Pfizer plans to sell or spin off two business units, causing stir among analysts

As Pfizer becomes more explicit about how it plans to downsize, concerns grow among some market-watchers about whether the company is on the right track

Jeffrey Bouley
NEW YORK—It became clear in March that Pfizer Inc. wasconsidering the shedding of much of its non-pharma businesses—perhaps 40percent of the entire company or more—but late last week the company madethings more explicit by announcing that it is "exploring strategic alternativesfor its Animal Health and Nutrition businesses based on its recent businessportfolio review to determine the optimal mix of businesses for maximizingshareholder value." Analysts are predicting that offloading those units couldnet Pfizer something around $22 billion to $24 billion.
 
 
With this first step, the company is being vague—or simplykeeping its options open—saying that it is considering "a full or partialseparation of each of these businesses from Pfizer through a spin-off, sale orother transaction," and suggesting that other options are also on the table.Pfizer notes that given the "separate and distinct nature" of the two businessunits, it may very well choose different options for each.
 
"Both Animal Health and Nutrition are strong businesses withattractive customer bases and solid fundamentals, but distinct enough from ourcore businesses that their value may be best maximized outside the company,"says Ian Read, president and CEO of Pfizer. "In exploring these alternatives,we can determine what options will best drive their future growth opportunitiesand expansion, and enable shareholders to potentially realize higher value forthese businesses."
 
 
The news didn't get the warmest reception from investors,with share prices dropping about 3 percent following the news, after climbing36 percent over the previous 12 months, though it is hard to tell if the mild dismayis over the fact that Pfizer is making its breakup plans official or concernthat the company isn't going far enough, fast enough.
 
 
Pfizer noted that it expects to complete any transactionsthat may result from these evaluations in a year or two, and doesn't anticipatemaking any more announcements about strategic alternatives for Animal Health orNutrition until sometime in 2012.
 
Taken altogether, some analysts are suggesting that the extendedtimeline and the choice of business units are more tentative thantransformative for Pfizer.
 
 
For example, Pfizer says it will continue to "enhance thevalue of its Established Products business within the company," pointing outthat the fastest-growing markets for pharma are in the emerging markets, and thefastest-growing segments within those markets are off-patent medicines andtheir generic equivalents. "Given these dynamics and the company's footprintand asset base, the company believes that the Established Products business iswell-positioned to capture the opportunities being created by the demographicsand rising economic power within these markets," the company says.
 
 
But many market-watchers had assumed Read, fairly new to thechief executive's office, would actually break the company up into five piecesand then grow the drug division from a leaner, more focused position.
 
 
Analyst Jami Rubin at Goldman Sachs, who was pushing for aPfizer breakup as early as 2008, notes that separating the company into fiveparts is still a possibility and while that is probably the best way for Readto unlock Pfizer's value, she insists, she still calls last week's announcementa "great first step." Picking Animal Health to spin off or sell makes sensebecause with annual sales of more than $3.5 billion, it can stand on its own,Rubin points out. As for Nutrition, it seems to be the business unit thatinvestors are most keen to see shed, so that also makes sense. Rubin alsosupports the retention of the Established Products business for now, since itis isn't big enough yet to compete with such major generics players as Teva andMylan.
 
Timothy Anderson at Bernstein Research seems to be of themind that Pfizer is being too tentative, though, having said that breakingEstablished Products was the "only innovative part to what CEO Ian Read wasconsidering." That said, Anderson still isn't all that critical of the companyoverall, writing in a note to investors that while some of them "may bedisappointed that [Pfizer] is not going the full distance," he still gives thecompany an 'Outperform' rating because of new medicines such as crizotinib forlung cancer and tofacitinib for rheumatoid arthritis. He also pointed to increasedusage of the Prevnar vaccine in adults and maintains that Pfizer has "perhapsthe best late-stage pipeline of the different drug companies we cover."
 
 
Christopher Schott, an analyst for JPMorgan Chase & Co.,agrees with that latter point, saying in a note to clients that "Pfizer'slate-stage pipeline is as well-positioned as at any time in recent history."
 
 
Erik Gordon, a University of Michigan business professor whostudies the biomedical industry, disagrees though, having rhetorically asked inan e-mail interview with Bloomberglast week: "Should Pfizer double its dependence on what it does worst: Get newdrugs out the door?"
 
 
Indeed, there have been notable pipeline failures, such asthe decision in 2006 to halt development of the torcetrapib cholesterol pill afterit failed to benefit patients in a late-stage study. That product was supposedto succeed Lipitor, the blockbuster for which Pfizer loses patent protection inNovember. Also, the potential Alzheimer's disease drug Dimebon, which analystssuggested might generate $5 billion in annual sales, failed to help patients ina late-stage test last year. Around the same time, Sutent, which has been approvedfor kidney and stomach cancers, failed to shrink breast tumors in two studies. Furthermore,the drug figitumumab was shown in studies not to aid lung cancer patients.
 
Also in the "con" camp have been Richard Evans and ScottHinds of Sector & Sovereign Research LLC, who wrote a note after thebreakup talks gained steam earlier this year that large spin-off activity mightnot be the best choice. They fear that leaving only a "core Pfizer" wouldsimply mean a smaller company facing likely decline as key products reach theend of their patent protection.
 
In addition, analyst Michael Levesque at Moody'sInvestors Service worries that spin-off and sell-off plans will make Pfizer tooreliant on risky experimental drugs and lead to a downgrade to its stock value,credit rating/debt rating and more, writing in his own note: "We want to put acaution out there to bondholders. [If Pfizer sells units] the business becomessmaller and less diverse, and if those proceeds are just returned toshareholders, then that is a negative credit risk."
 
 
Pfizer Nutrition is primarily focused on formulas andnutritional products for infants and children up to seven years old, while PfizerAnimal Health is involved in the discovery, development, manufacture andcommercialization of products to prevent and treat disease in livestock andcompanion animals, including vaccines, medicines, diagnostics and genetic tests.Both companies have operations in more than 60 countries.  


Jeffrey Bouley

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