Thursday, December 06, 2012

Deals of the Year M&A Nominee: Pfizer/Nestle

It's time for the IN VIVO Blog's Fifth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (a half dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

After digesting the 2009 acquisition of Wyeth, Pfizer has been reprioritizing. Since taking the helm in 2011 CEO Ian Read has vowed focus the company exclusively on biopharmaceuticals. In 2012, Pfizer followed up on last year's $2.4 billion sale of Capsugel by selling its nutritionals business to Nestle for $11.85 billion and announcing plans to spin out its animal health unit.

We’re nominating the Pfizer spin-outs in the M&A category because when industry’s biggest pharma player gets the deconsolidation religion, we’re intrigued to see how far it will go. To paraphrase those old Tootsie Roll Pop commercials, how many spin-off deals does it take to get to the innovative core of a large pharmaceutical company?

Pfizer’s deal with Nestle reflected the fierce competition in the global infant health market. The high price tag of the April 23 sale – well above most analysts’ expectations for the unit -- kept Nestle’s competitors at bay. Pfizer Nutrition reported 2011 sales of $2.14 billion, with 85% of the business coming from emerging markets such as China, Indonesia, Mexico, the Middle East and Thailand. The addition of the business to Nestle brings its portfolio to about $7 billion; well above revenues generated by its closest competitor, Mead Johnson Nutrition (about $3.7bb in 2011).

The Big Pharma announced in early-June that an IPO for its animal health business will likely to take place in 2013. The stand-alone company will operate under the name Zoetis. By spinning out the minority stake, much like Bristol-Myers Squibb did with Mead Johnson in 2009, Pfizer keeps its competitors from expanding their lofty animal health businesses. This move also allows Pfizer to avoid the tax consequences of an outright sale of the $4.2 billion business, but still hold on to about 80% of Zoetis – at least for the foreseeable future. Analysts expect the company to further reduce its stake in Zoetis, perhaps through a swap for Pfizer stock mimicking BMS’s DOTY-nomination garnering move in 2009.

Read’s efforts to reprioritize Pfizer were not immediately well-received when announced in mid-2011. Investors had hoped for even more drastic moves as the company anticipated the loss of patent exclusivity for the blockbuster cholesterol drug Lipitor (atorvastatin), which lost patent protection in early 2012. Yet, Pfizer has so far maintained that it will hang on to its Established Products unit, a $10 billion business that handles most of the mature drugs the company owns that have already lost patent protection. Pfizer has been keeping the unit to capitalize on the rapid growth within emerging markets, though intriguingly it has not ruled out a sale.

It has also planned to keep its Consumer Health business close to its vest as a means of converting some legacy pharmaceutical products to over-the-counter drugs. Pfizer execs have commented in recent months that unwinding the Established Products unit or even the Consumer Health business could be more effort than its worth – the products are not manufactured by unit, but scattered across many different manufacturing facilities, and consolidating those businesses would require some major reorganization on the part of the company.

So how many deals would it take to get to that innovative core? The world may never know.

--Lisa LaMotta

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