Reckitt Benckiser plans demerger for pharmaceuticals unit

Reckitt Benckiser, the maker of Cillit Bang, Dettol, Gaviscon and Nurofen, has announced that it will spin-off its one-drug pharmaceutical business into a separate UK stock listing.

Reckitt’s shares have been partly weighed down by the uncertainty around its drug division, which is made up of just one marketed drug, a heroin addiction treatment called suboxone that is dispensed in a dissolvable film.

The group’s stock jumped 3.35pc to the top of the FTSE 100 at £52.40 a share after it announced it would proceed with a demerger which will take place over the next 12 months.

Chief executive Rakesh Kapoor said he believes RB Pharmaceuticals (RBP) could "deliver significant long term value creation as a stand-alone business and would allow the company to focus on its core strategy to be a global leader in consumer health and hygiene".

It is expected that existing Reckitt Benckiser shareholders will receive new shares in the spun-off entity, equal to the proportion that they already hold in the consumer group. The spun-off pharmaceutical division will then be listed on the London Stock Exchange.

Prior to listing, the float will not be open to new investors. However, it is expected that shares will quickly trade hands as some institutions would prefer to be only exposed to Reckitt's consumer business. Reckitt has tried to limit a fire-sale of the shares by choosing London over a New York listing, as some UK investors cannot hold US paper.

However, some quarters of the City were unimpressed by Reckitt’s announcement and had hoped for a more concrete and accelerated timetable. The company first announced a strategic review of RBP last October, but there had been significant speculation for more than a year prior to that.

Martin Deboo, an analyst at Jefferies, called the announcement “paradise postponed” adding that Reckitt’s statement felt “like an anti-climax”.

In addition, Reckitt's chief financial officer was quoted as saying that the unit could still end up being sold and a spokesman confirmed that RBP’s listing prospectus preparations would lend itself to a sale process.

However, industry bankers have repeatedly emphasised the lack of interest from other pharmaceutical companies and financial sponsors.

This is partly because the heroin-addiction drug is considered to be in a niche market, which does not easily fit with other drug groups' portfolios.

In addition, suboxone faces intense generic competition after losing patent protection for the drug, meaning that few companies would want to buy into a declining revenue stream.

Reckitt reported sales in its pharma division were 8pc lower year-on-year at £344m during the first half of the year and operating profits dropped by 13pc to £183m at constant exchange rates.

The drug division is also too small to offer an alluring inversion prospect to a US buyer, which would offer a deal incentive because of a potential relocation to a lower tax base. Abbott Laboratories recently sold its off-patent, declining revenue drugs to Mylan for the punchy price of $5.3bn US group Mylan was able to benefit from an inversion that would cut its tax bill.

On top of this, Reckitt Benckiser’s drug division is also in the midst of an inquiry by the US Federal Trade Commission into its controversial attempt to pressure US drug regulators into blocking generic rivals to its lucrative heroin substitute drug. The US Food and Drug Administration threw out a petition last year by Reckitt that argued that tablet formulas, rather than its suboxone film method, could be a risk to children who could swallow them accidentally.

A potential buyer could still believe that they could do a better job of the drugs group’s presence in growing emerging markets. RBP is also working on injectable methods and other drugs, although these are still in trial stages.

If the planned spin-off goes ahead, Shaun Thaxter, currently president of RBP, will be the chief executive, and Howard Pien, who was hired in February, will be its chairman. Reckitt said it had not decided yet whether to retain a stake in the business after it is floated.

Reckitt said that in the rest of the business sales grew by 3pc at the constant exchange rate to £4.6bn while adjusted operating profits were 3pc higher at £1.08bn.