Eager for a Pfizer breakup? After new number-crunching, a top analyst sees the split as a no-go

Pfizer CEO Ian Read (photo courtesy of Pfizer)

When Pfizer CEO Ian Read first raised the idea of a big split 5 years ago, it was a major departure from the company’s decades-long, growth-by-megadeal strategy.

Analysts and investors salivated. Ever since, market-watchers have seen a Pfizer ($PFE) break-up as a question of when and how, rather than if.

But now, one top pharma analyst reads the tea leaves another way: Tim Anderson of Bernstein & Co. figures Pfizer is leaning against a split.

“We are increasingly of the view that management is NOT going to pursue a split up, at least at the current point in time,” Anderson wrote in a Monday note to investors.

Why? A recent conversation with Read, for one thing, in which the CEO hinted at a few financial drawbacks. Splitting up could disrupt cash flows and might weaken Pfizer’s balance sheet when compared with leaving the company whole, Read suggested back in June at the firm’s Strategic Decisions Conference.

Those split-up challenges probably explain why Pfizer was so intent on a tax-inversion deal, first with its epic failure to buy AstraZeneca ($AZN) and move its domicile to the U.K., and then with its now-canceled $160 billion merger with Ireland-based Allergan ($AGN), Anderson notes. With that merger kaput, Pfizer management “says that tax inversions are now effectively off the table,” he writes.

Two other number-crunching reasons: In summing up Pfizer’s two parts--innovative pharma and established products--Bernstein’s team comes up with about $36 per share. And that’s roughly in line with Pfizer’s current share price. And in analyzing Pfizer’s growth prospects now, compared with 5 years ago, the Big Pharma’s future looks brighter.

Back in 2011, with EPS growth projected at 2.6% through 2015, “dividing the company into a ‘good bank’ and ‘bad bank’ made sense,” Anderson says. Now that projected annual growth sits at an estimated 6.9%, not so much.

The analyst acknowledges that his views aren’t orthodox. “This is a new perspective for us, and it is also not consensus” among analysts, he says.

It also doesn’t fit with investor expectations, according to Bernstein’s recent survey. Among 109 respondents, slightly more than half (51%) believe Pfizer will go through with the split. One-third “were indifferent,” Anderson writes, and 16% expect the company to drop the idea.

So, what would Pfizer do if it chooses not to take the plunge? Deals, and probably big ones, if not an outsized megamerger. That’s what surveyed investors expect from Pfizer’s non-split future--an expectation that falls in line with Read’s comments at the Bernstein conference, “where he acknowledged that target companies of all sizes are theoretically on the table,” the note states.

Of course, Pfizer has already snapped up a couple of smaller companies since its big Allergan buy fell through, including its $4.5 billion buyout of Anacor ($ANAC). And it's said to be in the hunt for Medivation ($MDVN), the maker of cancer-fighter Xtandi that's attracted buyout interest from a host of Big Pharma and Big Biotech companies.

But the growth-by-M&A approach would be a Back to the Future sort of move--“simply an extension of the strategy the company pursued over the last 15-plus years,” as Anderson puts it. And that, of course, takes us around the board to Go, he says: “This is potentially troubling because it was this same strategy that caused Pfizer to consider splitting up in the first place.”

We’re likely to hear more from Read next week when Pfizer reports its second-quarter earnings; the potential split is always a hot topic on calls with analysts. And, in any case, the question will be answered by year’s end. That’s Read’s stated deadline for a split or no-split decision.

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