Pfizer plans to sell or spin off two business units, causing stir among analysts
NEW YORK—It became clear in March that Pfizer Inc. was considering the shedding of much of its non-pharma businesses—perhaps 40 percent of the entire company or more—but late last week the company made things more explicit by announcing that it is "exploring strategic alternatives for its Animal Health and Nutrition businesses based on its recent business portfolio review to determine the optimal mix of businesses for maximizing shareholder value." Analysts are predicting that offloading those units could net Pfizer something around $22 billion to $24 billion.
With this first step, the company is being vague—or simply keeping its options open—saying that it is considering "a full or partial separation of each of these businesses from Pfizer through a spin-off, sale or other transaction," and suggesting that other options are also on the table. Pfizer notes that given the "separate and distinct nature" of the two business units, it may very well choose different options for each.
"Both Animal Health and Nutrition are strong businesses with attractive customer bases and solid fundamentals, but distinct enough from our core businesses that their value may be best maximized outside the company," says Ian Read, president and CEO of Pfizer. "In exploring these alternatives, we can determine what options will best drive their future growth opportunities and expansion, and enable shareholders to potentially realize higher value for these businesses."
The news didn't get the warmest reception from investors, with share prices dropping about 3 percent following the news, after climbing 36 percent over the previous 12 months, though it is hard to tell if the mild dismay is over the fact that Pfizer is making its breakup plans official or concern that the company isn't going far enough, fast enough.
Pfizer noted that it expects to complete any transactions that may result from these evaluations in a year or two, and doesn't anticipate making any more announcements about strategic alternatives for Animal Health or Nutrition until sometime in 2012.
Taken altogether, some analysts are suggesting that the extended timeline and the choice of business units are more tentative than transformative for Pfizer.
For example, Pfizer says it will continue to "enhance the value of its Established Products business within the company," pointing out that the fastest-growing markets for pharma are in the emerging markets, and the fastest-growing segments within those markets are off-patent medicines and their generic equivalents. "Given these dynamics and the company's footprint and asset base, the company believes that the Established Products business is well-positioned to capture the opportunities being created by the demographics and rising economic power within these markets," the company says.
But many market-watchers had assumed Read, fairly new to the chief executive's office, would actually break the company up into five pieces and then grow the drug division from a leaner, more focused position.
Analyst Jami Rubin at Goldman Sachs, who was pushing for a Pfizer breakup as early as 2008, notes that separating the company into five parts is still a possibility and while that is probably the best way for Read to unlock Pfizer's value, she insists, she still calls last week's announcement a "great first step." Picking Animal Health to spin off or sell makes sense because with annual sales of more than $3.5 billion, it can stand on its own, Rubin points out. As for Nutrition, it seems to be the business unit that investors are most keen to see shed, so that also makes sense. Rubin also supports the retention of the Established Products business for now, since it is isn't big enough yet to compete with such major generics players as Teva and Mylan.
Timothy Anderson at Bernstein Research seems to be of the mind that Pfizer is being too tentative, though, having said that breaking Established Products was the "only innovative part to what CEO Ian Read was considering." That said, Anderson still isn't all that critical of the company overall, writing in a note to investors that while some of them "may be disappointed that [Pfizer] is not going the full distance," he still gives the company an 'Outperform' rating because of new medicines such as crizotinib for lung cancer and tofacitinib for rheumatoid arthritis. He also pointed to increased usage of the Prevnar vaccine in adults and maintains that Pfizer has "perhaps the best late-stage pipeline of the different drug companies we cover."
Christopher Schott, an analyst for JPMorgan Chase & Co., agrees with that latter point, saying in a note to clients that "Pfizer's late-stage pipeline is as well-positioned as at any time in recent history."
Erik Gordon, a University of Michigan business professor who studies the biomedical industry, disagrees though, having rhetorically asked in an e-mail interview with Bloomberg last week: "Should Pfizer double its dependence on what it does worst: Get new drugs out the door?"
Indeed, there have been notable pipeline failures, such as the decision in 2006 to halt development of the torcetrapib cholesterol pill after it failed to benefit patients in a late-stage study. That product was supposed to succeed Lipitor, the blockbuster for which Pfizer loses patent protection in November. Also, the potential Alzheimer's disease drug Dimebon, which analysts suggested might generate $5 billion in annual sales, failed to help patients in a late-stage test last year. Around the same time, Sutent, which has been approved for kidney and stomach cancers, failed to shrink breast tumors in two studies. Furthermore, the drug figitumumab was shown in studies not to aid lung cancer patients.
Also in the "con" camp have been Richard Evans and Scott Hinds of Sector & Sovereign Research LLC, who wrote a note after the breakup talks gained steam earlier this year that large spin-off activity might not be the best choice. They fear that leaving only a "core Pfizer" would simply mean a smaller company facing likely decline as key products reach the end of their patent protection.
In addition, analyst Michael Levesque at Moody's Investors Service worries that spin-off and sell-off plans will make Pfizer too reliant on risky experimental drugs and lead to a downgrade to its stock value, credit rating/debt rating and more, writing in his own note: "We want to put a caution out there to bondholders. [If Pfizer sells units] the business becomes smaller and less diverse, and if those proceeds are just returned to shareholders, then that is a negative credit risk."
Pfizer Nutrition is primarily focused on formulas and nutritional products for infants and children up to seven years old, while Pfizer Animal Health is involved in the discovery, development, manufacture and commercialization of products to prevent and treat disease in livestock and companion animals, including vaccines, medicines, diagnostics and genetic tests. Both companies have operations in more than 60 countries.