Can Shuffling the Deck Create Growth?
Dividing PFE as it stands (‘total-PFE’) into two or more entities, for example one having older off-patent products (‘established-PFE’) and one having newer products and R&D (‘core-PFE’), infers that such a division either makes core-PFE a growth company, or opens the door to this outcome over time
The sales-weighted average age of products on market for core-PFE is just six months less than total-PFE; this suggests core-PFE’s immediate prospects for sales growth are not much different than total-PFE’s
The number of Phase III and filed products per dollar of sales for core-PFE is only slightly better than for total-PFE – total PFE ranks 5th among large-caps for both Phase III / sales and filed / sales; core-PFE ranks 5th on the former and 4th on the latter. This suggests prospects for mid-term growth are only slightly improved
Most importantly, core-PFE’s R&D / sales ratio is more than 2 percent below the industry average, and at least 4 percent below the spending level necessary for zero real sales growth. Core-PFE is not a growth company, and cannot become one without both higher absolute levels of R&D spending and higher dollar-for-dollar levels of R&D productivity
Reducing the sales base to facilitate growth only makes sense if firms are likely to generate sufficient new product flow to create growth. As modeled, core-PFE loses products faster than it creates them. Ironically, firms that lose more products than they create benefit from being larger, since the larger sales base cushions the volatility associated with large product losses
Beyond falling well short of the presumed goal of creating growth, divestiture faces a number of practical hurdles: 1) divestiture would tend to reduce asset-utilization rates in the manufacturing base; we estimate rising utilization as a consequence of mergers has reduced COGS / sales by roughly 4%; 2) established-PFE has nearly half of total-PFE’s emerging market sales; while we’re skeptical about the long-term prospects in the EM’s, they do contribute to near- / mid-term growth; and 3) because established-PFE presumably is in ‘planned-decline’ with no investment in R&D we presume it must pay most of its earnings (>= 90%) as dividend; because core-PFE is not a growth company it almost must offer a competitive payout ratio (+/- 50%); together, the combined dividend necessary to support both siblings is larger than that required for the parent