Pfizer: Potential buyers knocking on its door
Pfizer wants to sell its consumer products division for $10B, but what to do with the money?
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Potential buyers are knocking on Pfizer's door for its $10 billion consumer products division, and people are scratching their heads over what the company plans to do once they get their hands on the money.

The truth is that Pfizer (up $0.07 to $26.46, Research) isn't exactly strapped for cash. The New York City-based drug maker already has more than $20 billion in cash on hand and a strong revenue stream. The drug maker had the biggest 2005 sales tally in the business, $51.3 billion, and with a market cap of $194 billion, Pfizer is the biggest kid on the block. This means that Pfizer already has the means to acquire smaller companies with strong pipelines, in order to bolster its means of making future revenue.

"I think they want to monetize their assets and clean up their income statement and balance sheet and start reinvesting," said Les Funtleyder, analyst for Miller Tabak & Co. "But they already have a lot of cash on the balance sheet," said Funtleyder. "Do they need another $10 billion? I'd like to see them do something with the cash they've got."

Buyers knocking on Pfizer's door

Nonetheless, the drug maker plans to sell its over-the-counter consumer products division, famous for Listerine, Rolaids and Sudafed, among others. Sales for this division totaled $3.8 billion in 2005, a 10 percent rise from the year before. Consumer products is a fast-growing but small segment of a business that is dominated by branded drug sales, in particular its lead product Lipitor, a cholesterol drug with $12.2 billion in 2005 sales.

Reckitt Benckiser, a British company that makes Lysol and other consumer products and is traded on the London Stock Exchange, is preparing a $10.5 billion bid for the Pfizer division, according to the Sunday Times. A spokesman for Reckitt Benckiser wouldn't confirm or deny.

Andrew Saunders, analyst for investment firm Numis Securities, said Reckitt "has certainly got enough juggling balls in the air at the moment" with its 2005 acquisition of the over-the-counter drugs business Boots Group for $3.4 billion. But Saunders said that Reckitt, with its market cap of $25.4 billion, is not stretched too thin to buy to Pfizer's consumer products division.

While Pfizer spokesman Paul Fitzhenry declined comment on "media speculation" surrounding the reported bid, he said that Pfizer's "process is on track and we have seen interest from a number of potential buyers."

Pfizer vice-chairman David Shedlarz said last month that the company plans on "reaching a final decision on this matter in the third quarter of this year."

So if the deal goes through, investors want to know how Pfizer plans to spend the money.

What keeps Pfizer CEO McKinnell up at night?

Pfizer has enormous challenges going forward, and perhaps it's looking for the biggest possible cash injection to take care of all of them at once.

The company faces the impending loss of billions of dollars worth of annual revenue because of looming patent expirations. This year, the company is losing its patent on Zoloft, the antidepressant with $3.3 billion in 2005 sales. In 2007, Pfizer will lose protection on blood-pressure drug Norvasc, with $4.7 billion in 2005 sales, and allergy treatment Zyrtec, with $1.3 billion. When a drug loses patent protection, the price plunges about 80 percent over the next six months as consumers flock to cheaper generics.

Also, some analysts are concerned about Merck's (unchanged at $35.64, Research) Zocor, a cholesterol drug with $4.4 billion in 2005 sales that loses patent protection in June. Zocor offered at generic prices could undermine sales of Lipitor, and some analysts believe that consumers are already switching products in anticipation of the price plunge.

To offset the losses, Pfizer has been cutting jobs and closing plants, and aims to save $4 billion through its cost-cutting. The company is also looking forward to getting its recently-approved insulin inhaler Exubera on the market, with analysts calling the drug a potential blockbuster.

Also, Pfizer has been testing Lipitor, which lowers LDL or "bad" cholesterol, in conjunction with another drug, torcetrapib, which increases HDL or "good" cholesterol. Successful tests would help Pfizer set its product apart from Zocor. Al Rauch, analyst for A.G. Edwards, has projected that a Lipitor-torcetrapib combo could add $8 billion in annual sales for Pfizer.

What to do with cash from the sale?

Pfizer's stock price plunged 12 percent in 2005, after the company spooked investors in October by withdrawing financial forecasts for 2006. Also, the company had to pull its blockbuster painkiller Bextra off the market because of health risks and it suffered plummeting sales for another painkiller, Celebrex, which was linked to health risks. These drugs are members of the same class as Vioxx, an arthritis painkiller that resulted nearly 10,000 lawsuits from plaintiffs blaming the drug for heart attacks.

Pfizer's stock price has bounced back this year, climbing 11 percent, nearly quadrupling the 3 percent advance on the S&P 500. Nonetheless, many investors aren't happy with the stock price, and a $10 billion cash injection from selling off its consumer division would give them assets to deal with that.

"They're under a lot of pressure to show some sense of urgency to the investment community that they're taking their situation seriously," said Tim Fidler, director of research for Ariel Capital, a mutual fund and holder of Pfizer stock. "If they were able to sell it, they would be under some pretty strong pressure from investors to buy back stock."

While a buy-back of stock could drive up the price, Fidler sees this is a temporary measure that doesn't address the company's impending loss of blockbuster products. Fidler believes Pfizer should invest in "refilling" its pipeline by buying smaller drug companies.

"To me, the big argument going on with the stock is that people are pushing them to buy shares, but that's a fairly short-term view," said Fidler. "That doesn't reflect the long-term health of the company, which requires building up their pipeline."

So who would Pfizer buy?

Funtleyder of Miller, Tabak said Pfizer will probably use the money to buy several drug companies valued at several billion dollars each. Biotechs are often seen as the front line in developing innovative new drugs, but Funtleyder said biotechs are too expensive for Pfizer's tastes.

Funtleyder said Pfizer might go after medical device companies, though he didn't name any specifically, and makers of generic drugs. In the generic arena, Funtleyder said Pfizer could probably go after Mylan Laboratories (down $0.63 to $24.29, Research), with a market cap of $5.1 billion, or Barr Laboratories (up $2.37 to $63.94, Research), with a cap of $6.5 billion, but would avoid the industry leader Teva Pharmaceuticals (up $0.40 to $42.56, Research), with a cap of $33 billion.

"I think the one thing we can all mark off the likely list is a mega-acquisition," said Funtleyder. "Pfizer is in the shrinking mode now."

The analysts interviewed for this story do not own stock in the companies mentioned here and their firms do not do business with them.

To find out Pfizer's earnings projections for 2006, click hereTop of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.