It looks like Pfizer (NYSE:PFE), the world’s largest drug maker, might be the next company to go through some major changes. Goldman Sachs is predicting that a full breakup of the company will occur in three stages. According to Goldman Sachs, Pfizer is in currently the first stage of the breakup, after announcing that it was separating the Animal Health and Nutrition divisions. According to the rumor mill, Danone of France and Mead Johnson (NYSE:MJN) may bid on Pfizer’s nutrition division for around $10 billion. It is also rumored that Bayer (BAYRY) may bid on the animal health unit for close to $18 billion.
It is expected that this first step will drive earnings per share up by $0.18. With pharmaceutical companies like Abbott Labs (NYSE:ABT) and Covidien (NYSE:COV) pursuing multi-billion dollar spin-offs, Pfizer would be wise to consider further splits. And it just might do so according to Ian Read, Pfizer chief executive officer. This could make Pfizer an attractive investment. Especially if the sale of the animal health division results in an initial public offering and split-off while the nutritional division is sold. These transactions would allow Pfizer to focus more on growing its pharmaceuticals business and generics business.
Its second step would be to reconsider Pfizer’s organizational structure which could increase its share price to $26, a definite buy considering the stock is now around $22 per share.
The third step, a full breakup, could grant Pfizer an additional $5.7 in sales. But this could take a few years to see independent potential in the spun-off businesses and also depends on the continued success of the drug pipeline.
After discussion of a Pfizer split surfaced, the stock grew 1.5%. Amid the recent U.S. stock recession, investors are optimistic that the company is making the right decisions. This optimism is in contrast to the effect of the S&P 500 reaching toward a four-year high, which did nothing for consumer confidence. Although consumer confidence was reported to be at an all time high, the numbers show otherwise as Bank of America (BAC) and Apollo Group (APOL) had saw large losses in the U.S. However, since healthcare companies tend to see growth during uncertain times, it may be too early to get too excited about its growth. Nonetheless, I still consider it a strong buy since its competitors are struggling.
Both Abbott and GlaxoSmithKline (NYSE:GSK) are two of the competitors with stock prices dwindling as of recent. A company with more significant losses is Merck (NYSE:MRK), though the company hopes to make significant strides in the months to come. Although the three companies have not necessarily had a bad year, I still think Pfizer is the best choice to get in on now, before the reorganizational changes.
On the horizon for Pfizer is Pfizer Oncology’s latest cancer research presentation at the 2012 Meeting of the American Association for Cancer Research. Investors like to see that their investments are doing some good work. Pfizer is also ready to reveal a couple of clinical trial results for the drugs Aristotle and Averroes. This could mean increased business for Pfizer. The furthered safety and success of its cardiovascular drugs, something the company is working on, could also help the company see growth.
Unfortunately, there is a dark cloud following Pfizer. Over the past several years, fraud settlements have tarnished its name. Starting back in 2004, Pfizer paid $430 million to Warner-Lambert, its subsidiary. In 2008, the company paid a $152 million settlement with another $49 million settlement a few months later. 2009 saw an obscene $2.3 billion settlement. Just last year, it paid another $14.5 million. Although Pfizer has agreed with the federal government to adhere to regulations, you cannot foolishly ignore its track record.
It is not just past fraud settlements affecting Pfizer. There is a looming dark cloud that is the pending Chantix class-action lawsuit. Over 2,400 people have filed suit that the stop-smoking drug is not safe. But Pfizer insists that the drug is absolutely safe for smokers looking to quit the habit. Kristian Rasmussen, the lead plaintiff’s attorney in the class-action lawsuit claims otherwise. Rasmussen argues that the drug is linked to suicide cases and that there is significant evidence to show that Chantix caused the suicides.
The main argument in most of the lawsuits is that Pfizer failed to effectively warn users of the possibility of depression, cardiovascular disease, and mood swings that include significant aggression. Those side effects have already been updated by the FDA on the side-effects label for the drug. But Pfizer is remaining firm on the belief that they provided enough warning about the drug and that it is not to blame for suicidal tendencies. If this claim is proven, it will be a bit of a publicity nightmare for Pfizer. But if the plaintiffs cannot effectively present a connection between the drug and the suicide cases, Pfizer will be okay. Still, it is a story to be watched as it can affect the stock overall.
Fraud and lawsuits aside, as an investor, I look to a company’s future when deciding whether or not to buy. I still maintain confidence in Pfizer. Perched upon a market cap of $168 billion, it is the largest pharmaceutical company in the world for a reason. Looking at the past year, things have been good, and are expected to continue both into the next year and through the restructuring phase. If and when the company splits off and sells, the stock price is expected to see an impressive gain. For now, this growth is something to be part of as long as you keep one eye on those lawsuits.
About the author:
I fundamentally analyze every business from the top down.
In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.