October 10, 2017 / 6:04 PM / 9 months ago

Breakingviews - Pfizer and Glaxo may find romance over the counter

LONDON (Reuters Breakingviews) - Painkillers and pile cream: these are either the recipe for a terrible night in, or a potentially good corporate deal. Pfizer, the $215 billion U.S. drugmaker, has tasked investment banks with looking into a spinoff or sale of its consumer-goods division, which makes Advil and Preparation H. New GlaxoSmithKline boss Emma Walmsley would be well placed to offer a home.

Advil products, which are a Pfizer brand, are pictured at a Walgreens store in Pasadena, California, U.S. January 31, 2017. REUTERS/Mario Anzuoni

Over-the-counter products are a tiny sideline for Pfizer, accounting for just 6.4 percent of its revenue last year. Pfizer Chief Executive Ian Read therefore loses little from putting the business on the block. While these goods might share manufacturing and shipping processes with prescription medicines, the unique nature of cooking up, testing and distributing drugs to patients suggests there’s not much reason to keep them together. Germany’s Merck is considering a similar split.

Of course, some are less dismissive – including Walmsley. She took over as CEO in April, having run the consumer-goods joint venture Glaxo co-owns with Switzerland’s Novartis. Walmsley has pledged to focus on Glaxo’s drugs, like its HIV and asthma meds, rather than her old division, which makes just 15 percent of group operating profit. But as she will know, consumer goods are a game of scale – something rivals like Sanofi, Reckitt Benckiser and Johnson & Johnson also covet.

A neat solution would be to fold Pfizer’s consumer business into the Glaxo-Novartis joint venture. Valued at 15 times operating profit – roughly the 10-year average for the consumer-staples sector – the business could be worth $10 billion. That assumes Pfizer’s consumer operating margin is roughly the same 20 percent that Glaxo is targeting. Since Glaxo now values its venture with Novartis at $27 billion, Pfizer could argue for a stake somewhere south of 30 percent. One day, the enlarged company might make for a more lucrative spinoff or sale than Pfizer could muster today.

Timing matters. Read says he will make a decision some time in 2018. Ideally, Glaxo would buy Novartis out before doing any other deals, since it would otherwise have to pay the Swiss for their share of any synergies that came from adding Pfizer. Besides, Walmsley has only been in the job for six months. Nonetheless, she could do worse than toss an offer over Pfizer’s counter.


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