Pfizer To Shed Animal Health & Nutrition Units

Pfizer To Shed Animal Health & Nutrition Units

July 8th, 2011 // 12:36 pm @


After months of speculation and debate, Pfizer is now looking to sell or spin off its Animal Health and Nutritional businesses, although the drugmaker has apparently had a change of heart about its Consumer Health operation and appears committed to keeping the unit.

The move comes after Pfizer signaled its intention several months ago to start disposing of major operations in a bid to focus mostly on pharmaceuticals, prompting a debate about the extent to which Pfizer can successfully transform itself into a growth company, even though shedding the Animal Health and Nutritional units could yield recognizable benefits.

“Both Animal Health and Nutrition are strong businesses with attractive customer bases and solid fundamentals, but distinct enough from our core businesses that their value may be best maximized outside the company,” Pfizer ceo Ian Read says in a statement. “In exploring these alternatives, we can determine what options will best drive their future growth opportunities and expansion, and enable shareholders to potentially realize higher value for these businesses.”

At issue is the extent to which this shift in strategic thinking can pay dividends, real and imagined, as Pfizer undergoes a transformation akin to turning the Queen Elizabeth around in a bathtub. The drugmaker is in the midst of a years-long effort to cut billions of dollars in expenses by closing plants, axing thousands of jobs and, significantly, eliminating numerous areas of R&D undertakings.

As part of their thinking, Pfizer execs have envisioned dividing the remaining pharmaceutical business in two – an established entity consisting of older, off-patent meds, and core products, which would be home to newer drugs and R&D. However, some Wall Street analysts have questioned whether the core pharma unit is capable of generating sufficient growth, given the ongoing pipeline problems. For instance, Richard Evans of Sector & Sovereign Research recently opined that Pfizer “is not doing enough R&D to create growth” .

This approach prompted speculation that the so-called Established Business would also be spun off, although Read signaled that does not seem to be the case, prompting disappointment from investors who were hoping for a bigger break-up to bolster the stock, according to ISI Group analyst Joe Ruggieri in an investor note this morning.

In fact, by holding on to the Consumer Health business, Pfizer seems to be acknowleding that relying strictly on a core pharma business is unworkable. A sale or spin off would also be ironic, given that Pfizer sold the Warner-Lambert consumer health business to Johnson & Johnson a decade ago and then cited the value of the Wyeth consumer health business when making that acquisition in 2009.

The Pfizer statement says this: “The pharmaceutical industry’s fastest-growing markets are in the emerging markets, and within the emerging markets, the fastest-growing segment is off-patent medicines and their generic equivalents. Given these dynamics and the company’s footprint and asset base, the company believes that the Established Products business is well positioned to capture the opportunities being created by the demographics and rising economic power within these markets.

“Also based on this portfolio review, the company believes that it can continue to enhance the value of its Consumer Healthcare business within Pfizer. Consumer Healthcare has a strong connection to the company’s core biopharmaceutical businesses, including the potential opportunity to extend the value of certain Pfizer legacy biopharmaceutical products, and strong connections with emerging markets and pharmacy customers worldwide.”

“To us, this makes sense since emerging markets remain important to the overall growth story for pharma and a sale of only the commodity generics businesses would have generated little if any upside for investors,” writes Leerink Swann analyst Seamus Fernandez in an investor note. “Additionally, with the conversations intensifying for Rx to OTC switches in the US & EU, as well as the interaction of consumer businesses with pharma in emerging mkts, we think it makes sense for Pfizer management to retain Consumer Health.”

As for the Animal Health and Nutritionals businesses, Credit Suisse analyst Catherine Arnold estimated earlier this year that the Nutritional unit should realize a compounded annual growth rate in sales of more than 8 percent, and the Animal Health operation should notch the 7.2 percent. By comparison, she forecast a sobering 1.7 percent decline for pharmaceuticals .

She also noted that investors are likely to be told that spinoffs could boost the earnings multiple and yield considerable value later because a unit could eventually be sold. The same argument was made about Bristol-Myers Squibb and the Mead Johnson nutrition business, which has outperformed the S&P 500 since a spin off occurred a year ago.

Fernandez estimates the nutritionals unit could fetch five times sales or $10 billion, while he values the Animal Health operation at three times sales of $4 billion or $10 billion to $12 billion, although he looks for a spin off the Animal Health unit and an outright sale of the nutritionals business.

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