Inside Wall Street: More upside potential at Pfizer

The world's largest drugmaker plans to spin off its animal health unit, which should boost its stock.

By Gene Marcial Jun 18, 2012 10:31AM

Pfizer (PFE) isn't just developing more innovative drugs to stay on top of the global health care business. The world's biggest research-based pharmaceutical company also continues to look for ways to enhance shareholder value.


Spinning off its animal health care division, which generated sales of $4.2 billion in 2011, is its latest investor-incentive brainstorm.

 

Pfizer announced on June 7 that it would spin off to shareholders its animal health unit and turn it into an independent, publicly traded company. Pfizer will shortly file a registration statement for an initial public offering for the new company, to be called Zoetis, in which it will hold a minority stake.


That should be welcome news to Pfizer shareholders, who will have the opportunity to own shares in a thriving new company in an expanding industry. Global demand for products and services for animals has been strong.

 

More details about the planned spin-off will be revealed in Pfizer's second-quarter announcement. In the meantime, the animal health unit will be treated as a continuing operation for financial reporting purposes. The animal division has been a positive contributor to Pfizer's bottom line, but the company believes the unit will perform better as an independent company and, at the same time, further improve shareholder value.

 

"Pfizer animal health unit is a dynamic business with strong fundamentals, an expanding and loyal direct consumer base and a proven management team," said Pfizer chairman and CEO Ian Read. "Our focus continues to be on taking the action that will generate the greatest after-tax value for our shareholders," he added.

 

Zoetis plans to build on Pfizer's leadership in providing a diverse portfolio of animal vaccines, medicines, biopharmaceuticals, diagnostics and genetic tests to prevent and treat diseases in livestock and companion animals, according to Read.


The animal unit has more than 9,000 employees and markets its products in more than 120 countries, including the emerging nations. It has its own extensive research operations and holds leading market positions in North America, Europe, Africa, the Middle East, Latin America and Australia.

 

The spin-off is expected to be completed before July 2013. "We think Pfizer could entertain a split-off transaction where investors choose stock in either Pfizer or the new company," says Joseph Cornell, the president of Spin-Off Research.


In a split-off, holders of Pfizer shares must choose to continue owning the stock or exchange some or all of the parent's stock for shares in the spin-off company. Typically in a spin-off the parent offers its existing shareholders stock in the subsidiary in exchange for shares in the parent.

 

Cornell notes that to induce enough shareholders to swap stock, investors are offered shares in the unit that are worth more than the shares being returned to the parent company. This offered premium explains why split-offs are often oversubscribed. Some successful split-offs have been those of Sara Lee (SLE)/Coach (COH), Du Pont (DD)/Conoco (COP) and Bristol-Myers Squibb (BMY)/Mead Johnson Nutrition (MJN).

 

Shares of Pfizer have leaped from $16 a share in April 2011 to a 52-week high of $23.08 on April 27, 2012. Currently trading at $22, the stock is expected to continue rising.


Analyst Herman Saftlas of S&P Capital IQ, who rates Pfizer as a "buy," expects improving bottom-line trends, "helped by growth in emerging markets, cost restructurings and share buybacks." Generic competition for its blockbuster cholesterol drug Lipitor, which produced sales of $9.6 billion in 2011, is expected to drive down sales in 2012. Lipitor's patent expired in November 2011. But Saftlas says he likes Pfizer's R&D pipeline, with key catalysts on three potential breakthrough drugs expected over the near term.

 

Saftlas says Pfizer's animal health division offers one of the largest-selling and broadest product lines in the field, including feed additives, antibiotics and other veterinary products. Pfizer's bottom line is expected to be helped by more buybacks with its ample cash stash. Operating cash flow for 2012 is projected at about $19 billion. In April 1012, Pfizer agreed to sell its nutrition unit to Nestle for $11.8 billion. That should give the company more ammo for more share repurchases.

 

For 2013, Saftlas expects Pfizer to post earnings of $2.33 a share, up from an estimated $2.24 a share in 2012. In 2010, Pfizer earned $1.11 a share.



Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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