More doors are closing than opening for Pfizer (PFE -0.50%) with regard to the big drugmaker's options for its consumer healthcare business. Pfizer announced in October that it was reviewing strategic alternatives for the unit, including the potential for a sale, a spinoff, or keeping the business.
Selling the unit appeared to be Pfizer's preferred option. The company moved forward with an auction in the hopes of generating up to $20 billion in a sale. However, the front-runner for buying Pfizer's consumer healthcare business, GlaxoSmithKline (GSK -0.94%), dropped out of the bidding on March 23. Is a spinoff of the unit now Pfizer's best option?
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Dropping like flies
In 2006, Pfizer sold its consumer healthcare business to Johnson & Johnson (JNJ -1.80%) for $16.6 billion. That sale included products such as Benadryl, Listerine, Neosporin, and Sudafed. A few years later, though, Pfizer rebuilt its consumer healthcare business with its acquisition of Wyeth.
When Pfizer announced it was looking at another potential sale, Johnson & Johnson was naturally considered to be on the short list of top prospective buyers. However, in January J&J decided against attempting to buy Pfizer's consumer healthcare business. One potential factor in the company's decision was the challenges of overcoming regulators' likely antitrust concerns.
Reckitt Benckiser withdrew from bidding on Pfizer's consumer unit only days before GlaxoSmithKline. The British drugmaker stated that it had offered to buy part of Pfizer's consumer business but not all of it. Pfizer wasn't agreeable to only selling off part of the business, so another potential buyer was crossed off the list.
Reckitt's exit left GlaxoSmithKline as the most likely candidate to win Pfizer's consumer unit. However, GSK CEO Emma Walmsley's statement that potential deals "must meet our criteria for returns and not compromise our priorities for capital allocation" hints that the price tag was too high for the company.
Who's left?
In Pfizer's Q3 conference call, CEO Ian Read stated that he expected "broad interest from potential acquirers." But with J&J, GlaxoSmithKline, and Reckitt Benckiser out of the running, who's left?
Nestle is one name that's been mentioned. While Nestle is known primarily as a food company, it has taken steps in recent years to expand into healthcare. The company's Nestle Health Sciences subsidiary develops nutritional products and has invested in other pure-play healthcare organizations. In addition, Nestle CEO Mark Schneider's background is in healthcare. Schneider served as CEO of Fresenius before taking the helm at Nestle.
Procter & Gamble (PG 0.52%) is another prospective acquirer. Pfizer's products, including Advil, Centrum, Nexium, and Robitussin, appear to be solid additions to P&G's current consumer healthcare lineup, which include Metamucil, Nyquil, Pepto-Bismol, and Prilosec.
One other possibility is Abbott Labs (ABT 0.73%). Abbott's current primary consumer focus is on nutritional products, and Pfizer's consumer healthcare products would bring a different flavor to Abbott's offerings.
And there's still another option for Pfizer -- turning to private equity funds. Although most of the buzz has centered on big names like J&J, GlaxoSmithKline, and others, private equity could very well be on the table.
Spinoff alternative
However, it's entirely possible that Pfizer simply won't get the price it wants for the consumer business. I suspect that's what we're seeing with the GlaxoSmithKline exit. Spinning off the consumer healthcare unit could be the best alternative for Pfizer shareholders.
Pfizer CFO Frank D'Amelio stated a few months ago that this was exactly what happened with the company's animal health business. He noted that Pfizer received offers it considered to be too low and opted to spin off the business as a separate entity, called Zoetis, rather than sell it for a lower price.
That has turned out to be a smart move. Zoetis stock is up more than 150% since the spinoff in 2013. During the same period, Pfizer's share price has increased only 25%.
There's no guarantee, however, that a spinoff of the consumer healthcare business would be as successful as the Zoetis spinoff. It's a totally different ballgame to market consumer products than to sell primarily to veterinarians and livestock producers.
The option no one wants
Of course, there is one other alternative for Pfizer -- keeping the consumer healthcare business. I think it's fair to say that it's the one option no one wants.
Pfizer hasn't really wanted to be in the consumer healthcare business for years. That's why the company sold its consumer unit to J&J more than a decade ago. Shareholders would see it as a negative if Pfizer retained the business after announcing that it was evaluating strategic alternatives.
My view is that Pfizer really would rather sell the consumer unit than spin it off. But the company might not be able to get the $20 billion it wants. Would Pfizer settle for less -- perhaps $18 billion? We'll find out soon enough. It's now past the deadline for bids from potential acquirers.
Pfizer will make a decision this year. If a sale isn't announced within the next few months, a spinoff could be the next best thing.
