Pfizer's Long-Term Strategy: A Possible Breakup

| About: Pfizer Inc. (PFE)

Pfizer (NYSE:PFE), the world's largest drugmaker, may consider dividing its branded medicines and generic product units into separate businesses, CEO Ian Read said recently.

This is part of a strategy of slimming down the company. Having already divested the animal health and infant nutrition units, Read still faces a stock that trades for a lower price-to-earnings ratio than almost eighty percent of similar-sized peers.


Pfizer has four business units: cancer care, primary care, specialty drugs, and so-called established products, which are medicines that have lost patent protection and are sold against generics.

Geno Germano, president of the company's specialty care and oncology businesses, told Bloomberg News in a January interview that Pfizer's four drug units are probably going to evolve to two, the innovative business (new drugs) and the value business (generics).

The relative share of the two segments is estimated for 2013 at about $36 billion in sales for new drugs, and $17 billion for generics, according to Goldman Sachs.

Read said that in developed markets like the U.S. and Europe Pfizer is already structured into brand-name drugs and generics, but in most other places it is organized by country or region instead of types of drugs. But the company is planning to reorganize everywhere following the US pattern.

As a first step, a separate management would be established for the two main line of business in a test to see whether shareholders prefer to invest in two distinct companies or not.

In any case, a split would be a long-term proposition.


Pfizer's breakup would follow a familiar trend in the pharmaceutical industry.

Bristol-Myers Squibb (NYSE:BMY) has spun off baby formula maker Mead Johnson four years ago and turned it into a success: the pure-play drugmaker Bristol now fetches a valuation that is two-third higher than Pfizer's.

Also Abbott Laboratories (NYSE:ABT) has split off AbbVie Inc. recently to get its other businesses out from under the shadow of its best-selling arthritis drug Humira. Abbott kept the medical devices, diagnostic tools, infant nutrition and branded generics.

Emerging markets

The pharma industry's other main trend is the faster growth in the emerging markets. Sales of drugs grow faster almost everywhere outside the US and Europe.

However emerging markets are price sensitive and mostly prefer generics.

In the past few years Pfizer has made efforts to expand its generics business.

Last year it joined Mylan Inc. (NASDAQ:MYL), a major force in generics, to sell generic drugs in Japan. Pfizer will sell and market the drugs, while Mylan will run the logistical operations and manufacturing. 350 products which are part of the agreement, will be sold under Pfizer's brand, with Mylan's name also on the packaging. Mylan CEO Heather Bresch called Japan a significant opportunity as the government there promotes generics.

Pfizer also has arrangements with Strides Arcolab Ltd., a generics maker in Bangalore, India, and Brazil's Laboratorio Teuto Brasileiro SA.

Pfizer and China's Zhejiang Hisun Pharmaceuticals, a leading Chinese company, have launched a joint venture, Hisun-Pfizer Pharmaceuticals, to manufacture and sell off-patent drugs. Hisun-Pfizer has an investment of $295 million, Hisun is holding 51 percent ownership and Pfizer 49 percent. The production plants are located in Fuyang, Zhejiang province, the research center is located in Hangzhou.

In China, branded generics account for 70 percent of the domestic market. The joint venture has a portfolio covering cardiovascular disease, infectious diseases, cancer drugs, mental health and it aims to build a sales network to serve a large number of Chinese hospitals.


Splitting Pfizer in half may help investors better gauge the true value of its two businesses, which could be about $35 billion more than its market capitalization of $201 billion.

Analyst Jami Rubin at Goldman Sachs estimates that by valuing Pfizer's innovation and generic businesses separately and applying trading multiples based on peers by 2013 earnings forecast for each unit, the company is worth $32 a share. That implies an equity value of about $236 billion, a 17 percent premium to the current market capitalization.

Pfizer is actually a very profitable company. It earned more than 31 cents in operating profit for every dollar of sales in the last 12 months, more than all of its rivals except AstraZeneca and Novo Nordisk, according to data compiled by Bloomberg.

Still, the stock trades for about 12 times analysts' earnings estimates for 2013, lagging behind 79 percent of pharmaceutical companies larger than $10 billion. The median multiple for the group, which includes Merck (NYSE:MRK) and Novartis (NYSE:NVS), is 14. Even similar-sized generic drugmakers, including Mylan Inc. and Actavis Inc., fetch 13 times this year's estimated earnings on average.

Since Pfizer announced its plans to sell or spin off its baby-food and animal-health units in July 2011, the shares have risen 31 percent. While the gain is more than double the advance of the Standard & Poor's 500 Index during that time, Pfizer still has not been able to fetch a valuation as high as its peers.


John Eade, an analyst for Argus Research, said that should Pfizer pursue a full breakup, he doesn't see it happening "in the next couple of years."

Splitting Pfizer's businesses, including the management, operations and manufacturing, may prove too difficult, according to Marshall Gordon, a health-care analyst at ClearBridge Investments, which oversees about $57 billion, including Pfizer shares.

"I don't think you can really separate the two assets," Gordon said. "The most important part is the manufacturing. I think that's really hard to separate out."

The bottom line is that Pfizer's current management is trying its very best to increase the company's valuation even if it takes a drastic reorganization.

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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Drug Manufacturers - Major
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here