By Ransdell Pierson
(Reuters) - Pfizer Inc plans to separate its animal health unit into a stand-alone company, a move Wall Street expected as the largest U.S. drugmaker focuses more intently on its core pharmaceuticals business.
Pfizer said on Thursday that preparations were under way for a public offering of a minority stake in the new animal health company, which would be called Zoetis.
The business, which generated revenue of about $4.2 billion last year, sells medicines, vaccines and other products for livestock and pets. It has more than 9,000 employees and markets products in more than 120 countries.
Pfizer said it would provide details of the proposed IPO in the coming months, when it reports second-quarter earnings.
New York-based Pfizer, which agreed in April to sell its baby formula business to Nestle SA for $11.85 billion, had also been shopping its animal health unit since last year. But Chief Executive Officer Ian Read has said in recent months that any separation of the animal health business would probably be in the form of an IPO, to avoid hefty taxes.
ISI Group analyst Mark Schoenebaum valued the animal health unit at about $15 billion, and estimates Pfizer could generate $3 billion in cash proceeds by spinning off 20 percent of the business through an IPO.
"Pfizer did not provide any information on what they will do with the majority stake that they will continue to own," he said in a research note.
Schoenebaum speculated Pfizer would eventually divest its possible 80 percent remaining stake by offering those shares of Zoetis to Pfizer shareholders at a slightly discounted price. By doing so, he said the drugmaker would reduce by about 8 percent the number of outstanding shares of Pfizer.
In the meantime, however, Pfizer will treat the animal health business as a continuing operation.
The Pfizer unit competes with thriving animal health operations of Merck & Co, Eli Lilly and Co and Sanofi SA, all of which are able to use knowledge from their human medicines to develop products for pets and farm animals.
Animal health operations are also attractive, compared with prescription drugs, because there are fewer concerns about patent expirations and regulatory interventions that can decimate sales of their products. Moreover, middle-class populations are growing in emerging markets such as China, with adequate disposable incomes to acquire pets.
Pfizer's animal health sales jumped 16 percent in the first quarter to $982 million, boosted by the company's recent acquisition of King Pharmaceuticals and its Alpharma animal health brands. By contrast, Pfizer's sales of prescription drugs slumped 2 percent in the quarter to $14.2 billion, hurt by the loss of U.S. patent protection on its Lipitor cholesterol fighter and ensuing competition from cheaper generics.
In the case of Merck, its animal-health sales - also from livestock and pets - rose 7 percent in the first quarter to almost $760 million, eclipsing the 2 percent growth for its prescription drugs.
The contrast was even more stark at Lilly. Sales from its Elanco animal health business soared 33 percent to $491 million in the quarter, while overall company sales fell 4 percent due largely to generic competition for its Zyprexa schizophrenia drug.
Despite Pfizer's strategy of focusing on its prescription drugs, which have high profit margins, the company has decided to hold onto its consumer products business, including Centrum vitamins and the Advil painkiller.
Shares of Pfizer were up 0.4 percent at $22.02 in early afternoon trading.
(Reporting By Ransdell Pierson and Lewis Krauskopf; Editing by Lisa Von Ahn and Tim Dobbyn)