Pfizer (NYSE:PFE) has decided that less is more. The world’s largest pharmaceutical company has said it will shed its nutritional and animal health businesses to pump more money into its pipeline compounds. Pfizer is, after all, a pharmaceutical stock first and is in need of new drugs to deal with patent expirations.
However, some investors think Pfizer isn’t going far enough. They want the company also to skinny itself down so that when the dust clears Pfizer is strictly a prescription pharmaceutical business and nothing more.
To achieve that goal, Pfizer would have to jettison its established products business that sells generic drugs in international markets and the consumer health division that makes over the counter painkiller Advil and multivitamin Centrum. Selling all four units would put an estimated $70 billion into the pockets of Pfizer and/or its shareholders.
Right now, the company plans to meet those advocating a total breakup half way. CEO Ian Read, who took the reins of Pfizer last December from embattled predecessor Jeff Kindler, said in February that he would review the idea of divesting all of the company’s non-drug businesses. But so far only the nutritional and animal health businesses have been cleared for takeoff from fortress Pfizer.
Big pharma rival Eli Lilly (NYSE:LLY) has expressed interest in the animal health business, which had sales of about $3.5 billion in 2010. But Lilly doesn’t want the whole thing, just certain products to help the company expand its animal heath unit’s offerings in vaccines and pet products, as well as boosting its presence in Europe. Pfizer evidently said “uh-uh, all or nothing.” With Lilly backing away from that demand, Pfizer is now saying rather than selling the business in its entirety, spinning off the unit may provide the best after-tax value for shareholders.
But a spin-off is unlikely to bring Pfizer the $10 billion to $12 billion that a sale would. “It’s like a dividend; the value goes to the shareholder,” according to Adam Berger, head of mergers and acquisitions at Leerink Swann.
An outright sale or spin-off of the company’s nutritional business is also in the works, and a number of companies are likely to line up to pay the estimated $10 billion to capture the maker of baby formula and infant supplements. Analysts point out that Mead Johnson (NYSE:MJN) the baby formula maker that Bristol-Myers Squibb (NYSE:BMY) took public in February 2009, had sales of $3.14 billion last year. Mead now trades at a trailing P/E of 31, nearly 75% higher than Pfizer’s.
Read has said he plans to use the proceeds to buy back shares and develop new drugs. Among them are the apixaban blood thinner, the lung cancer drug crizotinib and tofacitinib for rheumatoid arthritis. Analysts surveyed by Bloomberg say the three drugs may reach $3 billion in annual sales by 2015.
Pfizer sorely needs the new products. The company loses patent exclusivity in a few months for its biggest product, the Lipitor cholesterol pill with $10.7 billion in sales last year.
While some investors want Pfizer to slim down so it can concentrate on its drug-development business, one observer thinks it might not be such a good idea. Pointing to the company’s recent drug failures, Erik Gordon, a University of Michigan business professor, wonders whether Pfizer should become more dependent on what it does worst: get new drugs out the door.
As of this writing, Barry Cohen held a long position in Pfizer.