When Pfizer (PFE) recently announced that it was conducting a review of its business segments in order to maximize shareholder value, I was immediately curious about the relative value of each of its major segments. In my last article I examined each of Pfizer’s business units and estimated a value for each of the business segments. In particular, I divided Pfizer into its Branded Biopharmaceutical ($48.7 billion 2010 sales), Generic Biopharmaceuticals ($10 billion), Consumer Healthcare ($2.8 billion), and “Other” including Animal Health, Nutrition, and its Capsugel business segments ($6.2 billion in combined sales in 2010). I then examined how much each component would be worth if it were an independent business, and what companies might be interested in acquiring these components.
Pfizer’s Branded Biopharmaceutical business is the company’s core and would remain even if Pfizer sold all of its other business units. Pfizer might continue its pattern of buying smaller pharmaceutical companies with promising lead compounds and would probably continue its expansion into biologics. But I think it would be less likely to continue to pursue a policy of large acquisitions.
Pfizer’s generic division (the Established Products unit) has $10 billion in annual sales, more than Perrigo (PRGO) or Watson Pharmaceuticals (WPI), and only about 40% less than Teva (TEVA), the world’s largest generics pharmaceutical manufacturer. This segment is probably worth between $13 and $22 billion, making it large enough for a spinoff directly to shareholders. It’s too large for Perrigo, Watson, or Mylan (MYL) to reasonably acquire. Teva has a market cap of $47 billion and enough of a history of acquisitions to make it the most likely acquirer of Pfizer’s generics unit. However, Teva’s 2010 purchase of Ratiopharm for $5.1 billion might make Teva less likely to acquire another generics unit as it continues to incorporate Ratiopharm into its business. This is especially true if the Established Products unit has a valuation in the $20 billion range.
Pfizer’s current consumer healthcare division (obtained via the Wyeth acquisition) had 2010 sales of $2.8 billion, making an acquisition likely to be in the range of $8 – 10 billion. Johnson & Johnson (JNJ) bought Pfizer’s previous consumer healthcare division in 2006. This history makes the consumer healthcare division perhaps the most likely to be sold to another company. J&J paid $16.6 billion in 2006 for a unit with 2005 sales of $3.9 billion. J&J is a likely candidate to buy this segment, as is Abbott Laboratories (ABT).
Another business unit that Pfizer might divest is its animal health business. When Pfizer acquired Wyeth, European regulators required the combined company to sell some products in its European Animal Health division. Eli Lilly (LLY) bought the European rights to those products last year, and is the most likely candidate to buy the rest of the Animal Health division if it goes on sale. However, the terms of that deal were not disclosed, so we can only estimate the size of a deal from sales numbers. With 2010 sales of $3.6 billion, Pfizer’s animal health unit would likely fetch a price of $8-14 billion based on price/sales numbers of its closest comparables. While this would be a large acquisition for Eli Lilly, Lilly does have a $5 billion war chest and $3.6 billion in annual sales could completely replace revenues lost from the loss of its U.S. patent on Zyprexa.
Both Merck (MRK) and Sanofi-Aventis (SNY) would likely be thrilled to acquire Pfizer’s animal health division. This is particularly true in light of their decision to cancel the planned merger of their own animal health units. However, that merger was cancelled because regulators were concerned about antitrust issues, and regulators might be similarly concerned with an acquisition to create an even larger animal health company. Novartis (NOVN) and Bayer (BYERF.PK) were both interested in purchasing divested units of Merck and Sanofi-Aventis, and might be similarly interested in Pfizer’s animal health unit. However, Novartis and Bayer have much smaller current animal health units, and so the acquisition of Pfzer’s would represent a major strategic change.
Capsugel is a world leader in gelatin capsule manufacturing, and had sales of $752 million in 2010. This is perhaps the most likely business segment to be sold to another company, and likely suitors are in the generics and consumer health care segments: Johnson & Johnson, GlaxoSmithKline (GSK), Teva, or Watson. Unsurprisingly these are companies for which drug formulations are important – just think of the advertising you’ve seen for Liqui-Gels.
Many companies could benefit from the acquisition of certain of Pfizer’s business lines. In my opinion, if the generic pharmaceuticals unit were divested, it would either be spun off into its own company or acquired by Teva. The consumer healthcare division is likely to be most appealing to Johnson & Johnson. The animal health unit could be spun off into its own company, which would be the world’s largest for animal care, but I think it more likely that Eli Lilly would purchase it. Capsugel is more of a toss-up: Johnson & Johnson has the deepest pockets, but it might be more important to one of the generic pharmaceutical companies. The most appealing investment opportunities are in the consumer healthcare and animal health divisions. These are good margin, nice growth businesses that have leading product lines. Follow the paths of these units to profitable investing.