Does the Pfizer Restructuring Make Sense?

The Pfizer restructuring will be a case study in whether corporate restructuring & innovation can co-exist or whether M&A is the more viable answer.

Pfizer recently announced a major restructuring into three business segments. The move followed an unsuccessful attempt by the company to market its OTC, or Consumer Healthcare segment as it will be named under the new regime. The reorganization will position the company’s most promising growth area as its rebranded Innovative Medicines segment with the existing business lines from the old segment, as well as adding biosimilars and a new hospital business unit.

The Established Medicine segment will include many of its legacy products, including Lipitor. Management indicates that this segment will operate as a standalone business and include drugs whose patent rights will expire soon along with other legacy products, as well as having its own dedicated manufacturing capabilities.

While positioned as a standalone, this segment could be on “life support” as the continued ability to extend the life of certain formulations (Lipitor, Viagra) will be tested and will likely face more competition from generics. The restructuring leads to the question of whether this segment will be sold or spun-off along with the Consumer Healthcare segment.

The Innovative Medicines segment, which by all reading represents the future growth potential of Pfizer, includes many of the formulations currently on the market for internal medicines - Elequis and Lyrica, to oncology formulations such as Ibrance and Xtandi and inflammation and immunology drugs, including Enbrel and Xeijanz. The segment will now include biosimilars and a new business unit specializing in anti-infectives and sterile injectables, according to Pfizer.

On the surface, Consumer Healthcare may not be compatible with the core business, with approximately $3.4B in revenue its size is less than 10% of total revenues. Management could consider acquisitions in this space, but it would take away funds to consummate a merger of a larger pharma or acquire a smaller research firm. Does the Consumer Healthcare segment have the draw to attract a buyer or would such an acquisition strategy work?

The situation brings to mind a similar situation from a few years earlier. In 2013, Pfizer announced a restructuring into 3 business segments - two of which were labeled Innovative business lines and the remaining the Value business line. Interestingly, consumer healthcare was included in one of the Innovative business segments. In 2016, Pfizer considered a break-up in the wake of its failure to acquire Allergan. Restructuring is not a new idea, but one that will keep resurfacing until a mega-merger such as an Allergan or Bristol-Myers-Squibb occurs, where the combined firms can restructure (read sell or spin-off) the less desirable segments.

If Management can execute a sale of Consumer Healthcare and either sell or spin-off the Established Medicines segment, we see a company that will have the capital to pursue research-oriented firms and their portfolios, or craft the mega-merger they have sought so intensely. If the sale of both segments occurs this may increase the risk of ownership of Pfizer stock, as some earnings insulation from these segments will not be available.  

Management’s spin that the “new” segment strategy is a natural outcome and that it positions the company for future growth is suspect. The real question is whether Pfizer can survive as an independent company or if it needs to morph into a mega-merged pharma. There are essentially three future scenarios for Pfizer. The company can continue as it stands, as a sale of one or more of the segments will not add to shareholder value. The company could sell one or more of the segments and couple that with a blockbuster acquisition that positions Pfizer with a revitalized pipeline of products. Or, lastly, Pfizer merges with another pharma and takes on a new corporate identity and new challenges.

Edward Pratesi is a managing director at accounting and business consulting firm UHY Advisors.