J&J Shows Pfizer the Money

When Johnson & Johnson paid $16.6 billion last week for Pfizer's consumer health business, trumping GlaxoSmithKline in a spirited bidding war, it supplanted Pfizer as the world's largest pharma company.

Analysts say the cash deal--which included top brands like Visine, Listerine, and Benadryl--further insulates J&J from some of the uncertainty of drug discovery. Pfizer took a greater risk, trading stable brands for quick cash to initiate stock buybacks and make acquisitions to strengthen its pipeline.

Analysts were pricing the deal at $12 to13 million, about three times the revenues of the consumer business. J&J paid more than four times annual revenues.

"Our decision is based on the strength of the offer," said Paul Fitzhenry, Pfizer's senior director of corporate media relations. "Over the next 30 months, we'll be putting that money to work."

Pfizer is concentrating on its prescription business, which remains the largest in the industry.

"The old adage is: it's great to be a pure-play company if you do that really well," said Jason Napodano, senior biotechnology analyst at Zacks Investment Research, adding that Pfizer has the potential for "explosive" growth. "Pfizer definitely wanted to become a more pure-play behemoth. A company like J&J builds its entire business on safety and diversity."

But Fitzhenry denied that the sale was a change in strategy for Pfizer. Instead he described it as "unlocking what we perceive as trapped value," a $4 billion unit lost in a $52 billion goliath. (At J&J, in contrast, consumer goods will represent about a quarter of revenues.)

"This is actually a very good outcome for both J&J and Pfizer," said Peter Young, president of specialty investment-banking firm Young & Partners. "Pfizer was never that great at that type of business. J&J has made higher margins in its consumer business."

J&J told investors that the deal doubles the size of its consumer business and allows the company to expand into new global markets. It also noted that consumer-directed healthcare has been driving patients to seek more affordable therapies, like OTC drugs.

The deal also includes the rights to acquire allergy drug Zyrtec when it completes its Rx-to-OTC switch.

"J&J made a very shrewd decision to go after the consumer market more aggressively," said Elgar Peerschke, head of the global healthcare practice at Bain & Company.

He added that consumer brands, while less profitable, offer stability to an industry that is often stymied by regulatory, R&D, and liability issues. At the same time, he noted, Pfizer is following the trend of pharma companies that sell off ancillary businesses, such as agriculture or chemicals.

J&J, which recently lost its bid to purchase Guidant, will likely continue to pursue other ways to build its medical device and pharma divisions. "That part of the business is very important; I don't think they're going to walk away from it," said Young, who added that J&J has recently changed its strategy to focus more on licensing than acquisitions.

Pfizer's stock buyback will increase prices in the short-term but has limited long-term value, according to Michaela Drapes, pharmaceutical editor at Hoover's.

"When done on that scale, it's the kind of move that can point to some problems with cash flow," she said. "They really need to do something about their pipeline."

Napodano agreed. "This is a company that has pretty anemic top-line growth," he said. "I would rather see the company go on a biotech buying spree."

Fitzhenry noted that Pfizer has made six biotech acquisitions since September 2004, and is planning more activity in the $1 to 4 billion range. "We're looking at targeted acquisitions, and we are taking a disciplined approach to investing to grow the company."