GSK And Reckitt Opting Out Of Pfizer's Consumer Business Sale Speaks Volumes

Reckitt and GSK withdraw from negotiating on potential deals for with Pfizer's consumer business, leaving slim chances Pfizer will receive an acceptable offer from other drug firms mentioned as potential suitors for the business, which it has valued at around $20bn. A spin-off could move to the fore.

Chances are growing that Pfizer Inc. will opt to spin-off rather than sell its consumer business after two of the largest firms with interest in making a deal backed away.

Reckitt Benckiser Group PLC and GlaxoSmithKline PLC have announced they withdrew from negotiating with Pfizer on potential deals for its consumer business with a portfolio that includes Advil analgesics, Robitussin cough medicine, Nexium 24HR frequent heartburn remedy, Anbesol topical pain relief, Centrum multivitamins and Emergen-C vitamins and supplements.

Their exits from the bidding, market analysts say, leave slim chances that Pfizer will receive an acceptable offer from the other drug firms mentioned as potential suitors for the business, which it has valued at around $20bn. Instead, a spin-off could move to the fore.

"We do not believe successfully selling the business is critical to [Pfizer] having the capacity to engage in other business development efforts, including large-scale acquisitions, given their current financial situation following US tax reform." – Credit Suisse analyst Vamil Divan

"With what appears to be a lack of other interested parties, we believe this now leaves [Pfizer]with the option of keeping the business within the broader PFE umbrella or spinning it off since we do not believe PFE sees it as part of their 'innovative core',” said Credit Suisse analyst Vamil Divan in a March 23 research note.

Divan also said Pfizer won't shy from making deals in the pharmaceutical sector if it doesn't divest or spin-off the consumer unit, making what the firm "will buy a more common question than what [it] might sell."

"Importantly, we do not believe successfully selling the business is critical to PFE having the capacity to engage in other business development efforts, including large-scale acquisitions, given their current financial situation following US tax reform," he wrote.

Divan recommends Pfizer acquire "multiple smaller innovative companies" as growth drivers rather than attempting to take over another large pharma because "large deals are often highly disruptive to R&D productivity at the acquiring company."

A Pfizer representative said the firm continues to evaluate its options, including retaining the business. "We have not yet made a decision, but continue to expect to make one in 2018.

Pfizer included a spin-off to make its consumer business a separate corporate entity when it announced several months ago that it is considering various strategic options for the unit. Divesting the unit has been a recurring topic since Pfizer re-entered the consumer sector through its 2009 acquisition of  Wyeth that brought consumer health brands as well as Rx properties, and the company already has sold some nutritional brands it acquired in the deal. However, its current process came with a Feb. 1 deadline for bids and with CEO Ian Read saying the the unit is "distinct enough from our core business that there is potential for its value to be more fully realized outside the company." (Also see "Pfizer Déjà Vu: Is It Time To Sell The Consumer Health Business?" - Pink Sheet, 10 Oct, 2017.)

Recent Deals Influencing Suitors' Enthusiasm?

While Glaxo and Reckitt acknowledged discussions with Pfizer, other large pharmas also have been suggested as potential homes for its consumer business. But those firms' own current business strategies and priorities don't point strongly to acquiring a large consumer business.

Johnson & Johnson, which substantially expanded its consumer health business in 2006 when Pfizer temporarily exited the sector and sold its previous portfolio, always could be considered a potential buyer of businesses and brands across the health care product sector. However, J&J is on more of a trimming tack recently and looks to boost its consumer business, which some analysts call "lackluster," with an investment in expanding digital channel sales. (Also see "J&J Consumer Makes 'Aggressive' Shift In Digital Sales To Drive Growth" - Pink Sheet, 25 Jan, 2018.)

Bayer AG more recently made a deal that greatly expanded its consumer health profile, acquiring Merck & Co. Inc.'s OTC drug and nutritional brands in 2015, and has yet to turn the move into a growth driver. It shook up its consumer business management in late 2017 as its turnaround attempt had failed to bear fruit. (Also see "Bayer Seeks Stronger Footing In Consumer Health After 2017 Stumble " - Pink Sheet, 2 Mar, 2018.)

