Pfizer Sells Nutrition Portfolio To Nestle For Nearly $12B, Widening Nestle’s Reach In Emerging Markets

Pfizer’s price of $11.85 billion for selling its pediatric nutritionals business to Nestle came in at the upper end of what most analysts expected. It plans to use the cash it expects to receive – nearly $9 billion – mostly for share repurchases and ‘”tuck-in” M&A.

Pfizer is selling its international pediatric nutritionals business to Nestle S.A. for $11.85 million, a price that reflects global infant formula players’ fierce competition for growth opportunities in emerging markets.

Nestle managed to keep Pfizer Nutrition out of the hands of its competitors with a deal announced April 23 that reached the upper end of some analysts’ expected price range while exceeding others’ predictions.

Morningstar analysts projected a price tag in the $9 billion to $10 billion range and suggested Nestle went high with its offer to fend off rival bidders Danone and Mead Johnson Nutrition Co.

Pfizer Nutrition tallied 2011 sales of $2.14 billion, with 85% of the business coming from emerging markets such as China, Indonesia, Mexico, the Middle East and Thailand. The nutrition unit in China is Pfizer Nutrition’s largest market, Pfizer China told PharmAsia News. Nestle projects the business, including brands such as S-26 first-year formulas and Promil Gold follow-on formulas, will continue at a 13% compound annual growth rate since 2009 and reach $2.4 billion in sales this year.

Filling Gaps In Portfolio, Emerging Markets

With sales of Nestle’s infant formulas and growing-up milks already more than $5 billion a year, the addition of Pfizer Nutrition gives the Swiss company a pediatric nutrition business worth more than $7 billion and a commanding lead in the worldwide segment.

By comparison, in 2011 Abbott Laboratories Inc. generated $3.19 billion in pediatric nutritionals sales, while Mead Johnson tallied $3.68 billion. Danone reported $4.83 billion for its baby nutrition business and another $1.55 billion for its medical nutrition division, which includes pediatric products.

The acquisition also further balances Nestle’s geographic presence in favor of the fast-growing markets of Africa, Asia and Oceania, which includes Australia and New Zealand…

In a same-day presentation, Nestle executives pointed out the complementarity of Pfizer Nutrition’s products with its existing portfolio, which includes the Gerber brand acquired in 2007. The Pfizer assets plug gaps in Nestle’s offerings, with products touting brain development benefits and formulations for picky eaters.

The acquisition also further balances Nestle’s geographic presence in favor of the fast-growing markets of Africa, Asia and Oceania, which includes Australia and New Zealand; those regions combined now will account for 55% of Nestle’s pediatric nutritional sales, compared to 45% before the deal.

The sale is the second major divestiture since Ian Read assumed leadership of the New York-based drug company in December 2010 and, responding to investor discontent, vowed to remake the company (Also see "Reading Into Pfizer's Changes: First Steps For New CEO" - Pink Sheet, 7 Feb, 2011.). After a strategic review, Pfizer in July 2011 announced plans to shed its nutrition and animal health units, to devote more resources to biopharmaceuticals (Also see "Pfizer Will Unload Nutrition Division, Keep Consumer Product Unit" - Pink Sheet, 11 Jul, 2011.). In April 2011, in a smaller, but still significant transaction, it sold its drug formulation and delivery business, Capsugel, to private equity firm KKR for $2.4 billion in cash. With Read at the helm, the company also raised its dividend and vowed to be more proactive in buying back shares.

Most important to long-term growth, it sought to reinvigorate its large and unfocused R&D organization. Even as key drugs lose patent exclusivity, signs of life are beginning to emerge from that all-important group, with several major drug candidates up for approval in 2012, notably the Factor Xa anti-coagulant Eliquis (apixaban), which it is co-developing and co-marketing with Bristol-Myers Squibb, and tofacitinib, a first-in-class oral JAK inhibitor for rheumatoid arthritis; moreover, Phase III results of a closely watched drug for Alzheimer’s disease, bapineuzumab are slated to read out in the second half of the year.

