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After divestiture, all eyes on Pfizer's next move

by Ben Fidler | Published April 24, 2012 at 9:57 AM

When the bell finally rang on the long-awaited divestiture of Pfizer Inc.'s nutrition business early Monday, April 23, the only thing that surprised observers was the high price tag. But what investors will likely watch with greater curiosity is where the drugmaker aims to go from here: Will it return to its old megamerger ways, or continue toward a breakup?

Pfizer agreed to shed its nutrition business -- which sells infant and toddler nutritional products -- to Nestlé SA for $11.85 billion on Monday. Analysts, who had expected the division to bring in anywhere from $9 billion to $11 billion, all appeared to be surprised by the price tag, which equates to roughly 19.8 times forecasted 2012 Ebitda -- a big win for Pfizer and its investors. But they are more mixed on where Pfizer will go from here, even with the divestiture of its animal health business. It is larger than the nutrition segment, and the divestiture will likely come at some point this year via an initial public offering.

If one is to believe Pfizer CEO Ian Read, the world's biggest drugmaker will continue to slim down and attempt to maximize the value of each of its business units as it fashions itself into a pure-play pharmaceutical company, much like Bristol-Myers Squibb Co. did several years ago when it spun out its Mead Johnson & Co. nutrition unit and focused on restocking its pipeline through a series of so-called string of pearls acquisitions.

"They're sort of copying a [BMS] type of strategy," says one healthcare M&A lawyer.

But will it continue that way? Two schools of thought have emerged during Pfizer's massive restructuring: The first, championed by Goldman, Sachs & Co. analyst Jami Rubin, is that Pfizer will continue down its path, stripping away noncore assets until it is left with a generics company and a branded pharma company that eventually are split in two. In the second scenario, posited by Jefferies & Co. analyst Jeffrey Holford, Pfizer is laying in the weeds, amassing cash through divestitures before it makes its big jump back into the type of large-scale buyouts that defined its past, such as Warner-Lambert Co. ($114 billion), Pharmacia Corp. ($57 billion) and Wyeth ($68 billion).

Rubin, citing a meeting with Pfizer management, wrote last month that Read appeared to be open to an additional breakup down the road, explaining that each of the gigantic company's business divisions would be valued more highly outside of the Pfizer umbrella. With the nutrition business selling for what Rubin estimated as a 13.6 times enterprise value-to-Ebitda multiple, compared with the 6.8 times figure Pfizer currently trades at, she believes the deal supports the breakup thesis, which ends in an Abbott Laboratories-like split.

While the idea has intrigued investors, causing Pfizer's stock to climb to a then-four-year high ($22.50 per share) when Rubin released her note on March 27, not everyone is buying it.

"I think it's pretty unlikely," said Morningstar Inc.'s Damien Conover. "They're not quite as diversified as Abbott. The only other piece that's likely to be split off or sold is the [consumer products division], and if that were to happen, it's more of a 2015 [deal]."

The caveat to Rubin's theory has been that Pfizer's existing late-stage pipeline must be successful, which is why others such as Jefferies' Holford believe Pfizer could return to the megadeal. Despite Read's proclamation that most of the cash will be used for share buybacks, and his insistence earlier this year that the company is less inclined to make a large-scale acquisition, Holford believes that Pfizer needs to build a stronger R&D platform. Holford described BMS and Abbott's spunout pharmaceutical business as "the most likely targets for this strategy in a 2013 time frame."

Holford has long believed that BMS is the ideal fit for Pfizer, citing a lack of overlap between the two companies' portfolios, aside from two competing rheumatoid arthritis treatments.

The biggest clues could come via the results of Pfizer's most significant late-stage pipeline products. The first key event will come on May 9, when tofacitinib, part of a new class of oral treatments for rheumatoid arthritis, will be reviewed by a panel chosen by the U.S. Food and Drug Administration. The second will come should Pfizer receive FDA approval this year for its potential blockbuster anti-coagulant, Eliquis. Pfizer is also co-developing bapineuzumab, an Alzheimer's treatment, with Johnson & Johnson and Elan Corp. Phase 3 results for the drug could be released later this year.

Until those drugs make a significant dent in the hole left by Lipitor's patent expiration, or Pfizer acquires new compounds through a buyout, many will remain skeptical.

"They've maintained growth, but not real growth; it's just margin growth," said the healthcare M&A lawyer, citing Pfizer's divestitures and cost cuts. "Let's see what they do with that $12 billion."

Pfizer's stock closed down at $22.38 per share Monday, a 0.8% drop from its Friday close.

Morgan Stanley's Michael Boublik, Clint Gartin, Carmen Molinos and Joe Modisett and Centerview Partners LLC's Blair Effron, Alan Hartman, Eric Tokat and Emlen Fischer worked on the nutrition disposal for Pfizer.

A Skadden, Arps, Slate, Meagher & Flom LLP team led by Paul Schnell, Kenneth Wolff, Sally Thurston and Jose Esteves; a Clifford Chance LLP led by Tony Reeves and Emma Davies; and DLA Piper LLP acted as legal counsel for Pfizer.

Nestlé took financial advice from a Rothschild team led by Emmanuel Macron and Brice Lemonnier and Deutsche Bank AG's Bruce Evans, Joseph DiMondi, Steven Varlakhov and Scott Bell. The company took legal counsel from a Mayer Brown LLP team led by David Carpenter and John Boelter and including Mark Uhrynuk, John Roberti, Adrian Steel Jr., Richard Assmus, James Barry and Lee Morlock.

A King & Wood Mallesons team led by Mike Barker and Sharon Henrick provided legal advice in Australia to Nestlé, including legal due diligence on the local Pfizer business and advice on competition matters.

J.P. Morgan Chase & Co. is assisting Pfizer in evaluating options for animal health. Pfizer is reportedly using J.P. Morgan, Bank of America Merrill Lynch and Morgan Stanley for the potential animal health IPO.

--David Marcus contributed to this report.

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After divestiture, all eyes on Pfizer's next move

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