Carve-outs or divestitures are top of mind for many biopharma companies as they reassess their long-term strategy and resulting internal priorities. Carve-outs are attractive as they can enable rapid, substantial cash generation and the opportunity to realign portfolios and redeploy resources, including human capital, to new areas of focus. But many fail or take a very long time to complete. In this article, we share our tips on how to execute a successful carve-out.
Carve-outs can be an attractive M&A option for refocusing biopharmas
Carve-outs have been popular for biopharmas refocusing their growth agenda on specific therapeutic areas or modalities. For example, Takeda has raised over $10 billion through divestitures after its acquisition of Shire in order to focus on its core business and de-lever. AstraZeneca has disposed of multiple non-core assets, each worth several hundred million dollars, and Novartis, Merck KGaA and BMS have each sold whole franchises totalling several billion dollars — in China, for example, several vaccine and pharma-related subsidiaries have been divested from their parent companies.
When offloading established products, sellers can benefit from the de-risked nature of these assets and typically structure financial terms weighted to upfront payments. Figure 1 shows the upfront payments that AstraZeneca and Takeda received through divestments since 2019. This financial profile provides the sellers with the capital they need in a timely fashion — capital that can then be redeployed towards building commercialisation capabilities, enabling M&A in the core business, investing in research and development (R&D) or achieving other strategic goals.
Given the financial and strategic benefits of successful carve-outs for sellers, once biopharmas decide on pursuing the strategy, it is critical that they maximise their chances of completing the deal by taking a number of key steps.
The five steps to a successful carve-out
Having worked on numerous biopharma carve-outs, we have detailed below the five key steps to maximise the chances of a successful transaction (see Figure 2).
1. Clearly define the scope of the carve-out
- The early definition of the carve-out scope will ensure both the seller and buyer can accurately appraise synergies, the value of the portfolio and ultimate deal terms, and the actions required during the transition.
- Scope definition should cover products, geographies and the scale of personnel and facilities (e.g. manufacturing) that are essential parts of the carve-out. For example, a portfolio of closely related products (e.g. sharing manufacturing facilities and sales force) may be best divested as one.
2. Start to position and operate the carve-out as a stand-alone business
- Before the sale process is initiated, the carve-out should be positioned and operated as a stand-alone business as much as possible (if not already operating as such) to ensure separation can be achieved with minimal transition requirements and to iron out any potential issues around separation of core functions (e.g. IT, data management, manufacturing, R&D, commercial, medical).
- For product-level divestments (rather than business units or portfolios), this may focus primarily on identifying stand-alone requirements or current level of support (e.g. sales force and manufacturing) rather than operating it as stand-alone so that the buyer can start planning the post-carveout phase. Financials should be available on a pro forma basis for analysis by any potential acquirer.
- As the seller implements this operational independence, it may revisit the scope of the carve-out as interdependencies are discovered (e.g. commercial or operational synergies between products).
3. Identify the ‘natural home(s)’ for the carve-out
- Carve-out destinations vary, from formation of a stand-alone business to acquisition by either financial or strategic buyers, often followed by incorporation into another business. For example, Teva divested its women’s health division to CVC Capital Partners as a standalone business, whilst Atnahs Pharma incorporated the hypertension portfolio it acquired from AstraZeneca into its existing operations.
- The carve-out’s operational independence, product mix and most likely route to value creation should be assessed to develop hypotheses for the buyer that would be a good fit. Figure 3 demonstrates how these characteristics can be considered together to identify the likely natural home for the carve-out, whether as an operationally independent business (more common for financial sponsors) or one integrated into the new owner (more common for corporates).
- The landscape for potential acquirers should then be scanned to identify buyers (or archetypes of buyers) that are not expected to be interested in the asset, to rule them out (e.g. a financial buyer may be reluctant to invest significantly in capex to support or maintain manufacturing footprint).
- The potential list of buyers can be narrowed down further by working out the strategic reasons that could underpin a possible transaction (e.g. ability to drive growth under new ownership vs a stable cash generator vs a platform for additional bolt-on acquisitions). The list may still be relatively long if the universe is wide — but could be segmented into acquirer types (e.g. corporate vs financial).
4. Optimise the carve-out’s equity story for its identified natural home
- Once the carve-out’s natural home has been identified, the seller should refine its value proposition and promote the business to the most appropriate buyers/investors.
- It is crucial to outline the benefits to buyers, in particular how they could gain from the addition of the portfolio (e.g. through synergies, cross-selling effects).
- Where necessary, minimal scope/transaction perimeter refinements may be considered to reduce friction for a potential buyer (e.g. apportioning additional shared services with the carve-out to ensure operational independence is maintained).
5. Offer flexibility to potential buyers
- Early management interaction should be offered to buyers to identify their specific needs and requirements and to keep them engaged throughout the process (e.g. often informal discussions or expressions of interest may precede the formal process or even prompt the seller to consider the carve-out).
- Potential scope refinements and changes in the deal structure should be anticipated in advance (e.g. optionality around geographies or groups of products) and offered to buyers, if feasible, to maximise the chances of deal execution. However, care must be taken to ensure the remaining portfolio is attractive to other potential buyers.
Strategic focus before as well as during the carve-out process is vital
Many carve-outs or divestments do not materialise, require multiple attempts to achieve a sale or take several years to complete. The culprit is often faulty execution rather than a change in strategic direction.
External, strategic support is valuable throughout the carve-out journey to facilitate execution and ready the asset for formal due diligence scrutiny. Specifically, we find strategic support to have the most impact in five key areas:
- Asset strategic review and vendor due diligence to provide a third-party perspective and articulate the value proposition
- Organisational planning to prepare for the transition
- Identification of suitable buyers
- Negotiation support
- Deal terms modelling to understand the potential value creation for the carve-out