Bloomberg News

Pfizer Adds Payoff to Pipeline in Deal Seen at $22 Billion

July 08, 2011

(Updates with closing share price in fifth paragraph.)

July 8 (Bloomberg) -- Pfizer Inc.’s plans to shed two businesses boosts the potential payoff for three experimental drugs moving toward regulatory review later this year.

Pfizer, the world’s biggest drugmaker, yesterday said it plans to sell or spin off its animal health and baby food divisions. The units may command a price of $22 billion, said Seamus Fernandez, an analyst at Leerink Swann & Co. in Boston. Pfizer Chief Executive Officer Ian Read has said he plans to use the proceeds to buy back shares and develop new drugs.

Read is giving new products led by the apixaban blood thinner, the lung cancer drug crizotinib and tofacitinib for rheumatoid arthritis added prominence within Pfizer’s revenue portfolio. Divesting the units -- which generate $5.5 billion in annual sales, or 8 percent of the New York-based company’s revenue -- also lets Pfizer sharpen its focus on developing the three drugs, which analysts surveyed by Bloomberg estimate may reach $3 billion in annual sales by 2015.

“In the next 3 to 6 months, there’s going to be a lot of pipeline news, and as Pfizer gets smaller the pipeline becomes more important,” said David Maris, an analyst with CLSA in New York. “This is a management team that is following through on what they said they would do, which is take a fresh look at the business and decide what is important and what is not.”

Pfizer declined 7 cents to $20.16 at 4 p.m. in New York stock exchange composite trading. The shares have climbed 36 percent in the past 12 months.

Sales to Fall

Pfizer loses patent exclusivity in November for its biggest product, the Lipitor cholesterol pill with $10.7 billion in sales last year. The drugmaker forecasts sales may fall as much as 8.3 percent in two years as the company’s new medicines fail to offset lower sales of Lipitor.

Crizotinib was accepted for priority review by the U.S. Food and Drug Administration, and the company expects clearance by year’s end, said Chris Loder, a spokesman. The drugmaker plans to seek approval of tofacitinib and apixaban by the end of the year, he said. Pfizer partners with New York-based Bristol- Myers Squibb Co. on apixaban.

“Pfizer’s late-stage pipeline is as well positioned as at any time in recent history,” said Christopher Schott, a New York-based analyst for JPMorgan Chase & Co., in a note to clients.

Wanting More

On Feb. 1, Read said he would review whether to divest four business areas that aren’t involved in developing new drugs, including the two now being shopped. Pfizer fell 2.7 percent yesterday, after the company said it will keep its established products and consumer health units with $12.9 billion in yearly sales. Some investors wanted the units sold to focus on higher- profit drug development.

Erik Gordon, a University of Michigan business professor in Ann Arbor, isn’t convinced Pfizer’s pipeline will pay off.

“Should Pfizer double its dependence on what it does worst: Get new drugs out the door?” Gordon, who studies the biomedical industry, said in an e-mail.

In 2006, Pfizer halted development of its torcetrapib cholesterol pill, a product designed to succeed Lipitor, after it failed to benefit patients in a late-stage study.

Development Failures

Last year, the drugmaker said its experimental Alzheimer’s drug Dimebon failed to help patients in a late-stage test. Analysts had predicted the product would generate $5 billion in annual sales. That same month, Sutent, approved for kidney and stomach cancers, failed in two studies to shrink breast tumors, and the experimental drug figitumumab didn’t help lung cancer patients.

Read, head of global pharmaceutical operations from 2006 until his appointment as CEO last December, said Pfizer needed to fix its “innovative core.” Fifteen research programs have been discontinued since last September and the budget to develop new medicines will be cut by as much as $3 billion in the next two years from $9.4 billion in 2010 to target experimental drugs with a greater chance of success, he said.

The units Pfizer is seeking to divest may be sold outright, or spun off as independent companies. Spinoffs evade a 35 percent capital gains tax and sometimes provide the best return for investors, said Adam Berger, head of mergers and acquisitions at Leerink Swann, in a telephone interview.

Still, the remaining parent company wouldn’t benefit from the added proceeds the way it would in a sale, he said.

Value to Shareholder

“It’s like a dividend; the value goes to the shareholder,” Berger said. “But Pfizer has been extraordinarily acquisitive, and sometimes if you’re a very large business it’s hard to grow from that base.”

Another option might be a sponsored spinoff in which investors buy a stake in the company, typically 20 percent, when the deal is announced, Berger said. That allows the parent company to share in proceeds from the divestiture, he said.

Pfizer acquired its nutrition unit in the 2009 purchase of Wyeth. The unit sells food replacement and supplement products in more than 80 countries, according to the company’s website.

Mead Johnson Nutrition Co., the baby-formula maker that Bristol-Myers took public in February 2009, had sales of $3.14 billion last year, led by the Enfamil infant formula. The Glenview, Illinois-based company trades at 27 times earnings, almost three times the valuation of Pfizer, after a 188 percent surge through yesterday that beat the Standard & Poor’s 500 Index’s 63 percent rise, according to Bloomberg data.

Valuing Nutritionals

Applying Mead Johnson’s profit margins and share price valuation of 31 times net income to Pfizer’s unit, which had $1.87 billion in sales last year, would give Pfizer nutritionals a market value of about $8.4 billion, according to data compiled by Bloomberg.

Leerink’s Fernandez put the figure at about $10 billion for the nutritionals and said “demand would be high.”

Pfizer may fare better with an initial public offering for the animal health unit, which could value the unit at $10 billion to $12 billion, Fernandez said. He cited a “conversation with Pfizer” that suggested nutritionals would be sold and the animal health division may be spun off.

Pfizer had 28 divestitures completed in the last five years, with an average deal size of $1.8 billion, according to data compiled by Bloomberg. The biggest was the $16.6 billion sale of its consumer products business to Johnson & Johnson in June 2006. Pfizer sold Capsugel, a hard-capsules manufacturing business, to KKR & Co. in April for $2.38 billion.

Pfizer said it doesn’t anticipate making more announcements about the alternatives for the two units until sometime in 2012, and that any transaction may take as many as 24 months to complete.

--Editors: Reg Gale, Andrew Pollack

To contact the reporter on this story: Tom Randall in New York at trandall6@bloomberg.net.

To contact the editor responsible for this story: Reg Gale in New York at rgale5@bloomberg.net.


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