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Prospect of breakup has Pfizer stock riding to a four-year high

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Three years after Pfizer Inc. announced its acquisition of Wyeth Pharmaceuticals in what turned out to be a $67 billion merger, the payoff for investors may finally be in the cards.

But it isn't the synergies between Wyeth and Pfizer research expertise - trumpeted three years ago by analysts as the main catalyst for the deal - that have investors buying up Pfizer stock today, sending it Friday to a four-year high of $22.65 a share.

It's the break-up value of the combined companies that is attracting speculation, as Pfizer chief executive Ian Read signals an intention not only to sell off the drug firm's animal health and nutrition business but to consider separating the generics and brand-name pharmaceuticals units as well.

Les Funtleyder, a health care strategist and fund manager for Miller Tabak & Co. in New York City who owns Pfizer stock, said the breakup is made more intriguing by some of Wyeth's former assets, especially its consumer-products division that markets such well-known remedies as the cough medicine Robitussin. But he is sure the Wyeth deal wasn't done as a way of making it easier for Pfizer to sell off parts of its business.

"It doesn't make the deal look that smart," he said.

Instead, Funtleyder said, the possible break-up of Pfizer is more likely simply a change of strategy by Read, who replaced Jeffrey B. Kindler as the company's CEO late in 2010. Read, he said, has been working to increase shareholder value by raising Pfizer's dividend and buying back billions of dollars worth of stock - not to mention laying off thousands of scientists, including at least 1,100 at the company's Groton laboratories - and now he appears to be poised to sell off major parts of the business.

"Getting bigger didn't work," Funtleyder said, pointing to a 10-year swoon in Pfizer's stock price as the company went through a mergers-and-acquisitions frenzy that ended with the purchase of Wyeth in October 2009. "(Getting smaller) may not be the recipe for success, but it could be."

"Huge mergers and acquisitions appear, finally, to be going out of favor," added Derek Lowe, who writes the popular industry blog In The Pipeline. "Since there are no longer reputations to be made, bold visions to be realized, and (don't forget) massive fees to be earned by implementing such moves, the latest word is: breaking up. Spinning off. Leaner, meaner, core businesses, unlocking value, more focus, back to what they do best."

In any case, talk of a Pfizer breakup - spurred by Goldman Sachs analyst Jami Rubin - energized the stock last week, even in the wake of a report Friday that the company was facing a new class-action lawsuit related to its marketing of pain-relief drugs Celebrex and Bextra. The stock price climbed from $21.82 Monday to close up nearly 4 percent on the week.

"The stock has been sensitive to news about spinoffs," Funtleyder said.

According to Rubin's analysis, which was based on a recent meeting with Read, Pfizer is still working through its breakup strategy. During this phase of the breakup, she said, Pfizer will be shedding noncore businesses, such as already has occurred with the $2.38 billion sale of its former Capsugel manufacturing unit to KKR & Co.

Next, she said, the company would likely simplify its management structure, separating the innovation side of the business, which includes high-potential pharmaceutical research-and-development projects, from the value side, largely involving established products. From there, a full breakup could occur within two to three years, she suggested, similar to a split currently being executed by Abbott Laboratories.

The industry blog FiercePharma said Pfizer's breakup would give Pfizer a chance to spotlight its pipeline of new drugs.

"Without the drag of lower-margin generics, branded drugs could deliver faster, more impressive growth for investors," according to the report. "And the separate generics business would be a stable, value-oriented company in its own right."

But analyst Funtleyder said any attempt to spin off parts of the company would be dependent on some pipeline successes, which have been few and far between in recent years. Fortunately, he added, Pfizer has been ramping up the number of promising late-stage drugs nearing U.S. regulatory approval, including tofacitinib, a pill to treat rheumatoid arthritis that was developed in Groton.

Ironically, the rise of Pfizer's stock price related to spinoff talk is occurring only months after the New York-based company lost its patent on cholesterol pill Lipitor, the world's leading medicine, with sales in its final year of about $10 billion. Now that the weight that hung over Pfizer's head has finally been dropped, he said, the company is ready for a restructuring that could force it to focus on the core mission of R&D that once made it the envy of the industry.

"All the bad news is out," he said. "All the options are on the up side."


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