With $300M spent on potential split, Pfizer CEO now 'biased' toward branded M&A

Now that Hospira's ($HSP) in the bag, Pfizer ($PFE) execs have less of an appetite for M&A in their Established Products unit. That $16 billion deal gives Pfizer added heft in injectable generics, not to mention a solid biosimilars pipeline.

Pfizer CEO Ian Read

But on the innovative side of the business, it's a different story, CEO Ian Read said last week. With Pfizer set to decide by the end of 2016 whether to split up--a prospect much discussed during the second-quarter earnings call--that just makes sense.

When it comes to dealmaking, "I have a bias on our portfolio, if valuations are equal and opportunities are equal; I'd prefer to do a BD deal that strengthens our Innovative business as I think we've done quite a bit to strengthen the Established business," Read said during the call.

Making both sides of Pfizer as attractive as possible would be key to a split, because Pfizer would have to see a payoff for shareholders in making two companies from one.

When Pfizer internally divided its operations into three different units--with the established products business as one of them--observers predicted that it would be the unit first to find its own feet. Now, it looks as if Pfizer might split in two rather than three, and the Hospira deal did do its part to beef up the established products business to that end. And Pfizer has spent $300 million on the mechanics of a potential breakup, CFO Frank D'Amelio said during the call--showing how serious it is about the idea. Of that amount, Pfizer has shelled out $164 million so far this year, on tax planning, systems changes, regulatory work and so on, D'Amelio said.

"It's a massive amount of work," the CFO told analysts. "This is a company that's been restructuring for a decade … and now you want to do something where you're taking a major piece of the company and you're going to carve it out, in a sense undo much of the work you've done previously. It requires a lot of effort. It costs a bunch of money."

Predictably, many analysts are sighting out potential purchases for Pfizer, several of which stem from its failed attempt to buy AstraZeneca ($AZN) last year. That foray shows Pfizer is still up for a megadeal after its long history of big mergers, the thinking goes. So, Pfizer could (or should) be looking at companies such as GlaxoSmithKline ($GSK), the recent subject of quite a few M&A rumors. Or Allergan ($AGN), which just agreed to sell its generics business to Teva Pharmaceutical Industries ($TEVA), a deal that would make it a brand-focused opportunity for Pfizer to add to the innovative side of its business.

Then again, there's AstraZeneca itself, which may have made some progress since it fought off Read's suit last year--but appears to be lacking when measured against its lofty goal of $45 billion in revenue by 2023. Leerink Partners analyst Seamus Fernandez, for one, invoked a Pfizer bid redux in a recent note to AZ investors, essentially as an alternative if the company doesn't do something big--"large accretive M&A" or "a substantial restructuring of the business," for instance.

"Without more decisive action, we see a chance that AstraZeneca prior suitor, Pfizer, re-emerges," Fernandez wrote, a prospect he called "unlikely but not unfathomable."

- see the transcript at Seeking Alpha

Special Report: Top 15 pharma companies by 2014 revenue - Pfizer - GlaxoSmithKline - AstraZeneca | The top 20 highest-paid biopharma CEOs - Ian Read, Pfizer

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