Bottom Line: Giving up the drug is the right move but one that’s hard to price

 
Elizabeth Fournier

WITH a portfolio comprising everything from mosquito repellents to hair removal cream and dishwasher tablets, Reckitt’s position as a branded consumer goods company is undisputable.

But for years now it’s had a bit on the side – a pharmaceutical arm that produces one thing only, a drug called Suboxone that’s used as a replacement in treating opiate addiction.

Suboxone was developed by Reckitt & Colman during the 1980s and became part of the Reckitt Benckiser stable in 1999 when it merged with Netherlands-based Benckiser NV.

Granted approval by the US Food and Drug Administration in 2002, for a while Suboxone was a star product, fuelling profits at Reckitt as sales jumped from £89m to £588m between 1994 and 1995.

But then the inevitable generics came along and growth – along with revenues – fell off a cliff. In its update yesterday Reckitt said sales of Suboxone slumped by 14 per cent in the third quarter to just £191m – barely double what they brought in almost 20 years ago.

So it’s no wonder investors cheered the announcement yesterday – albeit long expected – that Reckitt had decided to quit the Suboxone dependence.

Shares leapt almost six per cent as hopes were raised of a possible cash return or, at the least, a chance for management to refocus on the core brands that have taken over as growth drivers since Suboxone’s retreat.

But a few sticking points still remain. With generic competition ever present and no clear idea yet of how much of the market Suboxone can keep, analysts are struggling to put a price on the asset. Ballpark estimates range from £2bn to £6bn for a full sale, though the option remains for the firm to spin the unit off, or even find a market peer willing to trade it for some more consumer assets.

Either way the outcome is likely to be positive for the shares once investors have more certainty on revenue streams, but they could be waiting a while for clarity, with no decision expected until well into next year.

In the meantime, shareholders will have plenty of time to sit back and form their wishlist of what Reckitt can do with the proceeds. Top of the list is likely to be a buyback, but there’s also a decent case to be made for more over-the-counter healthcare deals to follow up on last year’s $1.4bn acquisition of Schiff Nutrition.

Chief executive Rakesh Kapoor has made no secret of the fact he’s on the lookout for “interesting size M&A”.

With anything up to £6bn of cash making its way towards his warchest in the near future, investors would be wise to stick around for the ride.