In this Market Foolery podcast, and with the big news coming out of healthcare, host Chris Hill calls upon the expert insight of Industry Focus: Healthcare host Kristine Harjes.
In this segment, they consider the word that giant Pfizer (NYSE:PFE) is considering spinning off or selling its consumer healthcare business, home to such obscure brands as Advil and ChapStick. Ignoring that "considering" is a long way from "doing," would this be a good idea, and why would the company want to sell such a consistent cash cow?
A full transcript follows the video.
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This video was recorded on Oct. 10, 2017.
Chris Hill: Pfizer comes out today and says that it is considering selling or spinning off its consumer healthcare business. For the sake of context, market cap for Pfizer is somewhere in the neighborhood of $215 billion. And just the consumer healthcare division alone, which includes brands that everybody knows, like Advil and ChapStick and Centrum vitamins, that division alone is estimated to be worth somewhere in the neighborhood of $14 [billion] to $15 billion.
So, first, do you think this is a good move? Do you think the fact that they are considering either selling this or spinning this off -- because this seems like, among other things, a nice little cash machine for them.
Kristine Harjes: That's absolutely what it is. Let me be clear that when they issued this press release this morning, it was a statement that they were considering, which, honestly, I found a little bit silly. Like, yeah, you're considering business opportunities. Aren't you always doing that? That's what you do when you're an executive at this kind of corporation.
Hill: Did it strike you as being just a little bit needy?
Harjes: "Pay attention to me!"
Hill: Like, "Hey, just in case anyone is wondering, we would totally sell this part of our business."
Harjes: Yeah. Like, what, are you just trying to make that part of the business feel bad about itself? I don't know. Whether or not it's a good idea, maybe. Who's really to say? Consolidation has been a huge theme in healthcare for years now, and it seems like we're almost starting to see the pendulum swing in the other direction, where these gigantic corporations are starting to consider breaking apart. You heard earlier this year that the German Merck was also considering a spinoff of its consumer health division, and now here you have Pfizer, who already has a lot of cash, and this would be another move to get even more cash on their books, potentially to make another acquisition in the biopharma arena.
The consumer health business, as you mentioned, that's your ChapStick and your Robitussin. It's slow growth. It's not going to be a huge needle-mover for Pfizer moving forward. But if they're looking to ignite growth and replace some of the lost revenue from drugs that are coming off patent, they do need to make a somewhat splashier acquisition on the pharma side of the business. And this money would allow them to do that.
Hill: So that goes to my next question, which is, they've got the cash on the balance sheet -- what are they doing with this money? This is a stock that, for many years, was such a great stock for investors. Over the last, pick your time frame, one, two, five years, this has really just sort of matched the market, only not quite as well. It's essentially doing about 40% over the last five years. It's not in negative territory, but it's not really knocking the cover off the ball, and I'm wondering, if you're a shareholder of this company, are you looking at Pfizer and saying, "Why don't you return some of that cash to shareholders? Why don't you increase the dividend, or something like that?" Or, as you said, is the better move in terms of rewarding shareholders making a biopharma acquisition?
Harjes: This is a company that does reward its shareholders. It has a little under a 4% dividend yield last time that I checked, and they're going to stick to it. They would be a Dividend Aristocrat, except for some really unfortunate circumstances that happened around the time of the Great Recession, when they had a gigantic acquisition which then really bit them when the entire global market crashed. But as far as what they should do next to actually reward their shareholders, I do think investing it in a larger growth company would be smart.
One thing to consider, though, with Pfizer is that they have been really hung up lately on their tax bill. This is a company that attempted to merge with Allergan, a company that is based in Ireland, to try to reverse-engineer a buyout such that Allergan was buying them so they could have their headquarters in Ireland and pay a lower tax rate. And, of course, that fell through as soon as the U.S. Treasury put the kibosh on that. So now they're sitting on a ton of money that's overseas that they're refusing to repatriate. This is a story we hear across industries, where companies have billions and billions of dollars that they just don't want to bring back into the U.S. to pay taxes on. So this could be a way of getting some money to use here, without having to wait for a potential tax reform.
Hill: Yeah. Gosh. It's amazing to think back to January, when we were looking at a new president taking office, a new Congress about to start its term, and the two things that there seemed to be across the board agreement on was, "Oh, there's absolutely going to be tax reform this year, there's absolutely going to be a cut in corporate taxes, and there's absolutely going to be an infrastructure bill." And here we are closing in on mid-October, and neither of those things. So I get why Pfizer, among others, is looking to do something like this.
