Analysis: GSK to purchase Pfizer unit?

By STEVE MITCHELL, UPI Senior Medical Correspondent  |  June 2, 2006 at 4:14 PM
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WASHINGTON, June 2 (UPI) -- GlaxoSmithKline reportedly is looking to buy Pfizer's consumer healthcare division for $15 billion, a price tag analysts say will likely make it the highest bidder.

If GSK procures the Pfizer division, it would become the largest non-prescription-drugs manufacturer in the world.

GSK has not confirmed the press reports, and a number of other potential buyers, including Johnson & Johnson and Bayer, are also reportedly interested in Pfizer's consumer unit.

"It makes sense for all of them," Barbara Ryan, an analyst with Deutsche Bank, told United Press International.

"Ultimately, it will come down to who is willing to pay the most," she added.

If the reported offer of $15 billion is accurate, that would mean GSK would most likely be the highest bidder and is likely to secure the Pfizer division, Ryan said.

"If the number being reported for Glaxo is true, it's going to be hard for anybody to pay more than that," she said.

Ryan doesn't cover Glaxo, but she rates Pfizer a "buy."

"For Pfizer, (the consumer healthcare division) is an insignificant piece of their earnings, accounting for about 2.5 percent, so there's an opportunity to use that money to better drive shareholder value," she said.

Pfizer's consumer division includes the Listerine and Sudafed brands and generated sales of $3.9 billion in 2005.

Ryan said Wyeth, another potential buyer of the Pfizer division, would be unlikely to match the reported GSK offer.

Sav Neophytou, an analyst with Seymour Pierce, told UPI $15 billion is too high to be a reasonable offer.

"I don't think Glaxo is going to bid as much as the press is saying," Neophytou said.

He noted the offer price of $15 billion would represent a valuation of 3.5 times the prospective revenues of Pfizer's healthcare division but added GSK refused to pay that much for Boots Healthcare International.

A fair value would be $13 billion, Neophytou said. "Up to $14 billion might be OK, but more than that will begin to look like they've overpaid," he said.

The acquisition of the Pfizer division would make good strategic sense for GSK. It would equate to more sales and they would "get their hands on some very good quality brands," Neophytou said.

Pfizer's consumer healthcare division currently brings in about $700 million a year in profits, and GSK might be able to increase that by $150 million to $250 million via cost synergies, he said.

GSK's own consumer healthcare division makes about $1.3 billion annually in profits, he said, so the Pfizer acquisition could nearly double their bottom line.

GSK's healthcare division, which includes Aquafresh toothpaste and Nicorette smoking-cessation gum, had sales of $5.6 billion in 2005.

In a research report issued to investors Friday, Neophytou rated GSK a "buy," saying, "With its 3 percent dividend yield and shock resistant earnings, we believe GSK offers investors a relatively defensive investment opportunity in turbulent markets."

Neophytou told UPI it is "very unlikely" Bayer would be able to afford the Pfizer division under its current situation with the takeover proceedings for Schering.

Reckitt Benckiser, another potential bidder, paid $3.6 billion in cash to acquire Boots Healthcare International last October, so it's uncertain if they'll be able to come up with the funds to purchase the Pfizer division, he said.

Colgate-Palmolive has downplayed its interest in Pfizer's consumer unit, and Novartis has dropped out of contention.

Final bids are due June 6.

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