Last week, Pfizer (NYSE:PFE) announced that it was splitting its operating segments into three divisions. The company presently operates under a two-unit system: Innovative Health and Essential Health. Soon, however, it will instead sport an Innovative Medicines business, an Established Medicines unit, and a Consumer Healthcare segment.
As this second reorganization in four years seems like a prelude to additional business development moves, this is an opportune time to consider if this big pharma stock is worth buying.
Why is Pfizer reorganizing yet again?
Back in 2014, Pfizer shifted itself into its current structure in order to reduce operating inefficiencies stemming from its 2009 acquisition of Wyeth, and to better showcase the growth potential of its newer products, which were being overshadowed by legacy medicines that faced generic competition.
Unfortunately, this effort has largely failed to create much in the way of value for shareholders. Pfizer's stock has grossly underperformed both the broader market and the biotech industry as a whole since it implemented that reorganization.
The main reason is that Pfizer simply didn't go far enough. At the time, Wall Street was clamoring for it to split into two companies, which would have, in theory, reduced the drag on newer growth products created by declining stars like Celebrex, Viagra, and Zoloft. Given how Pfizer's stock has performed in the intervening period, that assessment appears to have been spot-on.
Instead, Pfizer decided to acquire a handful of smaller companies like Anacor Pharmaceuticals and Medivation to boost its pipeline and product portfolio. That strategy, however, has done little to blunt the impact of its plummeting off-patent portfolio.
To be fair, Pfizer also made separate attempts to acquire pharma behemoths AstraZeneca and Allergan, either of which would have provided it sufficient mass to catalyze a formal breakup, but it failed to consummate either merger after the hoped-for tax benefits evaporated. Not surprisingly, Pfizer decided to kick the can down the road on a possible split after these megamergers failed.
Now, Pfizer is pulling the trigger on another reorganization, but it appears to have failed to learn from its previous mistakes. This reorganization seems to be centered squarely around its consumer healthcare unit, which it tried and failed to sell earlier this year.
Long story short, Pfizer's asking price for its consumer healthcare business proved to be too rich for potential acquirers such as GlaxoSmithKline, Johnson & Johnson, and Nestle. Now, the unit appears destined for a spinoff. As the company noted in its press release: "Pfizer continues to evaluate strategic alternatives for this business [consumer healthcare] and expects to make a decision in 2018."
While a spinoff would bring in additional cash, it wouldn't solve Pfizer's biggest problem -- the waning sales of its legacy medicines. This has been an ongoing concern for almost a decade now, and hiving off another profitable unit isn't exactly a solution.
To illustrate the scope of this problem, Wall Street analysts forecast that Pfizer's top line will rise at a compound annual growth rate of 2% over the next six years -- among the lowest growth rates within its big pharma peer group. That anemic outlook implies that Pfizer's stock will continue to underperform the broader markets, underscoring why this plan to carve out its consumer healthcare unit probably won't be a market-moving event for the company.
My guess is that Pfizer is still hunting for big game like an Allergan, AstraZeneca, or perhaps a Bristol-Myers Squibb to purchase as a precursor to a formal split into a generics unit and a growth-oriented company. Before it does that, however, it seems intent on hiving off its consumer healthcare business to make for a cleaner break. The bottom line here is that Pfizer is arguably another couple of years away from breaking up, and that means that the company's investing thesis is largely unaffected by this latest reorganization.
So where does this leave investors? My view is that Pfizer is still best viewed as a top income stock due to its above-average dividend yield of 3.66%, strong free cash flows, and mountain of cash reserves. However, it's probably best avoided by investors searching for compelling value or growth plays. Until this drugmaker figures out how to package its legacy products into a standalone business, its stock is likely to continue to lag the market, and the red-hot pharmaceutical space in particular.