Markets

The Pfizer Fire Sale: Positioning for the Future or Suicide Note?

By Jim Edwards

Updated on: July 7, 2011 / 7:18 PM EDT / MoneyWatch

Here's an alternative interpretation of Pfizer (PFE) CEO Ian Read's announcement that he'll spin off the company's animal health and nutrition units: It's a corporate self-mutilation plan that will please shareholders and cement Read's reputation as the one Pfizer CEO who did not preside over years of declining stock -- but at the cost of leaving the company worse equipped to deal with both its investors and the vagaries of the drug business in the future.

Today's announcement comes after just four months of thinking. Give Read credit: He acts fast. Almost as fast as when he succeeded previous CEO Jeff Kindler and then announced a strategic review of all Pfizer's businesses three months later. Call him Speedy Ready.

Although Read's plan is quick, it's not obvious why it's right. Here are the Q1 sales results for the divisions Pfizer was considering selling:

Pfizer's Q1 2011 sales:
Animal health: up 16% to $982 million
Consumer Care: up 12% to $745 million
Nutrition: up 3% to $470 million
Established products: down 5% to $4.5 billion

Pfizer is getting rid of two growing businesses but keeping a unit -- Established Products -- that's clearly a problem. Hmm. The spinoffs will cut about $5.7 billion from annual sales and reduce the company's total sales to about $57 billion.

The stated reason for all this is to deliver greater shareholder value. Under ex-CEO Hank McKinnell, and then Kindler, PFE climbed down from more than $45/share to under $15, shedding billions in value. It's only recently perked up, along with the rest of the market:

In fact the word "shareholder" occurs five times in Read's statement, which is an indicator of his priorities. Selling these units will generate cash for stock buybacks and buoy the price in the short run. But lacking the sales growth from animal health and nutrition, what happens to Pfizer then?

Bernstein Research analyst Tim Anderson a few weeks ago proposed that Pfizer's core prescription pharmaceuticals business could lose 30 percent of its revenue through 2020:

Even if it kept all its units, it would struggle to keep sales flat, Anderson predicts:

In other words, it's the non-prescription drug units that are keeping Pfizer afloat. That might not concern Read, however. Consider his compensation. He earned $17.4 million last year and his pension is now worth $20 million, because as a Pfizer lifer he attained the company's the "Rule of 90" (age plus service equals or exceeds 90) in November 2010.

Read is so unimaginably wealthy that, having goosed the stock -- unlike either of his predecessors -- he can bail on Pfizer without penalty but with his reputation intact. After that, growth becomes someone else's problem.

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Image by Flickr user badjonni, CC.