How Will Zoetis Spinoff Impact Pfizer Stock?

Jun.20.12 | About: Pfizer Inc. (PFE)

Pfizer (NYSE:PFE) plans to spin off its animal health unit, but at the same time, it will not relinquish its controlling interest in that unit. As a standalone company, the unit will be called Zoetis. As it currently stands, the unit has about 9,000 employees around the world, which makes this a good starting point for a "new" company. Pfizer is getting ready to file a registration statement for a potential initial public offering for a minority share in Zoetis.

This is a better decision than the rumors we initially heard, which suggested that Pfizer would sell the animal health unit altogether. Pfizer will still be in control, however, even after the spin-off has occurred. I think this makes the situation a difficult one to analyze in terms of what kind of effect it will have on the stock. If Pfizer stays in control, it makes it harder to guess how much independence Zoetis will have. It also makes me wonder what benefit this spin-off could possibly have for Pfizer.

At this point, we have few details about this proposition. Pfizer plans to make the details known, however, when it reports on its second-quarter earnings. That being said, the company maintains that it is dedicated to only taking actions that aim to "generate the greatest after-tax value for our shareholders." Zoetis will continue to build on the foundation that Pfizer has laid for it. As far as I am concerned, this is a good move, as the company was very successful when it was being led by Pfizer's strategy. In order to maintain that success, the best decision would obviously be to change as little as possible. If the company is not changing in any essential way, however, why spin the animal health division off in the first place? What is the real reason behind Pfizer's actions? These are the questions that stockholders need to answer if they are planning to make any major decisions about the stock.

One possible explanation comes directly from Pfizer. The company's CEO says that this is part of a strategy that will allow Pfizer to focus more intensively on the development of new pharmaceuticals. This is a sensible move, but it may be a risk as well. The animal health unit is a successful division of Pfizer. There could be negative long-term effects for Pfizer, therefore, if it relinquishes even the slightest control over the company. That being said, the company is behind its competitors in terms of developing those all-important new drugs, so it has to compensate in some way. Pfizer had already announced plans to sell off its infant nutrition business, and it plans to cut costs by $1 billion this year. It is possible that this move will help turn the company around in the long run, but I would not get too excited until some actual results come from Pfizer's strategy.

While Pfizer is searching for ways to become a stronger company once again, its competitors are continuing forward with much strength. This shows the long road ahead for the company and also shows how some competitors are beginning to rise to the top.

Merck's (NYSE:MRK) bestseller Januvia may soon face some serious competition. Johnson & Johnson's (NYSE:JNJ) canagliflozin may hit the market next year, and this drug has been shown to control blood sugar levels more effectively than the offering from Merck. Johnson & Johnson's new drug is quite innovative. It represents a novel approach to dealing with the issue of controlling blood sugar in patients with type 2 diabetes. This level of control has been difficult to achieve, so it is certainly good news for medical professionals and patients with type 2 diabetes. It is also good news for Johnson & Johnson shareholders, however, as it gives the company an edge over competitors like Merck. In the big picture, I expect this to have a positive impact on Johnson & Johnson and a negative impact on Merck.

Bristol-Myers Squibb (NYSE:BMY) is about to make its mark on the pharmaceutical industry as well. It is establishing itself as a company that is leading the fight against cancer. Its drug has been found to be majorly effective for patients with lung, kidney, and skin cancer so far. This is a huge breakthrough in the treatment of cancer, and Bristol's competitors will have to move fast to catch up in this part of the industry. Stockholders would be wise to pay close attention to this company, as this drug may do great things for Bristol stock.

Novartis (NYSE:NVS) is another company that is making its presence felt in the pharmaceutical industry. Novartis recently conducted an extension study into the long-term efficacy of the drug Gilenya, which is used to treat multiple sclerosis. Thus far, the results have been very positive. In addition, other drugs may be less effective than the treatment offered by Novartis. Companies that want to make their presence felt have to be innovative and successful in treating serious conditions such as this one.

When compared to the competition, Pfizer just does not seem to be doing anything new. When we invest in a pharmaceutical stock, we are looking for a sign that it will make a difference in the world. I do not think this is simply because it will lead to a greater financial reward for us, but it is also because we feel it is the responsibility of pharmaceutical companies to heal us.

The only thing that we are currently hearing form Pfizer is how it is getting smaller by selling off stakes in its subsidiaries. This may be the best strategy for the company to follow, given its current situation. After all, the end aim is to release resources and time for a better focus on creating new drugs for the pharmaceutical market. Its current situation may simply be an indication, however, that this is not the pharmaceutical stock to back. The future is difficult to predict, but at a glance, the future of the company does not look particularly good. I suspect that Pfizer stock will be going down until it can begin to prove itself as a stronger force in the industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.