Pfizer Needs to Think About Splitting: Goldman

NEW YORK ( TheStreet) -- After cutting a string of mega mergers, Pfizer ( PFE) may be the next Dow Jones Industrial Average component to consider a breakup to unlock the value of its waning shares.

It's the thought that Goldman Sachs argues in a Tuesday research report, as others in the pharmaceuticals and healthcare space like Abbott Laboratories ( ABT) and Covidien ( COV) pursue multi-billion spinoff plans. Already, Pfizer is headed in the direction of consolidation after putting its animal healthcare and baby nutrition units on the selling block.

After meeting with Pfizer Chief Executive Ian Read, Goldman Sachs analyst Jami Rubin says that the world's largest drug maker may take bigger breakup steps than just a sale of its animal health and nutrition units. "We recently met with PFE's CEO Ian Read, who expressed an openness to going further with separations beyond Animal Health and Nutrition if the conditions make sense... This, coupled with the CEO's openness to consider unlocking further value, could create an attractive situation with significant upside," wrote Rubin of the meeting.

If Pfizer were to undergo a full breakup Rubin expects it to occur in three parts, with a previously stated intention to separate the New York-based company's animal health and nutrition units being the first step. In July, CEO Read said that Pfizer was exploring strategic alternatives for its animal health and nutrition units. Recent media reports signal that Danone of France and Mead Johnson ( MJN) could bid on Pfizer's nutrition business for $10 billion. March reports also signal that Bayer ( BAYRY) could bid up to $18 billion for Pfizer's animal health unit.

Rubin added new twists to Pfizer deal rumors in his report of talks with Read. "Mr. Read believes the most likely scenario to be a sale of Nutritionals and an IPO/split-off of Animal Health, reiterating that "buybacks will be the case to beat," wrote Rubin.

In a split, Pfizer would be more focused on its growth oriented pharmaceuticals business and a stable generics business, argues Rubin, who sees the moves netting Pfizer 18 cents a share in earnings per share. A second step would then be a rationalization of Pfizer's organizational structure after the disposals with efficiency efforts likely to wrench out a $26 a share stock value that puts Pfizer on Goldman Sachs' "America's conviction buy list."

On Rubin's report, Pfizer shares closed up over 1.5% to $22.50 in Tuesday trading. The company's shares are up nearly 10% since announcing a strategic review in July.

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The final step, a full split of Pfizer's drugs businesses could come in two to three years' time, with the possibility that the moves drive $5.7 billion in additional sales, adding 93 cents to earnings per share, according to Rubin.

In December 2010, Ian Read took over as CEO of Pfizer after the retirement of Jeffrey Kindler, and has led sweeping change. The company has revamped its drug R&D processes, launched dividend and share buyback increases and announced multi-billion dollar sale and spinoff efforts.

"In our view, Pfizer has emerged a new company, with significant execution still ahead but the important groundwork laid down. While 2011 was clearly a transformative year for Pfizer with sweeping catalysts that unlocked shareholder value, we continue to see significant and stock-moving catalysts ahead," wrote Rubin.

Previously, the company had been one of the most aggressive post-crisis M&A players, buying Wyeth in 2009 for over $60 billion and King Pharmaceuticals for $3.3 billion a year later. Overall, Pfizer has cut $230 billion worth of deals since 1987, according to Bloomberg data, which shows that its average acquisition is nearly $4 billion.

In 2011, Pfizer saw its profitability rise to a post-recession high of $12.8 billion on sales of nearly $67.5 billion; The animal health and baby nutrition units that Pfizer is looking to divest reported $6.3 billion in 2011 sales.

Analysts give Pfizer shares a $24.92 price target, according to estimates compiled by Bloomberg on expectations that the company will see its profits increase to $16 billion, even as sales fall to $62.3 billion.

For more on healthcare sector spinoffs see how a Covidien split continues the breakup of the Tyco empire. See 5 short sighted stock spinoffs for more on corporate breakups.

-- Written by Antoine Gara in New York.

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