Between the lines, Read offers investors a split preview

Ian Read
Ian Read

Pfizer's Ian Read performed a Hamlet-esque burlesque (“To split or not to split?”) yesterday in a conference call with Bernstein's Tim Anderson, telling investors that the company is still weighing the merits of a breakup, but that at a managerial level, the giant's “innovative core” and “value company” sides are already largely separate—at least in the developed world.

"I would acknowledge that there are two businesses within Pfizer that will become clearer and clearer as emerging markets mature,” said Read. “One is an innovative core, which should be fast-growing, high research percentage, science based, technical detailing, and one would be a value company that has a lot of products that are post-LOE [Loss Of Exclusivity], some of them competing in a pure generics space and some competing in emerging markets in a branded space.”

With the sale of the company's nutritionals division to Nestle and the partial spin-off of its animal health unit completed, Pfizer brass is turning its attention to the firm's core pharmaceuticals business, creating separate management and reporting structures for those units that will “eventually” generate separate profit and loss statements. The plan, then, is to provide “transparency” on the two divisions, see how shareholders respond and then weigh further cleaving the company's new and established products units—a process that would take several years. Where it gets tricky is where they overlap—in emerging markets, in manufacturing and on consumer products, which the company has decided not to spin off, given its utility for wringing profit from all of those LOEs, especially in emerging markets.

“We have not separated out emerging markets and of course the manufacturing area is difficult, because many plants are multipurpose,” said Read. “We can move relatively quickly to give you, if we choose to do so, visibility on a P&L basis for those two businesses,” but separating manufacturing would be tough “and in fact may not be appropriate given the trials and tribulations that some of our competitors have had when they have not managed manufacturing as a corporate asset.” Feel the burn, J&J and Novartis?

The pros of a split, said Read, include “maximizing the value of a value company business that needs to be managed with the culture of a generic company, with their unrelenting focus on cost and speed and management of prices, and freedom from some of the restrictions we have because of our transfer pricing and tax policies—and probably a company that can be more aggressive on the commercial/regulatory side than we're prepared to be because we have a reputation that's very important on the innovative side that we're not willing to put at any risk whatsoever,” while eliminating “distractions” for the innovative side of the business. Some analysts have been clamoring for large pharmas like Pfizer and J&J to do just that.

On the downside, they'd lose the benefits of scale that come with a shared back office structure. A split would come with substantial upfront costs, and would require mind-bending manufacturing agreements spanning many years.

“But none of these things are impossible to overcome if you believe that the shareholders would prefer two independent entities because they believe that focused management with one objective," said Read, "one type of culture, would produce a better result.”