Pfizer Repositions Itself To Stay On Top

| About: Pfizer Inc. (PFE)

Pfizer (NYSE:PFE) made two important announcements this month that could significantly impact its future. Pfizer's Animal Health business will be part of a new business entity named Zoetis. The IPO of Zoetis is expected to happen during the first half of 2013. The other major announcement was Pfizer's deal with AstraZeneca (NYSE:AZN) for marketing Nexium in United States and other major markets.

Zoetis, the Animal Health Business

Pfizer announced last year that it is exploring strategic alternatives for the Animal Health unit, and it may sell the unit or form a new company. After selling its nutrition division to Nestle earlier this year for $11.9 billion, Pfizer has now decided to spin off its Animal Health unit.

The global animal health industry is worth $100 billion, and the animal vaccines and medicines market -- the core area in which Pfizer operates -- is worth $22 billion. The vaccines and medicines market grew at a compounded annual growth rate of 6% between 2006 and 2011. Vetnosis, a research and consulting firm specializing in global health and veterinary medicine, expects the industry to grow at 6% CAGR for the next five years.

Pfizer's animal health business recorded double-digit growth in 2010 (+29%) and 2011 (+17%). The Animal Health unit of Pfizer commands approximately 19% of the market share, making Zoetis the market leader in the animal vaccines and medicines segment. The segment-leading position and the projected steady growth of the industry must have worked in favor of Pfizer's decision to spin off the company, rather than selling the profitable unit to one of its competitors.

Pfizer will be giving up 20% of ownership by selling Class A shares via IPO. The remaining 80% will be held by Pfizer as Class B shares (Class B shares have more voting rights than Class A). The Class B shares will come out at some point, and most likely it will be paid to Pfizer's existing shareholders as a dividend. Wall Street expects the new company to have a market capitalization of more than $15 billion, and it definitely seems like a good deal for Pfizer's existing shareholders.

When most of the drug majors are pushing hard to reduce their exposure to pharmaceuticals and diversifying into related areas (Johnson & Johnson expanding its medical diagnostics and devices business, Novartis positioning into eye care and generics, etc.), Pfizer remains focused on pharmaceuticals. I read somewhere that pharmaceutical companies diversify when they expect less from their pipeline and concentrate when they believe in their pipeline. Investors must be happy to know that Pfizer is not spinning off its trouble like Abbott did with Abbvie, but instead it is creating a company that can be a market leader in its segment and grow.

The Pfizer AstraZeneca Nexus for Nexium

This is one deal that AstraZeneca must be really happy to do. AstraZeneca had to find a way to market its blockbuster drug Nexium, which is nearing its patent expiry, and Pfizer took the chance to add some revenue to its income statement. But what's more important than money is the possibility of more such deals in the future.

Nexium, the heartburn drug, generated more than $4 billion in 2011 for AstraZeneca. Nexium will lose its U.S. patent in May 2014 and will be under pressure from generics after that. According to Pfizer's press release, it will pay $250 million to AstraZeneca up front and pay royalty based on product launch and sales. AstraZeneca will continue manufacturing the drug and supply Pfizer with the OTC product after getting the necessary regulatory approval. Pfizer and AstraZeneca have also agreed to give Pfizer a right of first refusal regarding OTC rights for Rhinocort Aqua, a nasal steroid used for the treatment of allergic rhinitis.

The New Positioning

The decision to spin off the Animal Health business and the OTC agreement with AstraZeneca were announced the same day. Pfizer's intentions are loud and clear. It is not going to be worried about future patent cliffs, and it plans to ramp up its consumer health care business. CEO Ian Read will keep Pfizer a pure-play pharmaceutical company.

(Form S-1 for Zoetis can be found here.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.