Pharmaceutical industry pundits have been abuzz lately, encouraging Big Pharma to move away from a diversified mega-corporation mentality and get rid of noncore businesses that are inhibiting its ability to developing new blockbuster drugs. In doing so, add the so-called experts, the companies could unleash shareholder value and reward investors who have been disappointed by the industry’s weak performance during the past decade.
Is this a sound strategy or just the latest flavor of the month? Spinoff proponents are probably right about one thing: Members of Big Pharma that sell off noncore assets will probably enjoy a short-term boost to their share prices. That’s good for traders. Whether these moves are good for the company and investors over the long haul remains to be seen.
Based on recent moves and comments from new CEO Ian Reed, Pfizer (NYSE:PFE) appears to be in the “less is more” camp. The company recently struck a deal to have private equity firm KKR take Pfizer’s Capsugel unit off its hands for nearly $2.4 billion. Capsugel makes hard capsules, soft gels and other drug vessels. Moreover, Pfizer doesn’t appear to be done. Rumors persist that the company also plans to shed both its Wyeth nutritional and animal health businesses, as well as its generic drug unit.
Obviously, Wall Street likes what it’s hearing from Pfizer. In the past month, the company’s shares have gained more than 12%, putting the stock as high as it’s been in the past two years. That’s at least some comfort to Pfizer investors who have seen the value of the company’s shares drop more than 20% in the past five years.
Bristol-Myers Squibb (NYSE:BMY) has also enjoyed the short-term benefits of divestiture. Its shares are up a respectable 22% since spinning off its pediatric nutritional company Mead Johnson (NYSE:MJN) in the middle of 2010.
Some industry followers are now encouraging Abbott Laboratories (NYSE:ABT) to follow suit. They say that investors looking at Abbott only see a company facing huge risks to its blockbuster drug Humira, including patent expiration in 2016 and competition from new drugs. These concerns, they add, account for the company’s share price drop in the past year — despite outstanding profit growth.
One analyst speculates that Abbott’s stock would jump by more than 30% if the company spun off its Ross nutritional unit, which makes Similac baby formula and Ensure for adults, as well as its sizable medical-device business.
Investors shouldn’t hold their breath waiting for Abbott to heed the advice. These businesses aren’t going anywhere soon, according to company CEO Miles White. In a conference call earlier this year, White said the Ross nutritionals business will remain an essential part of Abbott. He also emphasized that the company doesn’t make strategic decisions based on what the Street would like to see.
Ditto for Sanofi-Aventis (NYSE:SNY). The company recently went the acquisition route, taking over U.S. biotechnology company Genzyme. Dismissing the advice of those prodding the company to dump its non-pharmaceutical businesses, CEO Chris Viehbacher said his goal is not to get a 5%-10% bump in the company’s share price, but to get back to a price-earnings ratio equal to that of the S&P 500.
