Analysis: J&J acquires Pfizer's OTC unit

By STEVE MITCHELL, UPI Senior Medical Correspondent  |  June 26, 2006 at 6:26 PM
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WASHINGTON, June 26 (UPI) -- Johnson and Johnson's decision to purchase Pfizer's consumer division for $16.6 billion is a positive for Pfizer, but analysts said it probably won't haveo much of an impact on the nonprescription products field.

The deal makes J$J the largest consumer healthcare manufacturer in the world, with retail products including Band Aid, Neutrogena and Tylenol. Pfizer's consumer division -- which racked up sales of $3.9 billion last year -- makes brands including Listerine, Nicorette, Visine, Neosporin, Sudafed and Zantac.

It's a good move for Pfizer because they effectively doubled the worth of their consumer unit and at the same time freed up some cash for pumping back into research and development on the pharmaceutical side.

"For Pfizer, it's a good transaction because they were clearly, in their own valuation, not getting enough value out of that franchise," Barbara Ryan, an analyst with Deutsche Bank, told United Press International. "They can use the cash to further enhance their drug business," Ryan added.

By Pfizer's estimation, the consumer unit was a value of approximately $8 billion, "so they enhanced the value pretty dramatically" with J&J's $16.6 billion purchase price, she said.

In terms of the impact it will have on the consumer products arena, Ryan said the effect will be minimal.

"I don't know if it will have that much impact," she said, noting J&J is already a major player in that market. "Now they're just a bigger player," she said.

Sav Neophytou, an analyst with Seymour Pierce who previously said GlaxoSmithKline's rumored offer of $15 billion for Pfizer's consumer division was not a fair value, told UPI J&J paid too much.

"Sixteen point six billion is not a fair value," Neophytou said. But he added that it could help J&J get out of the hole and "it's the cost of doing business for them."

The main advantage this would bring for J&J "would be clearly the cost synergies," Neophytou said. The same delivery vans they're using now could be carrying 10 brands instead of only eight, he said. "They could squeeze the supply chain a little better and might increase their margins a little bit," he said.

The impact on the consumer products market will be slight, he said. "It will present competition for Glaxo, but not any more than they've already been facing," he said.

Bank of America analyst Glenn Novarro agreed that the deal might help boost Johnson and Johnson's growth and will boost their competitive position.

"We have been noting for some time that (J&J) would need to rely more heavily on (merger and acquisitions) to acquire new avenues of growth, as its own internal R&D efforts were not likely to be enough," Novarro wrote in a research note.

However, Prudential analyst Larry Biegelsen also thought J&J paid too much and that the deal may not help their bottom-line.

Biegelsen said in a research report the acquisition "seems expensive and unlikely to boost (J&J's) sagging topline growth."

He noted that Pfizer's consumer unit doesn't seem to fill J&J's areas of need, which many analysts think revolves around revitalizing its medical devices division. and sales in this division were down 5 percent in the first quarter of this year.

Bank of America analyst Chris Schott said the deal would be a positive for Pfizer and rated the firm's stock a "buy" in a research report released Monday.

"Although generic Zocor remains a concern with regard to Pfizer's Lipitor franchise, we see limited downside in the name at current levels," Schott stated.

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