UPDATED: Pfizer's long-anticipated split-up isn't happening. So what's next?

By Tracy Staton Sep 26, 2016 7:10am

Pfizer has decided not to split up, abandoning a plan the company has been working toward for 5 years. Though the Big No isn't a complete surprise, it's a big course change for the drug giant, and for CEO Ian Read himself, who made the idea a centerpiece of his reign.

The news is likely to disappoint many analysts and investors, who’ve been following the will-they-or-won’t-they question ever since Read first opened it up. Quarter by quarter, Read and his team have fielded analyst questions about when, how and why. Now, they’ll have to explain why not--and what's next.

Read has some nitty-gritty financial reasons for the choice--including cash flow that's easier to tap as one company--and analysts figure taxes played a role.

But there's another obvious reason: M&A. The company bought Hospira last year, adding a suite of biosimilars to its portfolio, and recently agreed to pay $14 billion for Medivation, the maker of the blockbuster prostate cancer med Xtandi. And more dealmaking could well be the answer to what's next.

M&A has always been Pfizer's M.O., Bernstein analyst Tim Anderson pointed out in a Monday investor note. "A critic could argue that Pfizer is back to being the same old Pfizer as before, relying on M&A to grow and to refill its pipeline," Anderson said, "but at the expense of growing larger in the process, depending on the size of deals it chases."

The essential question has always been whether Pfizer execs believe the company’s individual pieces could perform better on their own. Back when Read first proposed a breakup--which would leave Pfizer in two separate chunks, one focused on developing and selling new drug brands, the other on older brands, generics and biosimilars--the idea was that each business could be worth more as standalone companies than they would be together.

Not so today, CFO Frank D’Amelio said Monday. When the split idea first came up, “market valuations of other companies suggested that our two businesses could potentially be worth more as separate companies than they are together in a single company.” But since then, “any potential gap between Pfizer’s market valuation” and a sum-of-the-parts estimate “has closed,” D’Amelio said.

Meanwhile, Pfizer’s overall long-term growth prospects are now stronger than market watchers might have thought previously--and certainly stronger than estimates back in 2011, Anderson said earlier this year. Then, when EPS growth was projected at 2.6% through 2015, “dividing the company into a ‘good bank’ and ‘bad bank’ made sense,” Anderson said in July--and not so much now that projected annual growth sits at an estimated 6.9%.

In announcing the decision Monday, Read said as much: “We believe that by operating two separate and autonomous units within Pfizer we are already accessing many of the potential benefits of a split--sharper focus, increased accountability, and a greater sense of urgency--while also retaining the operational strength, efficiency and financial flexibility of operating as a single company,” the CEO said in a statement.

Meanwhile, as Anderson pointed out Monday, without the tax benefits of an inversion, splitting up would likely create a bigger tax burden on each piece than Pfizer could manage as a single company. "[O]ne of the drivers for pulling the plug on this plan likely related to the tax dis-synergies splitting up would create," he figures.

Yes, other pharma industry hive-offs have done well; JP Morgan analyst Chris Schott pointed out Pfizer’s own animal health spinoff, Zoetis, on the call. Read himself mentioned AbbVie, the pharma unit that Abbott Laboratories split off in 2014. But those increases in value say as much about what was happening before the spinoff as they do about what happened after, Read suggested.

“You have to question, number one, were the separate parts all being invested in equally? I don't think they were,” he said. “Were they getting the same amount of management attention? I don't think they were.”

Pfizer has certainly made some deals on both sides of its business. The company’s Hospira buyout has already yielded one biosimilar approval--a knockoff version of Johnson & Johnson's anti-inflammatory blockbuster Remicade, which could launch next month--and added a large portfolio of injectable generic drugs to its essential health division.

For the innovative products side of the company, the planned acquisition of Medivation will deliver not only Xtandi but also a couple of promising oncology candidates.

The long-awaited decision doesn’t mean Pfizer is saying never, however. Read also suggested on the Q2 call that it might be an option down the road if the circumstances warrant.

“I don't think that optionality necessarily has an expiration date,” he said. And in discussing the money Pfizer has spent so far to set up for and evaluate a potential split--$600 million over several years--D’Amelio noted that the investment lays the groundwork whether a split were to happen now or later: “[I]f we were to make a decision soon or sometime in the future, that work remains completed. We don't basically lose any of the work that we've completed to date.”

And Read was careful to leave the door open in Monday’s statement. “We will continue to generate the financial information necessary to preserve our option to split our businesses,” he said, “should factors materially change at some point in the future.”

As for upcoming M&A, Anderson points out that an entire range of Big Pharma and Big Biotech companies are shopping right now. "Pfizer is certainly not alone in looking for things to buy--many other companies claim to be doing the same," he said.

Editor's note: This story was updated with comments from analysts.

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