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PRICING 3M's DRUG DIVISION: There's No Consensus on the Pharmaceutical Unit's Value, and Naming Bidders is Speculative, Too.

Posted on: Thursday, 8 June 2006, 06:00 CDT

By John Welbes, Pioneer Press, St. Paul, Minn.

Jun. 8--When 3M Co. said in early April that it wanted to sell its underperforming pharmaceutical division, the news was just the prescription to continue a run-up in 3M's stock price.

Finding out what the division is actually worth, though, will take longer. And identifying a buyer and closing the deal is likely to take many months, analysts say.

So, just how attractive is 3M's pharmaceutical division?

While Maplewood-based 3M is better known to consumers for its office products, the company has put multiple millions of dollars into developing and marketing drugs. Some of its well-known brand name prescription drugs are Aldara skin cream, Maxair asthma inhalers, and Minitran transdermal patches, which deliver nitroglycerin to heart patients.

With $700 million in annual revenue and $300 million in operating profits by one estimate, the division could fetch $3.5 billion, based on recent valuations of pharmaceutical companies, Lehman Bros. analyst Robert Cornell wrote in a research report.

But there's no consensus on what a pharmaceutical division like 3M's is worth these days. Merrill Lynch analyst John Inch estimated in a report that the division likely will sell for close to $2 billion.

Names of potential buyers are purely speculative too, at this point, with Johnson & Johnson and Swiss drug company Novartis thought to be logical candidates.

Meanwhile, Wall Street interpreted 3M's April 4 announcement as a positive sign that new Chief Executive George Buckley isn't afraid to jettison divisions that don't meet sales expectations and to concentrate instead on growing core businesses. 3M's pharmaceutical sales reportedly fell 17.5 percent in the last quarter of 2005, and the unit has been seen as a drag on 3M's overall health care business.

The division employs 1,500 people worldwide, including about 600 at the Maplewood headquarters.

3M's stock closed Wednesday at $80.34, a 6 percent increase from the $75.84 closing price the day before the pharmaceutical sale was announced.

Analysts also note that 3M's stable of brand-name drugs faces expiring patents, competitors and marketing challenges. In mid-May, word of another potential competitor for one of Aldara's applications surfaced. A government advisory committee indicated that a vaccine against human papillomavirus, commonly known as HPV, is safe and effective. That family of viruses is the same one Aldara acts on when it's used to treat genital warts.

Any projected sale price for the pharmaceutical division "is very speculative," said Dmitry Silversteyn, an analyst with Longbow Research who follows 3M. He notes that 3M's lineup of drugs has exposure to generic competitors because some of the products no longer have patent protection or will soon lose it.

One of the patents on Metrogel-Vaginal, a popular 3M product used to treat bacterial infections, expired Tuesday. U.S. Food and Drug Administration records also show that Aldara's patent for use on genital warts expires in 2009.

Those dates could make buyers take a longer look at the division, "so it'll take some time," to get the sale done, Silversteyn said.

3M's Aldara, which also is approved for use for pre-cancerous skin conditions, was once seen as a drug that could produce $1 billion in annual sales. But it never got on pace to meet those expectations, with 2005 sales estimated at $256 million, which may account for more than a third of all of the pharmaceutical division's revenue. Challenges in marketing Aldara to doctors and questions about its side effects might have contributed to lower-than-expected sales.

Also on the horizon is the FDA's anticipated approval of Gardasil, an experimental HPV vaccine, which could compete with Aldara. The vaccine, made by pharmaceutical giant Merck, would be marketed initially to females ages 9 to 26.

3M has declined to comment on the prospects for more competition for Aldara or on the pending sale of the pharmaceutical division since the initial announcement.

3M first received FDA approval for Aldara as a treatment for genital warts, which are caused by certain types of HPV. The HPV family of viruses is also a major cause of cervical cancer. A vaccine for HPV could affect sales of Aldara, but one industry analyst thinks that won't happen anytime soon.

Females would need to get vaccinated before they become sexually active, which would require parents to seek out the vaccine for a child, said W. Scott Evangelista, a managing partner at Swiftwater Group, a pharmaceutical consulting firm.

"The market for Aldara is not going anywhere anytime soon because the population is so great," he said. "That vaccine will take a fair amount of time before it gets a lot of traction."

A challenge for any dermatological product, though, is to simply get doctors' attention.

"Dermatologists love to experiment with different things. There are competitors on the market and everybody has their favorite," Evangelista said. Marketing and selling are key to determining which prescriptions catch on with doctors.

Any prospective buyer is expected to calculate how well its pharmaceutical sales force could market Aldara and 3M's other prescription drugs. The division makes products to treat about a dozen different medical conditions, while 3M as a whole makes 50,000-plus products.

In April, 3M Executive Vice President Brad Sauer said the division would have a better chance to grow if it were part of a "dedicated pharmaceutical industry company."

As for Merck's HPV vaccine and its potential to hurt Aldara sales and the value of the pharmaceutical division, Silversteyn said Aldara doesn't have a large enough market share "that they'd have to worry about losing it. I don't think that's going to be an issue."

Despite the slower sales and questions about side effects, Aldara still has its fans. Dr. Loretta Ciraldo, a professor of dermatology at the University of Miami, visited ABC's "Good Morning America" on May 23 to talk about products that can help sun-damaged skin.

Aldara was one of the drugs she touted, noting that it can be used on the chest to remove precancerous changes to the skin.

If one recent company's sale of its pharmaceutical business is any indication of the sales process, 3M's divestiture from that segment could take many months. Lubrizol Corp., a Cleveland-based company, said last July that it planned to sell off its noncore businesses including its pharmaceutical ingredient and compounds business.

In late March, Lubrizol said it would sell that division to Auctus Management, a private equity group based in Munich, Germany. The deal closed in May.

John Welbes can be reached at jwelbes@pioneerpress.com or 651-228-2175.

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Copyright (c) 2006, Pioneer Press, St. Paul, Minn.

Distributed by Knight Ridder/Tribune Business News.

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Source: Saint Paul Pioneer Press (St. Paul, Minn.)

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