The world’s largest pharmaceutical company as measured by market capitalization is hoping to spin-off 20 percent of their equity in their animal health division for $3 billion in late 2012.  Pfizer  (NYSE:PFE) is said to value the business at up to $18 billion even as shareholders continue to show their disappointment over poor performance of the division.
 
The company is said to be in discussions with several investment bankers who may be tapped to run the initial public offering (IPO) should one occur later this year.  Past successes from other spin-offs have followed on from offerings of some or part of the equity holding while giving the ‘new’ entity some room to breathe and establish itself as a viable business, separate and apart from the former parent company.  The Financial Times explained how the value of spinoffs around the world is expected to double in 2012 as the capital markets improve.  Pfizer would not be the first company to shed itself of an product group amid concerns that it doesn’t fit well with its other core businesses.  Bayer AG (PINK:BAYRY) may be interested in the animal health unit, but an IPO may be the best exit for Pfizer.

What Business Are You In?

Pfizer has experienced some degree of shareholder frustration as investors have grown weary of less-than-stellar performance from animal health and infant nutrition.  The company has already put the infant nutrition group on the auction block and has attracted the attention of Nestle  (PINK:NSRGY) and Danone  (PINK:DANOY) with offers in the neighborhood of $10 billion.  Nestle, the Swiss-based self-proclaimed ‘world’s foremost nutrition, health and wellness company,’ sees a very strategic fit with its current business lines which include Gerber baby food offering.  Danone touts itself as the ‘world’s leader in fresh dairy products’ and no doubt feels that infant nutrition would bolster its Bledina formula brand.   Both companies have such a large share of the infant nutrition market that there may be regulatory inquiries that necessitate a further break-up of offerings to avoid any anti-trust issues.

The Competition Is Watching Closely

One of Pfizer’s competitors, Merck  (NYSE:MRK) has faced challenges from expiring patents and the revenue protection that they afford.  Pfizer is one company in a very crowded industry and hold an impressive position with products like Viagra and Lyrica that are market leaders and protected against generic equivalents while they remain under patent protection.  Recently, Viagra received a six-month extension until April 2020 because of Pfizer’s assistance in providing resources to the U.S. Food and Drug Administration (FDA) to test another Pfizer drug, Revatio in children with pulmonary hypertension.  The two drugs contain the same active ingredient, sildenafil, and because of the cooperation with the FDA, any drug containing sildenafil will receive an extension of six months.

Many shareholders welcome Pfizer’s focus on its core drug business and are pleased to see it exiting non-essential products that may distract management from seizing opportunities like extended patent protection and further research and development efforts that result in a deep pipeline of future products that enjoy exclusivity and high revenue yields.  In 2011, Viagra generated nearly $2 billion and Revatio brought in $535 million for Pfizer.

The Future For Pfizer

The company is fortunate to have generated offers for its infant nutrition brand by Danone and Nestle and early interest in animal health from Bayer.  According to The Spinoff Report (TSR), the pipeline from 2011 that carries into 2012 for spinoffs totals a record $750 billion.  Past performance of the TSR portfolio reached 84 percent from December 2007 to April 29th 2011.  While past performance is not always an indicator of future results, Pfizer appears to be well-positioned to monetize their investment in animal health and to exit the business with a nice profit to show for their efforts.

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