3M Might Sell Drugs Unit

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3M

(MMM) - Get Report

said Tuesday that it's contemplating the sale of its branded-pharmaceuticals business.

The St. Paul, Minn., conglomerate used the formal term "exploring strategic alternatives" in its announcement. However, it also acknowledged that in the current "very competitive pharmaceutical marketplace, continued success requires broad pipelines of new drugs, significant investments and a longer-term risk-reward business model than applies to most other 3M businesses."

3M hired Goldman Sachs to find a buyer for the division.

"The best way for this business to grow is for it to be free to pursue separate strategies under the direction of a dedicated pharmaceutical industry company with a business model better suited to maximize its potential," said Brad Sauer, executive vice president of 3M Health Care, a division that includes pharmaceuticals and other medical products.

Analysts praised the decision, and investors responded by bidding up the stock by $1.96, or 2.6%, to $77.80 in early afternoon trading.

John P. McNulty, of Credit Suisse, calls the decision "a big positive" for 3M and a sign that George Buckley, the new chairman and CEO, plans to sharpen the company's strategy. Buckley assumed the leadership role Dec. 7 after having served as chairman and CEO of

Brunswick

(BC) - Get Report

since June 2000.

"This is the first big move by ... Buckley, and it looks like a good one that should unlock value for the shareholder," McNulty said in a Tuesday research report. McNulty, who doesn't own shares, has an outperform rating on 3M. His firm has had a recent investment-banking relationship with the company.

"It shows that

Buckley is also moving 3M back closer to its core technology roots, as pharma was never core in our view," adds Jeffrey Cianci, who follows the company for UBS. Cianci, who has a buy rating, doesn't own shares. His firm has recently performed noninvestment-banking work.

Brand-name drugs accounted for $700 million to $800 million of 3M's $21.2 billion in worldwide revenue last year. The biggest product is Aldara, a topical drug for treating genital warts and certain skin lesions, whose sales, McNulty says, were $225 million to $250 million last year. Although dermatology is 3M's biggest product line, it also has drugs for women's health, cardiology, sexual health and respiratory ailments.

McNulty and his colleague Catherine Arnold, who follows the drug industry, speculated that several large companies might be interested in 3M's products, including

Novartis

(NVS) - Get Report

,

Allergan

(AGN) - Get Report

,

Schering-Plough

(SGP)

and

Johnson & Johnson

(JNJ) - Get Report

.

They believe the operation could fetch a price of $2.1 billion to $2.8 billion.

However, just because 3M is looking to sell its pharmaceuticals, that doesn't mean it's exiting the health care business altogether. On Monday, 3M completed its purchase of Omnii Oral Pharmaceuticals, a provider of dental products based in West Palm Beach, Fla. 3M says it is the world's second-largest supplier of products to the dental industry.

Dental products and brand-name drugs are just part of 3M's health care division. The unit also includes animal-care products, health information systems, stethoscopes, medical tapes and infection-control products.

The combined health care division accounted for $4.37 billion in sales and $1.22 billion in operating revenue, the most among 3M's seven operating divisions, last year. The operating profit margin of 27.8% ranked second among the business units.