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Pfizer's potential consumer health sale could revive M&A ambitions

While Pfizer Inc. has made no decisions on the fate of its consumer health business just yet, analysts expect that a sale would clear the way for an acquisition down the road.

Pfizer's consumer healthcare business is one of the largest over-the-counter, or OTC, drug franchises in the world, with its roughly $3.4 billion revenue in 2016 accounting for 6.4% of the company's total, according to S&P Global Ratings. The unit counts pain medicine Advil, cough medicine Robitussin and vitamin range Centrum among its most well-known products.

Yet as drugmakers prioritize developing new therapies with hopes of blockbuster sales, the steady business brought by consumer health products can sometimes fall by the wayside. Despite the high valuations placed on consumer staples companies in recent years, it has proven challenging for diversified biopharma companies such as Pfizer and Johnson & Johnson, which also has a sizable consumer franchise, to garner a similar premium for their own businesses, Barclays analyst Geoff Meacham said in an Oct. 10 note.

Merck & Co. Inc. sold its consumer unit to Bayer AG for $14.2 billion in 2014, about a decade after Bayer bought Roche Holding AG's OTC business in a roughly $2.9 billion deal. Sanofi sold five OTC drugs to Ipsen SA earlier this year but swapped its animal health business for Boehringer Ingelheim Corp.'s consumer unit around the same time.

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Germany-based Merck KGaA also recently announced a review of its own consumer business, which made €860 million in sales during 2016.

Others have argued that the steady, if somewhat flat, cash flow for consumer goods is precisely what they need to fund innovation in other areas. GlaxoSmithKline plc has expressed a desire to not only keep its consumer unit but to buy back Novartis AG's share of the business with this strategy in mind. Outgoing Novartis CEO Joe Jimenez said in July that he is in no rush to divest the group's stake in the joint venture with Glaxo.

Reports circulated last year that Pfizer's consumer business could be up for sale, and at the time British consumer goods company Reckitt Benckiser Group plc expressed open interest. Speculation quieted until June 2017, when Morgan Stanley analysts discussed the company's option in a note that highlighted spinning off the unit as a potentially tax-free option. Morgan Stanley is one of Pfizer's financial advisers in the current review.

Reckitt Benckiser's capacity for a purchase like this has diminished in the meantime, according to Jefferies analyst Martin Deboo in an Oct. 11 note. With no Pfizer sale on the horizon, the company went ahead with a $17.9 billion deal for Mead Johnson Nutrition Co. earlier this year and is still working through the acquisition. Aiming for Merck KGaA's consumer unit, a quarter of the size of Pfizer's, would be a more affordable option for now, Deboo said.

Priority business in Pfizer's future

While the strategic review is not affecting the company's ratings with Moody's and S&P Global, the latter noted that a sale would lessen Pfizer's product diversity, which could have negative implications in the future.

An acquisition down the line would ease some of this pressure, and Barclays' Meacham sees a consumer health divestiture as a potential precursor to that. Based on the consumer unit's profits and the trading performance of its peers, Meacham estimated that it would fetch between $9 billion and $13 billion in an outright sale, an influx of cash that could go to deal-making, particularly in oncology, he said.

Credit Suisse analyst Vimal Divan believes the business could go for at least $11.8 billion and up to $13.9 billion but emphasized that Pfizer is not concerned about cash so much as tax reform when it comes to potential acquisitions. Pfizer CEO Ian Read has said the company needs clarity on tax policy to assess the value of deals.

The pharmaceutical industry is engaging in fewer deals this year as a whole, according to a Sept. 21 S&P Global Ratings report. This shift in priorities, from deals to topline sales and EBITDA growth, helped the rating agency bump its outlook on the industry from negative to stable.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.