Four large healthcare companies are preparing to spin off certain business units over the next 12-18 months and that could be good news for investors. Typically the stocks of newly independent health-care companies have tendencies to outperform the general market, according to Mike Bailey, director of research at FBB Capital Partners.
FBB Capital Partners is based in Bethesda, Md., and has about $1 billion in assets under its umbrella. Bailey discussed all four planned spinoffs in an interview on Sept. 13.
Bailey said he did not really advise clients to hold shares of companies before they spun off the health-care units. “We would probably keep it simple, for tax reasons, and just buy the spun-off companies,” he said.
Of course, after each spinoff is completed, analysts will have a better feel for each independent company’s growth prospects as well as standard measures of value, including price-to-earnings and price-to-sales.
Here are his specific comments about the four companies and the units they plan to spin off.
Healthcare Stock Eli Lilly (LLY) and Elanco (ELAN)
Eli Lilly LLY announced plans to shed about 20% of its Elanco Animal Health business for between $20 and $23 a share, a deal that could raise up to $1.66 billion. The life-sciences leader has previously put plans in place to sell the entire stake later, and Bailey commented that he expects that to happen in 2019.
Zoetis ZTS is a competitor of Elanco and was spun off by pharma trailblazer Pfizer PFE in February 2013, first traded for $31.50 a share. The shares closed at $88.79 on Sept, 12.
Bailey explained that when Pfizer announced its strategy to spin off Zoetis, he didn’t take advantage of the opportunity, and “it seems now that Pfizer was lowballing expectations” for the unit.
While saying it was too early to give an investment opinion about Elanco, he called the industry fundamentals for animal health care “attractive” and added: “If they can copy what ZTS has done, with margin expansion and a few deals, you probably have potential upside. There is certainly a case that Elanco can do what Zoetis did.”
Healthcare Stock Novartis (NVS) and Alcon (ACL)
Novartis said that it too plans to spin off assets; specifically its Alcon eye-care business during the first quarter of 2019. Alcon will be based in Switzerland, like its parent company.
Analysts expect the company to be valued around $20 billion. Novartis spent a total of roughly $50 billion to buy the current Alcon unit, including an Ophthalmology pharmaceutical business that won’t be included in the spun-off company. The new Alcon will be a consumer staples play with stock multiples that are “pretty high,” Bailey said. But the high multiples would be supported by “steady growth,” he said, and Alcon has a good reputation for making high-quality devices.
“High quality, low competition, high barriers to entry and pretty good fundamentals” make for “a pretty good business,” he said.
Healthcare Stock Danaher (DHR) and its dental business
When Danaher DHR, announced a plan to spin off its dental business in a tax-free transaction to be completed during the second half of 2019, investors were happy. Shares rose 4.5% that day.
Unlike the other three parent companies that Bailey discussed, Danaher is a stock that FBB Capital Partners actually holds for its clients. Bailey said, “We would own Danaher with or without the dental spinoff,” but he added that he has “higher conviction” for Danaher after the spinoff is completed.
“I have been following Danaher closely for a number of years, and dental has always been ‘around the corner’ for improvement, and they have had a tough time making it work,” he said.
Healthcare Stock General Electric (GE) and GE Healthcare
General Electric GE, also has plans to spin out its health-care unit via a two-step process that starts with a public offering of about 20% of the company by the end of 2019. After that, the remaining 80% “will be distributed tax-free to our shareholders through a spin or split,” GE CEO John Flannery said during a conference call on June 26.
After holding shares of GE for a number of years, FBB Capital Partners sold late in 2017. “At the time, it seemed healthcare and aerospace were two of the better-performing divisions,” Bailey said.
He also said he would “probably wait for the spinoff” to consider purchasing shares of an independent GE Healthcare, rather than purchasing shares of GE before the spinoff.