Reckitt Heroin-Addiction Unit Review Points to Possible SaleMatthew Boyle
Reckitt Benckiser Group Plc said it will start a strategic review of its pharmaceutical unit, pointing to the possible sale of a business that analysts say could fetch at least 1.5 billion pounds ($2.4 billion).
The review will take “some time” and Reckitt Benckiser plans to update investors in 2014, the Slough, England-based maker of Durex condoms said today. It also raised its full-year revenue guidance, sending the shares up as much as 6.2 percent.
Analysts have advocated a sale of the pharmaceutical unit, which gets almost all of its revenue from Suboxone, a drug to treat addiction to opioids including heroin. Chief Executive Officer Rakesh Kapoor has said that is not “a space we want to be in.” The review comes seven months after the first generic variants of the drug began to erode sales and profit margins. Since 2010, Suboxone has been sold in a film-strip format which has captured more than two-thirds of the market in the U.S.
“We think now is the right time to seek an exit,” said Graham Jones, an analyst at Panmure Gordon. “Whether RBP is worth 1 billion or 4 billion pounds is of less consequence than the management being focused on managing the core business.”
Reckitt Benckiser rose 5.8 percent to 4,760 pence at 9:42 a.m. in London, the steepest gain in the U.K. benchmark FTSE 100 Index. The stock has gained 23 percent this year.
Sanford C. Bernstein analyst Andrew Wood said the most likely outcomes are a sale or spinoff of the unit. Keeping the business is less likely as investors “are not attributing enough value to this business within Reckitt,” he said.
Valuations for RB Pharma were as high as 6.3 billion pounds two years ago, yet have declined now that the business faces threats from generic and branded competition after several years of dominating the $1.7 billion opioid-dependency treatment market. Exane BNP Paribas currently estimates that the unit could be worth about 1.5 billion pounds, while Investec analysts value it at as much as 5.5 billion pounds.
Beyond generics, Suboxone faces competition from Orexo AB’s tablet Zubsolv, which won U.S. regulatory approval in July and began selling in September. Orexo has said Zubsolv has a market potential of at least $500 million in annual sales.
“The number of new threats that will impact RBP in 2014 makes this a buyer’s market for RBP,” said Pablo Zuanic, an analyst at Liberum Capital in New York.
The division’s sales fell 16 percent at constant exchange rates in the third quarter, hurt by a decision to stop making tablet versions of Suboxone in March amid increased competition. That was a steeper rate than the 12 percent decline in the second quarter. Suboxone film will lose market share over time, Chief Financial Officer Adrian Hennah said on a conference call.
“We’ve always said it’s a fantastic business, but it’s not core to the company,” CEO Kapoor said in a telephone interview today. “I’ve said that several months after the entry of generics we will confirm the impact of generics. We are now in that phase. Nothing is ruled out.”
The company has not yet hired advisers, Kapoor said.
The adjusted operating profit margin for Suboxone narrowed to 57 percent in the first half from 63.6 percent in the same period a year ago, the company said in July, as Suboxone film is less profitable than the tablets. The film version of Suboxone was introduced in September 2010, a year after the tablet version lost U.S. patent protection.
The medicine combines buprenorphine, a painkiller derived from the opium poppy, with naloxone, a chemical that blunts withdrawal symptoms. The maker of French’s mustard and Nurofen painkillers is also developing an injectable Suboxone and a product for cocaine addicts.
Reckitt Benckiser said today it expects full-year revenue to grow at least 6 percent, including acquisitions and divestments and excluding results from the pharma unit. It had previously expected growth at the upper end of 5 percent to 6 percent, as well as stable operating profit margins.
Non-pharmaceutical sales advanced 5 percent on a comparable basis in the third quarter, the company also said. The median estimate of 10 analysts was for a 4.7 percent gain.
The third-quarter performance was boosted by a 10 percent gain in sales in Latin America and Asia, a region where other consumer-product companies such as Unilever have witnessed decelerating growth. Kapoor said emerging-market growth rates are “modestly down” yet still “good.”
Sales in Europe and North America rose 2 percent in the quarter, down from 3 percent growth in the first half. Conditions in Europe remain “challenging,” the company said.
According to Kapoor, there’s a “disconnect” between improving economic figures in the U.S. and consumer confidence.
“Big U.S. retailers are voicing concerns about the state of the consumer,” the CEO said. “The U.S. market is not very clear to me.”
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