Pfizer To Use Cash From Sale Of OTC Unit To J&J For Biotech, Specialty Deals

Pfizer will use the cash gained through the sale of its consumer unit to Johnson & Johnson to make targeted specialty pharma and biotech acquisitions, the firm said following announcement of the deal June 26.

J&J will acquire Pfizer's OTC business in a $16.6 bil. all-cash transaction that is expected to close by the end of 2006. Pfizer announced in February that it was deciding whether to sell or spin off its OTC unit, which brought in $3.9 bil. in 2005 sales.

Pfizer cited the firm's $1.9 bil. acquisition of Vicuron in June 2005 as an example of the type of deal the company will pursue with the additional cash; the Vicuron deal brought Pfizer the recently launched antifungal Eraxis (anidulafungin) and the antibiotic dalbavancin, which is "approvable" at FDA (¹ (Also see "Pfizer $1.9 Bil. Vicuron Acquisition Culminates Antibiotic Research Deal" - Pink Sheet, 20 Jun, 2005.), p. 15).

The firm said it will generally focus on deals in the $1 bil.-$4 bil. range and will consider both brand acquisitions and company acquisitions.

During the recent Goldman Sachs Healthcare Conference, Pfizer CEO Hank McKinnell estimated that approximately half of the cash generated through the sale of the OTC unit would be used for licensing and acquisition agreements with the remaining half allocated to share repurchase.

J&J's acquisition of Pfizer's consumer unit follows its loss in a high-profile bidding war with Boston Scientific to acquire the device firm Guidant (² (Also see "J&J Sees Rx Synergies In Guidant Deal; Big Buy Does Not Rule Out More Deals" - Pink Sheet, 20 Dec, 2004.), p. 25).

Both the Pfizer OTC unit purchase and the Guidant bid suggest J&J is seeking to diversify its business away from pharmaceuticals. Following the Pfizer integration, J&J expects 40% of its business will be pharmaceuticals, 35% devices and diagnostics and 25% consumer products.

Pfizer's decision to unload its consumer business stands in stark contrast to this strategy by further concentrating the firm's focus on the high risk/high reward prescription pharmaceutical business.

Although some observers are questioning J&J's move toward a more diversified portfolio, the price that the firm paid for the Pfizer brands demonstrates how coveted the division was among bidders. GlaxoSmithKline was also rumored to be involved in negotiations with Pfizer.

The $16.6 bil. that J&J paid was higher than the amount originally anticipated for the unit. When Pfizer announced it was reviewing its options for the division, McKinnell said the price could be driven above $10 bil. Estimates that followed were in the $14 bil. range.

The price tag is more than four times the 2005 sales of the division, while average prices in the consumer segment are two times annual sales.

During a June 26 call announcing the transaction, J&J CFO Robert Darretta acknowledged that the price "represents a multiple that's higher than what's been the typical experience in the consumer segment."

"This is a very different set of assets, however," he said. "This is an extraordinary set of assets....Particularly unique, we think, is the enduring nature of the assets coupled with being positioned in categories that are exhibiting higher rates of growth."

Lower multiples were paid for assets that "were not achieving the same growth rates as these assets have been achieving, and we think we're only going to accelerate that rate of growth once it's under our ownership," Darretta said.

In addition to a number of major consumer brands including Listerine mouthwash and the smoking cessation therapy Nicorette , J&J also gains U.S. Rx-to-OTC switch rights for the non-sedating antihistamine Zyrtec (cetirizine).

CEO William Weldon noted during the conference call that Zyrtec was the most prescribed non-sedating antihistamine in the U.S. in 2005, with annual sales of $1.5 bil. J&J did not provide a timeline for switching Zyrtec, but Pfizer noted that Zyrtec loses patent exclusivity in December 2007.

Schering-Plough's non-sedating antihistamine Claritin (loratadine) received switch approval in 2002 (³ (Also see "Schering OTC Claritin Will Launch In December Without Rx Transition Period" - Pink Sheet, 2 Dec, 2002.), p. 7).