The Deal: Pfizer's 3-Way Split Preps Company Long Term

NEW YORK (The Deal) -- As expected, Pfizer (PFE) announced last week its plans to split its generics business into a distinct unit. What analysts and investors didn't expect was that Pfizer would divide itself into three parts instead of just two.

Pfizer will formally separate into three distinct businesses and integrate emerging markets into each, with the separation of financials expected to begin starting with Pfizer's fiscal 2014, Chairman and CEO Ian Read said during the company's sales and earnings conference call with investors Tuesday, July 30.

Pfizer's generics business, now called the "value products group," includes brands that have lost their exclusivity and mature products expected to go generic by 2015. This sector also retains Pfizer's biosimilars portfolio.

Many investors believe the move is in preparation for a spinoff into a separate generics company or for an outright sale, but Pfizer isn't ready to say that.

The two other segments include the expected unit of drugs with exclusivity beyond 2015, called "innovative products" and led by Geno Germano. That unit, which was the one industry watches hadn't expected in the reognization, combines vaccines, oncology and consumer healthcare products, and will be headed up by Amy Schulman.

The rationale for the third unit, Read said, is that Germano's group is operationally and commercially quite different from the vaccines group. The products in Germano's group target a collection of large disease areas that are detailed to both primary care and specialist physicians. Contrast that to the vaccines business, which is smaller, with a distinct culture, dedicated research facilities and a research focus.

"I thought it was very important for those businesses to maintain their unique focus and extend it globally," Read said. Plus, he "didn't want vaccines to be subsumed into a larger primary care business."

"Each has a different operating model with distinct specializations around science, talent and market approach," Read noted.

The generics segment will maintain collaborations for broadening Pfizer's off-patent business, including its partnerships with Mylan Pharmaceuticals in Japan, China's Zhejiang Hisun Pharmaceutical and Laboratorio Teuto Brasileiro in Brazil.

Like several other lumbering pharma giants, Pfizer needed to do something to get lean and mean. It reported revenue of roughly $13 billion for the second quarter, down 7% from 2012's second quarter revenue of $14 billion. The downturn reflects loss of exclusivity for Lipitor and continued volatility in emerging markets.

Frank D'Amelio, Pfizer's chief financial officer, gave a succinct version of the new strategy's goal: "This is all about getting these three businesses to hum internally, to operate with excellence inside the company."

ISI Group analyst Mark Schoenebaum said in a research note that the three-split move "is really clever."

"If your entire goal is to move your stock by giving investors more clarity and allowing them to do a true sum of the parts," this is a great idea, he wrote. One of the three units could command a very high, biotech-like price/earnings ratio of 20 or higher, Schoenebaum suggests. He pegged Pfizer's P/E ratio now at about 12.5.

Dividing a diversified life sciences business into something closer to pure-play sectors and then doing a split or spin into separate companies has worked for several firms to build value in the core. Abbott Laboratories ( ABT) spun off its research-based pharmaceuticals business, AbbVie ( ABBV), taking it public in January. At the end of June, Covidien ( COV) split off its drugs business, renamed Mallincrodt. Bristol-Myers Squibb ( BMY) spun off Mead Johnson & Co.

Such reorganizations take a while, though. Abbott had announced plans to split in two as far back as October 2011. Covidien said it would make the move a few months later, in December 2011.

Pfizer already started the restructuring ball rolling by spinning out and taking public Zoetis, its animal health unit. Hiving off Zoetis through a combined initial public offering and share swap rather than an outright sale allowed Pfizer to avoid a potentially large tax bill.

The company has sold two other multibillion-dollar businesses, Capsugel for $2.4 billion in 2011 to Kohlberg Kravis Roberts and its infant nutrition unit for $12 billion to Nestle in 2012. Pfizer used the funds from those sales to buy back shares. The divestitures have helped salve the pain from Pfizer's loss of market exclusivity for its blockbuster Lipitor.

As for most of big pharma, Pfizer will continue to analyze and complete any "bolt-on" drug licensing deals and smaller acquisitions--or bigger ones--that it sees as filling out its pipeline and adding value to the company. Those will be managed company-wide, using staff with the necessary expertise from whichever unit is necessary, Read said.In 2014,the company will reveal more detailed statements for each of the three units.

"We'll show direct costs and direct expenses," D'Amelio said. In 2015 those statements will be even more granular, he said.

D'Amelio said the company would need three years of audited financials prior to making a decision to split off or spinoff any of the three units. He confirmed on the call that those financials would be prospective. So don't expect a complete break-off of any of the three units from the parent company until 2017.

Of course, that doesn't mean a Valeant Pharmaceuticals ( VRX) couldn't come along before then and acquire one of them. Watch this space.

-- Written by Pamela Taulbee In New York

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