Sell, Spin or Keep? Pfizer in a Quandary on Advil-Chapstick Unit

(Bloomberg) -- Pfizer Inc.’s attempt to unload its consumer-health business fizzled, but hanging on to the division a while longer may not be a headache for the world’s largest drugmaker.

British pharmaceutical giant GlaxoSmithKline Plc, the final prospective buyer, withdrew from the bidding Friday, ending for now a sale process that began in October. Reckitt Benckiser Group Plc, another potential buyer, pulled out earlier this week.

The future of the business, which was valued at as much as $20 billion, is up in the air. Pfizer could spin it off into a separate company, or keep it until it can fetch a better price from a single buyer. The drugmaker said in a statement on Friday it will continue to review its options and expects to make a decision this year.

Waiting too long could be costly. Changing consumer habits are pushing down prices of everything from cough medicine to lip balm. As retail giants Inc. and Walmart Inc. reshape shoppers’ expectations, the margins of consumer-health businesses are likely to be pinched.

“The world has changed,” said Michael Leuchten, a London-based analyst with UBS Group AG in a telephone interview. “That means these businesses or assets probably won’t be able to fetch the multiples they have in the past.”

Spin Scenario

Despite the tectonic shifts in the retail world, Pfizer’s consumer business, which includes Advil and heartburn reliever Nexium, continues to bring in cash. Sales, which totaled $3.47 billion last year, grow about 2 percent to 4 percent a year, and the division accounts for a good portion of the company’s dividend, according to John Boris, an analyst with Suntrust Robinson Humphrey who advises holding Pfizer shares.

“If you’re going to spin it off, that’s a whole different animal,” Boris said. “There’s a higher probability they end up holding onto it. I think they were pretty set on that they were going to sell the business.”

Jeff Jonas, a portfolio manager at Gabelli & Co. who holds Pfizer shares and said that he was hoping for a sale, said a spinoff could allow the company to avoid taxes it would have to pay in a sale. It could also take with it a healthy amount of Pfizer’s $43.5 billion in debt, Jonas said.

Pfizer has fared well in shearing off business units in the past: In 2013, it spun its animal-health business Zoetis Inc. off to shareholders, and the stock has since more than tripled in value.

Deal Pressure

Pfizer has faced pressure from investors to make deals and grow its pipeline. A proposed $160 billion merger with Allergan Plc was scrapped after the Obama administration cracked down on so-called inversion deals. Pfizer also attempted a $120 billion deal with British drugmaker AstraZeneca Plc.

A sale of the consumer business isn’t crucial for Pfizer to complete a large merger, as the company has more than $30 billion in cash. Some analysts have mentioned it as a potential suitor for Bristol-Myers Squibb Co. Suntrust’s Boris said that he still expects Chief Executive Officer Ian Read to do a large deal this year.

“He had two swings at the plate,” Boris said. “He can’t screw up the third swing.”

Pfizer shares, which have declined 2.4 percent this year, were off 0.7 percent at $35.35 at 11:15 a.m. in New York.

Ashtyn Evans, an analyst at Edward Jones & Co. who has a buy rating on Pfizer, said in an interview that if the company had put the consumer-health unit on the block at a different time, it may have been a different result.

Gabelli’s Jonas said while this was Pfizer’s first formal review process for the unit, there has been speculation about its future for several years. He said he wouldn’t be surprised if Glaxo or Reckitt returned at some point in the future.

Glaxo Chief Executive Officer Emma Walmsley has been shaking up the drugmaker, focusing on developing promising new drugs. Glaxo’s investors balked last year when she mentioned interest in the Pfizer unit, fearing that it might endanger Glaxo’s dividend.

Amazon Effect

Amazon and other online retailers pose a significant challenge in consumer health, offering low prices and home delivery. Bayer AG cited an “Amazon effect” on its consumer unit last year, saying that as brick-and-mortar stores closed, internet sales were slicing into its share.

The sale’s fate “tells you about big pharma’s attitude toward consumer health -- the brutal reality is that consumer health is not as profitable as the pharma business,” said John Rountree, a partner at consulting firm Novasecta Ltd. in London. “There’s something inherently unattractive about consumer health from a profitability point of view.”

Still, Pfizer might not have been willing to let its asset go on the cheap, said Daniel Mahony, a partner with Polar Capital in London.

“I think the CEO has been clear that they don’t need the cash,” he said in an email. “I suppose if no one is prepared to pay their asking price, then why sell it?”

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