Pfizer opts not to split into two companies

Cynthia Koons and Jared S. Hopkins
Bloomberg News

Pfizer Inc. decided not to split in two separate companies, opting against what could have been one of the biggest breakups in the drug industry’s history after years of what it called an “extensive evaluation.”

The decision follows the collapse of Pfizer’s attempted $160 billion merger with Allergan Plc in April, a deal that would have shifted the company’s tax address overseas and bulked up one of the units before a split. In recent months, New York-based Pfizer had signaled it might stay together.

The question now is what’s next for the biggest drugmaker in the U.S., and whether it can rely on dealmaking and new products to rekindle growth after a series of patent expirations on key products led to years of declining sales. The drugmaker most recently agreed to a $14 billion deal to acquire Medivation Inc. and its cancer treatments.

“More transactions seem likely,” Tim Anderson, an analyst at Sanford C. Bernstein who rates the shares outperform, wrote in a note to investors. “A critic could argue that Pfizer is back to being the same old Pfizer as before, relying on M&A to grow and to refill its pipeline.”

The shares fell 1.8 percent to $33.64 on Monday. Through Friday, the stock had gained 52 percent since March 2012, when a Goldman Sachs Group Inc. analyst suggested that the company may be willing to split. That’s comparable to the 53 percent increase in the Standard & Poor’s 500 Index in the same period, but well below the 96 percent jump in the S&P Health Care Sector Index.

Soon after the meeting with Goldman Sachs, Pfizer began reorganizing its business into what eventually became two distinct units — one cash-generating business with older and off-patent medicines, and another growth-focused operation with products dependent on more recent research and development. At the time, revenue was declining and the drugmaker was facing slower growth from older drugs.

Although Pfizer spent $600 million to prepare for a breakup over the past couple of years, it had in recent months telegraphed that it was leaning against a complete separation of the two businesses. After years of declines, revenue has started to pick up, helped by strong sales from some of Pfizer’s newest drugs — especially the cancer treatment Ibrance, which beat analysts’ estimates after its introduction.

“Much like every other drug company right now, we’re focused on the pipeline and some of their new very important drug launches,” said David Heupel, a Minneapolis-based fund manager at Thrivent Financial for Lutherans, which holds Pfizer among its $100 billion of assets. “While they’re a little behind their peers, we think they’re making some strides in immuno-oncology, which could have some significant revenue potential down the road.”

“Clearly there is some disappointment” about the decision not to break up the company, said Alex Arfaei, an analyst at BMO Capital Markets who advises buying Pfizer. “To their credit they’ve been gradually lowering expectations so this shouldn’t be shocking to anybody. They’ve been preparing the market for this.”

By operating two separate and autonomous units, Pfizer already has access to the potential benefits of a split, Chief Executive Officer Ian Read said Monday in a statement. The drugmaker will also preserve its option to separate “should factors materially change at some point in the future.”

John Fraunces, senior portfolio manager at Turner Investments, said keeping the two units under the same parent company was the right call at a time when the industry is facing political scrutiny on drug price increases.

“In an environment where things are becoming a bit more sensitive in terms of drug pricing, I think more diverse entities like this provide investors more protection than the pure-plays,” Fraunces said.