible entrants from the world of private equity, who may not be willing to pay quite so high a price given the absence of any synergies, according to industry experts.
"In certain deal situations where there are [companies from within the industry] involved, it's clear that they have a lot of synergies and it's a strategic priority, I think private equity can be cautious," said Kara Murphy, co-lead of healthcare private equity at Bain & Co., in an interview with S&P Global Market Intelligence. "So if those fall away, absolutely I am sure private equity is going to take a hard look. It's just, what's the valuation expectation?"
Although they generally like healthcare companies, the lack of any possible synergies may act as a deterrent to private equity firms competing against industry players, said a veteran investment banker, who spoke to S&P Global Market Intelligence on condition of anonymity.
"If everybody steps away, then it may be that some of the guys have taken a look and they will re-ignite their discussions," he said. "It doesn't necessarily mean that private equity will end up paying as high a price for a business that's a cash cow, but doesn't really have very much in the way of growth because de-facto they will not have any synergies and therefore they're really just going to have to accept the business plan as it is."
While London-based GSK had repeatedly expressed interest in Pfizer's consumer unit to expand the consumer joint venture — which forms one of the three key pillars of the business along with pharmaceuticals and vaccines — CEO Emma Walmsley nevertheless insisted that she would be financially disciplined about any approach. Yesterday, the company instead bought out Novartis AG's stake in their joint venture, plowing $13 billion into the deal, and Walmsley admitted she did not bid for Pfizer's unit due to "capital constraints."
Private equity firms invested a record $14.2 billion in deals in the U.S. healthcare sector last year, according to S&P Global Market Intelligence data. Bain's Murphy said private equity companies can sometimes move with more certainty and speed than corporates, and that can play to their advantage if someone wants to exit on the faster end. Still, private equity companies will be seeking returns of 25% to 35%, compared with an industry player, who might be looking for a more muted return at 12% to 15%.
EY Parthenon's co-lead of the Americas healthcare team, Dan Shoenholz, attributed interest in the sector to a number of healthcare-focused fundraisings, including funds that have been in healthcare for a long time but recently managed to raise a record-breaking size, as well as new entrants from Europe, and favorable macro trends.
"We're finally seeing a little more clarity around the regulatory regime," Shoenholz said. "The prospects for a significantly disruptive set of new changes has receded so that's increased confidence."
"In reality, there's too much money and not enough deals and so if it's a good, sustainable, defensible business, they might lower their returns to 20%, conceptually," said the banker.