Additionally, the German firm is working on bringing crop science competitor Monsanto Co. under its roof in a $62.5bn deal. It awaits US and Russia regulators' anti-trust decisions on the deal after the European Union signed off earlier in March after both firms agreed to divest some operations.

French pharma Sanofi, which prioritized consumer sector growth under its previous CEO late in the 2010s and early in this decade, has not been mentioned as being in discussions with Pfizer. Although its leadership no longer speculates on becoming the consumer market leader, Sanofi in 2017 completed a year of integrating Boehringer Ingelheim GMBH's OTC drug and nutritional products business acquired in a business swap that closed on the first day of the year. Worldwide in 2017, its consumer business, which now is a distinct operating segment, reported sales of $5.1bn on 1.4% growth in the US, 2% in Europe and 3% in its other markets. (Also see "GSK Rides Cold, Flu And Pain OTCs In Q4 While Allergy Carries Sanofi" - Pink Sheet, 8 Feb, 2018.)

A smaller OTC drug competitor, Prestige Brands Holdings Inc., probably would be interested in acquiring some of Pfizer's consumer health brands rather than the business. Prestige Brands has added multiple brands in the past five years, most recently by acquiring C.B. Fleet Co. in a deal that closed in 2017. (Also see "OTC Evolution For Prestige Brands Combines Near- And Long-Term Strategies" - Pink Sheet, 6 Feb, 2017.)

Perrigo Co. PLC  also might be considered a possible buyer in a Pfizer deal but the Ireland-incorporated firm has struggled with its European branded consumer health products business it added in 2015 and is prioritizing driving growth for its longtime strength, private label and store brand OTC drug sales in North America, and is expanding its Rx generics business outside of specialty topical drugs. (Also see "Perrigo Finding Balance As Three-Legged Stool With Two Consumer Units, Rx Division " - Pink Sheet, 5 Mar, 2018.)

While US firm Merck & Co. left the consumer space by selling its portfolio to Bayer, German firm Merck KGAA isn't a likely suitor for Pfizer's business – in 2017 it began seeking a purchaser or partner for its own consumer unit. (Also see "Big Pharma Set To Compete For German Merck's Consumer Health Unit" - Scrip, 5 Sep, 2017.)

Glaxo, Reckitt Have Their Reasons

GSK took a look at Pfizer's business even though CEO Emma Walmsley was less-than-overwhelmed by Pfizer's announcement. Its enthusiasm to make a deal likely was tempered by still being in the early years of running a consumer health joint venture that includes all of Novartis AG's OTC drug and nutritional product brands.

"While we will continue to review opportunities that may accelerate our strategy, they must meet our criteria for returns and not compromise our priorities for capital allocation,” Walmsley said in GSK's March 23 announcement.

Among the previous consumer health sector deals likely influencing potential bids for Pfizer's business, Reckitt's is the freshest. It turned its 2017 addition of infant and adult formula manufacturer Mead Johnson Nutrition Co. into a platform for dividing its organization into separate health and home product units. (Also see "Reckitt At '2.0' On Consumer Expansion But Question No. 1 Remains, Potential Pfizer Business Bid? " - Pink Sheet, 20 Feb, 2018.)

In Reckitt's March 21 announcement, CEO Rakesh Kapoor said integrating Mead Johnson into its operations and reorganizing into two units are the firm's immediate expected growth drivers. "An acquisition for the whole Pfizer consumer health business did not fit our acquisition criteria and an acquisition of part of the business was not possible,” Kapoor said.

Analysts had said that acquiring Pfizer's consumer business would dwarf Reckitt's ongoing changes. Backing away, said Societe Generale's Iain Simpson, is a giant positive.

In a March 22 note, Simpson said "many investors in recent months have been deeply concerned by the risk of RB overpaying for the Pfizer assets" and have had "questions around how this potential acquisition would be funded, with the transaction size likely necessitating either an equity issue or an asset disposal."

"The end of these talks removes a source of binary risk for RB’s share price, and reassures the market of RB’s commitment to shareholders," Simpson added.

From the editors of the Tan Sheet.