Analysts Praise Break Up

These moves leave the giant company more vulnerable to the high-risk high-reward nature of biopharma drug development. Still, in an era where Big Pharma divestitures and spinouts are greeted warmly on Wall Street, investors have met them with largely positive reactions, in some cases calling for a complete break up of the company to unlock its stagnant value (Also see "Reading Into Pfizer's Changes: First Steps For New CEO" - Pink Sheet, 7 Feb, 2011.). Even now, Pfizer could go further, argues Goldman Sachs analyst Jami Rubin, who wrote about a recent meeting with Read, in which he said he would be open to more divestitures under the right circumstances; presumably he would think about Pfizer’s relatively small generics business as one potential candidate.

Pfizer gained the nutritionals business through its 2009 purchase of Wyeth. It has opted to hold on to the consumer health business that also originated with Wyeth, including the dietary supplement brands Caltrate and Centrum.

Credit Suisse analysts said the transaction with Nestle – which came in at a relatively high multiple 19.8 times greater than the enterprise value/earnings before interest, taxes, depreciation and amortization – “strengthened [Pfizer’s] reputation as a solid deal-maker” following its Capsugel divestiture (Also see "Capsugel CEO Driesen Plots Post-Pfizer Course" - Pink Sheet, 28 Nov, 2011.). The analysts expect a similarly bountiful transaction or spin-off is around the corner for Pfizer’s $4.18 billion animal health business.

Pfizer likely will use the proceeds from Nestle to buy back stock – potentially 373 million shares, UBS analysts estimate. The repurchase could increase Pfizer’s 2013 earnings-per-share growth by three percentage points, the Morningstar analysts added.

“Financially, this is a very attractive and accretive acquisition to Nestle,” said Kurt Schmidt, global head of Nestle Nutrition, during a same-day call with analysts. “Most importantly, it best positions us for future growth in this attractive category by gaining and enhancing leadership where the births are.”

Nestle gains from Pfizer 5,400 employees, five factories and three research & development facilities; the firm expects to realize $160 million in annual cost synergies by 2015 or 2016.

The companies hope to close the transaction in the next 12 months, but Nestle first will have to clear some regulatory and antitrust hurdles, given the addition of Pfizer Nutrition to an already broad-based portfolio of products. Nestle executives declined to address antitrust issues during the call, calling it premature to discuss.

As a condition of approval for the $68 billion Pfizer-Wyeth merger, China’s Anti-trust Bureau of the Ministry of Commerce required Pfizer to divest its swine vaccine business in China (Also see "China Orders Pfizer And Wyeth To Divest Certain Operations As Condition To Merger Approval" - Scrip, 30 Sep, 2009.). Pfizer sold that business to Chinese local company Harbin Bio-Vaccine, an animal health subsidiary of Harbin Pharmaceutical Group Co. Ltd. (Also see "Pfizer Divests Its Swine Vaccine Business To Harbin Pharmaceutical Group In China As Condition Of $68 Billion Merger With Wyeth" - Scrip, 1 Jun, 2010.).

In what could be another telling move in China, Head of Preclinical Outsourcing VP Richard Connell said in an earlier interview that the company has decided to “pause” its plans for an anti-infectives research center in China after hitting some “speed bumps.” When it was announced in February 2011, the unit was intended to be Pfizer’s first discovery research center in China, and a major expansion to the company’s virtual research approach in China, which has relied on partnerships with contract research organizations and universities. The move was also controversial in some circles, as it included a decision by Pfizer to move the bulk of its anti-infectives research from Connecticut to Shanghai – a decision some analysts believed might be related to stricter U.S. FDA standards for development of anti-bacterial agents (Also see "Pfizer On “Pausing” Anti-Infectives Research In China, And Taking A Long View On Asian Partnerships: An Interview With PharmAsia News (Part 2 of 2)" - Scrip, 13 Mar, 2012.).

Some might argue that the recent moves indicate a step backward for Pfizer in China.

[Editor’s note: This story also appeared in “The Pink Sheet” DAILY, April 23, 2012.]