On Tuesday, Pfizer officially announced that it was "reviewing strategic alternatives" for its consumer healthcare business. Those alternatives include a sale, a spinoff, or ultimately keeping the business within Pfizer. Shareholders should be cheering for the first two options. Here are three reasons why Pfizer investors will win if the company decides to sell or spin off its consumer business.
1. A sale would generate a lot of cash -- and a spinoff would generate a lot of excitement
Last year, when Pfizer was reportedly thinking about selling its consumer healthcare unit, sources told Reuters that the company thought it could fetch as much as $14 billion. That price seems about right. In 2016, Pfizer's consumer segment made $3.4 billion in revenue. It's on track to make roughly the same amount this year. A $14 billion price tag would translate to a price-to-sales ratio of a little over four, right where Pfizer's overall price-to-sales ratio currently stands.
If Pfizer does sell the consumer unit, the deal would generate a lot of cash, even after taking out taxes. Should the company use that cash to make smart acquisitions, it would definitely be beneficial to investors.
But what if Pfizer takes the spinoff route? Investors could win in that scenario, too. The last time Pfizer spun off a business was in 2013 with animal health business Zoetis (NYSE:ZTS). Since then, Zoetis stock has more than doubled, while Pfizer stock is up a little over 30%. There's no way to know how well a consumer healthcare spinoff might perform, but I have no doubt that investors would be quite excited if Pfizer opted to spin off the consumer business.
2. Earnings growth would improve
Earnings growth is the fuel that drives stocks higher. Separating out the consumer healthcare business, either through a sale or a spinoff, would allow Pfizer to grow earnings more quickly. How?
Imagine pedaling a bicycle with enough force to go 20 miles per hour. However, you have a small child on the bike with you who isn't pedaling, so you actually only go 15 miles per hour. If you stop, hand the child to its parent, and resume pedaling like you were before, your speed would pick up to 20 miles per hour.
That's a pretty good analogy for where Pfizer is now. The company's innovative health segment is growing. Consumer healthcare is in the innovative health segment, but the business hasn't been growing lately. If you take the nongrowing smaller part out of the mix, the remaining business would have even stronger growth.
3. Greater focus on the core business
If you're a Pfizer shareholder, where do you want management spending most of its time -- on areas where the company can achieve the fastest growth or on other areas? That's a valid question for any business. In Pfizer's case, the best growth potential is with its core biopharmaceutical business.
There's no guarantee that it will happen, but it doesn't seem unrealistic to expect that a greater focus by management on the core business would yield returns over the long run. It's also possible that the consumer healthcare business would enjoy greater success if it had a senior management team focused more exclusively on it. That's why Pfizer CEO Ian Read said that "there is potential for its [consumer healthcare's] value to be more fully realized outside the company."
Will Pfizer do it?
In 2016, Pfizer thought about splitting up its essential health business, which includes legacy drugs and biosimilars. However, it eventually decided against the move. It's possible that the company will also choose "none of the above" as its answer this time around with consumer healthcare. My hunch is that this time is different, though.
Consumer healthcare truly is outside of Pfizer's core focus, just like animal health was with the Zoetis spinoff. I think that divesting consumer healthcare would unlock value for shareholders.
Is a sale or a spinoff more likely? If corporate tax reform passes in the U.S., Pfizer could pay less taxes on a sale than it would have in the past -- a big plus. However, I suspect the decision could come down to how many interested buyers there are.
Reckitt Benckiser Group Plc's CEO, Rakesh Kapoor, has stated in the past that his company would be interested if Pfizer's consumer healthcare business went up for sale. At the Morgan Stanley healthcare conference in September, Johnson & Johnson (NYSE:JNJ) CFO Dominic Caruso said that the consumer unit of a larger corporation could be "a logical choice" for J&J to buy to spur growth in its own consumer business. Pfizer's timing might not be ideal for a sale of its consumer unit, however. German drugmaker Merck KGaA has also publicly said that it was evaluating the sale of its consumer healthcare business.
Don't expect more news from Pfizer anytime soon. A decision won't be made until 2018. In the meantime, Pfizer says that it doesn't "plan to make any further statements about the strategic review process."