Pfizer Baby Food Unit Gets $6.8 Billion in Mead Model: Real M&A
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Pfizer Inc. (PFE) investors are pushing for a spinoff of the drugmaker’s nutrition business that would command a price tag of $6.8 billion and deliver more than twice the gains of the U.S. stock market.
Mead Johnson Nutrition Co. (MJN), the baby-formula maker that Bristol-Myers Squibb Co. (BMY) took public in February 2009, now trades at 23.1 times adjusted earnings, more than twice the valuation of its former parent or Pfizer, after a 133 percent surge through yesterday that beat the Standard & Poor’s 500 Index’s 52 percent rise, according to data compiled by Bloomberg. Applying Mead Johnson’s profit margins and valuations to Pfizer’s own nutrition unit, which had $1.87 billion in sales last year, would give it a market value of $6.8 billion.
While Bristol-Myers outperformed U.S. drugmakers by 20 percentage points since announcing plans for Mead Johnson’s initial public offering in April 2008, Pfizer fell in the same period and has the third-lowest price-to-earnings valuation of S&P 500 pharmaceutical companies, data compiled by Bloomberg show. Investors are pressing Pfizer’s Chief Executive Officer Ian Read to slim down the company and focus on new drugs as it faces the loss of exclusivity for its Lipitor cholesterol pill.
“Who wouldn’t want a repeat of Mead Johnson?” said Les Funtleyder, a New York-based fund manager at Miller Tabak & Co., which owns Pfizer shares. “Investors and shareholders are pushing for value-creating strategies.”
Pfizer shares climbed 58 cents, or 3 percent, to $19.88 on the New York Stock Exchange today. The gain was the largest among the 52 companies in the S&P 500 Health Care Index and the second-biggest in the Dow Jones Industrial Average.
Bristol-Myers advanced 46 cents, or 1.8 percent, to $25.43, while Mead Johnson fell 45 cents, or 0.8 percent, to $55.36.
Joan Campion, a spokeswoman for New York-based Pfizer, said the company is conducting a strategic review of each of its units. No decision has been made about the future of the nutritional business, she said. The unit was acquired by the world’s largest drugmaker in the $68 billion purchase of Wyeth in 2009.
Pfizer and Mead Johnson both make infant formula and nutrition drinks for children and expecting mothers as burgeoning middle classes in emerging markets drive demand. Overall sales of baby food in Asia, Latin America and Eastern Europe more than doubled from 2005 to 2010, according to Euromonitor, a London-based research firm.
Mead Johnson, which analysts project will post a 20 percent increase in net profit this year, has a market capitalization of $11.4 billion. Its 133 percent rally from Feb. 10, 2009, through yesterday outstripped the 33 percent advance in the S&P 500’s gauge of 41 companies that sell consumer staples from foods to household products, data compiled by Bloomberg show.
The spinoff was “a positive development for the company,” Chris Perille, a spokesman for Glenview, Illinois-based Mead Johnson, said in a telephone interview. “We have been better able to invest for growth in our business than would have been possible as part of a larger pharmaceutical company.”
The maker of the Enfamil infant formula turned every dollar of sales into 14.4 cents of profit last year, according to data compiled by Bloomberg. Applying Mead Johnson’s profit margin and share price valuation of 25.2 times net income to the $1.87 billion of revenue posted last year by Pfizer’s nutritional unit would produce a market value of $6.8 billion, the data show.
Mead Johnson offers a guide for the valuation that Pfizer’s unit may command because they offer similar products and compete in many of the same markets, according to Linda Bannister, an analyst at Edward Jones & Co. in Des Peres, Missouri.
Selling the nutrition business would be a change of strategy for Pfizer. The company diversified by buying Wyeth to add biologic drugs, consumer and animal health products and baby formula. It also boosted sales in emerging markets such as China, India and Brazil to 18 percent of the company’s revenue under Jeffery Kindler, who Read replaced in December.
Mead Johnson’s revenue of $3.14 billion last year outpaced Pfizer’s unit by 68 percent, data compiled by Bloomberg show.
