Pfizer Boss Won't Commit to a Company Split, But Decision Might Depend on Whether Clinton or Trump Wins the U.S. Presidential Election
August 3, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Even before the Pfizer -Allergan merger was announced and then fell apart, Pfizer was discussing the possibility of splitting the company into two. The idea was that the company would break into one that focused on newer, faster-growing products, and another that focused on mature, branded drugs that often had expired patents.
But at Tuesday’s quarterly earnings conference call, Pfizer chief executive Ian Read indicated that may no longer be on the table. Read said that the company’s stock had been outperforming recently, and that companies similar to those the break-up deal would create had lower market valuations lately. “I do believe the trapped value question has become more complicated,” he said.
Pfizer’s profits dropped by 23 percent in the second quarter, primarily as the result of declining sales of older drugs. Despite that, they exceeded analyst projections. Profits were $2.02 billion, down from $2.63 from the same period in 2015. Earnings per share (EPS) dropped $0.33 from $0.42 last year. Adjusted earnings were actually up from $0.56 to $0.64. Revenue increased 11 percent to $13.15 billion.
Although analysts pressured Read into a timeframe for a commitment to a breakup, he wouldn’t be pinned down, and said he could always change his mind later. “I don’t believe optionality necessarily has an expiration date,” he said.
He also suggested that any decision would likely be made after the election in order to evaluate the incoming U.S. president’s tax plans.
“Hopefully if we have a new administration,” Read said at the conference, “whichever administration is in, there will be a need to look at tax reform, and tax reform has implications for what you want to do and what kind of taxes you want to pay. So it is an influence in our thinking.”
Although election plans tend to be mangled in the actual legislative process, Donald Trump’s tax reform plan would cut corporate tax rates to a maximum of 15 percent. Because Trump’s overall tax proposal would result in a drop in $9.5 trillion in federal revenues over the first decade of implementation, it would have to be linked to major spending cuts or it would jack up the national debt by almost 80 percent of gross domestic product by 2036. Hillary Clinton has pledged reform to corporate taxes to improve competition, but no specifics have been announced.
Read also pointed out that a split would place limits on the amount of cash each company would be able to access, it would place limits on research-and-development investment and dividend payouts. “If you’re one company you have more choices,” Read said. “Once you split you permanently divide those cash flows and you basically lose flexibility.”
Mark Schoenebaum, an analyst with Evercore ISI, told MarketWatch that internally at Pfizer, talks about a split have been more about timing, instead of whether to actually split.
“The real question is what can be done if the divisions were split versus what can be done if they’re inside Pfizer?” Read said. “Is there some material obstacle inside the company in either of these divisions if they remain inside Pfizer?”