Should Big Pharma shrink itself? We've seen drugmakers revamp themselves to mimic smaller biotech shops, hoping that splitting into teams will boost innovation and accountability. We've heard rumblings from industry observers, who've suggested that Pfizer take it one step further and spin off various pieces of itself. Now, Barron's suggests that Pfizer isn't the only one that would be better off split.
From a shareholder's point of view, that is. Pharma stocks haven't been stellar performers of late. Drugmakers overall have the lowest valuations of any industry group, Barron's points out. And so, quoting a Goldman Sachs analyst, the weekly suggests Abbott Laboratories and Pfizer hive off various units to give their shares a jump-start. Other companies that might benefit from a series of spin-offs include Novartis and GlaxoSmithKline.
Consider Bristol-Myers Squibb's recent sale of its Mead Johnson nutritionals business. Barron's notes that investors cheered that deal. So why shouldn't Abbott sell its unit that turns out Similac baby formula and Ensure nutrition boosters? Pharma behemoths' break-up value is probably 30 percent higher than the sum of those parts, Goldman analyst Jamie Rubin figures. "The status quo is not working," Rubin wrote to investors. "[B]igger is not better."
However, this idea of selling off "non-core" businesses runs counter to one strategy some Big Pharmas have been pursuing: diversification. Pfizer, for instance, just picked up an acquisition to help grow its consumer healthcare business. GSK and Sanofi-Aventis have been growing in that field as well, and Novartis just wrapped up its multibillion-dollar buyout of the eye-care company Alcon. The aim is to help make up some of the losses expected from future generic competition. So who's right: the would-be sellers or the buyers?