A Big-Name Merger In Consumer Health Care

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Includes: GSK, PFE
by: TipRanks
Summary

Pfizer and GlaxoSmithKline are merging their consumer health care divisions.

The joint venture will start out with over $12 billion in potential revenues.

Both parent companies stand to see substantial advantages from the spinoff.

Last Wednesday, Dec 19, pharmaceutical giants Pfizer, Inc. (PFEResearch Report) and GlaxoSmithKline PLC (GSKResearch Report) announced an agreement to merge their consumer health care divisions into a single entity. The joint venture will be owned 68% by GSK and 32% by Pfizer, with Pfizer appointing 3 of the 9 board members. The agreement gives GSK the right, after three years, to split the joint venture into stand-alone company, which will be traded on the UK stock exchange.

Consumer health care encompasses the over-the-counter products that so many of us rely on for day-to-day needs. GSK markets toothpaste through this division, including the international brands Sensodyne and Parodontax, as well as the popular Theraflu medication. Pfizer’s over-the-counter brands include Advil and Centrum, the world’s best-selling pain-killer and multivitamin. It’s a lucrative segment for both companies, with Pfizer recording $3.5 billion and GSK $9.2 billion in revenues from it in 2017. This suggests that the new venture will hit $12 billion or more in revenues right from the start.

Splitting the consumer health care divisions from the larger parent companies will allow both Pfizer and GSK to focus on core strengths moving forward. For Pfizer, that includes a wide array of ‘blockbuster’ prescription medications. Chances are, you’ve heard of (or maybe even used) some of these: Lipitor, Zithromax, Zoloft, Lyrica. Lipitor, for example, is a popular treatment for high cholesterol, and this author was recently prescribed Zithromax for a respiratory infection.

GSK’s primary revenue generator is vaccine production. The company manufactures and markets many of the regular vaccines that every parent is familiar with: the tetanus and diphtheria boosters, polio and pertussis shots, and even the flu shots that everyone updates every year. As a parent, I can attest to the ubiquity of GSK products when it’s time to renew the kids’ vaccinations.

Will the Analyst Reviews Turn Around?

Neither Pfizer nor GSK has shown great performance in the markets recently. Pfizer stock is somewhat moribund, turning down a bit at the end of last week after holding between $40 and $45 per share since August. GSK’s stock has been volatile for years, but it did get a boost right after the joint venture announcement. We can turn to the TipRanks database to see what the market analysts have to see about these companies, and try to divine their prospects for the future.

Pfizer, Inc. (PFEResearch Report)

Pfizer is the second largest publicly traded pharmaceutical company, with a market cap of $242 billion. As pointed out above, the company produces a large number of best-selling prescription meds, so it is not reliant on any one product for solvency.

Looking at PFE’s analyst reviews, we see an analyst consensus of ‘Hold,’ but it’s important to note the most recent review, a solid ‘Buy’ from Cantor Fitzgerald’s Louise Chen (Track Record & Ratings). She looked at this stock on Dec 20, the after the joint venture with GSK was announced, and set a $53 price target, giving a very bullish 26% upside to the stock.

Referring directly to the GSK agreement, Chen said, “We view the JV as financially and strategically beneficial to PFE, and a spin-out is what shareholders we have spoken with wanted to see. Furthermore, the underlying growth of PFE's key drugs and pipeline will be more evident without the Consumer Business. We think a greater appreciation for PFE's innovative medicines and pipeline should drive the stock higher.”

PFE currently holds a $44 average price, giving the stock a small 6% upside. I think it will be interesting to see how the price target moves in the coming weeks, when more analysts have had time to review the joint venture.

GlaxoSmithKline PLC (GSKResearch Report)

In London, GlaxoSmithKline’s stock jumped by more than 8% with news of the Pfizer joint venture. GSK also saw a boost – albeit a more modest one – on Wall Street Thursday. GSK is currently rated a ‘Moderate Buy’ on the analyst consensus, based on 1 ‘buy’ rating and 2 ‘holds,’ all given at least a week before the joint venture announcement. The stock’s average price target of $41 gives an 11% upside when compared to the $37 share price.

GSK’s most recent ‘buy’ rating came on Dec 11, from Peter Welford (Track Record & Ratings) of Jefferies. He gave the stock a $45 price target, suggesting a 21% upside from the current share price. In his comments, Welford based his bullish view on GSK entering “a period of sustained earnings momentum.”

The new joint venture may provide a solid basis for that view. Spinning off the consumer health care division will, by company estimates, save Glaxo more than $600 million per year, while the core vaccine division will continue to generate revenues.

The New Year will tell us if these two stocks are poised to change course for the better. Each has a recent ‘buy’ rating, and the combined venture on over-the-counter meds shows promise to streamline efficiency for both parents. The spinoff, with over $12 billion in potential revenues, will be the world’s largest provider of over-the-counter drugs and healthcare products, and both Pfizer and GSK will each have fingers in that cookie jar.

Keep your eyes open on both of these stocks; while the joint venture announcement came at an inopportune time – only a week before Christmas – to have an immediate effect on share price and market value, both PFE and GSK stand to gain as the news percolates out after the holidays.

Author: Michael Marcus

Disclosure: I/we 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.