The breakup of Pfizer (NYSE: PFE) is looking more possible by the week.
Two weeks ago, Sanford Bernstein analyst Tim Anderson issued a report stating that after talking with CEO Ian Read, he felt Pfizer was taking a serious look at the potential.
And last week Bill Steere stepped down from Pfizer's board of directors. Having served as CEO from 1991 to 2000 and chairman of the board from 1992 until 2001, Steere was the father of the bigger-is-better philosophy that seems to have plagued the drug giant.
With Steere gone and a new CEO that appears interested in maximizing value, could a breakup be imminent? Investors can only hope so.
Sum of the parts
If the breakup does occur, it'll likely happen as spin offs. Some smaller units might be sold; Pfizer has already said it's looking to sell Capsugel, an operating unit that develops drug formulations, like capsules, for Pfizer and other drugmakers. But a majority of the businesses -- animal-health, over-the-counter products, generics, and the like -- will probably be spun out into separate companies that will be owned by current shareholders.
The theory here is simple: Faster-growing parts of a business are often undervalued when thrown in with the rest of the business. When drugmakers spin off their non-pharma assets, investors usually assign higher values to the faster-growing assets than they did when they were a part of the larger company.
It's worked for other drugmakers. Bristol-Myers Squibb spun out Mead Johnson Nutrition (NYSE: MJN) and Zimmer Holdings (NYSE: ZMH). Medco Health Solutions (NYSE: MHS) has been on a tear since Merck (NYSE: MRK) released its grip on the company. Ditto for Abbott Labs (NYSE: ABT) and its stepchild Hospira (NYSE: HSP).
What's left?
Once the company has broken up and investors have sold shares of the spin offs or kept the ones they wanted to continue owning, the only thing left will be the pharmaceutical business.
We're still years away, if it happens at all, but investors need to be prepared to run screaming and not look back once Pfizer is left with just its drugs.
Pfizer hasn't historically been very good at developing new drugs. None of its top-selling drugs were homegrown.
|
Drug |
2010 Sales (in billions) |
Origins |
|---|---|---|
| Lipitor | $10.7 | Warner-Lambert |
| Enbrel | $3.3 | Wyeth |
| Lyrica | $3.1 | Northwestern University |
| Prevnar | $2.4 | Wyeth |
| Celebrex | $2.4 | Monsanto via Pharmacia |
Source: Company press release.
There's nothing wrong with licensing or acquiring drugs from other companies, especially if a drugmaker can pick winners that become multi-billion drugs. Grabbing rights to blockbusters has been a strength of Pfizer's, although we can argue whether it overpaid for Warner-Lambert, Pharmacia, and Wyeth.
The big unknown is how much cash and debt will be shed in the spin offs and how much will be retained. Pfizer currently has a war chest of $28 billion and long-term debt totaling a whopping $38.4 billion. If the company sticks all the debt with the spinoffs and keeps the cash with the pharma, then it might be worth taking a look at. Maybe.
There's also the issue of Pfizer having vast amounts of its cash stored in offshore subsidiaries, avoiding U.S. taxation. If it wants to license the drugs stateside, it may have to pay taxes to repatriate the cash.
Buy, sell, hold?
Without knowing exactly what Pfizer is going to do, it's a little hard to know whether it's worth owning. My gut says that management will realize that the sum of the parts is worth more than the value investors are currently bestowing.
But my gut also said that Pfizer wouldn't make a major purchase when I picked the company as my best stock for 2009, and look how that turned out. Proceed with caution, Fools.
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