Investors have been salivating for years over the prospect of Pfizer splitting into two separate companies. And now, D-day--decision day--is approaching. CEO Ian Read has promised to decide on a breakup by year's end.
As Bernstein analyst Tim Anderson points out in a Tuesday note, most market watchers see the big break as a foregone conclusion. After all, Pfizer has reorganized internally and made deals to augment its established products unit, including its big Hospira buy last year. Even Pfizer’s tried-and-failed megamerger attempts seemed designed to beef up both sides of the company in preparation for a subsequent split.
But what if Pfizer’s answer is no?
Read has repeatedly said that he might decide against the big divorce. Those caveats might have been viewed as perfunctory, but counting on that fact would be unwise, Anderson figures.
“In our opinion, splitting up made clear sense when the long-term Pfizer model seemed to lack growth,” Anderson said, likening Pfizer’s split-up approach to the financial industry’s “good bank” and “bad bank” splits after the 2008 financial crisis. The “innovative” products unit was clearly the “good” bit, with a clearer path to growth, while the “established” products side, based as it was on off-patent products, was the slower-growing “bad” bit.
“Fast forward to today, however and Pfizer appears to have long-term growth in front of it across both units, in part because of the success of products like Ibrance and Prevnar-13v, and the added revenue stream from the 2015 Hospira acquisition,” Anderson writes.
Pfizer’s recent sales figures show just how much Ibrance and Prevnar are delivering to the company’s top line. The breast cancer drug Ibrance has beat all launch expectations, and Prevnar sales have been leaping quarter after quarter, helping fuel recent revenue beats. For the first quarter, Ibrance brought in $429 million, $30 million ahead of analyst estimates, while Prevnar racked up $1.5 billion, compared with street forecasts of $1.4 billion.
Meanwhile, given the state of the stock market--where specialty pharma is suffering--Pfizer might not see much payoff for investors in hiving off its established products business.
Citing a meeting with Read last week, Anderson said Pfizer management sees current P/E multiples as complicating the decision to split. Plugging a low-end multiple of 8X or 9X earnings into the established products equation “suggests splitting up creates no upside,” and though Pfizer has been arguing that its business rates a higher multiple, there’s no guarantee the market would deliver. And the higher Pfizer’s own stock price goes, the less likely it might be that the company breaks up, Anderson figures.
Even so, Bernstein sees Pfizer coming down on the side of a split by year’s end: “[I]f it doesn’t, investors will likely be disappointed,” Anderson writes.
Then again, Read might just delay the decision once more if the right megamerger opportunity came along. Last week, the CEO said he’s no longer interested in chasing the sort a tax inversion deal a la its now-canceled $160 billion Allergan buy. But he wouldn’t rule out another outsized acquisition, so long as it makes financial sense for shareholders.
“If you believe you can reorganize your research into productive smaller units, there is a logic to consolidation of the industry by taking out duplicative expenses,” especially if the two companies can squeeze out some serious savings, Read said at Bernstein’s Strategic Decisions Conference last week.
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