I was struck by several articles (see WSJ, Pharmalot, Fierce Biotech) today talking about Pfizer's contemplated sell off, spin-out, break up to become a smaller more focused company. The idea is that it would divest its four non-pharma units - that being nutritionals, consumer health, animal health and Capsugel (capsule making) units. It could also choose to spin out its "established products" group of off-patent drugs, generics and biosimilars. This could amount to 40% or more of the current $67 B in revenues. Good idea? Merck (Medco), BMS (Zimmer & Mead Johnson), Lilly (Guidant) and Abbott (Hospira) have all been cited as positive spin offs.
Presumably, Pfizer would then be able to focus, according to the new CEO, on its "innovative core". [Be The Ball]. This core consisting of its four pharma units - primary care, specialty care, oncology and emerging markets. This would also allow it to cut its R&D spend and apply it to a smaller company. This may all be a great idea. The analysts seem enraptured by it at the moment. However, I was struck by a line I saw in several of the articles stating that Pfizer would then be able to "morph into a pure pharmaceutical research company" like Eli Lilly. Huh?
Has anyone read analyses of Lilly lately? Particularly relative to their approach to the proverbial patent cliff. Lilly stands poised to lose approximately 75% of its current revenues from patent expirations within the next 7 years. It seems to be a foregone conclusion that Lilly will experience revenue drops in 2011 and 2012 at minimum -- before they have any chance to start growing again. Seeking Alpha discusses this. They note that Lilly hasn't had the best track record of late delivering drugs out of its pipeline despite apparent attractive candidates. If their revenue continues to fall beyond 2012, they are overvalued according to Seeking. If they are able to deliver, they are undervalued -- but they need to deliver.
You know what? Pfizer also has intriguing candidates in its pipeline too. But it also has an even worse track record than Lilly in getting the darn things out. And when they put their spin-out plan into effect, they will have less diversification to lay off risk -- certainly within this new stand alone pharma business. There's the rub. The new model may be very attractive for its potential -- but it will reduce any safety net - and the business will need to deliver out of its pipeline to make it work. That means results need to improve dramatically from the pipeline - with the more focused and leaner R&D spend planned.
Posted by Bruce Lehr March 14th 2011.
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