Source: Flickr via user William Murphy.
Pfizer (PFE +1.10%) is the world's largest drugmaker, reporting nearly $50 billion in sales last year. Even so, its stock has drastically underperformed the broader market over the past decade:
The pharma giant's stock is seemingly stuck in a rut, largely because of the loss of exclusivity for former top sellers such as Celebrex and Lipitor. But the truth is slightly more complex.
Pfizer has been churning out major new products such as its pneumonia and meningitis vaccine, Prevnar-13, during this time period. The problem, though, is that the company's massive market cap of roughly $200 billion makes it difficult for any single product to move the needle in terms of its top or bottom lines.
In fact, the drugmaker's bottom line has more or less remained flat in recent years, primarily as a result of its aggressive share buyback program:
The inherent inertia that goes hand-in-hand with being such a large company has also made the return to the growth track a long and arduous task. Nonetheless, Pfizer appears close to seeing the light at the end of tunnel, so to speak.
After jettisoning its animal health business with the IPO of Zoetis in 2013, reorganizing its corporate structure in 2014 and buying intravenous generic drugmaker Hospira to kick off 2015, Pfizer appears set to split into two separate businesses. Here's what investors need to know moving forward.
How a split might be organized
On its fourth-quarter conference call, management was decidedly not forthcoming about whether the company will split in 2015 -- or how a split might be structured. The issue at hand is that Pfizer can't simply divide itself into an old (global established products) versus a new (innovative products) products business.
Given that the established product line is seeing its top line plummet (sales dropped another 7% in the fourth quarter, for example), it would probably sink like a stone as a stand-alone entity. At the same time, legacy products such as Lipitor are diluting the positive impact of newer growth products in cardiovascular care, oncology, and vaccines.
So management's monumental task is to figure out how to package its established products line in a way that would create value for shareholders. And that's where the recent Hospira acquisition appears to come into play.
Source: Wikimedia
Hospira gives Pfizer a nice asset to pair up with its established products business, clearing the way for a logical split.
That said, the pharma behemoth may choose to do a second deal to bulk up its innovative products business first. As it currently stands, innovative products make up less than half of total sales, and Pfizer only spent roughly $17 billion to acquire Hospira, leaving ample cash reserves for another buyout.
Is Pfizer a strong buy ahead of these forthcoming changes?
As management repeatedly stressed on the call, the company may not execute a split in 2015. After the Hospira deal, though, it appears that management is indeed working toward this goal before year's end.
So the burning question now appears to be how the innovative products business will be packaged to create the largest amount of value. If management wants to add bulk to this business in terms of market cap and/or lower its effective tax rate, we could see yet another acquisition.
Based on their growth prospects and respective market caps, Actavis, AbbVie and Bristol-Myers Squibb have all been floated as potential buyout or merger candidates for Pfizer's innovative products business. And that's a huge unknown for investors going forward.
All three companies offer an intriguing mix of strengths and weaknesses as takeover targets. The pairing that would probably unlock the largest amount of value for shareholders appears to be Dublin-based Actavis, given that it would help to shrink Pfizer's effective tax rate that topped 30% at one point last year, and still offer shareholders a high growth business partner. But AbbVie and Bristol certainly wouldn't be bad consolation prizes either.
So getting back to the original question of whether Pfizer is now a buy or not: The answer looks like a resounding 'yes'. Management has taken the bold steps toward dealing with its ongoing patent problems, and is on the cusp of creating an exciting new growth-oriented business via another buyout.
