Pfizer Evaluates Sale or Spin-off of Consumer Health Unit

Consumer health division valued at roughly $14 billion with annual sales of about $3.5 billion

p1Drug behemoth Pfizer Inc. (NYSE: PFE) is evaluating a potential sale or spin-off of its consumer health division that could value the unit at as much as $14 billion, less than two months after the firm opted against a corporate breakup, as reported by Reuters on November 9th, 2016. The planning is still in a preliminary stage and the New York-based pharmaceutical major may opt to retain the business. The potential sale makes sense for Pfizer given the complexity of its businesses and the company’s plan to emerge as a leaner and more focused organization.

Pfizer’s exit from the consumer health business, which includes lip balm Chapstick, painkiller Advil, multivitamin Centrum, and calcium supplement Caltrate, would be one of its biggest corporate moves since its collapsed $160-billion deal to buy Allergan Inc. (NYSE: AGN) in April 2016. Pfizer has two operating segments: Innovative Health (IH) and Essential Health (EH). The Consumer Healthcare unit operates under the Innovative Health segment.

p2Back in 2006, Johnson & Johnson (NYSE: JNJ) bought Pfizer’s then consumer care business, following which Pfizer built that unit back up with its 2009 acquisition of Wyeth. Later, Pfizer sold its nutrition business Swiss food giant Nestlé SA and spun off its animal health business, Zoetis Inc. (NYSE: ZTS).

Over the past three years, Pfizer has been strengthening its over-the-counter (OTC) drug portfolio. It entered into an exclusive global license agreement with AstraZeneca PLC (NYSE: AZN) for the OTC rights for NEXIUM. The drug giant quickly followed that up with the acquisition of Alacer, maker and distributor of Emergen-C products, a popular Vitamin C product line in the U.S. In addition, Pfizer acquired Ferrosan’s Consumer Healthcare business, which broadened its Consumer Healthcare business with leading dietary supplements portfolio. In December 2013, its wholly-owned Polish subsidiary has acquired the rights to Polocard, a low-dose aspirin and the leading OTC brand for heart attack prevention.

Pfizer not to split into two entities

On September 26th, 2016, Pfizer announced that it had decided not to split into two entities. Pfizer was earlier planning to split into two entities, with one business focused on patent-protected drugs and another on cash-rich older products. Instead, the Company will retain its low-growth generics business because splitting it from Pfizer’s patent-protected products would not boost cash flow or better position the businesses in an intensely competitive market. Pfizer had so far spent at least $600 million preparing for a potential split as a means to reduce its complexity. Thus, the sale of the current portfolio of consumer products appears to be a logical next step that will allow Pfizer to focus on its core competency — developing and selling innovative drugs.

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In Pfizer’s most recent quarterly earnings call on November 1st, 2016, Chief Executive Officer Ian Read said that Pfizer was continually evaluating whether its consumer business, along with other business lines, was worth more in or outside the company. The consumer business had annual sales of about $3.5 billion.

If Pfizer decides to sell its Consumer Health business, it would not be the first big pharmaceutical company to do so, mainly because consumer OTC drugs have lower margins than prescription drugs. Moreover, they have little or nothing to do with insurance companies and government payment programs, which set them apart as two slightly different business models. On a similar consideration, Merck & Co. Inc. (NYSE: MRK) sold its consumer care business in 2014 to Germany’s Bayer AG for $14.2 billion. GlaxoSmithKline PLC (NYSE: GSK) and Novartis AG (NYSE: NVS) merged their consumer health businesses in 2015 via a joint venture, which is run by GSK as part of an asset swap worth $20 billion.

Reckitt Benckiser, Sanofi potential suitors

Source: Kline Group
Source: Kline Group

If Pfizer decides to sell its Consumer Health business, Reckitt Benckiser Group PLC could emerge as a potential buyer since it had expressed interest on a purchase when the same possibility was floated back in December 2015. Pfizer’s Consumer Health business is seen to ideally complement Reckitt Benckiser’s business that includes Nurofen painkillers and Durex condoms. Reckitt Benckiser had earlier made attempts to acquire Merck’s consumer unit and before that, licensed Bristol-Myers Squibb’s (NYSE: BMY) Latin American consumer brands for $482 million.

According to Kline Group, Pfizer’s consumer business boasts annual sales of about $1.4 billion in manufacturer-level sales and ranks fourth behind Johnson & Johnson/McNeil, Bayer, and GSK Consumer Healthcare. A potential combined Reckitt Benckiser-Pfizer entity would leapfrog Johnson & Johnson to become the top OTC player in terms of manufacturer-level sales. Moreover, Pfizer’s consumer business could give Reckitt Benckiser significant entry into OTC pain and digestives. Pfizer’s Advil is the No. 1 pain reliever in the U.S., with sales of $449.6 million for the 52 weeks ended October 2nd, 2016, according to IRI across total U.S. multi-outlet channels. Pfizer’s antacid brand Nexium 24HR also holds the top spot in that category with sales of $311.3 million, up 6.4%, in that period. Pfizer’s Centrum multivitamin brand is second in multivitamin sales only to Bayer’s One-A-Day franchise, but commands a sales volume of $286.5 million on a 3.3% growth.

However, Reckitt Benckiser’s penetration into the upper respiratory business with Mucinex and Delsym may be seen as a hurdle in acquiring Pfizer’s Robitussin and Dimetapp cough/cold lineups. Reckitt Benckiser’s multivitamin brand Airborne generated $126.7 million on 1.5% growth for the 52 weeks ended October 2nd, 2016.

Apart from Reckitt Benckiser, the other potential customers could include Bayer AG and Sanofi SA (NYSE: SNY), which indicated in late 2015 that it hoped to grow its consumer health through acquisitions.

Pfizer to shut down two U.K. facilities

On November 9th, 2016, Pfizer announced that it will be closing two of its three facilities in the U.K. over the next four years, slashing 370 jobs. One site is in London at Park Royal, which is expected to close by May 2017. It currently employs 100 people, who are expected to lose their jobs. The Park Royal facility fills dosed vials with liquid medications. Another side is its global cold chain packaging and distribution site in Havant, in Portsmouth. This facility will be shut down by 2020, and will cut 270 jobs. The operations at Havant will be consolidated with Pfizer’s Puurs, Belgium location.

While emphasizing that the recent developments had nothing to do with Brexit, Pfizer indicated that the Puurs site consolidation was due to the ability to leverage scale and more network flexibility. Pfizer has a manufacturing site in south London, which will take on some of the Park Royal operations.

Stock Performance

p5Pfizer’s stock stood at $32.59, slipping 2.69%, at the close on Friday, November 11th, 2016, having vacillated between an intraday high of $33.34 and a low of $32.19 during the session. The stock’s trading volume was at 35,787,741 for the day. The Company’s market cap was at $189.59 billion as of Friday’s close.

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