The company broke open a bombshell on Monday when it announced that it would break its business into three new divisions — two focused around drugs, vaccines, and consumer products with plenty of patent life left; and a third “value” segment centered around generic drugs and those products with patents expiring through 2015.
Pfizer Inc. (NYSE:PFE) hasn’t been shy about spinning off or selling businesses it no longer wants, but is this recent shake-up a sign that Pfizer’s ready to dump its generics business? Let’s take a look at the three routes that this top-tier company could take.
Keep it
The simplest option for Pfizer Inc. (NYSE:PFE) is just to keep its generics and soon-to-be off-patent drugs as part of its portfolio in the future. The firm’s established products division pulled in more than $10.2 billion alone last year, and that’s not even counting emerging markets sales, which Pfizer records separately and added more than $9.9 billion to the company’s total revenue.
It’s safe to say this is no financial slouch. As sales of branded pharmaceuticals were hit by patent expirations in 2012 — notably with former megablockbuster cholesterol-fighting drug Lipitor — generics revenue helped stabilize Pfizer Inc. (NYSE:PFE)’s overall sales to save what could have been a much worse performance last year.
However, if Pfizer’s looking to orient toward growth opportunities, this isn’t the business to lead the way. The company’s established products division grew sales just 1.3% in the two-year period between 2010 and 2012. With Pfizer’s leadership looking for a faster-paced future centered around its core branded pharmaceuticals, and with Wall Street analysts clamoring for a breakup of the company’s remaining low-growth segments, keeping this business around seems unlikely in the long term.
Spin it off
An option familiar to Pfizer Inc. (NYSE:PFE) investors would be for the company to spin off its generics and related drugs into a new company. Pfizer took the same option with its former animal health business earlier this year, spinning off the company now known as Zoetis Inc (NYSE:ZTS). Zoetis Inc (NYSE:ZTS) hasn’t lived up to investor expectations after a fast start, with shares down around 3% since its IPO. Still, a recent exchange of Pfizer shares for Zoetis shares — part of the former’s shedding of its investment in the latter — was met with high demand.
Animal health is a growth segment, however, something that generic drugs aren’t. Still, Wall Street has egged on Pfizer for a spinoff or sale, claiming that the result would return more value to investors. To be sure, a spinoff would offer some advantages. The new company would already have strong, if placid, sales, with little of the volatility of branded pharmaceuticals.
In addition, Pfizer Inc. (NYSE:PFE)’s established products branch would boast of partnerships with other companies in growing regions such as China, where the company established a joint venture with Zhejiang Hisun Pharmaceuticals earlier to develop generic medicines in the fast-growing health care market. Considering the Chinese government’s preference toward cheaper generic drugs over costly branded pharmaceuticals as it looks to lower health care prices for its rising middle class, Pfizer’s established products division could become an attractive emerging markets player.
Sell it
If Pfizer’s looking for immediate returns, it could follow in the footsteps of last year’s divestment of the company’s former infant nutrition business. A smart sale of that segment to nutrition giant Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCBB:NSRGY) grossed nearly $12 billion for the company.
That deal was a perfect match: Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCBB:NSRGY) earned a big boost in its emerging markets push, as Pfizer’s business drew around 85% of its business from developing economies. Meanwhile, Pfizer got rid of an unwanted business — and made a pretty penny for shareholders while at it. Is there such a perfect suitor for the company’s generics business?
One leading generics company that would fit right in is Mylan Inc. (NASDAQ:MYL). It’s questionable whether Mylan Inc. (NASDAQ:MYL) could afford Pfizer’s generics unit, a business that alone brought in sales equal to half of Mylan Inc. (NASDAQ:MYL)’s 2012 revenue. Still, Mylan has been growing well in recent years, and the company has had a number of relationships with Pfizer in the past, including a strategic collaboration last year to market generic drugs in Japan.
Mylan also launched its generic version of Pfizer’s Lipitor last year. Pfizer still sells Lipitor under its established products division, and a sale would add obvious synergies to Mylan’s cholesterol-fighting sales.
Fueling up for growth
Right now, it looks more likely that Pfizer Inc. (NYSE:PFE) will take action to divest this business, rather than keep around a slow-growth, if steady, segment. In the wake of its infant nutrition business sale and spin-off of Zoetis, Pfizer’s going all-in on a branded-pharmaceutical, high-growth future. Whatever this company decides on, it’s no time to make a hasty buy or sell decision on this company. Pfizer may be in the midst of reshaping its future, but this stock’s still among the best in big pharma — with or without its generics business.
That’s because Pfizer has been one of the best blue-chip stocks on the markets this year. Between a strong pipeline of drugs in development and a number of high-sales products already on the market, this is one company looking at a bright future. Pfizer is a shining example of the power of how big picture-and long-term investing is the best way to maximize your chance at true financial freedom.
The article 3 Potential Solutions for Pfizer’s Generic Drug Business originally appeared on Fool.com and is written by Dan Carroll.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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