Pfizer’s Possible Unit Shuffle Triggers Breakup Concern
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Pfizer Inc. (PFE)’s four business units may be combined into two, a top company official said, triggering speculation by analysts that the world’s biggest drugmaker is preparing to split in half.
Pfizer’s units cover oncology, primary care, specialty drugs, and so-called established products, which are medicines that have lost patent protection and are sold against generics. That’s “probably going to evolve to two, where there’s the innovative business and the value business,” Geno Germano, president of the specialty care and oncology businesses, said in a Jan. 8 interview.
Chief Executive Officer Ian Read took over New York-based Pfizer in 2010, as the company was digesting the 2009 acquisition of Wyeth and preparing for the loss of its top- selling product Lipitor. Under Read, Pfizer has cut research and operations and is divesting non-drug businesses, such as animal health and infant nutrition. Those actions have created questions about whether a bigger breakup is on the horizon.
The possible reorganization outlined by Germano may be another step toward a split by Pfizer two to three years down the line, said Mark Schoenebaum, an ISI Group Inc. analyst. Such a move would be similar to the action by Abbott Laboratories (ABT), which spun off its brand-drug business Jan. 1 as the new company AbbVie Inc. (ABBV)
Making the generics unit more independent of the business that finds and develops new medicines would be a sign that Pfizer is headed for such a major breakup, Schoenebaum said.
“Any signal that Pfizer is physically disentangling that business from the rest of those businesses, those would all be viewed as positive steps toward a spinout,” Schoenebaum said in a telephone interview. “It’s in their back pocket, should it make sense in a few years.”
The company hasn’t made any changes, Germano said in an e-mail today. “We currently operate under two distinct models - - innovative-driven and value-driven, and there have been no changes to Pfizer’s business unit structure,” Germano said.
Pfizer’s new drugs business will have about $36 billion in sales in 2013, and its generic medicines line $17 billion, said Goldman Sachs Group Inc.’s Jami Rubin, an analyst who has led speculation about a breakup.
“While we laud Pfizer’s decision to separate its animal health and nutritionals businesses, we see these moves as first steps in a potential full-scale breakup, akin to Abbott,” Rubin said in a client note in March. Abbott, based in Abbott Park, Illinois, shifted its drug operations into AbbVie and remained a diversified products company with medical device, diagnostics, nutrition and generic medicines units.
Pfizer fell less than 1 percent to $26.62 at the close of New York trading. The company had increased 22 percent in the past 12 months.
Pfizer’s Read has talked about a reorganization, though hasn’t committed to going forward with it, or with a future split. “Through 2013 and 2014, we’ll continue to refine our operational structure to maximize the values of those two distinct businesses,” Read said in July on a conference call.
When asked about a breakup, he said, “We will see how the value of those two businesses are reflected in our growth and on our share price and then take decisions based on that.”
A reorganization of Pfizer’s four major units into two wouldn’t be a cost-savings exercise, Germano said.
“We’ll squeeze out every bit of efficiency we can and I expect we’ll get some, but that’s not the main driver,” he said. “We really see the business segmenting into these two segments with pretty different capabilities, and we would want to organize in a way that we realize the most value for shareholders.”
Rubin said in her March note that such a move was a signal of things to come. “We believe the above incubation stage could take two or three years to build the stand-alone potential of the two businesses but Pfizer could be broken up by 2015,” she said. “If the pipeline is successful and drives meaningful top- line growth, management will want to separate the businesses so investors can better value the pharma business and drive multiple expansion,” she said.
Schoenebaum, the analyst, said the timing of a possible breakup would be driven by what Pfizer could command for the generics business from the market. It could be handled as a sale, or as a stock spinoff.
“Right now, generics company multiples aren’t higher than pharma company multiples,” Schoenebaum said. “So there aren’t reasons to do it from a P/E arbitrage point of view. But there might be strategic reasons to do it.”
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