Why Big Pharma Is Breaking Up

Breaking up might not be all that hard to do after all -- at least not for big pharma.

Merck (NYSE: MRK  ) CEO Ken Frazier stated on the Oct. 28 third-quarter results conference call that the company is considering divesting its animal health and consumer care business units. Novartis (NYSE: NVS  ) CEO Joe Jimenez just days later confirmed reports that his company could also be looking to sell its animal health business.

Why are these big pharma companies thinking about breaking up? Think of it as synergy in reverse -- the sum of the parts could be greater than the whole. That philosophy seems to have worked for other organizations recently.

Divide and conquer
Big pharma has been breaking up from A to Z in 2013 -- literally. Abbott Labs (NYSE: ABT  ) spun off its branded pharmaceuticals business into AbbVie (NYSE: ABBV  ) at the beginning of the year. Pfizer (NYSE: PFE  ) followed suit with an IPO of animal health business Zoetis (NYSE: ZTS  ) a few weeks later.

Both parent companies were driven by a desire to unlock shareholder value. With the year nearly at its end, how well have their efforts paid off?

ABT Chart

ABT data by YCharts.

Abbott's move clearly rewarded investors. The parent company's stock climbed nearly 21% year to date with solid improvement in its profit margin. Meanwhile, shares of spin-off AbbVie soared almost 42%, powered by continued strong sales of Humira

Pfizer also has rewarded shareholders with a return of nearly 25% so far in 2013, thanks in part to the success of its cancer drug lineup. Zoetis started off strong but is up less than 3% year to date. Part of the issue, in my view, is that the stock was priced at a premium from the outset. However, even with subpar stock performance from Zoetis, Pfizer accomplished its purpose of unlocking shareholder value. 

Will Merck make the move?
To understand why Merck is thinking about some sort of divestiture, take a look at its year-to-date performance. Shares are up about 14%, well below other big pharma rivals. The company is slashing its workforce by 20% in the wake of declining sales.

Merck's animal health business generated $3.4 billion in sales last year, accounting for slightly more than 7% of the company's total revenue. The consumer care unit -- including Claritin, Dr. Scholl's foot-care products, and Coppertone sun-protection products -- brought in $2 billion, or 4% of total revenue.

Goldman Sachs analyst Jami Rubin thinks that splitting out the two business units could yield roughly $12.5 billion in additional shareholder value. While Merck probably wouldn't get quite as high of a premium valuation for its animal health unit that Zoetis commands, Rubin's estimate seems to be realistic.

Merck's Frazier says the company is working to determine whether the animal health and consumer care businesses "produce the most value inside our portfolio or outside our portfolio." That answer seems likely to be "outside."

What isn't as clear, though, is which route Merck might take to divest those units and how quickly it would move to do so. Selling to another organization could be the preferred path rather than the spin-off approaches taken by Abbott and Pfizer.

Frazier shied away from giving any idea about when Merck could take action. Breaking up might not be too hard to do for big pharma, but it still takes a while. 

Staying power
One thing these big pharma stocks have in common is their nice dividends. Dividend stocks can make you rich. It's as simple as that. Over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 11, 2013, at 9:33 PM, PharmTeam wrote:

    Exactly how are those segments more valuable outside the company? Is it that the split will improve margins? Or that a smaller focused company might have more growth potential and sell for a higher multiple?

  • Report this Comment On November 11, 2013, at 10:31 PM, TMFFishBiz wrote:

    It's largely the multiple. Look at Pfizer. It trades at a P/E below 9, while Zoetis is much higher. Merck's animal health unit would likely trade at a higher multiple than the pharmacy business.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2722005, ~/Articles/ArticleHandler.aspx, 9/22/2014 10:38:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement