Updated April 8, 2016 3:12 p.m. ET
The past week saw Pfizer’s dreams of merging with Allergan
dashed by the U.S. Treasury Department. That puts a potential split of the company back into focus. And with few other avenues open to growth, it’s high time for the company to seize the opportunity.
For years, Pfizer has considered the idea of splitting its business into newer, patent-protected pharmaceuticals and a separate company for older products. On Wednesday, it said it expects to complete a review of prospects for this by year’s end.
That is an expedited timeline from the fall, when Pfizer said it would decide on a split by the end of 2018. The later date would have allowed for the integration of Allergan.
With that no longer a concern, Pfizer needs to face up to the reality that further deal-making forays aren’t likely to prove transformative. The Treasury’s new moves to aggressively curb tax-inversion transactions means the pool of targets that can make sense for Pfizer is only growing smaller.
Plus, shareholders’ patience won’t last forever. Two major attempts from Pfizer to bulk up and lower its tax rate in the past two years have fallen through; Pfizer tried to merge with British pharmaceuticals giant AstraZeneca
in 2014 before the ill-fated attempt to bring Allergan into the fold.
Better then to spur transformation through internal means. And the logic of that is pretty straightforward.
A 2% drop in Pfizer’s overall 2015 revenue masked the sharply different growth profiles of its two business segments. The innovative products one, which accounted for slightly more than half the total, grew sales at an 11% clip. Revenue for the established products business, meanwhile, fell by 14%.
Meanwhile, analysts expect compound sales growth for Pfizer of just 2.6% a year through 2020, according to FactSet. Its valuation, at about 14 times forward earnings and in the middle of the big pharmaceuticals pack, reflects these middling prospects.
But the innovative products business would likely command a higher earnings multiple if liberated from a portfolio of maturing drugs. And while the established products would likely command a low multiple at first, that could change.
The segment includes injectable-drugs company Hospira, which Pfizer bought last year. Thanks in part to that deal, Pfizer is at the forefront of development of biosimilars—drugs that are lower-cost versions of biologic drugs.
While legal issues mean biosimilars aren’t likely to be a commercial hit soon, Pfizer, in partnership with the Korean firm Celltrion, won approval for the second biosimilar in the U.S. earlier this week. This was for the blockbuster drug Remicade. So a new source of growth is on the horizon.
For Pfizer, the parts may well be worth more than the whole.
Write to Charley Grant at [email protected]