“If they spin out nutritionals and get a Mead Johnson-type price, it would add value to Pfizer shareholders,” Barbara Ryan, an analyst at Deutsche Bank AG in New York, said in an interview. “The question is: what are the business costs in terms of Pfizer building its emerging-market platform?”
Bristol-Myers climbed 17 percent through yesterday since saying on April 24, 2008, that it planned an IPO for Mead Johnson. That compared with a 3.3 percent drop for the S&P 500’s gauge of 11 pharmaceutical companies and a 2.9 percent decline for Pfizer, data compiled by Bloomberg show. Bristol-Myers still trades at 11.4 times profit, less than half of Mead Johnson’s valuation.
Mead Johnson Stake
The drugmaker said in November 2009 that it would separate its remaining 83 percent stake in Mead Johnson in a tax-free transaction that retired 270 million Bristol-Myers shares and reduced dividend obligations by $335 million a year.
The split off of Mead Johnson “was a key part of our biopharma strategy,” Jennifer Mauer, a spokeswoman for New York-based Bristol-Myers, said in a phone interview. “It allows all of the company efforts and resources to be focused on developing medicines for serious diseases.”
The move was part of former CEO James Cornelius’ strategy to shed non-pharmaceutical businesses and build up the pipeline of experimental drugs through partnerships and acquisitions.
Bristol-Myers will have generic competition next year for its Plavix blood thinner, which generates about a third of the company’s revenue.
Pfizer faces the loss of exclusivity of its biggest drug, the Lipitor cholesterol pill, which accounts for about 16 percent of its sales, data compiled by Bloomberg show. The company forecasts revenue may fall as much as 2.7 percent this year as the pipeline of experimental drugs fails to offset lower sales of Lipitor.
Pfizer may sell businesses that account for almost half of its revenue, Tim Anderson, an analyst with Sanford C. Bernstein & Co. in New York, wrote in a March 14 report. The company may divest four non-pharmaceutical businesses as well as its established products group, reducing sales to $35 to $40 billion from $67 billion, he said.
The nutrition unit would be an easy candidate since its products don’t match up with the rest of Pfizer’s offerings and the business was acquired recently, Anderson wrote.
Nestle SA (NESN) of Vevey, Switzerland, or Paris-based Danone (BN) may be interested in purchasing Pfizer’s nutrition unit after a spinoff, according to a note in January from Catherine Arnold, an analyst at Credit Suisse Group AG in New York. Any deal may trigger anti-trust restrictions, she said.
Robin Tickle, a spokesman for Nestle, didn’t return a request for comment after business hours. Sabrina Schneider, a spokeswoman for Danone, declined to comment.
If Pfizer were to sell its baby-formula division, it may be worth more than $7 billion, based on Mead Johnson’s earnings and previous deals in the pharmaceutical industry, according to data compiled by Bloomberg.
Mead Johnson generates 24.7 cents of earnings before interest, taxes, depreciation and amortization for every $1 of sales. At that level Pfizer’s unit would have posted Ebitda of about $461.7 million last year. Based on the median multiple of 15.4 times Ebitda for U.S. pharmaceutical takeovers greater than $1 billion in the last 10 years, the nutrition company may fetch $7.1 billion, the data show.
Pfizer’s shares traded at 8.5 times profit. That was the third-lowest of any company in the S&P 500 Pharmaceuticals Index, after Forest Laboratories Inc. (FRX) of New York and Indianapolis-based Eli Lilly & Co. (LLY), which were valued at 7 times profit, data compiled by Bloomberg show.
“Bristol shareholders are now also shareholders of Mead Johnson, and Mead Johnson has performed fabulously well,” said Edward Jones’ Bannister. “Pfizer unlocking some value, making the company smaller: I think that is a good idea and those are welcome moves from a shareholder perspective.”
There have been 4,788 deals announced globally this year, totaling $467.1 billion, a 12 percent increase from the $416.7 billion in the same period in 2010, according to data compiled by Bloomberg.
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