If at first you don't sell or spin off, try, try again.
In September, Pfizer (NYSE:PFE) announced that it had decided not to split its legacy drug business off from its higher-growth innovative health segment. Now Reuters has reported that the healthcare giant is considering either selling or spinning off its consumer healthcare business. My advice is this: Go for it, Pfizer.
Good for shareholders
Pfizer ultimately decided against spinning off the legacy essentials health business because the company's management thought staying together would be better for shareholders. The company must now go through the same thought process in determining whether or not to divest the consumer healthcare business. I think moving ahead would be good news for shareholders.
Based on Euromonitor International's retail sales data, in 2015 Pfizer had the fourth-largest consumer healthcare business in the world. The company claimed two of the 10 biggest-selling global consumer brands with Centrum and Advil. According to Reuters, sources say that Pfizer believes the business could be worth up to $14 billion.
In the first nine months of this year, Pfizer's consumer healthcare business generated sales of $2.46 billion. However, this reflected a slight decrease from sales in the prior-year period. Pfizer's shareholders need growth to drive the stock higher. Consumer healthcare isn't delivering that needed growth right now.
My view is that Pfizer could put the $14 billion or so that it has invested in its consumer healthcare business to better use. That amount coincidentally matches what the company paid to buy Medivation. Now, Medivation's Xtandi is one of Pfizer's key sources for future growth. Unlocking the money currently tied up in the consumer healthcare business could allow Pfizer to make more growth-oriented investments.
Spin vs. sell
Merck (NYSE:MRK) chose to sell its consumer healthcare business back in 2014 rather than spin off the unit as a separate company. The transaction provided over $14 billion to the big drugmaker, making more money available for later acquisitions of Cubist and Afferent Pharmaceuticals.
While Merck hasn't been a stranger to spin-offs, the company chose to sell its consumer healthcare unit. Perhaps one key factor behind Merck's decision was that there was a willing buyer ready to fork over a lot of cash (namely, Bayer). That could be a consideration for Pfizer, also.
Reckitt Benckiser Group Plc CEO Rakesh Kapoor publicly stated in late 2015 that his company would be "very interested" in potentially buying Pfizer's consumer healthcare business should it become available. Kapoor's comments were made when Pfizer was in the midst of attempting to acquire Allergan. Although that deal ultimately fell through, Reckitt Benckiser could be a ready buyer should Pfizer look to sell.
Of course, Pfizer will need to thoroughly examine all of the financial pros and cons of spinning off the consumer healthcare business versus selling. There can be tax advantages associated with spin-offs that outright sales don't enjoy. However, if Reckitt Benckiser or another party is primed to buy and offers the right price, a sale could be the better option for Pfizer.
What will Pfizer do?
I had hoped that Pfizer would spin off its established health business earlier this year. The company chose to do otherwise. Reuters reported that inside sources at Pfizer said the evaluation of next steps was in an early stage and that the company might decide to keep its consumer healthcare business. That's similar to language Pfizer used when deliberating about spinning off its established health business.
At this point, it's anyone's guess what Pfizer will do. I think, though, that parting ways with its consumer business might be more palatable than spinning off its legacy drugs unit. Selling to consumers requires a different business model and mindset than selling prescription drugs. That could tilt the decision more toward a sales or spin-off of the consumer healthcare business.
Merck hasn't regretted its consumer healthcare sale. Pfizer wouldn't, either, in my opinion. I'll say it again: Go for it, Pfizer. Your shareholders deserve it.