Quarter after quarter, when CEO Ian Read launches into Pfizer’s earnings call, market watchers start looking for crumbs that lead to a potential split-up of the company. For years now, those crumbs appeared to define a fairly straightforward path.
On Tuesday, the trail wasn’t so clear.
The 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.
But now that Pfizer is performing better overall--partly because of the Hospira buyout, which helped shore up the shrinking Essential Health division--the two sides of the company might not benefit as much from independence.
“I do believe that the trapped value question has become more complicated,” Read said during Tuesday’s Q2 earnings call.
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.”
Not so in Pfizer now, Read contended. The company is investing heavily in both sides of its business. As for the idea that split-off companies perform better because of management focus, Pfizer is trying to deal with that “by having very distinct leaderships” for its Innovative Health and Essential Health units.
Plus, consider the size of the spun-off company in context: “[T]here’s a big difference between a division that you're spinning being 8% of your revenue and its management attention compared to a division that has 45% of your total revenues,” Read pointed out.
Splitting up wouldn’t be a shortcut to tax savings, either, CFO Frank D’Amelio noted, thanks to new regulations issued by the Treasury Department in April. For three years after a break-up, each piece of the company would face the same tax standards separately as they did together. So, strike that subject--one near to Read’s heart--as an argument for the split. “[U]nder present tax laws, I don't see a separation as being a quick route to improving the tax situation,” the CEO said.
And then there’s cash flow. If Pfizer were to split up, then it wouldn’t have the freedom to deploy cash thrown off by one business to invest in the other. “When you're one company, you can take those cash flows, return them to shareholders, continue to invest in the area of business, pay your dividend, or do business development in the essential business,” Read said. “Once you split, you've permanently divided those cash flows and of course you lose flexibility.”
All this sounds quite a bit like backing away from the split-up path, at least for now. Read reiterated that Pfizer will decide the split question by years end--but he also suggested that it might be an option down the road if, a., the answer now is No, and b., the circumstances warrant.
“What I would like to stress is that 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.”
Bottom line, to Read? “[T]his is not a make-or-break decision for the company.”
Hospira gives Pfizer big Q2 revenue boost as new brands Ibrance, Xeljanz offset Prevnar fall
Eager for a Pfizer breakup? After new number-crunching, a top analyst sees the split as a no-go
Pfizer CEO Ian Read's long-anticipated split-up decision is looming. What if his answer is no?
Pfizer's done with tax inversions, but megamergers? Bring 'em on, CEO says
Pfizer slots Anacor into deal roster with $4.5B buyout
Medivation opens books to Pfizer, Amgen as bidders circle: Reuters
With $300M spent on potential split, Pfizer CEO now 'biased' toward branded M&A