Reckitt Benckiser to Spin Off Pharmaceutical Unit

Reckitt Benckiser Group Plc will spin off its pharmaceutical unit after concluding the business that once accounted for a fifth of earnings doesn’t fit into Chief Executive Officer Rakesh Kapoor’s plan to focus on consumer health.

The spinoff will occur in the next 12 months and will listed in the U.K., the Slough, England-based company said in a statement. Reckitt Benckiser may still sell the business and could maintain a stake after a spinoff, finance chief Adrian Hennah said in an interview today. The division gets almost all of its 780 million pounds ($1.3 billion) of revenue from Suboxone, a drug to treat addiction to opioids including heroin that’s the market leader in the U.S.

Addiction treatment is not “a space we want to be in,” Kapoor has said as he reviewed the business after generic variants of the drug began to erode sales and margins. Valuations for the unit, which will continue to be run by CEO Shaun Thaxter after the spinoff, range from about 1 billion pounds to as much as 4.8 billion pounds.

The spinoff means “it hasn’t been able to attract a trade buyer on satisfactory terms,” James Edwardes Jones, an analyst at RBC Europe, said in a note today. Hennah, who said he considered listing the business in the U.S., declined to speculate on a value for the unit.

Sales Growth

The company also today reported second-quarter sales growth of 4 percent, excluding the pharmaceutical division, in line with analysts’ estimates.

Kapoor is pushing further into consumer health-care through acquisitions and new products. That division has grown from 5 percent of revenue in 2005 to 30 percent, and now accounts for more than a third of operating profit. Sales from the business rose 10 percent in the quarter, fueled by Scholl footcare and Durex condoms.

Reckitt Benckiser shares rose 2.7 percent to 5,205 pence at 1:12 p.m. in London trading, bringing its 2014 gain to about 8.6 percent and the company’s market value to 37.6 billion pounds.

Since 2010, Suboxone has been sold in a film-strip format which has captured more than 60 percent of the market in the U.S.

Pharmaceutical Revenue

The division’s sales fell 5 percent in the second quarter at constant exchange rates, the company said today, while its market share declined to 63 percent from 64 percent due to pricing pressure from rival remedies. Orexo AB’s Zubsolv has captured about 2 percent of the market since its introduction in September, according to Sanford C. Bernstein estimates, while generics have grabbed about 19 percent. Last month, BioDelivery Sciences International Inc. won U.S. regulatory approval for Bunavail film, which CEO Mark Sirgo has claimed is more effective than Suboxone.

A third generic tablet has just entered the market, which will “bring new pressures upon us,” Thaxter told analysts in a presentation today. The company is developing new products including an injectable Suboxone, a nasal spray to treat opioid overdoses, and drugs for alcohol, cocaine and cannabis addiction. It is also looking to expand beyond the U.S., which currently accounts for 80 percent of revenue.

“Addiction is a structurally strong marketplace,” Thaxter said. “It is not going away anytime soon.”

Cloud Removal

The spinoff of Richmond, Virginia-based RB Pharma will “finally remove the cloud of uncertainty that has shrouded RB for years, and allow investors to focus on the attractive strategic shift towards health,” Andrew Wood, an analyst at Sanford C. Bernstein, said in a note to clients last week.

Increased sales of health-care products such as condoms, cough remedies and painkillers helped expand adjusted operating margins by 0.4 percentage points to 20.8 percent for the first half of the year. Margins excluding the pharmaceutical business should continue to widen in the second half, the company said.

Adjusted net income declined 4 percent to 829 million pounds. The average estimate of eight analysts compiled by Bloomberg was 804 million pounds.

Kapoor also said he was “not happy” with the company’s homecare business, where like-for-like sales declined 1 percent in the quarter due to a slowdown in sales of air freshener Air Wick. Economic conditions have grown more “challenging” as the year has progressed, Kapoor said, and will remain so for the rest of the year.

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