However, the best example to highlight the impact of a spin-off is the Abbott-AbbVie split, which saw the shares of the spun-off unit rise from $35 in January to the current $44, as of June 7.
So, why did AstraZeneca acquire Omthera Pharmaceuticals when others are spinning-off?
AstraZeneca plc (ADR) (NYSE:AZN)’s acquisition of Omthera is a strategic buy which focuses on capitalizing on the rapidly growing demand for fish oil products, especially the ones rich in omega 3. Fish oils are becoming a critical ingredient in the treatment of cardiovascular diseases, which makes this acquisition different from the previous spin-offs as noted above.
The units spun-off by Abbott and Pfizer Inc. (NYSE:PFE) do not offer the kind of opportunity offered by Omthera. Additionally, Zoetis’ business is completely different from Pfizer’s core business. On the other hand, Omthera’s products are quite in line with AstraZeneca plc (ADR) (NYSE:AZN)’s business, only that the ingredients come from a unique host.
Pricing
Pfizer’s most recent quarterly earnings grew 53.3%. It currently trades at 13.53 times earnings ratio, which is favorable when compared to Zoetis’ 33.87x. However, it is good that both companies now operate in different industries. The only sense in this comparison is because shareholders of Pfizer are swapping part of their holdings with a stake in Zoetis. This means that they are expensively priced, and the so-called discount may not be effective after all.
On the other hand, Abbott Laboratories reported 56.2% decline in earnings from its most recent quarter compared to AbbVie’s 9.6% rise. However, the giant pharma is cheaply valued compared to its spun-off unit. Abbott trades at 11.43 times trailing earnings while AbbVie trades at 13.1x.
The bottom line
Pfizer Inc. (NYSE:PFE)’s fundamentals are still very strong despite spinning off a profitable unit. Therefore, the decision to spin-off Zoetis could only mean one thing. The company wanted to concentrate on its core business, bio-pharmaceuticals, as correctly pointed out by the CEO. This is bound to improve the company’s progress in coming up with innovative bio-pharmaceutical products, which could result in huge upside in the long-term.
On the other hand, Zoetis seems to have a very strong foundation, and can as well focus on developing innovative animal health products, without having to care what happens to Pfizer. The pharma industry is increasingly pushing diversified companies to spinning-off their slowing units, or units that do not seem to result in synergy benefits. Pfizer’s move is a clever one, and a necessary one.
The article Is Concentration Better Than Diversification in Pharma? originally appeared on Fool.com and is written by Nicholas Kitonyi.
Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nicholas is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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