For Pfizer, Bigger as One May Be Better Than Smaller With Two

Print 27 September 2016
Jared S Hopkins, Cynthia Koons / Bloomberg

For Pfizer Inc., bigger is still better. 

By deciding not to split in two after a lengthy evaluation, the New York-based drugmaker is keeping greater leverage with the health insurers and pharmacy benefit managers that have gained increasing power since it first considered a breakup years ago.

Had it broken up, Pfizer would have turned into one company with older and generic products, and another with newer products. Generic drugs, in particular, are under pressure, said Jeff Jonas, a portfolio manager at Gabelli Funds, which holds Pfizer among its $35 billion in holdings.

“The generic side has a few more question marks,” Jonas said. Pfizer’s business in emerging markets is also “arguably a little bit tougher now” given economic weakness in India, China and Brazil.

Other generic drugmakers, such as Mylan NV and Teva Pharmaceutical Industries Ltd., have seen their valuations fall over the last year. They’re also facing pricing pressure from customers, after mergers and joint ventures by drugstores and distributors.

“Right now, with drug pricing concerns, the bigger-size companies could have more advantage when it comes to negotiations,” said Ashtyn Evans, an analyst at Edward Jones & Co. who advises buying Pfizer shares.

Price Pressure

That ongoing price pressure has been most evident in companies like Mylan, Valeant Pharmaceuticals International Inc. and Gilead Sciences Inc., which have all faced backlash from customers and politicians over the price of their treatments. Mylan, which has a large generic drugs line, has most recently taken heat for aggressively raising the price of the EpiPen allergy shot.

“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,” said John Fraunces, said senior portfolio manager at Turner Investments, where Pfizer is a top 10 holding in its $50 million health-care fund and has $300 million total assets under management.

The idea of breaking up Pfizer first emerged in 2012, when a Goldman Sachs analyst suggested the company might be worth more as two separate businesses. Speculation increased after Pfizer’s $160 billion merger with Allergan Plc failed in April, after the U.S. government issued rules to trim the tax benefits of the deal.

Advantages

Pfizer said in a statement Monday that the advantages of keeping its units together outweigh potential benefits of breaking them up. While the drugmaker hinted it might not go ahead with a breakup during a conference call in August, it did spend $600 million toward the potential split in the past couple of years.

Joan Campion, a Pfizer spokeswoman, declined to comment on Monday.

Some investors are in it for the pipeline of new drugs that Pfizer has been assembling.

“We do not own Pfizer because it was splitting,” said Bill Smead, chief executive officer of Smead Capital Management in Seattle, Washington. “We own it for their ability on an on-going basis to make medicines and vaccines that improve our lives. It produces prodigious free cash flow, dividends and is shareholder-friendly. And it is much, much cheaper than similar staple companies.”

Pipeline

Jonas, the Gabelli portfolio manager, said Pfizer has ramped up its internal research, mirroring a trend throughout the industry following a wave of patent expirations over the last decade. Pfizer’s star drug is cancer treatment Ibrance, whose annual sales for this year are expected to triple to $2.16 billion.

Analysts also cite Eliquis, a new blood thinner, and a pipeline of treatments in vaccines, cancer and cheaper versions of expensive biotechnology drugs. Most recently, it agreed to buy Medivation Inc. for $14 billion, gaining its already-on-the-market prostate cancer drug as well as several pipeline assets.

“They have a pretty solid pipeline,” said Evans, the Edward Jones analyst. “They didn’t have a lot of growth back then. The growth profile just looks better now.”

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