Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

(Updated )

Pfizer and its CEO Ian Read have been toying for years with the idea of splitting the company in two. But now, just months from when management is expected to announce a decision, there's a growing camp convinced the $213 billion company will opt to stay together. What gives?

The rationale for a breakup goes like this: One side of Pfizer is composed of older products, such as Viagra and Lipitor, that generate nice cash flow but whose sales growth will be hampered by expired patents. The other focuses on developing and marketing new drugs. Conventional wisdom would say to make the "boring" business a separate stock for investors who prefer predictability over risky growth, and vice versa.

Tale of Two Pfizers
The company breaks out financial results for these two main divisions, seemingly paving the way to split in two. However, a formal breakup may not be the best plan.
Source: Pfizer filing
*Includes legacy Hospira operations

Pfizer has been making acquisitions to fortify both sides of the company and the benefits of that seem to be real, judging by analysts' revenue forecasts: 

Looking Ahead
While Pfizer's revenue shrank last year, analysts have generally raised estimates for future growth:
Source: Bloomberg

So real, in fact, that a breakup may not be necessary now or even that beneficial. 

Let's consider the criteria Read and his team say they are using to decide on whether a split would be worthwhile. It centers on four key questions and as of now, the likely answers are telling:

  1. Are the businesses performing well within Pfizer? 
    Yes, and M&A is helping.
  2. Could the businesses perform well as stand-alone entities?
    Sure, but not necessarily better
  3. Is there trapped value in a combined entity?
    Perhaps a little.
  4. Can the trapped value be unlocked efficiently?
    Well, what's the point if there's not much to unlock? 

In its first major transaction since giving up on a $160 billion merger with Botox maker Allergan, Pfizer announced in May a $5.2 billion takeover of Anacor Pharmaceuticals, which gave it an experimental treatment for eczema. Then on Monday, Pfizer struck a $14 billion deal for Medivation, which has a blockbuster treatment for prostate cancer and two other cancer drugs in its pipeline. These add to Pfizer's "innovative health" division. Also this week, it agreed to pay $725 million for an antibiotics business from AstraZeneca, a drugmaker it tried to acquire in whole in 2014. And it's been about a year since Pfizer completed the $17 billion acquisition of Hospira, whose generic injectable drugs bolster Pfizer's "essential health" unit.

Even though Read's two largest takeover pursuits -- AstraZeneca and Allergan -- failed, his pro-activeness on the deal front has certainly helped Pfizer shares climb out of the industry rout that was triggered by Valeant's controversies late last year. The shares have gained 17 percent in the past six months.

Back in early 2011, when Read began to float the breakup idea, Pfizer's stock had a price-earnings ratio of about 13. Now it trades for almost 18 times trailing 12-month earnings. It does remain among the lowest valuations in the peer group, which shareholders in any giant, diversified company will often refer to as a conglomerate discount. Even so, analysts who have crunched the numbers on a breakup don't see much upside when assigning each division its own multiple. 

No Wow Factor
A sum-of-the-parts model from Tim Anderson, an analyst for Bernstein, published last month reveals little if any upside to breaking up Pfizer. In fact, analysts see the shares moving higher on their own.
Source: Bernstein, Bloomberg

Furthermore, the pharmaceutical industry is still very much in acquisition mode, and if Pfizer were to turn its attention to a breakup, that could mean missing out on more opportunistic deals. (In fact, Gadfly's Brooke Sutherland has highlighted some candidates.) And it's not like Pfizer can't revisit the breakup idea down the road when pharma M&A isn't so competitive. 

If it does opt out of a split, I wonder whether that could signal a shift in thinking around corporate breakups in general. They were very much in vogue the past few years, in part because of the spread of shareholder activism. In cases where a company had disparate business lines without much in the way of synergies, a breakup makes sense, allowing for management to be more focused and not compete for internal resources. Interestingly enough, though, spun-off stocks really haven't outperformed the broader market, and that may be reason enough to rethink them.

Call the Spin Doctor
Could corporate breakups wane in popularity given the mediocre performance of spinoff stocks?
Source: Bloomberg

Pfizer's got a good thing going -- why try to fix what isn't broken?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net