Cutting Up Pfizer May Just Make a Big Mess

May.27.11 | About: Pfizer Inc. (PFE)

By Michael Fitzhugh

Pfizer’s (NYSE:PFE) ideas about jettisoning its off-patent and established products into a spin-off company while retaining its most innovative offerings has driven a flood of investor enthusiasm in the company. But one new analysis argues that splitting the company wouldn’t work out quite as neatly as hoped.

Ian Read, who took over as the company’s CEO in December 2010, and has been the main proponent of the idea, sticks by its potential to strengthen the company’s “innovative core.” Pfizer fans could bet on the promise of the company’s pipeline by investing in “core-PFE” or invest in “established-PFE,” which would pay a dividend made possible by the slower and more stable revenue from older products.

But a new report from Sector & Sovereign Research argues that version of the future may be flawed. Richard Evans and Scott Hinds, co-authors of the report on Pfizer’s future, say a hypothetical spin-off focused solely on Pfizer’s established line-up would consist of older products and perform no R&D. As such, they say it “is almost certainly a business in decline.” To be attractive, they say, it would have to pay out “practically all its earnings in dividends.”

“Core-PFE is not a growth company, and cannot become one without both higher absolute levels of R&D spending and higher dollar-for-dollar R&D productivity,” they argue. Without boosting R&D spending, a plan that is not in the cards for Pfizer right now, the company would face the same trouble dogging its other Big Pharma peers, a gaping hole in revenue as losses from off-patent drugs outpace gains from the approval of new medicines.

Other futures for Pfizer are clearly possible, Evans and Hinds acknowledge. The company has been making some gains simply by reviewing its current commitments and terminating those projects that don’t fit with its efforts to “create a greater focus on high potential projects” in the areas it has chosen to focus on in the future: neuroscience, cardiovascular and metabolic diseases, oncology, inflammation and vaccines.

But even that may not be enough, Evans and Hinds note, saying that they’re convinced that process inefficiencies lay at the heart of the company’s R&D problems.