Pfizer Can Conquer by Not Dividing

Splitting up might have destroyed more value than it created.
At Closing, April 20st
36.63 USD

Pfizer has made a lot of bankers pout today.

The pharma giant has been hemming and hawing for more than four years over whether to split into two separate companies. It finally announced on Monday that its two main business divisions -- one for older, more-established drugs and the other for new ones -- will remain one big happy family.

While bankers might be sad to see dream fees evaporate, they shouldn't be surprised. Pfizer has been hinting it was leaning this way. The strategic and financial rationale for a split has deteriorated. And the company is better off looking outward for deals than trying to internally engineer its way to a modestly higher valuation.  

Breaking Up is Hard to Do

Pfizer's rising share price likely made its decision not to break up much easier

Source: Bloomberg

Back in 2012, analysts suggested breaking the company up would unlock "trapped value." But since then, even as the company built financial and operational separation between its divisions, that trapped value seems to have evaporated as its stock price has risen.

Pfizer's CFO pointed to the vanishing gap between the company's stock price and its sum-of-parts valuation in the company's statement on Monday. Splitting up not only wouldn't help cash flow for either of the new companies, the CFO said, but could actually destroy value with extra costs. 

Pfizer shares are up 50 percent since the spring of 2012 and 4.5 percent this year. It has gone from lagging its peers in valuation to roughly matching them -- it trades at about 17.7 times earnings, not far off the 18.9 median for big U.S. pharma companies and up from a multiple of about 13 in 2012.

Middle of the Pack

Pfizer's valuation has lagged U.S. big pharma peers often as it has mulled a breakup, but it has recently made up ground

Source: Bloomberg

Chart excludes Eli Lilly, Bristol Myers, which are included in the median ratio.

Analysts expect the company to post annual revenue growth this year for the first time since 2010; this hardly seems like the time to rock the boat. 


Pfizer lost major patents in the past few years and took major revenue losses, but looks set to return to growth

Source: Bloomberg

This decision may have been inevitable once the company's attempted mega-merger with Allergan fell apart. In its idealized form, that deal would have bulked up each of Pfizer's businesses enough, and added enough growth potential, to make two standalone companies more attractive. It also would have had major tax benefits, given Allergan's Irish tax domicile, making the spinoff math much friendlier. The deal's death and the U.S. government's crackdown on inversions helped snuff out the spinoff.

So what's next for Pfizer? Probably more deals.

Pfizer has already spent about $19 billion on Medivation and Anacor this year, in an effort to boost sales and its R&D pipeline. The company said it plans to spend on both its older and newer-drug businesses. 

Avoiding a complicated split keeps Pfizer actively in the deal game. And, even in decline, the company's older-drugs business -- which racked up $6 billion in revenue in the second quarter -- provides the cash for deals and to finance research.

Pfizer could certainly use more deals; its drug prospects behind growing medicines such as Eliquis and Ibrance are not the most exciting.

With the breakup drama behind it, Pfizer can focus its energies fully where they arguably should have been all along: on making smart investments for growth. 

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

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    Max Nisen in New York at

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    Mark Gongloff at

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