Galenica's business split fuels speculation of drug unit takeover

By Katharina Bart and Oliver Hirt

ZURICH (Reuters) - Shares in Swiss pharmacies operator and drugs firm Galenica (GALN.S) jumped on Tuesday after the company said it planned to list its two main arms separately as soon as 2017, fuelling speculation that the drug unit could be picked up in a takeover.

Large drugmakers have undertaken more than $100 billion (79.47 billion pound) worth of acquisitions in the first six months this year, according to ratings agency Moody's, as companies look to build scale in leading businesses or acquire a foreign tax domicile to cut their tax bills, a tactic known as inversion.

Galenica's chairman, Etienne Jornod, has long resisted calls from analysts and investors to split up the company, in which he is also a major shareholder. As recently as when it held an investor day in June Galenica has denied that the company would change its current structure.

However, Jornod told investors on Tuesday that plans to split had been launched "a few months ago," with the final decision being made after a European advisory body gave its backing last month for Velphoro, an iron treatment used for patients receiving kidney dialysis.

The company said earlier on Tuesday it was now realigning management to lay the groundwork for the separation, naming Shire (SHP.L) executive Soren Tulstrup as head of the drugs business, Vifor Pharma, and appointing Galenica's chief financial officer, Joerg Kneubuehler, as the new head of Galenica Sante, the healthcare business which runs several chains of pharmacies in Switzerland.

Tulstrup and Kneubuehler, who will both report to Jornod, replace Galenica's group chief executive David Ebsworth, who will advise on special projects until he retires at the end of August next year.

"It's surprising, but it's also positive," said Zuercher Kantonalbank analyst Sibylle Bischofberger, who has an investment rating on the shares of 'underweight' as she expects Galenica's business development to remain weak.

Alongside the planned split, Galenica reported on Tuesday a 9 percent drop in its first-half net profit to 134.7 million Swiss francs ($148.3 million), on virtually unchanged sales of 1.66 billion francs. Operating profit at the drug business was up 3.9 percent at 139.7 million francs on sales up 6 percent at 337 million francs out of total operating profits down 7.2 percent at 189 million francs.

"In our opinion, even though a separate listing of its businesses is not being envisaged shortly, Galenica's new structure exposes its pharmaceutical unit as a takeout target," Helvea analyst Olav Zilian said in a note to investors, rating the stock a 'buy'.

DRUG M&A

However, Galenica said it would shield Vifor Pharma, from acquisition attempts until it is equipped to stand alone.

"As long as Vifor Pharma is not strong enough to develop by itself, the company will remain within the group," Jornod said in an interview published on the firm's website.

"However, we think that soon, within three to five years, the moment will come to allow it to stand on its own feet."

Instead, Tulstrup's job as head of Vifor Pharma will be to seek acquisitions, such as in heart and gastroenterology drugs, to bolster a business facing a patent cliff on its iron products, with little in the pipeline to compensate, Galenica said.

Investors cheered the plan, with dealers citing the long-standing calls from analysts and shareholders for a split as well as takeover speculation for Vifor.

The shares ended 5.3 percent higher at 860 francs, when the Stoxx Europe 600 healthcare sector index was down 0.2 percent.

Major Galenica shareholders include firms linked to Swiss investor Martin Ebner, which have a 15.76 percent stake in shares and call options, as well as Alliance Boots Investments 2 GmbH, an investor group related to Europe's biggest pharmacy chain operator Alliance Boots [ABN.UL], which owns a 25.48 percent stake.

The Galenica stake held by Alliance Boots was transferred to a separate vehicle owned by the same shareholders and isn't affected by last week's news that U.S. retailer Walgreen Co (WAG.N) is going ahead with the full takeover of Alliance Boots next year, a spokeswoman for the Swiss firm said.

Galenica's chairman, Jornod, received 40,000 shares in Galenica in 2012, blocked for sale until 2017. His current stake totals nearly 44,000 shares, worth more than 37 million francs at current market prices.

(Additional reporting by Rupert Pretterklieber.; Editing by Sophie Walker and Greg Mahlich)