Pfizer's consumer and nutritional businesses soon may be for sale, but the timing may not be right for the most likely buyers, market analysts say.

The firm might spin off or sell the non-core pharmaceutical businesses as it moves to become a pure-play pharma firm, Bernstein Research analyst Tim Anderson wrote in a March 14 note after meeting with Pfizer CEO Ian Read.

A New Pfizer Coming?

The firm may spin off all but its innovative Rx business.
Nutritionals and OTCs are likely spin-off candidates, while Capsugel looks set for sale to another firm.
Pfizer's consumer divison sales are about $2.8 billion on brands including Advil, Centrum, Robitussin, Dimetapp and Preparation H.
Potential buyers including Sanofi-Aventis and Novartis may not have enough free cash to make a purchase right away.

Likely divisions on the chopping block include consumer health, nutritionals, animal health and capsule manufacturer Capsugel, which together had about $10 billion in sales in 2010, Anderson wrote.

Morningstar analyst Damien Conover said a majority of other major pharmaceutical firms are interested in adding businesses like those Pfizer may sell.

He estimated that one-third of pharma businesses are focusing purely on Rx, while the other two-thirds are trying to diversify.

"There's more pharma out there that want to be more diversified, so there's going to be some decent demand," Conover said in an interview.

Potential Buyers May Need Time

Recent acquisitions may keep likely buyers, such as Sanofi-Aventis and Novartis, from bidding.

If Sanofi were not "digesting" its recent acquisition of Genzyme, "that would be a nice play," Conover said.

Similarly, Novartis is incorporating its just-completed acquisition of Alcon, as is Merck its 2009 acquisition of Schering-Plough.

"To actually make the purchase price, because this would be a pretty sizable investment, I think you would have to potentially wait a year to give folks time to get a little more cash flow," he said.

Johnson & Johnson is unlikely to bid as it is correcting manufacturing problems in its OTC division, although bringing in a consumer business not plagued by quality issues could be appealing (Also see "FDA Enforces Consent Decree Over J&J/McNeil's OTC Manufacturing" - Pink Sheet, 14 March, 2011.).

GlaxoSmithKline could be the major pharma firm best positioned to make a deal with Pfizer. Conover mentioned that Glaxo wants to diversify its consumer health holdings.

He added that smaller firms like Church & Dwight and Prestige Brands likely are too small to secure the necessary cash to buy a business from Pfizer.

However, if Pfizer slices up the divisions and makes smaller parts available for sale, firms the size of C&D and Prestige Brands could have a chance at a piece of the firm. But Pfizer most likely prefers to sell bigger chunks, Conover added.

Sales of Pfizer's consumer health division are about $2.8 billion, according to the Bernstein note. Given a multiple of even two or three times sales, Pfizer could potentially seek a price of $5.6 billion to $8.4 billion.

Pfizer's Capsugel business could be an exception to the divided sales. The firm announced in October that divestiture was among the options it was considering for the Capsugel division (Also see "Capsugel Could Land In Private Equity Crosshairs If Pfizer Divests" - Pink Sheet, 11 October, 2010.).

Pfizer's non-pharma divisions are undervalued, nutritionals particularly so, because the company as a whole is pulled down by impending Rx patent cliffs, particularly with its blockbuster cholesterol drug Lipitor (atorvastatin) losing market exclusivity late this year, Conover said.

Group Danone and Nestle may vie for a spun-off nutritionals business.

Divestiture – either selling or spinning off divisions – would shrink Pfizer's annual sales 40%, from about $67 billion per year to $35 billion to $40 billion per year.

Previous Sale Of OTCs Seen As Mistake

Pfizer re-entered the OTC and nutritionals market with its $68 billion acquisition of Wyeth in 2009. It had vacated the consumer space in 2006 with the sale of Pfizer Consumer Healthcare to J&J for more than $16 billion, giving up brands like Zyrtec antihistamines, Nicorette nicotine replacement therapies and Listerine oral care products (Also see "Pfizer’s Wyeth Buy Rebuilds OTC Switch Potential" - Pink Sheet, 2 February, 2009.).

The company appeared to regret the sale to J&J, Anderson writes, "and investors uniformly seemed to believe it was the wrong decision, too."

With Wyeth, Pfizer gained brands including Advil analgesics, Centrum supplements and Robitussin cough/cold remedies. Shortly after the purchase, then-CEO Jeffrey Kindler said Pfizer was setting up the diversified businesses to grow, not to be sold (Also see "Pfizer Plans To Give Diversified Businesses Time To Grow" - Pink Sheet, 26 October, 2009.).

Conover said while Pfizer spoke of growing its consumer business revenues, the primary targets in the acquisition were Wyeth's long-term patent-protected products, including vaccines, not the consumer brands. So, selling them is not a change in course, he said.

Conover noted a steady consumer business is helpful when making long-term contributions to Rx research and development.

Just last month the firm bought Danish firm Ferrosan's consumer health unit, expanding its consumer footprint (Also see "Pfizer Buys Ferrosan Consumer Unit, Expands In Russia And Northern Europe" - Pink Sheet, 14 February, 2011.).

Anderson noted a possible negative for Pfizer's divestment of its consumer businesses. Because non-pharma divisions provide a buffer against an unclear future in the pharma market, "it is valid to ask whether [Pfizer] could be making a short-sighted decision in favor of shareholders, at the expense of the long-term integrity" of the firm, he wrote.

Spin-Offs More Beneficial Than Sales

Spinning off the divisions rather than selling them would be better for Pfizer, Anderson writes.

"Almost without exception, major spin-offs done by other pharmaceutical companies over the last many years have done well when measured as share price appreciation," he said, citing the separation of Mead Johnson Nutrition from Bristol-Myers Squibb among the examples.

However, some divisions – particularly Capsugel – are more likely marked for sale with the proceeds going to share buyback, Anderson wrote.

"Almost without exception, major spin-offs done by other major pharmaceutical companies … have done well." – Bernstein analyst Anderson

Apart from Capsugel, "the other non-pharma divisions would likely be viable stand-alone entities for which there would be investor demand, given the scarcity of investable businesses like these and the supposition that they may at some point be acquisition targets," he wrote.

Pfizer is such a large company that "getting smaller is not a bad thing," Anderson wrote. There are economies of scale for pharma firms only to a certain point, which Pfizer has exceeded, he added.

Anderson predicted investors would see the move positively because they "are desperate to see pharmaceutical companies take bold steps (of almost any sort) to try and break the cycle of underperformance."

Spinning off everything except the core innovative Rx division would put Pfizer in the ranks of pure-play pharma companies like Bristol-Myers, AstraZeneca and Eli Lilly, Anderson added.

While the exact timing of the move is still unclear, decisions likely will be made later this year, with the actual separation at some point in 2012, he wrote.

The firm also is considering divesting its established products division, which includes off-patent medicines, a generics division and a fledgling biosimilars unit.

By Carolyn B. Phenicie

Pfizer's OTC, Nutritional Businesses Could Be Looking For A New Home

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